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Contents
Overview
Recording of business transactions will occur in two steps:
Account assignment:
The business transaction is assigned to appropriate
accounts.
Booking:
The business transaction with its assigned accounts is
recorded in the journal.
To record a business transaction, all other concepts of the
double entry system applies.
Account assignment
During the account assignment you have to check:
Which accounts are involved.
What kind of account are they.
Is it an addition or divesture.
Which amount has to be assigned to which account.
You also have to check:
Is the balance of all accounts zero.
Are all items of the business transaction considered.
As a tools, account assignment stamps are often used.
Exercise
10
11
Debit
Credit
12
3.3.2.1 Bookings
Booking is a process.
Its main purpose is to record the account assigned business
Date
Narrative
Debit
Account
Amount
Credit
Account
Cost Accounting
Information
13
Cash
AR
cr
100
100
AR
100
14
dr
Inventory
VAT
AP
cr
dr
100
19
AR
119
cr
119
Revenue
100
VAT
19
AR
119
VAT
19
AP
Revenue
100
119
VAT
19
15
3.3.2.2. Reversals
Reversals are used if an erroneous entry is made.
Rule:
We document all transactions in the accounting system,
even errors are documented, corrected but not eliminated!
16
Reversals (2)
Case: A journal entry is made for provisions for social securtity, 2.000 EUR
instead of 5.000 EUR.
Original journal entry:
Expenses for social security 2.000
Provision
2.000
1. Corrections
Expenses for social security
Provisions
3.000
3.000
2.000
2.000
5.000
5.000
-2.000
-2.000
5.000
5.000
17
Example
18
Exercise
The purchase department has ordered spareparts for the
IT department, value 2.000 EUR net. Due to the lack of
information, the accounting department has booked am
amount of 2.500 EUR as material expenses.
Prepare the journal entries of the erroneous transaction
and adjust them to the correct business transaction. Use T
accounts.
20
3.4.1. Overview
Jan
Feb
Mar
Apr
May
Jun
Fiscal Year
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Calendar Year
Regular business
Opening Balance
Sheet
Closing Balance
Sheet
21
Equity
Debt
Asset Accounts
Dr
Opening
Balance
+ Additions
Liability Accounts
Cr
Dr
./.
Reductions
./.
Reductions
Closing
Balance
Closing
Balance
Closing Balance Sheet
Assets
Equity
Debt
Cr
Opening
Balance
+ Aditions
22
23
24
25
Year-end adjustments
Year-end adjustments are made to comply with legal
requirements regarding the presentation and
measurement of selected balance sheet items.
Asset accounts have to be checked to assure that they are
not overstated.
Example: Are all AR collectible?
All liabilitiy accounts have to be checked to esure that they
are not understated.
Example: Is there a risk due to pending processes?
26
27
./. x
Gross margin
Current FY
Current Assets
Cash
Securities
Inventory
Accounts Receivable
Prepayments
Other Assets
Deferred Items
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Previous FY
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Non-Current Assets
Property
Technical Equipment
Office Equipment
Assets under construction
Goodwill
Intangible Assets
Deferred Taxes
Subsidiaries
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Total
xxx
xxx
Current FY
Previous FY
Current Liabilities
Accounts Payable
Borrowings
Taxes
Prepayments
Deferred Items
Other Liabilities
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Non-Current Liabilities
Financial Liabilities
Other Provisions
Deferred Taxes
Pensions
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Equity
Share Capital
Capital Reserves
Retained Earnings
xxx
xxx
xxx
xxx
xxx
xxx
Total
xxx
xxx
+ Other income
Total expenses
./. x
Finance costs
Taxes
28
Equity:
Assets
Share Capital
other Assets
Capital Reserves
Retained Earnings
Profit & Losses carried forward
Profit of the current fiscal year
Expenses
Earnings
Profit
other Debt
29
Equity:
Assets
Share Capital
other Assets
Capital Reserves
Retained Earnings
Profit / Losses carried forward
Loss of the current fiscal year
Earnings
Expenses
Losses
other Debt
30
Exercise
Exercise 421
Description
A company has the following opening balance sheet:
Office Equipment
Inventory
Accounts Receivable
Cash
1.700
200
800
300
Equity
Provisions
Loans
Accounts Payable
1.000
400
850
750
Total Assets
3.000
3.000
20
100
150
Your task
Prepare the closing balance sheet by following the accounting cycle. Perform all bookings on T
accounts.
