International Accounting - appunti

Principles of International Accounting

a.a.2019/2020

Università Ca Foscari di Venezia

Corso di laurea magistrale in Lingue, economie e

istituzioni dell’Asia e dell’Africa mediterranea

Curriculum Language and Management to China

identify, record and communicate the economic events of an

Purpose of accounting: to

organization to interested users

Identify: you cannot account all the economic events within a company

Record: you need a tool to organize, order, evaluate the economic event -> bookkeeping

Organization is a general term (also non-profit like university, hospital etc), organization for profit

are companies because their goal is to make a profit, to get an earning

Communicate: the company has to prepare some documents and communicate to some

interested users

Interested users: somebody that uses these communication, they have an interest on a company

Users of accounting:

- Internal users (management accounting): management, finance, marketing, Human Resources

-> budgeting, cost benefit analysis. They have direct access to information.

- External users (financial accounting): taxing authorities, labor unions, customers, creditors

(bank), regulatory agencies (accounting standard setters), investors -> how to prepare and

analyze financial statements

What is accounting?

- Identification: identify economic events or transactions, those that imply an exchange of

money, a value that can be accounted with money [salary: expense for the company, can be

paid with money, cash goes down because you have to pay salary]

- Recording: record, classify and summarize; you need a tool to record this event, bookkeeping

is the tool for recording an economic event, it is divided into three steps (record, classify and

summarize),

- Communication: prepare accounting reports, you report all the economic events in a time

period, it is generally based on a fiscal year (12 months) [annual financial statement] that can

start in a different period according to the business activity of the company; there are also infra

annual financial statements (6 months) during the fiscal year; companies can also make

financial statements on a monthly base for internal purposes

- Analyze and interpret for users -> give an opinion, ratio analysis based on the calculation of

indicators

The accounting process includes the bookkeeping function which is just recording transactions

Financial accounting must be distinguished by bookkeeping

basic accounting equation:

The

Assets Liabilities equity

[economic resources] = (external debt) + (internal debt) [sources of

economic resources]

It provides the underlying framework for recording and summarizing economic events

It applies to all economic entities regardless of size, nature of business or form of business

organization

Bookkeeping is a conventional method used everywhere

Shareholder equity of a company: amount that you create when you open a business and start a

company (internal economic source) -> internal debt (if you decide to leave the company, the

company has to give you back money, at the end of the fiscal year if you have some returned

earnings the company gives you some money, dividends)

Bank: external entity that finance the business (external economic source) -> external debt

These two are sources of economic resources, we use this money for acquiring assets (desk,

chairs etc)

The value of these elements must be equal to the amount of money spent by the company

Assets has to be equal to the sum of internal and external debt (debt that we acquire for financing

our business)

Assets:

- Resources a business owns

- Provide future services or economic benefits

- Cash (what you have on your bank account), inventory (what you have on stock, raw materials,

semi-products), equipment/tangible assets (machinery, building, desk, laptop), intangible

assets (brand, patent)

Liabilities (sources that you collect from external individual):

- Claims against assets (you need money for the acquisition of your assets); long-term liabilities

(the expiration is not at the end of the fiscal year) -> you can ask for a loan or issue bonds;

short-term liability -> you contact the supplier, you purchase the products and pay after one

month, in the meanwhile you have a short-term debt toward the supplier [debt=short-term

liability; obligation=long-term liability]

- Creditors (individual or company that finance our sources): party to whom money is owned

- Accounts payable (debt towards suppliers), notes payable (cambiale passiva -> you sign a

document with the promise to pay the amount of money after the time specified; cambiale

attiva -> you receive the notes receivable from your customers), loans (long term debt)

Equity:

- Ownership claim on total assets

- What is left of assets once liabilities are paid

Equity consists of:

- Share capital: funds by selling shares to investors (debt towards shareholders)

- Retained earnings: profit retained in company’s business determined by revenues, expenses,

dividends (money given to shareholders according to the shares when there is a profit); part of

money not used to pay dividends

Profit is the result of the difference between revenues and expenses

R - E = P -> R>E revenues are higher than expenses

Retained earnings is the result of profit minus dividends

RE = P (R - E) - D

Tabular analysis -> place the amount of each economic event according to the basic accounting

equation (step 1: identification of economic event)

1) Investment by shareholders: cash+ (left side) equity+ (right side) [assets and equity are equal]

2) Purchase of equipment for cash: cash- equipment+

3) Purchase of equipment on credit (short-term debt towards supplier): supplies+ accounts

payable+ cash doesn’t change because you pay after one month

4) Services provided for cash and credit (the customer pays on bill): cash+ accounts receivable+

(the customer will pay later on) revenues+ (cash+accounts)

5) Payment of expenses (payment of salaries in cash): cash- expenses+

6) Payment of dividends: cash- dividends-

Bookkeeping is a tool to record economic events and works with

accounts

Account: accounting record of increases and decreases in a

specific asset, liability, equity, revenue or expense item. It

records an increase or a decrease of asset.

