ARAB OPEN
UNIVERSITY
UGSM-Monarch
Business
School
Course B291:
Financial Accounting
Unit 2
Presenter:
Dr. Yusuf Mohammed Nulla, D.Phil. (Distinction),
Ph.D.,MSc.,MBA, B.Comm.
ARAB OPEN UNIVERSITY
Session 1
Accounting cycle, transaction cycle, and source
documents
Accounting cycle
It is usually a year. It starts for example Jan. 1 and
ends Dec. 31.
Recording of transactions start from Jan. 1, 2014
and the preparation of the financial statements
starts after the end of the accounting cycle for
example Dec. 31, 2014. So on Jan. 1, 2015 financial
statements are prepared.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
Accounting cycle steps:
1. Recording and posting a transaction in the book
of prime entry/journal such as cash journal,
sales journal, purchase journal, and receivables
and payable journals.
2. Recording and posting of entries (double-entry
bookkeeping) of each economic transactions in
the general ledger. It then transferred to
individual account ledger, in a computerized
system. In manual system, posting is required.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
3. Once all the accounts ledgers are posted,
unadjusted trial balance is prepared. In the
manual system, lists all the ledger accounts
amounts vertically. In a computerized system,
trial balance report is generated.
• Unadjusted means it is not a final trial balance.
There are some entries missing related to noncash. For example, depreciation/amortization of
non-current assets (machinery, equipment, etc.),
payroll accruals, etc.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
4. Trial balance is prepared which includes adjusted
entries at year-end that will update the all the
ledger accounts and will provide new total
balances.
• It is important to prepare adjusting entries
because to reflect all the economic activities till
the cut-off date of period-end, and could be
material in amount.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
5. Prepare financial statements such as Income
Statement (Statement of Operations), Balance
Sheet (Statement of Financial Position),
Statement of Cash Flows, Statement of Retained
Earnings, and Statement of Comprehensive
Income.
6. Closing the temporary ledger accounts such as
all the revenues and expenses accounts in the
Income Statement.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
7. Prepare post-closing trial balance
• Only assets and liabilities are listed.
Accounting Cycle
• It is usually a year period. However, regulatory
authorities such as stock exchange and
governments may demand interim financial
statements such as quarterly or semi-annually.
• Management produces financial statements on a
monthly or quarterly basis for assessment and
budgeting.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
Transactions and recordable events
• Non-cash transactions is called barter
transactions. For example, service for service,
goods for goods, etc.
• Purchases means to buy goods and/or services in
economic terms.
• Revenue expenditures are the expenditures that
incurs to generate revenues. For example,
electricity, property rent, telephone, etc.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
• Capital expenditures are the expenditures that
incurs over the year period such as buildings,
computers, desks, chairs, machinery, etc.
Cash Basis vs. Accrual Basis of Accounting
• Under cash basis of accounting, all the
transactions are recorded based on cash received
or cash payments. Small non-profit organizations
and private businesses used this system. They
operate on a yearly financial calculation basis
during which cash-in and cash-out happened.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
• The advantage of cash basis of accounting is that
it reflects cash position through income
statement so the owner(s) can make business
decisions.
• The disadvantage is that it is a poor reflection of
the financial performance and financial position
of the business. Also, it violates IFRS provisions.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
• The accruals basis of accounting records
revenues when they are earned and expenses
are recorded when it is incurred in a same
period, independent of cash exchanges.
• It complies with IFRS provisions and better
reflects true financial performance of an entity.
• It is a concept of matching the revenues to the
expenses in a same period.
• Alternatively, valuation of assets and liabilities
will also provide profits, but it is rarely used.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
Capital expenditures vs. Revenue expenditures
• Capital expenditures means money spent on
non-current assets such as machinery, furniture,
automobile, etc. It doesn’t recorded in income
statement.
• Revenue expenditures means goods and services
purchased to generate revenues such as
stationary, utility, property rent, telephone, etc.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
Cash vs. Credit transactions
• A cash transactions are purchase of goods and/or
services for cash. There is no liability.
• Credit transactions are purchase of goods and/or
services for payment at a later date such as in 30
days. In this case liability incurs as Accounts
Payable.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
Data sources and source documents
For Seller:
For Buyer:
Price quotation
Purchase Order
Invoice
Debit Note
Debtor’s statement
Payment by Cheque
Credit Note
Remittance advice
Receipt
Please view pages 18-23 of Unit 2
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
Source Documents
Debit note: A customer request for a credit note
due to overpayment.
Credit note: A document sent by the seller/supplier
to the customer relating to
overpayments made by the customer.
Cheque: A document that instructs a bank to take
money from the account of the drawer and
give it to the payee.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
Remittance advice: A document send by the vendor
indicating which invoices are
being paid and which credit
notes are being offset.
