Basic Concepts for the Discipline PRINCIPLES of ACCOUNTING

8/18/2019 Basic Concepts for the Discipline PRINCIPLES of ACCOUNTING

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Basic concepts for the discipline PRINCIPLES OF ACCOUNTING

For students of EREI Facult!

Note: The basic concepts represent general notions and information about the questions studied and

analyzed at lectures and seminars. Extensive knowledge of basic concepts in not enough for successful

passing the exam participation in lectures and accumulation of additional information during the

seminars is necessary to obtain all required knowledge and skills.

C"APTER #$ GENERAL NOTIONS OF ACCOUNTING% FUNCTIONS AN& BASIC

PRINCIPLES

1. Notions, objectives and functions of accounting2. Legal framework of accounting in the RM

3. asic accounting !rinci!les". #ccounting !olic$%. &inancial and managerial accounting'. (sers of accounting information

Accountin' is a set of conce!ts and techni)ues that are used to measure and re!ort financial

information about an economic unit. *he economic unit is generall$ considered to be a se!arate

enter!rise. *he information is re!orted to a variet$ of different t$!es of interested !arties. *hese

include business managers, owners, creditors, governmental units, financial anal$sts, and even

em!lo$ees.

+bjectives of #

- *o !rovide information- *o assure control

&unctions of #

- Recording and !rocessing data- -roviding information- ontrol function- Legal function- &unction of forecast

Legal acts

- Law of #ccounting from 2/.0".200/- National #ccounting tandards- ommands on N#- hart of #ccounts- &R- &iscal ode- nstructions, letters etc. of Ministr$ of &inance- Law of udget etc.

Basic accountin' principles(

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BasicAccountin'

Principle)hat It eans

#$ Econo*icEntit!Assu*ption

*he accountant kee!s all of the business transactions of a sole!ro!rietorshi! se!arate from the businessowner4s personal transactions. &or legal !ur!oses, a sole!ro!rietorshi! and its owner are considered to be one entit$, but foraccounting !ur!oses the$ are considered to be two se!arate entities.

+$ onetar!UnitAssu*ption

5conomic activit$ is measured in monetar$ units, and onl$transactions that can be e6!ressed in those units dollars are recorded.

,$ CostPrinciple

&rom an accountant4s !oint of view, the term 7cost7 refers to theamount s!ent 8cash or the cash e)uivalent9 when an itemwas originally obtained, whether that !urchase ha!!ened last $ear orthirt$ $ears ago. &or this reason, the amounts shown on financialstatements are referred to as historical cost amounts.

.

-$ Full&isclosurePrinciple

f certain information is im!ortant to an investor or lender using thefinancial statements, that information should be disclosed within thestatement or in the notes to the statement. t is because of this basicaccounting !rinci!le that numerous !ages of 7footnotes7 are oftenattached to financial statements.

# com!an$ usuall$ lists its significant accounting !olicies as the firstnote to its financial statements.

.$ Goin'Concern

Principle

*his accounting !rinci!le assumes that a com!an$ will continue toe6ist long enough to carr$ out its objectives and commitments and will

not li)uidate in the foreseeable future. f the com!an$4s financialsituation is such that the accountant believes the com!an$ will not beable to continue on, the accountant is re)uired to disclose thisassessment.

*he going concern !rinci!le allows the com!an$ to defer some of its!re!aid e6!enses until future accounting !eriods.

/$ atchin'Principle

*his accounting !rinci!le re)uires com!anies to use the accrual0asis of accountin'. *he matching !rinci!le re)uires that e6!ensesbe matched with revenues. &or e6am!le, sales commissions e6!ense

should be re!orted in the !eriod when the sales were made 8and notre!orted in the !eriod when the commissions were !aid9. :ages to

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em!lo$ees are re!orted as an e6!ense in the week when theem!lo$ees worked and not in the week when the em!lo$ees are !aid.f a com!an$ agrees to give its em!lo$ees 1; of its 2012 revenues asa bonus on ed as soon as a !roduct hasbeen sold or a service has been !erformed, regardless of when themone$ is actuall$ received. (nder this basic accounting !rinci!le, acom!an$ could earn and re!ort 20,000 of revenue in its first month ofo!eration but receive 0 in actual cash in that month.

