Università degli studi di Pavia
Facoltà di Economia
a.a. 2014-2015
Lesson 1
International Accounting Lelio Bigogno,
Stefano Santucci
1
Introduction to the course
Lecturers presentation and CVs
Structure of the course
ow to prepare the exam
The contents of the exam
How to find out the tools for the
preparation
Basic assumptions of the course
Important notice: Friday the 3rd
of October there won’t be class!!
2
PART 1
IAS/IFRS: a General Overview
3
1. Some definitions
A basic question:
IAS?
IAS/IFRS?
IFRS
The answer?
4
1. Some definitions
International Accounting Standards
(IASs) were issued by the IASC
(International Accounting Standards
Committee) from 1973 to 2000.
The IASB (international Accounting
Standards Board) replaced the IASC in
2001.
5
Since then, the IASB
has amended some IASs and has
proposed to amend others;
has replaced some IASs with new
International
Financial
Reporting
Standards (IFRSs);
has adopted or proposed certain new
IFRSs on topics for which there was no
previous IAS.
6
…….IFRSs refers to the new
numbered series of
pronouncements that the IASB
is issuing, as distinct from the
International Accounting
Standards (IASs) series issued by
IASC.
7
…….Broader definition
IFRSs refers to the entire body of
IASB
pronouncements, including
standards
and
interpretations
approved by the IASB and IASs and
SIC
(Standing
Interpretation
Commission)
interpretations
approved
by
the
predecessor
International Accounting Standards
Committee.
8
In fact, through committees, both the
IASC and the IASB also have issued
Interpretations of Standards
9
Interpretations of IASs and IFRSs
are developed by the IFRS
Interpretations Committee, whose
name was changed from IFRIC
(International Financial Reporting
Interpretations
Committee)
in
March 2010.
10
The
IFRS
Interpretations
Committee replaced the former
Standing
Interpretations
Committee (SIC) in March 2002
11
The Interpretations Committee's mission is
"to
interpret
the
application
of
International Accounting Standards (IASs)
and International Financial Reporting
Standards (IFRSs) and provide timely
guidance on financial reporting issues not
specifically addressed in IASs and IFRSs, in
the context of the IASB Framework, and
undertake other tasks at the request of the
IASB".
12
2. The advantage of International
Accounting
GLOBALISATION – INTERNATIONALISATION
Common Accounting Rules
Markets Efficiency
International Accounting – Lesson 1
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The goal of the IFRS Foundation and
the IASB is to develop, in the public
interest, a single set of high-quality,
understandable, enforceable and globally
accepted financial reporting standards
based
upon
clearly
articulated
principles.
International Accounting – Lesson 1
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IAS/IFRS adoption is considered as a
quality improvement for financial
information produced.
YES BUT, WHERE IS THE REAL
IMPROVEMENT COMPARED TO
ITAGAAP?
International Accounting – Lesson 1
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IAS/IFRS adoption is considered as a quality
improvement, BUT some discussions are
still in place.Topics:
1)
An extremely on-going world (updating
needs, uncertain rules);
2)
An assets side approach (fair value
adoption problems);
3)
A complex set of rules but at the end of
the day often less strict than local GAAP
.
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In July - August 2014 a set of 23 National Standards
were issued after being updated.
These developments arise, on the one hand, from
changes in legislation and national accounting
practices and, on the other hand, from the
evolution of doctrine and the international context.
Some issues are dealt with in a IFRS/IAS point of
view (es: impairment of assets, fair value)
The aim was also to converge local gap to IAS/IFRS
where possible (in the light of who the actual users are
mainly small and medium-sized entities);
International Accounting – Lesson 1
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3. IFRSs and European Community
Standards issued by IASB must go through
due process of endorsement before
becoming law in EU.
All the standards and interpretations are
adopted in the form of Regulation.
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Endorsement process:
1.
2.
3.
IASB issues a standard
EFRAG (European Financial Reporting
Advisory Group) holds consultations
with interest groups
EFRAG delivers its advice to the
European Commission whether the
standard meets the criteria of
endorsment.
International Accounting – Lesson 1
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4.
5.
6.
SARG ( Standards Advice Review
Group) issues its opinion whether
EFRAG’S endorsement advice is well balanced and objective.
Based on the advice of EFRAG and the
opinion of SARG, the Commission
prepares
a
draft
endorsement
Regulation.
ARC
(Accounting
Regulatory
Committee) votes on the Commission
proposal.
