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Accounting Principles and Practices: A Comprehensive Overview - Prof. Ferri, Appunti di Cost Accounting

Alma Mater Studiorum – Università di Bologna (UNIBO)Cost Accounting
Prof. Paolo Ferri

A comprehensive overview of accounting principles and practices, covering topics such as common expenses, the recording process, transaction analysis, unearned revenue, insurance, and trial balance. It also delves into adjusting the accounts, including cash basis accounting, deferrals, and accruals. Furthermore, the document explains the accounting cycle, closing the books, and the presentation of assets, liabilities, and equity. It also covers merchandising companies, inventory systems, cost flow assumptions, and inventory analysis, offering a structured approach to understanding accounting concepts and their practical applications. Useful for students and professionals seeking to enhance their knowledge of accounting principles and practices.

Tipologia: Appunti

2022/2023

In vendita dal 28/10/2025

AnastasiaAngeli
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bg1
Chapter 1: Accounting in action
- Accounting consists of three basic activities: it identifies (economic relevant events), records
(systematic, chronological diary classification), and communicates (prepare accounting
reports) the economic events (relevant to the business) of an organization to interested users
(includes bookkeeping function). Then analyze and interpret for users
- Records those events in order to provide a history of its financial activities, recording means
keeping a systematic, chronological diary of events measured in monetary units
- Comunicates the collected informations by means of accounting reports
- Such infromations/datas through the accounting process are simplified and aggregate in a
serie of activities understandable and meaningful
USERS
Internal, finance, marketing, human resources, managers who plan, organize and run the business.
They must answer many important questions so they need detailed information on a timely basis.
So managerial accounting provides internal reports to help users make decisions about their
companies. (projection of income from new sales campaigns, forecasts of cash for the next year)
External, individuals and organizations outside a company who want financial information about
the company. Investors (owners), they consider how risky an operation is and also how much
money they can gain from the business, keep it or sell it? Creditors, (they can be institutional or not,
suppliers or bankers), evaluate the risk of granting credit.
ACCOUNTING STANDARDS ARE HIGHLY REGULATED
In order to ensure high-quality financial reporting, they are issued by standard-setting bodies:
- IASB, international accounting standards board. (London)
- FASB, financial accounting standards board
- GAAP, generally accepted accounting principles, followed in usa
- IFRS, international financial reporting standards (convergence process)
CONVERGENCE: process that tries to increase comparability and reduce differences between USA
(GAAP) and EU (IFRS)
RELEVANCE: means that information is capable of making a difference in a decision
FAITHFUL REPRESENTATION: means that the numbers and the descriptions match what really happened,
they are factual, neutrality
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Chapter 1: Accounting in action

  • Accounting consists of three basic activities: it identifies (economic relevant events), records (systematic, chronological diary classification), and communicates (prepare accounting reports) the economic events (relevant to the business) of an organization to interested users (includes bookkeeping function). Then analyze and interpret for users
  • Records those events in order to provide a history of its financial activities, recording means keeping a systematic, chronological diary of events measured in monetary units
  • Comunicates the collected informations by means of accounting reports
  • Such infromations/datas through the accounting process are simplified and aggregate in a serie of activities understandable and meaningful USERS Internal, finance, marketing, human resources, managers who plan, organize and run the business. They must answer many important questions so they need detailed information on a timely basis. So managerial accounting provides internal reports to help users make decisions about their companies. (projection of income from new sales campaigns, forecasts of cash for the next year) External, individuals and organizations outside a company who want financial information about the company. Investors (owners), they consider how risky an operation is and also how much money they can gain from the business, keep it or sell it? Creditors, (they can be institutional or not, suppliers or bankers), evaluate the risk of granting credit. ACCOUNTING STANDARDS ARE HIGHLY REGULATED In order to ensure high-quality financial reporting, they are issued by standard-setting bodies:
  • IASB, international accounting standards board. (London)
  • FASB, financial accounting standards board
  • GAAP, generally accepted accounting principles, followed in usa
  • IFRS, international financial reporting standards (convergence process) CONVERGENCE: process that tries to increase comparability and reduce differences between USA (GAAP) and EU (IFRS) RELEVANCE: means that information is capable of making a difference in a decision FAITHFUL REPRESENTATION: means that the numbers and the descriptions match what really happened, they are factual, neutrality

➔ 2 primary qualities that make accounting information useful for decision-making MEASUREMENT PRINCIPLES:

  • Historical cost: or cost principle, indicates that companies record assets at their cost, not only at the time the asset is purchased but also over the time the asset is held. For example if a land that was purchased at 20000$, increases its value to 30000$, it continues to be reported at 20000$.
  • Fair value: states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). We go in different direction as to the method we are using, in general most assets follow the historical cost principle because fair value may not be representationally faithful. ASSUMPTIONS:
  • Monetary unit: requires that companies include in the accounting records only transaction data that can be expressed in terms of money, this enables accounting to quantify economic events. Health of a company, quality of service, happiness of employees is not included because it is not quantifiable in money terms.
  • Economic entity: requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. (forms of business ownership: proprietorship, partnership, corporation)
  1. PROPRIETORSHIP: owned by one person, the owner is often manager/operator of the business, owner receives any profits, suffer any losses, he is personally liable for all debts. Generally small service-type of businesses
  2. PARTNERSHIP: owned by 2 or more persons, often retail and service-type business including professional practices such as lawyers, doctors, architects. Each partner has generally unlimited personal liability for the debts of the partnership. Written partnership agreement provide terms to respect as initial investment, duties, division of net income. Transactions must be kept separate from the personal activities of the partners (= proprietorship)
  3. CORPORATION: business organized as a separate legal entity under corporation law and having ownership divided into transferable shares, shareholders enjoy limited liability o they are not personally liable for the debts of the corporate entity. Shareholders may transfer all or part of their ownership shares to other investors at any time. A corporation enjoys an unlimited life even if one owner dies. (Apple, Toyota…)
  • Time period: life of a business can be divides in artificial time periods.
  • Going concern: the business will remain in operation for the foreseeable future. BASIC ACCOUNT EQUATION: Provides the underlying framework for recording and summarizing economic events. This equation applies to all economic entities regardless of size, nature of business or form of business organizations.

Examples of transaction analysis:

  1. Investment by stakeholders => + cash (A), + share capital-ordinary (E)
  2. Purchase of equipment for cash => - cash (A), + equipment (A)
  3. Purchase of supplies on credit => + supplies (A), + accounts payables (L)
  4. Service performed for cash => + cash (A), + revenues (E)
  5. Purchase of advertising on credit => + accounts payables (L), + expenses (E)
  6. Service performed for credit => + accounts receivables (L), + revenues (E)
  7. Payment of expenses => - cash (A), + expenses (E)
  8. Payment of accounts payables => - cash (A), - accounts payables (L)
  9. Receipt of cash on account => + cash (A), - accounts receivables (A)
  10. Payment of dividends => - cash (A), + dividends (E) FINANCIAL STATEMENTS:
  11. Income statement: Reports the profitability of the company’s operations over a specific period of time. Lists revenues first, followed by expenses and shows net income (or net loss).

Revenues – expenses = net income (or net loss)

  1. Retained earnings statement: Reports the changes in retained earnings for the same period of time as IS.

Retained earnings 1 + net income – dividends = retained earnings 2

  1. Statement of financial position: Reports the assets, liabilities, and equity (with the new retained earnings) at a specific date. Lists assets at the top, followed by equity and liabilities. Total assets must equal total liabilities and equity. Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year-end).

Total asset must be equal to total liabilities + total equity

  1. Statement of cash flow (not at the exam): information of cash receipts and payments for a specific period of time. Answers the following: Where did cash come from? What was cash used for? What was the change in the cash balance?
  2. Comprehensive income statement: other important income items that are not part of net income. Reported either by combining with income statement, or separate statement.