Receipt:
A written or printed
confirmation of payment.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Credit transactions
It is based on three conditions:
1. When payment is received.
2. At the time of delivery.
3. At the time that the invoice is sent to the
customer.
© Dr. Yusuf Mohammed Nulla 2014
Session 1
ARAB OPEN UNIVERSITY
Session 1
Credit transaction cycle
Price quotation Sales/purchase confirmation
Delivery
Payment/receipt of payment.
Accounting cycle
Recording transactions
Posting individual
transactions to the accounts in the ledgers
Recording/Receipt of payment in the cash book
Posting total receivables/payables, and total
cash receipts/payments
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 1
Preparing an unadjusted trial balance
Performing end of period adjustments
Preparing the financial statements.
___________________________________________
*For Session 2, please read pages 27 to 41. Please
bring Unit 2 to the class.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 3
Double-entry bookkeeping
Please read pages 43 to 111. Please bring Unit 2.
Debit entries are left side. Credit entries are right.
Assets are recorded at debit side (+), credit side (-)
Liabilities are recorded at debit side (-),
credit side (+)
Equities are recorded at debit side (-); credit side (+)
Income: debit side (-); credit side (+)
Expenses: debit side (+); credit side (-)
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 4
Balance off ledger accounts
Unadjusted trial balance:
• A trial balance report before adjusting entries
are made. Not a final list of accounts.
• A total of debits and credits must be equalled
before preparing income statement, balance
sheet, cash flow statement, etc.
• If there are errors such as in typing numbers and
one sided posting.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 4
Balancing and Closing Ledger Accounts
Balancing Account:
For each account, all the debits and credits must be
totaled and netted to get one number. For example
cash, total debits= 100,000, total credits=30000, the
net cash balance=70000.
Please see pages 116 to 129.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Accounting systems and the impact of IT on
financial reporting and control
Following images are accounting systems:
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Session 5
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© Dr. Yusuf Mohammed Nulla 2014
Session 5
ARAB OPEN UNIVERSITY
© Dr. Yusuf Mohammed Nulla 2014
Session 5
ARAB OPEN UNIVERSITY
© Dr. Yusuf Mohammed Nulla 2014
Session 5
ARAB OPEN UNIVERSITY
© Dr. Yusuf Mohammed Nulla 2014
Session 5
ARAB OPEN UNIVERSITY
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Session 5
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Session 5
Purpose of Accounting Information
1. Decision making (regards to mission and goals).
2. Planning (what resources are available, time-line
for actions, different scenarios and back-up
plans in unexpected situations).
3. Controlling (controls to get feedback on the
plans).
4. Recording transactions (to verify activities and to
prepare financial reports).
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 5
5. Performance measurement (to make decisions
from the results achieved).
Departments in an Organization
Sales and Marketing, Purchasing, Finance,
Accounting, & Human Resources.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 5
Business Transactions
1. Making sales to customers.
2. Making purchases from suppliers.
3. Purchasing non-current assets.
4. Paying expenses so the business can operate.
5. Paying employees for their work.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 5
Capital expenditure vs. Revenue expenditure
• Capital expenditure (purchases related to capital
to generate income such as machinery,
computers, etc.)
• Revenue expenditure (expenditures incurred to
generate income such as raw materials
purchases, labor costs, overheads that are
related to cost of goods sold).
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 5
The finance function
1. Raising money in to finance operations such as
purchase of non-current assets, raw materials,
etc.
2. Recording transactions and complying with
internal controls.
3. Producing reports to assist in decision making
such as for management.
4. Reporting to users such as shareholders, lenders,
and tax authorities.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 5
Raising funds
• Bank, capital markets, international money and
capital markets, government sources, and
venture capital.
Financial information for management
1. Financial and strategic management concern
decisions regarding investment, financing,
dividends, and operating decisions related to
pricing and costs.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 3
2. Treasury management plans and controls
concern decision with working capital
management, repaying loans, and foreign
currency.
3. Operations management concern with financial
planning, proposed decisions, and control.
Please read page 139 to 141 regards to internal
controls.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Session 5
Outputs from a general ledger includes:
Unadjusted trial balance, adjusted trial balance,
financial statements, and listings of individual
general ledger accounts.
Homework:
Self-assessed question 2 on pages 148 and 149.
Solutions on pages 154 to 160.
Self-assessed question 3 on pages 160 and 161.
Solutions on pages 166 to 172.
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Thank You !
The End
© Dr. Yusuf Mohammed Nulla 2014
ARAB OPEN UNIVERSITY
Reference:
The Open University (2010), “B291: Financial
Accounting”, Open University Business
School, UK.
© Dr. Yusuf Mohammed Nulla 2014