&or e6am!le, if # onsulting com!letes its service at an agreed

!rice of 1,000 M=L # should recogni>e 1,000 M=L of revenue assoon as its work is done?it does not matter whether the client !a$sthe 1,000 M=L immediatel$ or in 30 da$s. =o notconfuse revenue with a cash receipt .

4$ aterialit! ecause of this basic accounting !rinci!le or guideline, an accountantmight be allowed to violate another accounting !rinci!le if an amountis insignificant. -rofessional judgement is needed to decide whetheran amount is insignificant or immaterial.

ecause of materialit$, financial statements usuall$ show amountsrounded to the nearest M=L, to the nearest thousand, or to thenearest million M=L de!ending on the si>e of the com!an$.

5$Conser2atis*

f a situation arises where there are two acce!table alternatives forre!orting an item, conservatism directs the accountant to choose thealternative that will result in less net income and@or less asset amount.onservatism hel!s the accountant to 7break a tie.7 t does not directaccountants to be conservative. #ccountants are e6!ected to beunbiased and objective.

*he basic accounting !rinci!le of conservatism leads accountants toantici!ate or disclose losses, but it does not allow a similar action forgains. &or e6am!le, potential losses from lawsuits will be re!orted onthe financial statements or in the notes, but potential gains will not bere!orted. #lso, an accountant ma$ write inventor$ down to an amountthat is lower than the original cost, but will not write inventor$ up to anamount higher than the original cost.

AAA -L5#5, +M-#R5 *+

Le'ea Conta0ilitatii R3

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Articolul /$ -rinci!ii de ba>B Ci caracteristici calitative

819 ontabilitatea se Dine conform urmBtoarelor !rinci!ii de ba>B

a9 continuitatea activitBDiiE

b9 contabilitatea de angajamenteE

c9 !ermanenDa metodelorE

d9 se!ararea !atrimoniului Ci datoriilorE

e9 necom!ensareaE f9 consecvenDa !re>entBrii.

829 nformaDia din ra!oartele financiare trebuie sB cores!undB urmBtoarelor

caracteristici calitative

a9 inteligibilitateaE

b9 relevanDaE

c9 credibilitateaE

d9 com!arabilitatea.

FINANCIAL ACCOUNTING

onsider that financial accounting is targeted toward a broad base of e6ternal users, none of whom control the actual !re!aration of re!orts or have access to underl$ing details. *heir abilit$to understand and have confidence in re!orts is directl$ de!endent u!on standardi>ation of the!rinci!les and !ractices that are used to !re!are the re!orts. :ithout such standardi>ation,re!orts of different com!anies could be hard to understand and even harder to com!are.

tandardi>ation derives from certain wellForgani>ed !rocesses and organi>ations. n the (nitedtates, a !rivate sector grou! called the Financial Accountin' Standards Board 89 is!rimaril$ res!onsible for develo!ing the rules that form the foundation of financial re!orting. *heGs global counter!art is the International Accountin' Standards Board 8#9.*he # and are working toward convergence, such that there ma$ eventuall$ be a

single harmonious set of international financial re!orting standards 8&R9. *his effort toestablish consistenc$ in global financial re!orting is driven b$ the increase in global trade andfinance. ation is needed to enable com!arisons between individualcom!anies o!erating within a single econom$, so too is standardi>ation needed to facilitateglobal business evaluations.

&inancial re!orts !re!ared under the generall$ acce!ted accounting !rinci!les 8H##-9!romulgated b$ such standardFsetting bodies are intended to be general !ur!ose in orientation.*his means the$ are not !re!ared es!eciall$ for owners, or creditors, or an$ other !articular user grou!. nstead, the$ are intended to be e)uall$ useful for all user grou!s. #s such,attem!ts are made to kee! them free from bias 8neutral9. tandardFsetting bodies are guided b$conce!ts that are aimed at !roduction of relevant and re!resentationall$ faithful re!orts that are

useful in investment and credit decisions.