Chapter 2 : The recording process

  • ACCOUNT : individual accounting record transactions, increases and decreases in a specific asset, liability, or equity item. It consists in three parts (T-account): title, debit side (left) and credit side (right). Balance can be both debit (left, it does not mean you are in debit) or credit (right) depending on which one is greater. If the sum of Credit entries are greater than the sum of Debit entries, the account will have a credit balance and vice versa.
  • Double entry procedures: each transaction must affect two or more accounts to keep the basic accounting equation in balance; the sum of all debits to the account must be equal to the sum of all credits. The equality of debits and credits provides the basis this procedure. Assets → debits should exceed credits Liabilities → credits should exceed debits Normal balance → is on the increase side → To increase you should add on the debit side for assets and on the credit side for the liabilities, on the other hand if you want to decrease it you do the opposite Issuance of share capital and revenues → increase equity credit Dividends and expenses decrease equity → debit RECORDING PROCESS : business documents are needed
  1. Analyse each transaction for its effect on the accounts.
  2. Enter the transaction information in a JOURNAL / book of original entry ( 1. provides chronological record). Separate journal entry for each transaction. 2. Helps prevent or locate errors because the debit and credit amounts can be easily compared. 3. Discloses the complete effects of a transaction. First debit, then credit. Brief explanation on the line below the credit account title (no currency sign). JOURNALIZING - Entering transaction data in the journal, all of them together (ass., lia., equ.) DEBIT: ASSETS, DIVIDENDS, EXPENSES CREDIT: LIABILITIES, SHARE CAPITAL, RETAINED EARNINGS, REVENUES
  • Trial balance: list of accounts and their balance at a given time, prepared by the companies at the end of the accounting period, it provides the mathematical equality of debits and credits after posting (useful for preparing financial statements). Currency sign shown only for the first item of the column and for the total. The steps for preparing a trial balance are:
    1. List the account titles and their balances.
    2. Total the debit and credit columns.
    3. Prove the equality of the two columns. It does not prove that all recorded transactions in the ledger are correct. If the sum of credit entries are greater than the sum of debit entries, the account will have a credit balance Examples of accounts titles and explanations:
  1. Issued share for cash: D cash, C share capital-ordinary
  2. Issued notes for equipment: D equipment, C notes payables
  3. Received cash for future service: D cash, C unearned service revenues
  4. Paid rent: D rent expenses, C cash
  5. Paid one-year policy: D prepaid insurance, D cash
  6. Purchased supplies on account: D supplies, C accounts payables
  7. Declared and paid a cash dividend: D dividends, C cash
  8. Paid salaries to date: D salaries and wages expenses, C cash
  9. Received cash for service performed: D cash, C service revenue Trial balance has some limitations, indeed it may balance even when:
  10. A transaction is not journalized.
  11. A correct journal entry is not posted.
  12. A journal entry is posted twice.
  13. Incorrect accounts are used in journalizing or posting.
  14. Offsetting errors are made in recording the amount of a transaction.

Currency Signs ◆ Do not appear in journals or ledgers. ◆ Typically used only in the trial balance and the financial statements. ◆ Shown only for the first item in the column and for the total of that column. Underlining ◆ A single line is placed under the column of figures to be added or subtracted. ◆ Totals are double-underlined.

Depreciation: process of allocating the cost of an asset to expense over its useful life. Buildings, equipment, and motor vehicles (assets that provide service for many years) are recorded as assets, rather than an expense, on the date acquired Accumulated depreciation is a contra-asset account, it appears just after the account it offsets (equipment, …) on the balance sheet Book value NET BOOK VALUE = INITIAL VALUE- ACCUMULATED DEPRECIATION o Straight-line method: charges an equal annual amount as an expense so that the asset falls in value evenly throughout its useful life. DEPRECIATION= (INITIAL COST- RESIDUAL VALUE)/ USEFUL LIFE o Reducing balance method: applies the depreciation rate to the NBV of the asset, so that the expense is greatest in the first year of ownership and falls every year thereafter. DEPRECIATION= INITIAL COST* DEPRECIATION RATE o Unearned revenues: cash received before service performed so it is recorded as liability. (rent, airline tickets, magazine subscriptions, customer deposits) Before adjustment: credited unearned revenues (liability); revenues and net income understated, liabilities overstated, equity understated. Adjusting entry: debit (decrease) liability and credit (increase) revenues.

  • ACCRUALS: o Accrued revenues: revenues not yet received in cash or recorder, for service performed. Before adjustment: assets, equity, revenues, and net income understated. Adjustment entry: debit (increase) asset, credit (increase) revenue. o Accrued expenses: expenses incurred but not yet paid in cash or recorded. (interest, taxes, salaries) Before adjustment: expenses and liabilities understated. Adjustment entry: debit (increase) expense, credit (increase) liability. INTEREST= VALUE OF NOTE* ANNUAL INTEREST RATE* TIME Examples of adjusting entries:
  1. Supplies (prepaid expense): debit supplies expenses, credit supplies. (if not adjusted: expenses understated, net income overstated, assets and equity overstated)
  2. Insurance (prepaid expense): debit insurance expense, credit prepaid insurance. (if not adjusted: expenses understated, net income overstated, assets and equity overstated)
  3. Unearned revenues: debit unearned service revenue, credit service revenue.
  4. Accrued revenues: debit accounts receivables, credit service revenues.
  5. Accrued interest: debit interest expense, credit interest payable.
  6. Accrued salaries and wages: debit salaries and wages expenses, credit salaries and wages payables.

