Adjusting Entries

Adjusting entries are that account for transactions that occur in one period but affect another. You have to record these out-of-time entries as you get ready to close one accounting cycle to make sure they have been included in the right period.


Why we use adjusting entries
Sometimes transactions take place in one period but impact another. Other times, you know a transaction will be finalized in the future, but at least some part of it has ties to the current period. These two situations are the main reason for adjusting entries,


For example
                                    
To demonstrate the need for an accounting adjusting entry let's assume that a company borrowed money from its bank on December 1, 2010 and that the company's accounting period ends on December 31.


The bank loan specifies that the first interest payment on the loan will be due on March 1, 2011. This means that the company's accounting records as of December 31 do not contain any payment to the bank for the interest the company incurred from December 1 through December 31. (Of course the loan is costing the company interest expense every day, but the actual payment for the interest will not occur until March 1.) For the company's December income statement to accurately report the company's profitability, it must include all of the company's December expenses—not just the expenses that were paid. Similarly, for the company's balance sheet on December 31 to be accurate, it must report a liability for the interest owed as of the balance sheet date. An adjusting entry is needed so that December's interest expense is included on December's income statement and the interest due as of December 31 is included on the December 31 balance sheet. The adjusting entry will debit Interest Expense and credit Interest Payable for the amount of interest from December 1 to December 31.

Statement of Cash Flow

The statement case floe is provides the information about the inflow and outflow of business entity of during the accounting period.It also included both the cash receipt and payment.

PURPOSE OF CASE FLOW STATEMENT 
The main purpose case flow statement is to provide the information about the company gross receipt and gross payment of during the accounting period.
the ability to generate positive case flow in future period of time.
the ability to meet is obligation and to pay the dividend.
it needs for external financing.

CLASSIFICATION OF CASH FLOW
Operating Activities
the case flow statement is being with operating activities.its included the case effect of those transaction reported in the continue operating section in income statement.
Investing Activities
case flow relating to the investing activities present the case affect of transaction involving fixed assets. intangible assets and investing.
Financial Activities
The final stage of case flows statement is financing activities.The include the activity that involve the company owner and creditor.

METHOD OF CASE FLOWS STATEMENT
1:Direct method
2:Indirect method

FORMATE OF DIRECT METHOD

  CO. NAME
                               STATEMENT OF CASE FLOWS
                            FOR THE YEAR ENDED DEC.31,2010
CASH FLOW FROM OPERATING ACTIVITIES
case receive from customers                                        $ xxxxx
case paid for purchase of merchandise                             xxxx
case payment for expenses                                               xxx
case paid to suppliers and employees                                xxx
case payment for interest and taxes                                   xxx
Net cash flow from operating activities                                       xxxxxxx
CASH FLOWS FROM INVESTING ACTIVITIES
purchase of marketable security                                       xxxxx
sale of marketable security                                               xxxxx
loan made to borrow                                                        xxxx
collection of loan                                                              xxxx
purchase/sales of assets                                                   xxxx
Net cash flows  from operating activities                                     xxxxxxx
CASH FLOW FROM FINANCING ACTIVITIES
Proceed from short term borrowing                                 xxxx
proceed from issued capital                                             xxxx
dividend paid                                                                   xxx
Net cash flows from financing activities                                       xxxxxx
cash & cash equivalent  Jan.1,2010                                              xxxxx
cash$cash equivalent  Dec.31,2010                                             xxxxx

IAS 2

Definition:-

                 IAS defines entries and specifies requirement for the recognition of and entry as an expense or as an asset the measurement of inventories and disclosures about inventories. 

Reasons for Revising IAS 2 :-

                 The International Accounting Standards Board developed this revised IAS 2 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.

SCOPE:-
                 The Standard clarifies that some types of inventories are outside its scope while certain other types of inventories are exempted only from the measurement requirements in the Standard.
   Some of the scope is as follows:-


1. raw material (material in use)
2. work in process (work being in process)
3. finished goods (goods which are prepared for using)


The Standard does not apply to the measurement of inventories of producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established industry practices. The previous version of IAS 2 was amended to replace the words 'mineral ores' with 'minerals and mineral products' to clarify that the scope exemption is not limited to the early stage of extraction of mineral ores.


COST FLOW ASSUMPTIONS:-


1. Average-cost method
2. First in - first out method 
3. Last in – last out method...


The following item should not be include in inventory cost:-
Abnormal waste
Storage costs
Selling costs
Interest costs etc


Fair value:-
                 The amount for which an asset could be saved or liability could be settled.


Write down the net realizable value (NRV):-                
                 It is the estimated which the company’s estimate in the ordinary working of the business. Less the cost of completion this estimated cost should be there to make sale any nrv must be an expense in the period which the written down occur. Any reversal can be recognized in the income statement of the business in the same period which the reveal occurs.