International Accounting – Lesson 1
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7.
8.
9.
The European Parliament and the Council
of the European Union have 3 months to
oppose the adoption of the draft
Regulation by the Commission
In case of favorable opinion or the 3
months elapsed without opposition, the
Commission adopts the draft Regulation.
The adopted Regulation is published in the
Official Journal and enters into force on
the day laid down in the Regulation itself.
International Accounting – Lesson 1
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4. International Accounting Standards
around the world
See exhibit
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PART II
Basic Accounting: Some technical
vocabulary
1.
2.
3.
Sources records and book of prime
entry
Ledger accounts and double entry
Examples
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1. Sources records and book of
prime entry
Sources
Documents are the source of all information
recorded by a business.
Documents which are used to record the business
transactions in the books of account include:
quotation, sales order, purchase order, goods
received note, goods despatched note, statement,
credit note, debit note, remittance advice, receipt,
invoices.
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Invoices: relate to a sales order or a purchase
order
Credit note: relates to returned goods or
refunds when a customer has been overcharged
(regarded as a negative invoice)
Other documents:
debit notes: might be issued to adjust an
invoice already issued
goods received notes: record a receipt of
goods (most commonly in a warehouse)
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Books of prime entry
The details of source documents need to be
recorded; the records are recorded in books of
prime entry,which are:
• Sales day book
• Purchase day book
• Sales returns day book
• Journal
• Cash book
• Petty cash book
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Sales day book: for credit sales
Purchase day book: for credit purchases
Sales returns day book: for credit notes
raised
Purchase returns day book: for credit
notes received from suppliers
Journal: for transaction which are not
recorded in any of the other books of prime
entry
International Accounting – Lesson 1
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Cash book: for cash receipts and payments
It records all transaction that go through the
bank account.
Reconciliation of bank statement and cash
book
Petty cash book: for small payments.
A petty cash system is usually subject to
strict controls
Payments are made in respect of authorised
claims
All claims are supported by evidence
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2. Ledger accounts and double
entry
Why do we need ledger account ?
Ledger accounts summarise all the individual
transaction listed in the books of prime entry .
Record of transaction, assets and liabilities:
• in chronological order
• built up in cumulative totals
The method used to summarize records is
ledger accounting and double entry
International Accounting – Lesson 1
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The nominal ledger
Nominal ledger is an accounting record which
summarises the financial affairs of a business
The nominal ledger contains detail of:
• assets
• liabilities
• capital
• income and expenditure and
• profit and loss
International Accounting – Lesson 1
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The accounting equation
The accounting equation emphasises the equality
between assets and liabilities ( including capital as
liability)
Accounting equation is:
ASSETS=CAPITAL + LIABILITIES
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The accounting equation
Liabilities are trade accounts payable;
A payable is a person to whom a business owes money
Trade account payable are debts arising from the
purchase of material,components or goods for resale
Assets are trade accounts receivable
International Accounting – Lesson 1
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The accounting equation
Drawings are amount of money taken out of a
business by its owner
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The accounting equation
Matching convention
revenue earned is matched with the expenses incurred in
earning it.
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Double entry bookkeeping
Double entry bookkeeping: each transaction has an
equal but opposite effect .
Every accounting event must be entered in ledger
accounts both as a debit and as an equal but opposite
credit.
Weekly or monthly, totals are transferred from books
of prime entry into the nominal ledger.
Every transaction has two effects (dual effect)
International Accounting – Lesson 1
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Double entry bookkeeping
A debt entry will
• increase an asset
• decrease a liability
• increase an expense
A credit entry will
• decrease an asset
• increase a liability
• increase income
International Accounting – Lesson 1
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Double entry bookkeeping
Every financial transaction gives rise to two accounting
entries (a debit and a credit)
Debit entries in the nominal ledger is therefore always
equal at any time to the total value of credit entries.
Every transaction is recorded twice
every debit is balanced by a credit
International Accounting – Lesson 1
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Double entry bookkeeping
A cash payment is a credit entry in the cash account
The asset is decreasing.
Cash may be paid out to pay an expense or to purchase
an asset . The matching debit entry is therefore made in
the appropriate expense or asset account
International Accounting – Lesson 1
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Double entry bookkeeping
A cash receipt is a debit entry in a cash account.
The asset is increasing.
Cash might be received by a retailer who makes a cash
sale.