MANAGERIAL ACCOUNTING

Managerial accounting information is intended to serve the s!ecific needs of management.usiness managers are charged with business !lanning, controlling, and decision making. #ssuch, the$ ma$ desire s!eciali>ed re!orts, budgets, !roduct costing data, and other details thatare generall$ not re!orted on an e6ternal basis. &urther, management ma$ dictate the!arameters under which such information is to be accumulated and !resented. &or instance,H##- ma$ re)uire that certain !roduct develo!ment costs be deducted in com!uting incomeEon the other hand, management ma$ see these costs as a longFterm investment and sti!ulate

that internal decision making be based u!on income numbers that e6clude such costs. *his istheir !rerogative. Io!efull$, internal re!orting is being done logicall$ and rationall$, but it neednot follow an$ !articular set of mandator$ guidelines.

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usiness managers need accounting information to make sound leadershi! decisions. nvestors

ho!e for !rofits that ma$ eventuall$ lead to distributions from the business 8e.g., JdividendsK9.

reditors are alwa$s concerned about the entit$Gs abilit$ to re!a$ its obligations. Hovernmental

units need information to ta6 and regulate. #nal$sts use accounting data to form o!inions on

which the$ base investment recommendations. 5m!lo$ees want to work for successful

com!anies to further their individual careers, and the$ often have bonuses or o!tions tied to

enter!rise !erformance. #ccounting information about s!ecific entities hel!s satisf$ the needs of all these interested !arties.

*he diversit$ of interested !arties leads to a logical division in the disci!line of accounting

financial accounting and managerial accounting. Financial accountin' is concerned with

e6ternal re!orting to !arties outside the firm. n contrast, *ana'erial accountin' is !rimaril$

concerned with !roviding information for internal management.

USERS OF A INFORATION

nside users +utside users

Managers, owners, workers !nterested directly investors, creditors, clients

!nterested indirectly fiscal bodies, massFmedia etc.

C"APTER +$ T"E STU&6 OB7ECT AN& ET"O& OF ACCOUNTING

1. *he stud$ object of accounting2. #ssets and their features

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3. Liabilities and their features and classification". osts, e6!enses and revenues%. *he accounting method

Stud! o08ects(

1. *he wa$s of !ro!ert$ management2. Hlobal balance of the !ro!ert$

*he basic features of the accounting model in use toda$ trace roots back over %00 $ears. Luca

-acioli, a Renaissance era monk, develo!ed a method for tracking the success or failure of

trading ventures. *he foundation of that s$stem continues to serve the modern business world

well, and is the entrenched cornerstone of even the most elaborate com!uteri>ed s$stems. *he

nucleus of that s$stem is the notion that a business entit$ can be described as a collection of

assets and the corres!onding claims against those assets. *he claims can be divided into the

claims of creditors and owners 8i.e., liabilities and ownersG e)uit$9. *his gives rise to the

fundamental accountin' e9uation

Assets : Lia0ilities ; O


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Asset

s

Long-term

*Intangibles

*Physical A.

*Financial A.

Crrent

*In!entories

*Accontsrecei!able

*In!estments

*Cash

LIABILITIES

Lia0ilities are amounts owed to others relating to loans, e6tensions of credit, and other obligations arising in the course of business. m!licit to the notion of a liabilit$ is the idea of anJe6istingK obligation to !a$ or !erform some dut$.

OWNERS’ EQUITY

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Liabilities#$

%

$%&incl.'

*Ca(italstoc) an

s((lementary ca(ital

* +eser!es*Pro,t

retaineearnings

*$ther items

Liabilities

Long-term&incl.'

* Financial

*$ther

/hort-term&incl.'

*FInancial

*Commercial

*Accre

Cost

s

0irect

materials labor

In*irect-o!erhea

*s.

!ariable ,1e*

Costs( are resources used to manufacture !roducts or to !rovide services and are directl$

related to !roduction !rocess.

E3penses( are wastes which a!!ear in economic activit$ and are not included in the !roduction

cost, but are reflected in income statement.


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Expenses

$(erational

C$3/

0istribtio

n

A*ministrati!e

$ther o(.