An account can be illustrated in a T-account form.

In bookkeeping -> Left: increase of asset Right: decrease of

assets

Increase on one side and decrease on the opposite side

Double-entry accounting system:

- Each transaction/economic event must affect two or more accounts to keep the basic

accounting equation in balance, the output of each economic event is at least two or more

amounts [3 amounts=3 accounts]

- Recording is done by debiting at least one account and crediting at least one other account, for

each amount you need an account

- Debits must equal credits

The sum of all accounts and all left and right sides must balance

We register for a transaction some amounts, increase on debit (left side) and decrease on credit

(right side), a side for increase and the opposite side for decrease, for each account at a fixed

period of time (the end of the fiscal year), you have to calculate the balance.

Balance: the sum of amounts on the left side and the sum of amounts on the right side.

If debits are greater than credits, if the sum of the amount on the left side are higher than the sum

debit balance

of amounts on the right side, the balance is registered on left side (debit) ->

It’s the opposite when credits are higher than debits, the sum of amounts on the right side are

higher than the sum of amounts on the left side, the balance is registered on the right side (credit)

credit balance

-> [this is another conventional rule]

From the use of accounting equation (tabular analysis) to the use of bookkeeping (T-accounts)

T-accounts (step 2: record of each transaction)

1) Investments by shareholders: this transaction results in two amounts, cash and share capital,

so according to bookkeeping we open two accounts (one for shares and one for cash).

Increase of cash is recorded on the left side because it is an asset. Increase of share capital is

registered on the right side because it is part of equity (left side of the basic equation).

2) Purchase of equipment for cash: decrease of cash is registered on the right side than we have

already opened for cash, we use the opposite side to register the decrease of cash, the

balance after this second transaction is registered on left side because debits are higher than

credits. Increase of equipment is registered in another account and it is recorded on the right

side (because it is an asset).

3) Purchase of equipment on credit: supplies and accounts payable (we don’t pay in cash but we

pay on account later on at the end of the month). Increase of supplies is registered in another

account on the left side (asset). Increase of accounts payable is registered in another account

on the right side (liability).

4) Services provided for cash and credit: three accounts: I provided a service so I get an

increase of sales (increase of cash and of service revenue) but my customer pay by cash and

also on credit (accounts receivable). Increase on cash on the left side, increase of accounts

receivable on the left side, increase of service revenue on the right side -> service revenue is a

component of retained earnings (RE = R-E-D) which is a component of equity (Equity = share

capital + retained earnings) on the left side of the accounting equation

5) Payment of expenses: decrease of cash (payment of salaries) on the right side and increase of

expenses (open an account for salaries) on the left side (expenses are on the right side but

they are minus)

6) Payment of dividends: decrease of cash on the right side and increase of dividends on the left

side (it is a part of the left side of the accounting equation but it is minus)

Accounting cycle

Accounting cycle: Accounting equation analysis)

1) Analyze business transactions -> (tabular

T-accounts Journal

2) Journalize the transactions -> or (used in companies)

3) Post to lodger accounts (no esame)

Trial balance

4) Prepare a (document for checking if you have closed each account and you

have calculated the balance of each account in a proper way)

adjusting entries

5) Journalize (we prepare the financial statement on the end of the fiscal year

but there may be some transactions that do not close at the end of the fiscal year for example

an insurance -> record this event though the adjusting entry approach that is called accrual

accounting)

adjusted trial balance

6) Prepare an (that includes the adjusting entries)

financial statements

7) Prepare

Recording (step 1):

1) Analyze the transaction -> accounting equation (tabula analysis)

2) Enter the transaction in a journal -> Journal entry (journal or T-accounts)

3) Transfer journal information to ledger accounts -> Posting (no esame)

Journal entry:

2) record each economic event following a chronological order

- One entry for each transaction (debit and credit effect on specific accounts)

- Transactions recorded in chronological order (the order in which they occur)

- Contributions to the recording process:

• Discloses the complete effects of a transaction

• Provides a chronological record of transactions

• Helps to prevent or locate errors because the debit and credit amounts can be easily

compared

Piece of paper organized in columns and rows:

- Enter the date of the transaction (first column, date column)

- Enter the name of the accounts that you used to record these transactions in the account title

column (second column) and you provide an explanation in the row below (no esame)

- Enter the amount of the transaction in debit or credit column (third and forth column) according

to the accounting equation (left or right side)

Bookkeeping = recording economic events according to T-accounts or according to journal

In T-accounts you use always the same account for record different transactions, in the journal for

each transaction you open a different account

Trial balance:

4) calculate the balance of each account and report the balance in columns

according to left side or right side, the sum of the balance of the accounts on right has to be

equal to the sum of the balance of the accounts on the left -> tool for checking if you have closed

in a proper way the balance of each account, if they don’t balance you go back to check the

mistakes. First step before preparing the financial statement.