The credit entry would be made in the sales account
International Accounting – Lesson 1
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The rules of double entry
bookeeping
In terms of 'T' accounts:
ASSET
DEBIT $
Increase
CREDIT $
Decrease
LIABILITY
CAPITAL
DEBIT $ CREDIT $
Decrease Increase
DEBIT $ CREDIT $
Decrease Increase
For income and expenses, think about profit. Profit retained in the business
increases capital. Income increases profit and expenses decrease profit.
INCOME
EXPENSE
DEBIT $
CREDIT $
Decrease Increase
DEBIT $ CREDIT $
Increase Decrease
International Accounting – Lesson 1
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Credit transaction
Not all transaction are settled immediately in cash or by
cheque.
It’s possible:
• purchase goods or non-current on credit terms so that
the suppliers would be trade accounts payable until
settlement was made in cash
• grant credit terms to its customers who would be
trade accounts receivable of the business
International Accounting – Lesson 1
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Examples of accounts in the
nominal ledger
Examples of accounts in the nominal ledger include the following:
(a) Plant and machinery at cost
(b) Motor vehicles at cost
(c) Plant and machinery, provision for depreciation
(d) Motor vehicles, provision for depreciation
(e) Proprietor's capital
(f) Inventories – raw materials
(g) Inventories – finished goods
(h) Total trade accounts receivable
(i) Total trade accounts payable
International Accounting – Lesson 1
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Examples of accounts in the
nominal ledger
(j) Wages and salaries
(k) Rent and local taxes
(l) Advertising expenses
(m) Bank charges
(n) Motor expenses
(o) Telephone expenses
(p) Sales
(q) Total cash or bank overdraft
International Accounting – Lesson 1
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Examples: the accounting
equation
Mr XY starts a business. The business begins by owning the cash that he has
put into it, $2,500.
The business is a separate entity in accounting terms and so it owes the money
to Mr XY as capital. When Mr XY sets up his business:
Capital invested = $2,500
Cash = $2,500
Capital invested is a form of liability, because it is an amount owed by the
business to its owner(s).
Adapting this to the idea that assets and liabilities are always equal amounts,
we can state the accounting equation as follows.
As at 1 July 20X6:
Assets = Capital + Liabilities
$2,500 (cash) = $2,500 + $0
Mr XY purchases a market stall from Mr K, who is retiring from his fruit and
vegetables business.
The cost of the stall is $1,800.
International Accounting – Lesson 1
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Examples: the accounting
equation
He also purchases some flowers and potted plants from a trader in the
wholesale market, at a cost of $650. This leaves $50 in cash, after paying for
the stall and goods for resale, out of the original $2,500.
The assets and liabilities of the business have now altered, and at 3 July before
trading begins, the state of his business is as follows.
Assets
=
Capital +
Liabilities
Stall
Flower and plants
Cash
1,800 =
650
50
2,500
$2,500
+
$0
The stall and the flowers and plants are physical items, but they must be given
a money value. This money value is usually what they cost the business (called
historical cost in accounting terms).
International Accounting – Lesson 1
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Examples: the accounting
equation
On 3 July Mr XY has a very successful day. He sells all of his flowers and
plants for $900 cash.
Since he has sold goods costing $650 to earn revenue of $900, we can say that
he has earned a profit of $250 on the day's trading.
Profits belong to the owners of a business. In this case, the $250 belongs to Mr
XY. However, so long as the business retains the profits and does not pay
anything out to its owners, the retained profits are accounted for as an
addition to the proprietor's capital.
Assets
Stall
Flower and plants
Cash (50 + 900)
=
1,800 =
0
950
2750
Capital
+
Original investment
Retained profit
(900-650)
Liabilities
$2,500
250
2750
+
International Accounting – Lesson 1
0
46
Examples: the accounting
equation
At the beginning and end of 3 July 20X6, Mr XY’s financial position was as
follows.
Net assets
Capital
(a) At the beginning of the day: $(2,500 – 0) = $2,500 =
$2,500
$(2,750 – 0) = $2,750 =
$2,750
(b) At the end of the day:
There has been an increase of $250 in net assets, which is the amount of
profits earned during the day.
International Accounting – Lesson 1
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Examples: the accounting
equation
The next market day is on 10 July and Mr XY purchases more flowers and
plants for cash, at a cost of $740.
He is not feeling well, because of a heavy cold, and so she decides to accept
help for the day from his cousin Ethel. Ethel is to be paid a wage of $40 at the
end of the day.