$theracti!ities

+elate* tolong-termasse

ts

Finance

%1traor*inary%1ce(tional

%1(enses on

incometa1

Revenu

es

$(erating

+e!enesrom sales

$ther $+

$theracti!ities

$(erationsith long-

termassets

Finance%traor*in

ary

-rocedures of accounting method

". =ocumentation #ommon to other disciplines2. 5valuation3. alculation". +ther !rocedures

%. alance heet$. *Faccount %pecific for accounting /. =oubleFentr$P. *rial alance


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C"APTER ,$ BALANCE S"EET > T"E BASIC ACCOUNTING PROCE&URE

1. =efinition, im!ortance and t$!es of the 2. ontent and structure of the 3. 5conomic o!erations and

Q is a !rocedure of the accounting method, which focuses on the accounting e)uation b$

revealing the economic resources owned b$ an entit$ and the claims against those resources8liabilities and ownersG e)uit$9. *he balance sheet is !re!ared as of a s!ecific date and showsthe financial !osition 8or condition9 while other statements reflect results of o!erations.

can be1. =e!ending on legal status of the entit$

- nitial- +!erating- &inal 8closing9

2. =e!ending o the !eriod of !resentation- #nnual-

ntermediar$3. $ the area of coverage- -rimaril$- onsolidated- entrali>ed

functions are- Henerali>ation- nformative f.- #nal$tical f.

n the RM the has % cha!tersAssets Lia0ilities and OE

1. Long term # 3. +52. urrent #ssets ".Long term L

%.hort term L

*he accounting e)uation is the backbone of the accounting and re!orting s$stem. t is central tounderstanding a ke$ financial statement known as the 0alance sheet 8sometimes called thestatement of financial !osition9. *he following illustration for 5delweiss or!oration shows avariet$ of assets that are re!orted at a total of PS%,000. reditors are owed 1/%,000, leaving/20,000 of stockholdersG e)uit$. *he stockholdersG e)uit$ section is divided into the 120,000that was originall$ invested in 5delweiss or!oration b$ stockholders 8i.e., ca!ital stock9, andthe other '00,000 that was earned 8and retained9 b$ successful business !erformance over the life of the com!an$. =oes the stockholdersG e)uit$ total mean the business is worth/20,000O NoA :h$ notO ecause man$ assets are not re!orted at current value. &or e6am!le,although the land cost 12%,000, 5delweiss or!oration4s balance sheet does not re!ort itscurrent worth. imilarl$, the business ma$ have unrecorded resources, such as a trade secret or a brand name that allows it to earn e6traordinar$ !rofits. #lternativel$, 5delweiss ma$ be facingbusiness risks or !ending litigation that could limit its value. f one is looking to bu$ stock in5delweiss or!oration, the$ would surel$ give consideration to these im!ortant nonFfinancialstatement valuation considerations. *his observation tells us that accounting statements areim!ortant in investment and credit decisions, but the$ are not the sole source of information for making investment and credit decisions.

Assets ?@45.% : Lia0ilities ?@#1.% ; Stocholders= e9uit! ?@1+%

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#$ oansactions I*pact The Accountin' E9uation

*he !receding balance sheet for 5delweiss re!resented the financial condition at the noteddate. ut, each new transaction brings about a change in financial condition.

CASE A: A+!"L COLLECT AN ACCOUNT RECEI#ABLE f 5delweiss or!oration collected 10,000 from a customer on an e6isting accountreceivable 8i.e., not a new sale, just the collection of an amount that is due from some!revious transaction9, then the balance sheet would be revised to show that cash 8an asset9increased from 2%,000 to 3%,000, and accounts receivable 8an asset9 decreased from%0,000 to "0,000. #s a result total assets did not change, and liabilities and e)uit$accounts were unaffected, as shown in the following illustration.

