A. Accounting Process

• Recognition

• Recording

• Measurement

• Reporting

Example:

Charles sets up a new business. He has bought motor vehicle 2000 $, premises 5 000 $, stock of goods (materials) 1 000 $. Payments will be made in 3 weeks. He borrowed 4 000 $ from friend (payment within 6 months). After the events just described, he has 100 $ cash in hand and 4 700 $ at bank. Fair value of stock of goods is 800 $.

B. Recognition of Tangible and Intangible Assets

Tangible assets -non current assets (property, plant and equipment) with expected useful lives exceeding one year

Intangible assets - property rights with expected useful lives exceeding one year

Property, plant and equipment under construction - non-current assets, in the time of their construction, assembly or improvement

Recording Tangible and Intangible Assets

Initially recorded at cost of acquisition

Cost of acquisition - purchase price less recoverable VAT plus duties plus costs related to preparing asset for use less any rebates and discounts.

Measurement (Re-valuation) - at balance sheet date

At cost of acquisition less accumulated depreciation and impairment losses

3. Depreciation

• Measure of wearing out

• Systematic allocation of acquisition cost

• Over economic life of asset

• Commences no earlier than asset is commissioned for use, and depreciation ends no later than when accumulated depreciation equals the initial cost of the item of property, plant and equipment or a given asset is earmarked for scrapping or sale

Book value of asset - cost of acquisition less accumulated depreciation and impairment loss

Methods of Depreciation:

I. Time -Factor Methods

1. Straight-Line Method

- Cost of acquisition is divided by economic life of asset

Example:

Company's bought passenger car on credit 11 000 $.

Useful life - 5 years

Estimated residual value 1 000 $

Residual value - net amount for asset at the end of its useful life

2. Diminishing Balance Method

• Calculated on net written-down value

Example:

Company's bought passenger car on credit 11 000 $.

Useful life - 5 years

Estimated residual value 1 000 $

3. Reducing Balance Method

• Constant percentage rate calculated on net written-down value

• Multiple of straight-line rate

• Constant factor (1.5 or 2)

• Without residual value

Example:

Company's bought passenger car on credit 11 000 $.

Useful life - 5 years

4. Sum of the Years Digits Method

• Denominator = sum of years digits

• Numerator = years digits listed in reverse order

Example:

Company's bought passenger car on credit 11 000 $.

Useful life - 5 years

Estimated residual value 1 000 $

II. Use-Factor Methods

1. Service Hours Method

- Economic life is measured in working hours

- Proportion of actual hours worked to total hours available

Example:

Company's bought production machine on credit 40 000 $.

Useful life - 6 years

Estimated residual value 1 000 $

Working hours were estimated at 20 000 h.

In the first year machine was operated 6 000 h.

In the second year machine was operated 2 000 h.

In the third year machine was operated 5 000 h.

In the fourth year machine was operated 4 000 h.

In the fifth year machine was operated 2 000 h.

In the sixth year machine was operated 1 000 h

2. Productive-Output Method

- Economic life - total unit output of asset

- Proportion of production for period to estimated total unit output

Example:

Company's bought production machine on credit 15 000 $.

Useful life - 5 years

Estimated residual value 1 000 $

Estimated product life of 30 000 units.

In the first year machine produced 8 000 units.

In the second year machine produced 7 000 units.

In the third year machine produced 7 000 units.

In the fourth year machine produced 6 000 units.

In the fifth year machine produced 2 000 units.

D. Impairment of Asset

Impairment loss

• asset controlled by an entity will not bring, in whole or in part, expected economic benefits in the future

• write-down of the book value of asset to its net selling price or to its fair value

Test asset for impairment

1. Carrying amount (value) of asset is greater than its recoverable amount

• carrying amount - cost of acquisition less accumulated depreciation

• recoverable amount is the higher of net selling price and value in use

net selling price is amount at which an asset could be disposed less any direct selling costs

value in use is the present value of future cash flows obtainable as result of asset's continued use (including residual value)

The revised carrying amount is then depreciated over remaining economic life.

Example 1

Test impairment for asset after first year of use.

Cost of acquisition of machine is 102 000 $.

After first year accumulated depreciation is  22 000 $.

Economic life - 10 years.

Residual value is 5 000 $.

Current net selling price 66 000 $.

Direct selling costs 1000 $

Future cash flows 15 000 $ for each year.

Discount rate 5 %.

Example 2

Test impairment for asset after second year of use.

Cost of acquisition of machine is 110 000 $.

Company uses straight-line method to calculate depreciation.

Economic life - 5 years.

Residual value is 10 000 $.

Current selling price 66 000 $.

