BASIC ACCOUNTING FOR NONACCOUNTANTS

Cebu City Council l june 15-16, 2013 l Cebu City

Expectation
Content process From copax

Opening quote
Life is like a balance sheet. One wrong entry could change everything. We make decisions that give us either an Asset or a Liability. Yet in the end it is up to us on how to make adjustments to balance it.

Learning Objectives [24 hours]

1. Explain the Basic Accounting Concepts and Procedures 2. Explain the different Financial Statements and their significance .. 3. Apply the Standard Chart of Accounts to respective cooperatives.

Program day 1
Opening Activities Welcome Course outline Basic Accounting Concepts and Procedures
Organizational Structure Principles of Accounting Information Users Accounting Equation Accounting Cycle Books of Accounts

Program day 2
Opening Activities Recap Understanding Financial Statements
Financial Condition [ Balance Sheet ] Operation [Income Statement ] Cash Flows Computation of statutory reserves, Div & Patronage refund

SCA for Co-ops

Workshop
Group 1 - Unsay organizational structure sa inyong co-op? Group 2 - Unsay flow of authority in relation to finance, sa inyong co-op? (structure) Group 3 - Unsay duties ug responsibilities sa treasurer ug audit committee? Group 4 /5 - Unsay mga accounting policies ug principles practiced in your co-op?

Workshop
Group 3 - Unsay duties ug responsibilities sa treasurer ug audit committee? Group 4 - Unsay mga accounting policies ug principles practiced in your co-op?
Assign a documentor and reporter

Cooperative Structure
Audit Committee Secretary

General Assembly

Board of Directors

Election Committee

Credit Committee

Treasurer

Education Committee

Ethics Committee

Mediation/ Conciliation Committee

Management and Staff

TREASURER
Roles/Responsibilities & Limitations

Functions and Responsibilities

The Treasurer shall:
a. Oversee the financial management operations of the cooperative, subject to such limitations and control as may be prescribed by the Board of Directors; b. Have custody of all funds, securities, and documentations relating to all assets, liabilities, income and expenditures; c. Maintain full and complete records of all assets, liabilities, income and expenditures; d. Submit financial reports and documents required by the Auditor or the Board of Directors of the Cooperative;

Functions and Responsibilities

e. Ensure that all cash is deposited in accordance with the policies set by the board of directors; f. Prepare special reports required by the regulatory authorities; and g. Perform such other functions as may be prescribed in the By-laws and/or authorized by the General Assembly.

AUDIT COMMITTEE
Roles/Responsibilities & Limitations

FINANCIAL/INTERNAL AUDIT
A formal process where financial activities and financial records are examined and compared to predetermined audit criteria.

Processes involves: Review and assessment Examination and validation Conclusion and reporting

INTERNAL AUDIT THEN & NOW

BEFORE (Current Perception) Error detection Reactive approach Personnel Compliance Loss determination Legal recovery TODAY (Future trend) Risk-based Pro-active approach System enhancement Personnel development Management monitoring Threat and risk management Consultative

Check / ensure observance of accounting process, principles and practices.. Systems and procedures..

PERFORMANCE AUDIT
How the officers and management staff are carrying out their responsibilities ?? Economy, Efficiency and Effectiveness Identify ways of improving value for money improve systems and control

SOCIAL AUDIT
Art.80. Annual Audit. Cooperatives registered under this Code shall be subject to an annual financial, performance and social audit.

economic

social

Components and Social Audit Indicators

The Social Audit of the cooperatives shall consist of the following major components/categories with its objectives:
Membership Assets building Community involvement and Solidarity Information accessing and dissemination

Gender, Youth and Elderly Leadership and Organizational Management

WHAT is accounting ?

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character and interpreting the results thereof.

Functions of Accounting
Recording of data Classifying of data Summarizing of data Interpreting the results

major users of acctg info

Owners of the business Management of the business Banks or creditors Government or its agencies Prospective investors/members Consumers Employees of the business The general public

Concepts, Rules & Principles of accounting!

are general guidelines for sound accounting practices.

What are they?

Business entity concept. Dual aspect concept. Going concern concept. Accounting period concept. Monetary concept/money measurement concept. Historical (cost) concept/cost concept. Matching concept. Accrual concept.

Business Entity Concept

Proprietor of an enterprise is considered distinct and separate from the business. Only the business transactions are recorded and reported, and not the personal transactions of the proprietor. The personal assets of the owners or shareholders are not considered while recording and reporting the assets of the business entity.