CASE B: A+"L+ BUY EQUI$MENT #IA LOAN

f 5delweiss or!oration !urchased 30,000 of e)ui!ment, agreeing to !a$ for it later 8i.e.taking out a loan9, then the balance sheet would be further revised. *he ase illustrationshows that e)ui!ment 8an asset9 increased from 2%0,000 to 2P0,000, and loans !a$able 8aliabilit$9 increased from 12%,000 to 1%%,000. #s a result, both total assets and total liabilitiesincreased b$ 30,000.

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CASE C: A" L+! GETTING A LOAN TO $AY T%E &EBT

CASE &: A! " L! $AY T%E LOAN FROM CAS%

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C"APTER -$ T"E S6STE OF ACCOUNTS AN& &OUBLEDENTR6 ACCOUNTING

1. =efinition, structure and function of *Faccounts2. #ssetFside and Liabilit$Fside accounts3. =oubleFentr$ accounting and its control function". #ccounting formulas and their t$!es%. $nthetic and anal$tic accounts and their interconnection

'. *rial alance and its im!ortance/. hart of #ccounts, its structure and content

#ccountants and bookkee!ers often use *Faccounts as a visual aid for seeing the effect of thedebit and credit on the two 8or more9 accounts.

5ach account has1. *he account title and number 2. =ebit and credit sides3. -laces to record increases and decreases". =ebit and credit turnovers%. #ccount balances

*Faccounts functions1. &. of calculation2. &. of grou!ing3. &. of control

#ccounts can be assetFside and liabilit$Fside.

*he final balance for # =*F**he final balance for L *F=*

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*he field of accounting?both the older manual s$stems and toda$4s basic accountingsoftware?is based on the %00F$earFold accounting !rocedure known as dou0le entr!.=ouble entr$ is a sim!le $et !owerful conce!t each and ever$ one of a com!an$4stransactions will result in an amount recorded into at least two of the accounts in theaccounting s$stem.

&eatures of =5#

-each recorded transaction has a twoF!art effect on the entit$

- these effects are recorded in accounts- accounts are organi>ed according to the following rules

• assetsliabilities+5

• e)uit$ growths with revenues and goes down with e6!enses.

#ccounting formula 8#&9 gra!hical re!resentation of economic o!erations contains- the title of the debited account- the title of the credited account- amount of the transaction

AF can be1. as to the number of corres!onding accounts

- sim!le- com!le6

2. as to the objective of recording- current- reverse

hronological record of o!erations is reflected in the


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7anuar! D 7ournal of econo*ic operations

&ate Nr$ Content A*ount Correspondin'

accounts0%.01 1 -urchased materials on

account

U 100 !ieces6/

V%00 kg6P

*otal

/00

"000

"/00

=t

211

t

%21

10.01 2 onsumed materials for

!roduction

U 1000

V 3000

*otal

/000

2"000

31000

P11 211

1%.01 3 onsumed materials for!roduction

U 100

V 200

*otal

/00

1'00

2300

P11 211

Anal!tic account *at$

=ate Nr 5ntries :ithdrawals alanceT ! e ) ! e ) ! e

01.01 1000 / /0000%.01

10.01

1%.01

1

2

3

100 / /00

1000

100

/

/

/000

/00

1100

100

F

/

/

F

//00

/00

F*urnov

er

100 /00 1100 //00 F F

ame o!erations should be done for mat. V.

n result, *Faccount for 211 looks as

'(( )Materia*s

31000

2. 310003. 2300

1. "/00

=* "/00 * 33300& 2"00

i.e.

211 U V

=*211 5ntriesU 5ntriesV

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*211 :ithdrawalsU :ithdarwalsV

& &U &V

#fter !osting all transactions from an accounting !eriod, accountants !re!are a trial 0alance toverif$ that the total of all accounts with debit balances e)uals the total of all accounts with creditbalances.*rial alance Q is an ordered list of all accounts and accountsG balances. # trialbalance onl$ checks the sum of debits against the sum of credits. *he trial balance is a !art ofthe doubleFentr$ bookkee!ing s$stem and uses the classic 4*4 account format for !resentingvalues.* can be for s$nthetic and managerial accounts.* can have one, two or three e)ualities.

*he following are the main classes of error that are not detected b$ the trial balance.