DISCLOSURE:-
                Accounting policy for inventories. Carrying amount, generally classified as merchandise, supplies, materials, work in process and finished goods· g amount, generally classified as merchandise, supplies, materials, work in process and finished goods. The classification depends on what is appropriate for entity…


Carrying amount of any inventories at fair value less cost to sell


Amount of any reversal of a write down to NRV and the circumstances that led to such reversal


Amount of any write-down of inventories recognized as an expense in the period


 Carrying amount of inventories pledged as security for liabilities
Cost of inventories recognized as expense (cost of goods sold). IAS 2 acknowledges that some enterprises classify income statement expenses by nature ( material, labor and so on ) rather than by functions (CGS selling expense and so on ). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period).

IAS 16- Property, plant and equipment

Objective of IAS- 16

The main purpose of IAS 16 is to 

• Accounting treatment of Property,Plant&Equipment
• Recognition of Assets
• Determination of Carrying Amount
• Depreciation charges&impairment losses

Scope

The standards dosn,t apply to 

1. Biological assets related to agricultural activity
2. Minal rights and minerals reserve & non regenerative resources

Recognition of an asset 

 

At the time that PP&E costs are incurred, the entity evaluates these costs against this recognition 

principle. Costs that are expected to result in benefits lasting more than one period are 

capitalized, while day-to-day repair and maintenance costs are expensed as incurred. 

Property, plant, and equipment that qualifies for recognition as an asset is measured at its cost 

, which comprises the purchase amount of the asset less any discount, plus any and all 

taxes, and any costs directly attributable to bringing the asset to the location 

and condition necessary for it to be capable of operating in the manner intended by management.

Initial measurement

 

 

An item of property, plant and equipment should initially be recorded at cost.Cost includes all direct costs incurred on installation,construction or initial testing of the asset,plus all directly attributable costs explained above.

 

MEASUREMENT SUBSEQUENT TO INITIAL MEASUREMENT

1. Cost model

The asset is carried at cost less accumulated depreciation and impairment.

1. Revaluation model

The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably.

 

 

Depreciation

 

 

Depreciation is the systematic allocation of the depreciable amount of an asset over its

useful life. Depreciable amount is the cost of an asset, or other amount substituted for

cost, less its residual value.  Each part of an item of property, plant and equipment

with a cost that is significant in relation to the total cost of the item shall be

depreciated separately.  The depreciation charge for each period shall be recognised in

profit or loss unless it is included in the carrying amount of another asset. 

The depreciation method used shall reflect the pattern in which the asset’s future

economic benefits are expected to be consumed by the entity. 

 

METHODS OF DEPRECIATION

The most common methods to allocate depreciation are:

• Straight Line Method

D=COST-RESIDUAL VALUE/USEFUL LIFE

• Diminishing Balance Method

Depreciation is calculated on the declining balance in this method

The Accounting Cycle

The sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports at regular intervals is often termed the accounting cycle. The accounting cycle begins with the initial recording of business transactions and concludes with the preparation of a complete set of formal financial statements. The term cycle indicates that these procedures must be repeated continuously to enable the business to prepare new, up-to-date financial statements at reasonable intervals.

Transactions.  Changes in assets, liabilities, and equities are recorded as a result of transactions. A transaction is financial in nature, is expressed in terms of money, and generally results in the exchange of economic resources between parties. The two types of transaction are external transactions in which other entities participate and internal transactions in which only the enterprise participates.

Account.  A systematic arrangement that shows the effect of transactions on a specific asset or equity. A separate account is kept for each asset, liability, revenue, expense, and for capital (owner’s equity).

Real and nominal accounts.  Real accounts are asset, liability, and equity accounts and they appear on the balance sheet. Nominal (also called temporary) accounts are revenue and expense accounts and they appear on the income statement. Nominal accounts are periodically closed; real accounts are not.

Ledger.  The book (or computer print outs) containing the accounts is called a ledger. It usually has a separate page for each account. A general ledger is a collection of all the asset, liability, owners’ equity, revenue, and expense accounts. A subsidiary ledger contains a group of accounts that constitute the details related to a specific general ledger account.

Journal.  The book of journal entry were the essential effects and figures in connection with all transactions are initial recorded. From the book of original entry the various amounts are transferred to the ledger.

Posting.  The mechanical process of transferring the essential facts and figures from the book of original entry to the accounts in the ledger.

Trail balance.  A list of all open accounts in the ledger and their balances are trial balance may be prepared at any time,  a trial balance taken immediately after all adjustments have been posted and adjusted trial balance, a trial balance taken immediately after closing entries have been posted in designated and after closing or post closing trial balance.

Adjusting entries.  Entries made at the end of an accounting period to bring all accounts up to date on an accrual accounting basis so that correct financial statements can be prepared.

Financial statements.  Statements that reflect the collection tabulation and final summarization of the accounting data, basically four statements are involved: (1) the balance sheet which show the financial condition of the enterprise at the end of a period (2) the income statement which measures the result of operations during the period (3) the statement of changes in financial position which measures the resources providing during the period and usages to which they are put and (4) the statement of retained earnings which reconciles the balance of the retained earnings accounts from the beginning to the end of the period.

Closing entries.  The formal process by which all nominal accounts are reduced to zero and the net income or net loss is determined and transferred to capital account is known as “closing the ledger”, “closing the books”.