- a list of accounts and their balances at a given time (usually at the end of an accounting period)

- purpose is to prove that debits equal credits after posting

Time period assumption: accountants divide the economic life of a business into artificial time

periods. Generally month, quarter or year (fiscal year).

We can prepare the financial statement on a monthly basis, on a quarter or six months basis and

on annual basis (fiscal year 12 months). Infra-annual financial statements based on six months.

Large and listed companies have to provide financial statements on annual and quarterly basis,

the monthly basis financial statements are prepared for internal use, internal needs.

Adjusting entries

5) balance sheet income statement

Prepare a (statement of financial position) and the (profit and

loss statement) at the end of the accounting period.

Financial statement is based on balance sheet and income statement.

Balance sheet: you report the balance of al the assets, liabilities and components fo equity (share

capital and retained earnings)

Income statement: you report revenues and expenses -> by the difference between revenues

and expenses you calculate profit (revenues higher than expenses) or loss (revenues lower than

expenses).

From profit you subtract dividends so what it is not used to pay dividends is a component of

retained earnings. If there is no payment of dividends, profit is equal to retained earnings.

A company must make adjusting entries every time it prepares financial statement because at the

end of the fiscal year you consider the balance of all amounts referred to revenue, expenses,

assets, liabilities and components of equity and you use the balance fo revenues and expenses

for the calculation of profit.

Insurance is a service that you use not only for one fiscal year but also for the next fiscal yer so

you don’t consider this event for the preparation of income statement and balance sheet (because

I calculate the profit only for the current fiscal year). I record this event through accrual

accounting.

Accrual accounting: method for recording those events and transactions that don’t close at the

end of the fiscal year. It attempts to recognize transactions and events when they occur and not

when cash or equivalents is received or paid).

Accruals are costs which occur in the current period but have not yet been recorded, the

payment is postponed (rent which is paid at the end of the service period).

Prepayments are costs which have been recorded in the current period but relate to

consumptions in the following accounting period, you pay in advance (insurance paid in advance

but the service will be employed in the next fiscal year).

Adjusted trial balance

6)

- The adjusting process starts with the unadjusted trail balance after all transactions have been

recorded.

- Adjusting entries are made at the end of the accounting period and then an adjusted trial

balance is prepared.

- The adjusted trial balance serves as the basis for the preparation of the financial statement.

Examples:

Rent:

- you rent a space but you pay later on at the end of the fiscal year, there is no change in

cash (you don’t record this economic event). The total amount of rent expense is divided by 12

months and register the amount referring to one month (the end of the fiscal year). Because in

bookkeeping there are at least two amounts for each transaction, the other amount is accrued

rent expense which is a sort of liability (the company has a sort of liability towards the agency that

provides the space rented), the amount is relating just to one month relative to the end of the

fiscal year). When the payment is postponed, it is referred to the following fiscal year, you just

account the amount referring to moth of the closing fiscal year.

Insurance:

- insurance contract payed in cash in advance, so there a reduction of cash. This

service will be used also in the following fiscal year. The total amount of insurance is divided by

12 months, expenses of insurance referred just to one month. Prepaid insurance increases of the

total account and decrease of the amount of insurance expense referred to one month.

Even though I paid in advance the total amount the insurance had to guarantee the service also

for the next year. My receivable towards this agency (I’m a customer) is the total amount of the

prepaid insurance decreased by the fact that I have benefitted from these insurance for one

month in this closing fiscal year (the rest will be benefitted in the following fiscal year).

How to record the transaction: decrease of cash, insurance expense in the current closing fiscal

year (total divided by 12) and account receivable called prepaid insurance which is total insurance

minus the amount referred to one month, the closing month of the current fiscal year.

I prepare the adjusting entries and adjusted trial balance when I am at the end of the fiscal year.

The adjusted trial balance is the basis for the financial statement.

If there are no adjusting entries from trial balance we prepare directly the financial statement.

Financial statement

7)

- income statement

Preparation of (profit and loss statement): report revenues (right side) and

expenses (left side), sum of revenues and expenses, calculate profit (on left side, ) or loss (on

right side)

It reports on flows of revenues and expenses off a period of time (on an annually basis, the fiscal

period) whereas the balance sheet report on the stock of resources and claims

It contains:

- Revenues (the positive part of income)

- Expenses (the negative part of income)

- Profit (excess of revenues over expenses) or Loss

It summarizes the result of transactions in terms of reve