Dual Aspect Concept

This is the basic principle of accounting. All business events/transactions are regarded as having a dual aspect that is twofold effect. Each receiver is also a giver, and every giver is also a receiver.

Dual Aspect Concept

Example 1: Mr A purchases furniture for cash P1,000, he receives furniture on one hand, and pays P1,000 on the other. Thus the twofold effect is
Increase in one asset that is furniture. Decrease in other asset that is cash.

Dual Aspect Concept

Example 2, goods sold for cash. The two aspects are
Cash received. Giving away of goods.

The financial statements of a business should reflect the twofold effect of each business transaction.

Dual Aspect Concept

Each transaction involves two entries, a debit entry and a credit entry. Every debit must have a corresponding credit, and vice versa. Since every debit has a corresponding credit, the total debits must at any time equal the total credits.

Going Concern Concept

A going concern is defined as any enterprise which is expected to continue operating indefinitely in the future.

Going Concern Concept

Significant of this concept:
Financial statements are prepared on the basis of this concept. Continuity of business activities are ensured to outsiders over an indefinite period of time. The fluctuations in the market value of fixed assets is not taken into account. On the basis of this concept, a business is judged for its capacity to earn profits in future.

Accounting Period Concept

The net income can be measured by comparing the assets of the business existing at the time of its commencements with those existing at the time of its liquidation. Since life of business is assumed to be indefinite, the measurement of income according to this concept is not possible for a very long period.

Accounting Period Concept

The proprietor of the business cannot wait for such a long period. Therefore accountants choose some shorter and convenient time for the measurement of income. Twelve months period is normally adopted for this purpose. This time interval is called accounting period.

Monetary Concept/Money Measurement Concept

Every transaction is recorded in terms of money. A fact or happening which cannot be expressed in terms of money is not recorded in the account books.
example

Historical (Cost) Concept/Cost Concept

Asset is recorded at the price paid to acquire it that is at cost. This cost is the basis for all subsequent accounting for the asset. This cost price at the time of purchase is systematically reduced by the process called depreciation.

Matching Concept
All expenses incurred in an accounting year are compared with the revenues during that year. For this we have to recognize the revenues or inflow during an accounting period and the expenses incurred in securing those inflows. Net income is arrived at by applying the formula Net income = Revenues Expenses

Accrual Concept
The term accrual means something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. Revenue is realized at the time of sale of goods or services irrespective of when the cash is received.

Accrual Concept (Continue)

The financial statements will not reveal true and fair view of the affair of a business unit, unless all the transactions or events of the concerned year are brought into the books of accounts. Expenses are recognised at the time the services are received irrespective of when actual payment for the service is made.

MODIFIED ACCRUAL for CO-OP

items are recognized as assets, liabilities, equity and expenses when they satisfy the definition and recognition criteria for these elements while revenues may only be recognized when there is an inflow of cash or cash equivalent.

Example
interest on loans is recognized as income upon collection of installment payment during the term of loan. Income from investments in cooperatives is recognized when cash is received.

Off-setting
is getting the net amount of related assets and liabilities and presenting the net amount in the financial statements. The general rule is that there should be no offsetting of assets and liabilities except when it is required or allowed by accounting standard.

ACCOUNTING CONVENTIONS

Introduction
to facilitate its recording of business transactions in the books of accounts. They help in comparison of accounting data of different business units or of the same unit for different periods. to make accounting data more useful.

Introduction
Accounting conventions are:
Convention of disclosure. Convention of materiality. Convention of consistency. Convention of conservatism.

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Convention of Disclosure
All accounts must be honestly prepared. All material information must be disclosed therein. The balance sheet and profit and loss account are to be prepared as per the law.

Convention of Materiality
Unimportant items are either left out or merged with other items. If certain items are immaterial, then it does not matter how you deal with it in the accounts, because it cannot possibly have any significant effect on the results. The materiality convention allows the other conventions to be ignored and a simpler accounting treatment to be adopted.

Convention of Materiality
It should be noted that an item of material for one concern may be immaterial for another. Similarly an item material in one year may not be material in next year.

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Convention of Consistency
It states that, once specific accounting policies have been adopted, they should be followed in all subsequent accounting periods.

Convention of Conservatism/Prudent
This is the policy playing safe. The need to make estimates and form judgements when preparing financial statements. The conservatism states that, the accountant should error the side of caution.

 In other words, a prudent accountant will tend to:

Understate revenue, profits and assets. Overstate expenses, losses and liabilities.

It ensures that financial statements do not give and over-optimistic view of the financial performance and position of a business.

