università degli studi di pavia facoltà di economia a.a. 2014-2015

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Università degli studi di PaviaFacoltà di Economia

a.a. 2014-2015

Lesson 1 International Accounting Lelio Bigogno, Stefano Santucci

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Introduction to the course

Lecturers presentation and CVs

Structure of the courseow to prepare the examThe contents of the examHow to find out the tools for the preparation

Basic assumptions of the courseImportant notice: Friday the 3rd of October there won’t be class!!

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PART 1IAS/IFRS: a General Overview

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A basic question:

IAS?IAS/IFRS?IFRS

The answer?

1. Some definitions

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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.

1. Some definitions

http://www.iasplus.com/restruct/whatis.htm

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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.

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…….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.

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…….Broader definitionIFRSs 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.

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In fact, through committees, both the IASC and the IASB also have issued Interpretations of Standards

http://www.iasplus.com/interps/interps.htm

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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.

http://www.iasplus.com/restruct/restruct.htm

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The IFRS Interpretations Committee replaced the former Standing Interpretations Committee (SIC) in March 2002

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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".

2. The advantage of International Accounting

13International Accounting – Lesson 1

GLOBALISATION – INTERNATIONALISATION

Markets Efficiency

Common Accounting Rules


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.


IAS/IFRS adoption is considered as a quality improvement for financial information produced.

YES BUT, WHERE IS THE REAL IMPROVEMENT COMPARED TO ITAGAAP?


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 .


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);

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. International Accounting –

Lesson 1 18

Endorsement process:

1. IASB issues a standard2. EFRAG (European Financial

Reporting Advisory Group) holds consultations with interest groups

3. EFRAG delivers its advice to the European Commission whether the standard meets the criteria of endorsment.

International Accounting – Lesson 1 19

4. SARG ( Standards Advice Review

Group) issues its opinion whether EFRAG’S endorsement advice is well -balanced and objective.

5. Based on the advice of EFRAG and the opinion of SARG, the Commission prepares a draft endorsement Regulation.

6. ARC (Accounting Regulatory Committee) votes on the Commission proposal.


7. The European Parliament and the Council of the European Union have 3 months to oppose the adoption of the draft Regulation by the Commission

8. In case of favorable opinion or the 3 months elapsed without opposition, the Commission adopts the draft Regulation.

9. 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 21

4. International Accounting Standards around the world

See exhibit


PART II Basic Accounting: Some technical vocabulary

1. Sources records and book of prime entry

2. Ledger accounts and double entry

3. Examples


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.


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)


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


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


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


2. Ledger accounts and double entryWhy 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

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

The accounting equation


The accounting equation emphasises the equality between assets and liabilities ( including capital as liability)

Accounting equation is:

ASSETS=CAPITAL + LIABILITIES



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



Drawings are amount of money taken out of a business by its owner



Matching convention

revenue earned is matched with the expenses incurred in earning it.

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)



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



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



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



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

The rules of double entry bookeeping


In terms of 'T' accounts:

ASSET LIABILITY CAPITAL

DEBIT $ CREDIT $ DEBIT $ CREDIT $ DEBIT $ CREDIT $Increase Decrease Decrease Increase 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 $ DEBIT $ CREDIT $Decrease Increase Increase Decrease

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

Examples of accounts in the nominal ledger

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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

Examples of accounts in the nominal ledger

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(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


Examples: the accounting equation

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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 = $2,500Cash = $2,500Capital 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 + $0Mr 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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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 1,800 = $2,500 + $0Flower and plants 650Cash 50

2,500

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).



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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 = Capital + Liabilities

Stall 1,800 = Original investment $2,500 Flower and plants 0 Retained profitCash (50 + 900) 950 (900-650) 250

2750 2750 + 0



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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

(b) At the end of the day: $(2,750 – 0) = $2,750 = $2,750

There has been an increase of $250 in net assets, which is the amount of profits earned during the day.



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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.



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(a) After the purchase of the goods for $740.

Assets = Capital + LiabilitiesStall 1,800Goods 740Cash (770 – 740) 30

2,570 = $ 2,570 + $0



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(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 1,100Less cost of goods sold 740Ethel's wage 40

780Profit 320



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Stall 1,800 At beginning of 10 July 2,570Goods 0 Profits earned on 10 July 320Cash(30+ 1,100 – 40) 1,090

2,890 2,890 + 0



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After Mr XY has withdrawn $200 in cash, retained profits will be only $(320 – 200) = $120.


Stall 1,800 At beginning of 10 July 2,570Goods 0 Profits earned on 10 July 120Cash(1,090 -200) 890

2,690 2,690 + 0


Examples: the rules of double entry bookeeping

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In terms of 'T' accounts:

ASSET LIABILITY CAPITAL

DEBIT $ CREDIT $ DEBIT $ CREDIT $ DEBIT $ CREDIT $Increase Decrease Decrease Increase 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 $ DEBIT $ CREDIT $Decrease Increase Increase Decrease


Examples: double entry for cash transaction

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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.



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(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 ACCOUNT

Sales a/c 250 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 befound.)



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(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 ACCOUNT

Rent a/c 150 Cash at bank a/c 150



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(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 PURCHASES ACCOUNT

Purchases100 Cash at bank a/c 100



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(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