• #n error of ori'inal entr! is when both sides of a transaction include the wrong

amount. &or e6am!le, if a !urchase invoice for M=L 21 is entered as M=L 12, this will result

in an incorrect debit entr$ 8to !urchases9, and an incorrect credit entr$ 8to the relevant

creditor account9, both for M=L S less, so the total of both columns will be M=L S less, and

will thus balance.

• #n error of o*ission is when a transaction is com!letel$ omitted from the accounting

records. #s the debits and credits for the transaction would balance, omitting it would still

leave the totals balanced. # variation of this error is omitting one of the ledger account totals

from the trial balance.

• #n error of re2ersal is when entries are made to the correct amount, but with debits

instead of credits, and vice versa. &or e6am!le, if a cash sale for M=L 100 is debited to the

ales account, and credited to the ash account. uch an error will not affect the totals.

• #n error of co**ission is when the entries are made at the correct amount, and the

a!!ro!riate side 8debit or credit9, but one or more entries are made to the wrong account of

the correct t$!e. &or e6am!le, if fuel costs are incorrectl$ debited to the !ostage account

8both e6!ense accounts9. *his will not affect the totals.

• #n error of principle is when the entries are made to the correct amount, and the

a!!ro!riate side 8debit or credit9, as with an error of commission, but the wrong t$!e of

account is used. &or e6am!le, if fuel costs 8an e6!ense account9, are debited to stock 8an

asset account9. *his will not affect the totals.

• Co*pensatin' errors are multi!le unrelated errors that would individuall$ lead to an

imbalance, but together cancel each other out.

• +ther errors

TRIAL BALANCE ,ith three chec-i./ e01a*ities

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Acconts

For ,nancialaccoting

8/ acconts1&2 - Assets

3&4&5 -Liabilities

Acconts oreslts

6 - Liabilities

" - Assets

%tra-balancean*

managerialacconts

9anagerial a. - Assets

%tra-balancea.

- Assets

Nr. +f

accoun

t

*itle of account

=t

t

*urnov

er

=t

*urnover

t

&

=t

&

t

111

2"2

311

%21

ntangibles

urrent account

tatut. a!ital

#cc. -a$able

20000

20000

10000

10000

10000

20000

20000

10000TOTAL + + # # , ,

I#R* +& #+(N*

1"


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C"APTER .$ ACCOUNTING OF BASIC ECONOIC OPERATIONS

1. #ccounting of materials flow2. #ccounting of osts

3. #ccounting of 56!enses". #ccounting of revenues and financial results

Ra< *aterials 8materie !rima9 Q economic goods that are used directl$ in manufacturing offinal !roduct and can be found integrall$ or !artiall$ in the content of the final !roduct.

onsumables 8material consumabile9 Q are those categories of economic goods related otcurrent assets, like fuel, !ackaging, s!are !arts etc. which !artici!ate in manufacturing butcannot be found in the content of final !roduct.

5ntries record

=t 211 JMaterialsKt 2"1 JashKt 2"2 Jurrent account in national currenc$Kt %21 J#ccounts !a$ableK

Costs are directl$ related to the !roduction !rocess and re!resent the stud$ object ofmanagerial accounting.

#ccountsP11 JK asic !roduction P12 J#u6iliar$ activitiesKP21 Jndirect !roduction costsK

E3penses are reflected in the /th class accounts grou! /1 J+!erating e6!ensesK, /2JNonFo!erating accountsK, /3 J56!enses on income ta6K

Re2enues are reflected in the 'th class accounts.

Reco**ended readin' list(

1. L. Hrigoroi, L. La>ari Ja>ele contabiliatiiK, ed. artier, 20122. Needles ., -owers M., rosson . J-rinci!les of #ccountingK, engage Learning, 20113. Hilbertson ., Lehman M. J&undamentals of #ccountingK, engage Learning, 200P

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". Hhedrovici +. J-rinci!les of #ccounting =efinitions, *ests, 56ercisesK, 201"%. Legea contabilitatii din 2/.0".200/, M+ S0FS3 din 01.01.200P

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Documents

Basic Concepts for the Discipline PRINCIPLES of ACCOUNTING