Elements of acctg
Assets Owners Equity Revenue Expenses

5 Elements
Assets

Resources owned by the coop Result of past transaction or event It has capacity to provide future
services or benefits

Can be reliably measured

ASSETS
Cash and other cash items Loans Receivables Accounts Receivable-Trade Advances to Officers, Employees & Members Due from Accountable Officers, Employees & Members Other Receivables-Advances Merchandise Inventory Investment-PCF & VICTO Leasehold Rights and Improvements Furniture, Fixtures and Equipments Transportation Equipment Unused Office Supplies Prepaid Expenses

5 Elements
Liabilities

Present obligations of the coop They arise from past transactions or

events

Settlement requires outflow of

resources from the coop

LIABILITIES
Savings Deposit Accounts Payable Advances from Customer Accrued Expenses Loans Payable-PCF Loans Payable-KDI (Marketing Fund)

Equity

The residual interest in the

assets of the coop that remains after deducting its liabilities

Members share capital,

donation?grants & statutory fund

MEMBERS EQUITY
Share Capital Reserve fund Net Surplus Mortuary Fund

5 Elements
Revenue

Actual earnings as a result of

the coops operation the period during

REVENUES/INCOME
Sales Interest Income on Loans Service Fees Membership Fee Interest Income on Bank Deposits

5 Elements
Expenses

Cost of assets consumed or

services used in the process or earning revenue

Decreases in the equity that

result from operations of the coop

EXPENSES
Interest Expense on Borrowings Incentives and Allowances Other Operating Expenses

The Accounting Process

Documents

Information is entered in a Journal

Journal entries are posted to Ledger

Trial Balance

Post to ledger

Every end of accounting period:

Financial Statements Adjusting Entries

Trial Balance

ACCOUNTING FRAMEWORK
TRANSACTIO N(S)
BOOKS OF ACCOUNT SOURCE DOCUMEN ORIGINAL FINAL ENTRY TS ENTRY

FINANCI AL REPORT
BALANCE SHEET

CASH
CASH-IN

OFFICIAL RECEIPT 1
2

CASH RECEIPT
JOURNAL GENERAL

CASH
DISBURSEMENT

INCOME STATEMENT

CASH-OUT

VOUCHER
1 2

CASH
DISBURSEMENT

LEDGER

CASH-FLOW STATEMENT

JOURNAL

NON-CASH
ADJUSTMENTS

SUBSIDIARY

JOURNAL VOUCHER 1
1 2

GENERAL JOURNAL

LEDGER

ACCOUNTING EQUATION

Basic Accounting Equation

ASSETS EQUITIES
Members Equity

ASSETS

LIABILITIES

RULES OF DEBIT AND CREDIT

Personal Accounts: Debit the receiver and credit the giver Real Accounts: Debit what comes in and Credit what goes out Nominal Account: Debit expenses and loses and Credit incomes and gains

Double Entry Bookkeeping

Every transaction affects at least 2 accounts

Where there is value received, there is value parted with Total debits must equal the total credit
Value received Value parted with

Debit
e.g.

Credit

Cash Expenses

Loans Receivable Cash

Normal Balance Real Accounts

Assets
Normal balance (Debit to increase) (Credit to decrease)

Liabilities
(Debit to decrease) Normal balance (Credit to increase)

Equity
(Debit to decrease)

Normal balance
(Credit to increase)

Normal Balance Nominal Accounts

Income
(Debit to decrease) Normal balance

Expenses
Normal balance (Debit to increase) (Credit to decrease)

(Credit to increase)

WORKSHOP
1. Member A makes a share capital of P1,000 2. Coop buys a computer amounting to P36,000 3. Member B makes a savings deposit of P5,000 4. Coop receives loan proceeds from PCF as follows: Principal P500,000, Service Fee P15,000 5. Member C pays coop loan as follows: Principal P3,000, Interest P250 6. Coop pays office rent for the month P2,500 7. Coop pays loan to PCF: principal P10,000, interest P3,000 8. Member B makes a savings deposit withdrawal of P500

ACCOUNTING CYCLE

Program day 2
Opening Activities Recap Understanding Financial Statements
Financial Condition [ Balance Sheet ] Operation [Income Statement ] Cash Flows Computation of statutory reserves, Div & Patronage refund

SCA for Co-ops

RECAP / Winner takes all

Round 1 rep per group Round 2 - group

Questions..
1. True or false.

Understanding Financial Statements

The Standard Chart of Accounts for Co-ops