Direct selling costs 1000 $

Future cash flows 10 000 $ for each year.

Discount rate 5 %.

Depreciation after impairment

Restoration of impairment loss

• asset controlled by an entity will bring, in whole or in part, higher (after impairment) expected economic benefits in the future

Example 1

Test impairment for asset after third year of use.

Cost of acquisition of machine is 220 000 $.

Company uses straight-line method to calculate depreciation.

Economic life - 10 years.

Residual value is 20 000 $.

Current selling price 125 000 $.

Direct selling costs 5000 $

Future cash flows 29 500 $ for each year.

Discount rate 5 %.

Depreciation after impairment

After fifth year future cash flows 32 000 $ for each year

Net selling price 125 000 $

E. Accounting for Revaluation

Fair value - amount for which asset could be exchanged between knowledgeable and willing parties

Basically market value

Increase of asset value directly credited to equity

Exception - where increase reverses revaluation decrease previously recognized as cost

Decrease of asset - cost

Exception - loss on revaluation is charged against revaluation surplus

Example

1. Company buys freehold land for 50 000 $. The land is revalued to 70 000 $ in year 3, to 40 000 $ in year 4 and to 55 000 $ in year 5. Land was sold for 49 000 $. This land is not depreciated.

2. Company buys freehold land for 50 000 $. The land is revalued to 40 000 $ in year 3, to 45 000 $ in year 4 and to 60 000 $ in year 5. Land was sold for 49 000 $.This land is not depreciated.

F. Inventories

Raw materials - acquired for use in production process

Goods - bought for sale without any changes

Goods in process - partly processed and requiring further work

Finished goods - manufactured products ready for sale

Recognition of materials

Purchase price

Cost of acquisition

Record price - variances

Ex.

Company's bought materials from supplier A.

Purchase price 10 000 $ + VAT (23 %) - VAT taxpayer

Invoice for Transport 2 000 $ + VAT

Record price 9 000 $.

Cost allocation methods of inventories

Specific identification - identifying cost of each unit of inventory

FIFO - costs should be charged to revenue in order in which occurred

LIFO - The latest cost of item should be charged to revenue

Weighted average method - average cost should be charged to revenue

Example

Purchase, sale transactions of materials.

Date Operation Units Unit cost ($)

01.12 Purchase 40 20

02.12 Purchase 30 25

03.12 Purchase 30 30

04.12 Sale 70

Sales of materials

Company's bought materials for 100 000 $ + VAT (23 %) - VAT taxpayer. Invoice for transport 2 000 $ + VAT. Record price 9 000 $.

50 % of materials was sold for 55 000 $ + VAT 23 %. Materials were handed to customer.

Goods

Calculation of inventory value

In the wholesale

• purchase price

• cost of acquisition

Example

Company bought goods for 20 000 $ + VAT (23 %). VAT taxpayer. Invoice for transport 500 + VAT 23 %. Payments in 20 days.

In the retail

• net selling price

• selling price

Calculation of profit margin

• percentage of sale price

• percentage of cost of acquisition

Example 1

Cost of acquisition of goods - 10 000 $

Profit margin 20 %

Example 2

Company bought goods for 20 000 $ + VAT (23 %). VAT taxpayer. Invoice for transport 500 + VAT 23 %. Profit margin 10 %. Payments in 20 days.

Case 1

Company „Abis” is VAT taxpayer. On the 31.12.200X Year company has:

Fixed tangible assets 860 000 $

Long-term investments 100 000 $

Accumulated depreciation 180 000 $

Cash in hand 120 000

Cash at bank 200 000

Owner's eqiuty ?

Business transactions:

1. Company's bought 2 computers (need assembly) for 20 000 $ + VAT 22 % (each). Economic life - 5 years. Residual value 2 000 $. Diminishing balance method of depreciation.

2. Invoice for assembly 5 000 $ (cost is shared equally).

3. Invoice for loading and unloading computers 2 000 $ + VAT. 60 % of expense is assigned to computer no 1.

4. Computers were commissioned for use.

5. Company received car through donation. It's market value 25 000 $. Economic life - 5 years. Reducing balance method of depreciation ( constant factor -2).

6. Invoice for sold car. Initial cost of car 25 000 $. Accumulated depreciation 10 000 $. Selling price 60 000 $ VAT. Car's handed to customer.

7. Company's commissioned for use building with accordance to 6-month rental agreement. Value of building is 10 000 $.

8. Production machinery was given for scrapping. Initial cost 50 000 $. Accumulated depreciation 15 000 $.

9. Invoice for scrapping 2 000 $ + VAT

10. Company's bought production machinery for 30 000 $ + VAT. Economic life - 4 years / estimated product life of 100 000 units.