Qualities of useful information: relevance: if it makes a difference in business decision so if it has predictive value about the future and confirmatory value, that is if it confirms or corrects prior expectations. Materiality is another aspect of relevance - an item is material when its size makes it is likely to influence the decision of an investor or creditor- faithful representation: means that information accurately depicts what really happened so information must be complete, meaning that nothing important has been omitted; neutral, is not biased toward one position or another; free from error Enhancing qualities: comparability (different company use same accounting principles); consistency (a company uses the same accounting principles and methods from year to year); verifiability (an information is verifiable if independent observers using same methods obtain similar results); timeliness (informations have to arrive in time to have relevance); understandability (informations have that quality if they are presented in a clear and concise fashion). cctuv Prep exp debit exp for both Accr exp credit assets, credit liab Unea rev debit liab, debit assets Accr rev credit revenues ADJUSTED TRIAL BALANCE: It is prepared after the adjusted entries have been journalized and posted. An adjusted trial balance shows the balances of all accounts, including those that had been adjusted, at the end of an accounting period. Its purpose it’s to prove the equality of the total debit balances and total credit balances in the ledger after all adjustments. It provides the primary basis for the preparation of financial statements.

➔ (The Dividends account is closed directly to Retained Earnings and not to Income Summary because dividends are not an expense and they are not a factor in determining net income) Retained earnings represent the accumulated undistributed earnings of the corporation at the end of the accounting period. POST-CLOSING TRIAL BALANCE: lists the permanent account and their balances after journalizing and posting of closing entries; it proves the equality of the permanent account balances carried forward into the next accounting period; it contains only permanent-statement of financial position-account because all temporary accounts will have zero balances. It shows that the accounting equation is in balance at the end of the accounting period, however it does not prove that all transactions have been recorder or that the ledger is correct

CLASSIFIED STATEMENT OF FINANCIAL POSITION:

◆ Presents a snapshot at a point in time ◆ To improve understanding, companies group similar assets and similar liabilities together, items within a group have similar economic characteristics

  • Assets : o Intangible assets: long life, not physical assets (ex. Goodwill, patents, copyrights, trademarks). o Property, plant and equipment: relatively long useful life, they depreciate. (Depreciation - allocating the cost of assets to a number of years. Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life.) (Land, buildings, machinery, equipment) o Long-term investments: investments in other companies that are normally held for many years. (Investments in non-current assets such as land that the company is not using in its operating activities) (idle land) o Current assets: assets that the company expects to convert in cash or use up in less than one year or the operating cycle, whichever is longer. Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers. (Accounts receivable). In the statement of financial position they are listed in the reverse order they expect to convert them into cash (liquidity) The correct order of presentation in a classified statement of financial position for asset is the one above, so Intangible assets, plant, long term, current assets
  • Equity and liability : o Equity: it varies with the form of business organization. Proprietorship, 1 capital account. Partnership, a capital account for each partner. Corporations divide equity in share capital-ordinary and retained earnings. o Non-current liabilities: obligation that a company expects to pay after one year. (Bonds payable, mortgages payable, long-term notes payable, pension liabilities) o Current liabilities: obligation paid within a year or operating cycle. Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude. (notes payable, accounts payable, salaries and wages payable, interest payable, bank loans payable, taxes payable) Liquidity: ability to pay obligation expected to be due within the next year.

Records :

  • Purchases: recorded when receiving goods from the seller.
    • Merchandise for cash: debit (increase) inventory, credit (decrease) cash.
    • Merchandise for credit (on account): debit inventory, credit (increase) accounts payables; should be supported each time by a purchase invoice.
    • Freight costs: (FOB means free on board) o FOB S hipping point: B uyer pays, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Buyer debits inventory (these costs are considered part of the cost of purchasing inventory), credits cash. Companies will recognise these costs as cost of good sold when the inventory is sold o FOB D estination: S eller pays, ownership of the goods remains with the seller until the goods reach the buyer. Seller debits freight-out sometimes also called delivery expense (operating expense), credit cash. When the seller pays the freight charges, the seller will usually establish a higher invoice price for the goods to cover the shipping expense SB-DS Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.
  • Purchase Return: Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash, (Debit accounts payable or cash, credit inventory).
  • Purchase Allowance: buyer keeps the merchandise if the seller grants a deduction from the purchase price, (Reduce accounts payable or cash, reduce inventory).
  • Purchase discount: cash discount for prompt payment, this offers advantages to both parties, the purchaser saves money and the seller is able to shorten the operating cycle by converting the account receivable into cash; credit terms specify the amount of cash discount, the time period in which it is offered, and the time period to pay the full invoice price (ex. 2/10, n/30: 2% cash discount if pays in 10 days, must pay all in 30 days). The amount of discount decreases inventory: because companies record inventory at cost and by paying within the discount period the buyer has reduced its cost. Debit accounts payable (a+b), credit cash (a= amounts due), credit inventory (b= discount). Without discount: debit accounts payable, credit cash.