32
Feb
Mar
Apr
May
Jun
Jul
Revenue
Recognition
Aug
Sep
Feb
Mar
Apr
Nov
Dec
Goods delivered
and invoiced
Expenses
Jan
Oct
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
May
Apr
May
Customer pays
Jan
Feb
Mar
Service Period
Apr
33
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Feb
Mar
Apr
Nov
Dec
Goods delivered
and invoiced
Expenses
Jan
Oct
May
Jun
Jul
Aug
Sep
Oct
Service Period
Expense recognition
Nov
Dec
Jan
Feb
Mar
Apr
May
Apr
May
Customer pays
Jan
Feb
Mar
34
Example
Accrual Accounting
Current FY:
Revenues
Goods
Service expenses
(2.400 * 4/12)
Profit
Next FY:
Revenues
Goods
Service expenses
(2.400 * 8/12)
Profit
10.000
7.200
800
2.000
1.600
-1.600
10.000 EUR
7.200 EUR
2.400 EUR
Cash Accounting
Current FY:
Revenues
Goods
Service expenses
(2.400 * 4/12)
Profit
Next FY:
Revenues
Goods
Service expenses
(2.400 * 8/12)
Profit
7.200
2.400
-9.600
10.000
10.000
35
Exercise
Exercise 441
Description
The following transactions took place:
Purchase of goods to be sold in an order
Delivery (sale) of goods
Office expenses
Insurance expenses (12 month service period beginning in August)
20
180
140
24
Your task
Calculate the profit of the fiscal year 2010 by applying the accrual and the cash method.
37
Overview
We focus on business transactions that involve
Revenues
Expenses
Assets
Liabilities
38
39
Journal Entries
As a general rule, journal entries are treated as follows:
Revenue accounts are credited.
Balance sheet account Accounts Payable is debited.
40
Quiz
Sale of licenses
Executing a project, duration 3 years, where half of
the project is finished
Introduction of a EPD system at the customer where
licenses are already sold and customizing has to be
performed in the next month
Return of a defect product
Y/N
41
42
Journal entries
As a general rule, journal entries are treted as follows:
Expense accounts are debited.
Balance sheet account Accounts Payable is credited
when transaction is agreed on account.
Balance sheet account Cash is credited when
immediate payment is made.
43
Quiz
Y/N
44
45
Journal entries
The general rule on assets is:
Assets accounts are debited upon additions.
Asset accounts are credited upon divestures.
46
Quiz
Write-off of a receivable
Cash collection from a customer
Bonus payment for management
Adjusting of accounts receivable
Y/N
47
48
Journal entries
The general rule on liabilities and equity is:
Liability accounts are debited upon divestures.
Liability accounts are credited upon additions.
49
Quiz
Write-off of a receivable
Cash collection from a customer
Bonus payment for management
Adjusting of accounts receivable
Y/N
50
Accounting Game
See separate Sheet
51
Complex exercise
Max Meieris a sole proprietor, having a company that produces toys. His preliminary balance sheet at the end
of the fiscal year 2010 is presented as follows:
(000s EUR)
Machinery
Inventory
AR
Petty Cash
Cash on Bank
Sum
280
140
82
2
66
570
Equity
Provisions
Loans
AP
200
62
250
58
Sum
570
Sale of toys to a distributor totalling 100 TEUR (net) at 5.5.10, the distributor paid at 21.6.10. Max Meier had materials used for an amount of 40 TEUR.
c)
Collection of a receivable from a customer at 13.3., 8.8. and 17.9. with amounts of 5, 14 and 21 TEUR.
d)
Your task: Prepare the closing balance sheet at 31.12.10. Profit and / or losses have to be shown seperately
in the balance sheet.
52
Tools
for the exerciseCr(1)
Dr
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
53
Tools
for the exerciseCr(2)
Dr
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
54
Solution
(000s EUR)
Machinery
Inventory
AR
Petty Cash
Cash at bank
Sum
305
100
42
2
147
596
Equity
Profit
Provisions
Loans
Liabilities
Sum
200
60
62
250
24
596