Trading on 10 July was again very brisk, and Mr XY and Ethel sold all their
goods for $1,100 cash. Mr XY paid Ethel her wage of $40 and drew out $200
for himself.
Required
(a) State the accounting equation before trading began on 10 July.
(b) State the accounting equation at the end of 10 July, after paying Ethel:
(i) but before drawings are made.
(ii) after drawings have been made.
International Accounting – Lesson 1
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Examples: the accounting
equation
(a) After the purchase of the goods for $740.
Assets
=
Stall
1,800
Goods
740
Cash (770 – 740)
30
2,570 =
Capital
+
$ 2,570
+
Liabilities
International Accounting – Lesson 1
$0
49
Examples: the accounting
equation
(b) On 10 July, all the goods are sold for $1,100 cash, and Ethel is paid $40.
The profit for the day is $320.
$
$
Sales
1,100
Less cost of goods sold
740
Ethel's wage
40
780
Profit
320
International Accounting – Lesson 1
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Examples: the accounting
equation
Assets =
Capital
+
Stall
1,800
Goods 0
Cash
(30+ 1,100 – 40) 1,090
2,890
At beginning of 10 July 2,570
Profits earned on 10 July 320
Liabilities
2,890 +
International Accounting – Lesson 1
0
51
Examples: the accounting
equation
After Mr XY has withdrawn $200 in cash, retained profits will be only
$(320 – 200) = $120.
Assets =
Stall
Goods
Cash
(1,090 -200)
Capital
1,800
0
890
2,690
+
Liabilities
At beginning of 10 July 2,570
Profits earned on 10 July 120
2,690 +
International Accounting – Lesson 1
0
52
Examples: the rules of double
entry bookeeping
In terms of 'T' accounts:
ASSET
DEBIT $
Increase
CREDIT $
Decrease
LIABILITY
CAPITAL
DEBIT $ CREDIT $
Decrease Increase
DEBIT $ CREDIT $
Decrease Increase
For income and expenses, think about profit. Profit retained in the business
increases capital. Income increases profit and expenses decrease profit.
INCOME
EXPENSE
DEBIT $
CREDIT $
Decrease Increase
DEBIT $ CREDIT $
Increase Decrease
International Accounting – Lesson 1
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Examples: double entry for cash
transaction
In the cash book of a business, the following transactions have been recorded.
(a) A cash sale (ie a receipt) of $250
(b) Payment of a rent bill totalling $150
(c) Buying some goods for cash at $100
(d) Buying some shelves for cash at $200
How would these four transactions be posted to the ledger accounts and to
which ledger accounts should they be posted? Don't forget that each
transaction will be posted twice, in accordance with the rule of double entry.
International Accounting – Lesson 1
54
Examples: double entry for cash
transaction
(a) The two sides of the transaction are:
(i) Cash is received (debit entry in the cash at bank account).
(ii) Sales increase by $250 (credit entry in the sales account).
CASH AT BANK ACCOUNT
Sales a/c 250
SALES ACCOUNT
Cash a/c 250
(Note how the entry in the cash at bank account is cross-referenced to the
sales account and vice-versa. This enables a person looking at one of the
accounts to trace where the other half of the double entry can be
found.)
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Examples: double entry for cash
transaction
(b) The two sides of the transaction are:
(i) Cash is paid (credit entry in the cash at bank account).
(ii) Rent expense increases by $150 (debit entry in the rent account).
CASH AT BANK ACCOUNT
Rent a/c 150
RENT ACCOUNT
Cash at bank a/c 150
International Accounting – Lesson 1
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Examples: double entry for cash
transaction
(c) The two sides of the transaction are:
(i) Cash is paid (credit entry in the cash at bank account).
(ii) Purchases increases by $100 (debit entry in the purchase account).
CASH AT BANK ACCOUNT
Purchases100
PURCHASES ACCOUNT
Cash at bank a/c 100
International Accounting – Lesson 1
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Examples: double entry for cash
transaction
(d) The two sides of the transaction are:
(i) Cash is paid (credit entry in the cash at bank account).
(ii) Assets – in this case, shelves – increase by $200 (debit entry in shelves
account).
CASH AT BANK ACCOUNT
SHELVES (ASSET) ACCOUNT
Shelves a/c 200
Cash at bank a/c 200
International Accounting – Lesson 1
58