◆ Sales : recorded when performance obligation is satisfied (revenue recognition principle),

performance obligation is satisfied when the goods are transferred from the seller to the buyer. Sales invoice should support each credit sale.

The seller makes 2 entries for each sale:

  • Returns: o Damaged: 1. Debit sales returns and allowances (contra revenue account to sales revenue), credit accounts receivable (price= selling price). 2. Debit inventory, credit COGS (price = fair value). o Not damaged: 1. Debit sales returns and allowances, credit accounts receivable (price= selling price). 2. Debit inventory, credit COGS (price = cost of good returned).
  • Allowance: debit sales returns and allowances, credit account receivable. (Sales Return and Allowances is a contra-revenue account to Sales Revenue, its normal balance is a debit) (forse anche qui doppio passaggio???)
  • Sale discount: debit cash (a), debit (b) sales discount (contra revenue account to sales revenue, its normal balance is a debit), credit accounts receivable (a+b).

Adjusting entries :

Same as service company, plus inventory adjustment. For those using the perpetual system one additional adjustment to make the records agree with the actual inventory on hand. Involves adjusting Inventory and Cost of Goods Sold. Debit COGS, credit inventory.

Chapter 6: inventories ◆ Inventory: items owned by a company in a form ready for sale to customers in the ordinary course of business. Just in time inventory method reduces inventory level and costs, companies produce or purchase goods just when needed, but reliable suppliers are needed to the success of this method.

  • Merchandising companies have only merchandise inventory, in a form ready for sale to customers.
  • Manufacturing companies have finished good inventory, work in progress inventory, and raw materials inventory. Regardless of the classification, companies report all inventories under Current Assets on the statement of financial position at the end of the accounting period Determining inventory quantities: companies take a physical inventory ➔ Perpetual System Check accuracy of inventory records. Determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft. ➔ Periodic System Determine the inventory on hand. Determine the cost of goods sold for the period
  • Step 1. Taking a physical inventory: Counting, weighting, or measuring each kind of inventory on hand; it is more accurate when goods are not purchased or sold during the counting. Companies often “take inventory” when the business is closed or business is slow. At the end of the accounting period.
  • Step 2. Determining the ownership of the goods: ▪ Goods in transit: purchased not yet received or sold not yet delivered. Depends on FOB shipping point or destination; they must be included by the company who has legal title on them. Legal title is determined by the terms of sale. ➔ FOB Shipping Point: Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. ➔ FOB Destination: Ownership of the goods remains with the seller until the goods reach the buyer ▪ Consigned goods: hold goods for other parties and sell them for a fee without taking the ownership so these goods are not included in the inventory. (charge a commission on you for this) Inventory costing: Inventory is accounted for at cost (expenses necessary to acquire goods and place them in a condition ready to sale).

Unit costs are applied to quantities to compute the total cost of the inventory and the cost of goods sold using the following costing methods: ► Specific identification ► First-in, first-out (FIFO) ► Average-cost ◆ SPECIFIC IDENTIFICATION Actual physical flow costing method , companies keep record of the original cost of each individual inventory item. This practice is relatively rare even though with bar codes it can be really easy to apply this method. Most companies make assumptions ( cost flow assumptions ) about which units were sold After a company has counted inventory, it multiplies the quantity by the unit cost to compute the total cost of inventory and the COGS. COGS = BEGENNING INVENTORY + PURCHASES – ENDING INVENTORY Cost flow assumptions (used to not keep track of the cost of each item sold in a periodic inventory system, they must be used consistently from one accounting period to another), Cost flow does not need be consistent with the physical movement of the goods ◆ COST FLOW ASSUMPTION FIFO (first-in, first-out): The earliest goods purchased are assumed the first to be sold. Often parallels actual physical flow of merchandise. The costs of the earliest goods purchased are the first to be recognized in determining the cost of goods sold, this does not mean that the oldest units are sold first, but just recognized first. No one really knows which are sold first. Cost of ending inventory is COG Available for sale Cost Flow Assumptions