11. Company's bought rights to produce trucks for 10 000 $ + VAT (economic life - 3 years). Sum of the years digits method of depreciation. Residual value zero.

12. Company's made monthly depreciation (production machinery produced 1 000 units).

G. Accruals and Prepayments

Prepayment (prepaid expense or cost)

Ex

Insurance for company is 1000 $ a year. In this year company paid 1 500 $.

Accrued cost (expense)

It is used but not paid yet

Example

Production machine was repaired (10 000 $ + VAT) but company didn't get invoice before end of year

Bad debts

Provision for bad debts was made 15 000 $.

Provision for bad debts was consumed 10 000 $.

H. Employees' Pay

Gross pay - before deductions

Net pay (take-home) pay after deductions

Deductions:

National insurance contributions

In Poland:

National insurance contributions paid by employer

National insurance contributions paid by employee

Income tax - including personal reliefs

Health insurance

Deducted from income tax

Not deducted from income tax

Ex.

Calculated salaries of directly production employees 25 000 $ (gross pay). National insurance contributions paid by employer 25 %. National insurance contributions paid by employee 20 %. Health insurance at 9 %. Income tax 18 %. Personal reliefs amount 2 000 $.

I1. Manufacturing cost of product

Classification of cost by type

Classification of cost by function

indirect production cost

direct production cost

Finished goods Semi-finished goods Goods in process

Example

1. Company bought materials for 40 000 $ + VAT (23 %). Record price is 45 000 $. Payment 20 days.

2. 20 % of materials was consumed in production process.

3. Permuted depreciation of production machine for current month 10 000 $.

4. Calculated salaries of directly production employees 25 000 $.

5. 100 units of product were produced in this month (value of semi-finished goods 2000 $, value of goods in process 5000 $)

Case 2

1. Company bought materials for 100 000 $ + VAT (22 %). Record price is 90 000 $.

2. Company bought goods for 50 000 $ + VAT (22 %). Profit margin is 20 %. Company uses selling price to record goods.

3. Invoice for assembly of production machine 10 000 $ + VAT.

4. Invoice for business trip of directly production employee 1 000 $ + VAT.

5. 50 % of materials was consumed in production process.

6. Permuted depreciation of production machine for current month 10 000 $.

7. Permuted depreciation of engine room for current month 20 000 $ .

8. Permuted depreciation of administration building for current month 25 000 $ .

9. Calculated salaries of directly production employees 25 000 $.

10. Calculated salaries of indirectly production employees 10 000 $.

11. Calculated salaries of administration employees 20 000 $.

12. 100 units of products were produced in this month.

13. 50 % of products was sold for 80 000 $ + VAT.

14. 25 % of goods was sold.

15. Fixed tangible asset was sold for 100 000 $ + VAT. Cost of acquisition was 100 000 $, Accumulated depreciation 50 000 $.

16. Write off of fixed tangible asset caused by flood 10 000 $.

I.2 Profit / Loss Statement

• Comparative variant

• Calculation variant

Example 1

1. Company bought materials for 50 000 $ + VAT (22 %). Record price is 40 000 $.

2. Invoice for postal services 100 $ + VAT.

3. 50 % of materials was consumed in production process.

4. Permuted depreciation of production machine for current month 5 000 $.

5. Permuted depreciation of administration building for current month 10 000 $ .

6. Calculated salaries of indirectly production employees 1 000 $.

7. Calculated salaries of administration employees 2 000 $.

8. 100 units of products were produced in this month.

9. 50 % of products was sold for 50 000 $ + VAT.

10. Fixed tangible asset was sold for 10 000 $ + VAT. Cost of acquisition was 100 000 $, Accumulated depreciation 95 000 $.

Example 2

1. Company bought materials for 10 000 $ + VAT (22 %). Record price is 9 000 $.

2. Company bought goods for 5 000 $ + VAT (22 %). Profit margin is 20 %. Company uses selling price to record goods.

3. Invoice for commercial 1 000 $ + VAT.

4. 50 % of materials was consumed in production process.

5. Permuted depreciation of engine room for current month 20 000 $ .

6. Permuted depreciation of administration building for current month 2 000 $ .

7. Calculated salaries of directly production employees 5 000 $.

8. Calculated salaries of administration employees 20 000 $.

9. 100 units of products were produced in this month.

10. 50 % of products was sold for 10 000 $ + VAT.

11. 25 % of goods was sold.

12. Trademark was sold for 15 000 $ + VAT. Cost of acquisition was 100 000 $, Accumulated depreciation 90 000 $.

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