Principles of Accounting (1)

College of Management and Techology in Alexandria

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Lecture Week 6
Trial Balance, Building Blocks of Accounting, and Financial Statements

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 Learning Objectives

1. Preparing a trial balance.

2. A look on the building blocks of accounting: ethics, principles,
and assumptions in relation to financial statements.
3. Explain the accrual basis of accounting and the reasons for
adjusting entries.

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 The Accounting Cycle

Trial Adjusting
Transaction Journalize Post
Balance Entries
Analysis
Accounting

Adjusted
Financial Closing Post-Closing
Cycle

Trial
Balance Statements Entries Trial Balance

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 Yazici Advertising The trial balance lists all
Trial Balance account balances in the
October 31, 2020 general ledger. If the
books are in balance, the
Debit Credit
total debits will equal
Cash ₺15,200 the total credits. If this is
Supplies 2,500 not the case, we may
Prepaid Insurance 600 have made an error
Equipment 5,000 posting the journal entry
Notes Payable ₺ 5,000 into the ledger. We
Accounts Payable 2,500 cannot prepare the
Unearned Service Revenue 1,200 financial statements
Owner’s Capital 10,000 until the books are in
Owner’s Drawings 500 balance as determined
Service Revenue 10,000 by the trial balance.
Salaries and Wages Expense 4,000
Rent Expense 900 5
₺28,700 ₺28,700
 Quick Test; Trial Balance Preparation
The following accounts come from the ledger of Bali Beach Supply at December 31, 2020.

157 Equipment R$88,000 301 Owner’s Capital R$20,000

306 Owner’s Drawings 8,000 212 Salaries and Wages 2,000

Payable
201 Accounts Payable 22,000
726 Salaries and Wages 200 Notes Payable
Expense (due in 3 months)
42,000 19,000
112 Accounts Receivable 4,000 732 Utilities Expense 3,000
400 Service Revenue 95,000 130 Prepaid Insurance 6,000
101 Cash 7,000
Prepare a trial balance in good form.
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 Bali Beach Supply
Trial Balance
December 31, 2020
Debit Credit
Cash R$ 7,000
Accounts Receivable 4,000
Prepaid Insurance 6,000
Equipment 88,000
Notes Payable R$ 19,000
Accounts Payable 22,000
Salaries and Wages Payable 2,000
Owner’s Capital 20,000
Owner’s Drawings 8,000
Service Revenue 95,000
Utilities Expense 3,000
Salaries and Wages Expense 42,000
R$158,000 R$158,000

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Principles and Assumptions of Accounting
These are three fundamental assumptions of accounting underlying the preparation of financial statements.

Now Future

Going-Concern Assumption Time Period Assumption

Reflects assumption that the Presumes that the life of a company
business will continue operating can be divided into time periods,
instead of being closed or sold. such as months and years.

Monetary Unit Assumption

Include in accounting records only transaction data that can be
expressed in terms of money
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Financial Statements
We have four basic types of financial statements

1.Income Statement
2.Statement of Owner’s Equity
3.Financial Position Statement (Balance Sheet)
4.Statement of Cash Flows

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Principles and Assumptions of Accounting

Matching Principle
Revenue Recognition Principle (Expense Recognition Principle)

Recognize revenue when it is A company must record its expenses

earned (by delivering a product or incurred to generate the revenues
providing a service). Proceeds need reported (Expenses need to be
not be in cash. matched against revenues) in the
same accounting period.

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Income Statement
The income statement describes a company’s revenues and expenses along with the resulting net
income or loss over a period of time due to earnings activities.
The income statement describes the results of a company’s operations during a period of time
through revenues and expenses.
FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
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Principles and Assumptions of Accounting

Business Entity Assumption

A business is accounted for separately from other business
entities, including its owner.

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Statement of Owners’ Equity
FASTFORWARD
Statement of Owner's Equity
For the Month Ended December 31, 2011
C. Taylor, Capital 12/1/11 $ -

Connections
Net income for December 3,470
Plus: Investments by Owner 30,000
33,470
Less: Owner Withdrawals 200
C. Taylor, Capital, 12/31/11 $ 33,270

FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues: The beginning balance in owner's equity
Consulting revenue $ 5,800
Rental revenue 300 was zero because the company was
Total revenues $ 6,100 started on December 1, 2011
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470

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Principles and Assumptions of Accounting
IFRS generally uses one of two measurement principles
1. Historical Cost Principle (or cost principle)
Record assets at their cost.
For example, if Great Wall Manufacturing purchases land for ¥300,000,000, the company
initially reports it in its accounting records at ¥300,000,000. But what does Great Wall
do if, by the end of the next year, the fair value of the land has increased to
¥400,000,000?
Under the historical cost principle, it continues to report the land at ¥300,000,000.
2. Fair Value Principle
Assets should be reported at fair value (the price received to sell an asset) .
Fair value information may be more useful than historical cost for certain types of assets.
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Financial Position Statement (Balance Sheet)

The Balance Sheet describes a

company’s financial position at a
point in time.

It’s a summary of assets, liabilities

and equity at the end of the
accounting period.
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Financial Position Statement (Balance Sheet)
FASTFORWARD FASTFORWARD
Statement of Owner's Equity
For the Month Ended December 31, 2011 Balance Sheet
Taylor, Capital 12/1/11 $ 0 December 31, 2011
Plus: Investments by Owner 30,000 Assets
Cash $ 4,350
Net income for December 3,470
Supplies 9,720
33,470
Prepaid insurance 2,400
Less: Owner Withdrawals 200
Equipment 26,000
Taylor, Capital, 12/31/11 $ 33,270
Total assets $ 42,470
Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Connections Total liabilities
Equity
9,200

C. Taylor, Capital $ 33,270

Total equity 33,270
Total liabilities and equity $ 42,470
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Principles and Assumptions of Accounting

Full Disclosure Principle

A company is required to report the details behind financial statements if the details so
disclosed would impact the users’ decision-making process. Most of the details are reported
in the notes to the financial statements.

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Accrual- Versus Cash-Basis Accounting
Cash-Basis Accounting
• Revenues recognized when cash is received
• Expenses recognized when cash is paid
• Cash-basis accounting is not in accordance with International
Financial Reporting Standards (IFRS)

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Accrual- Versus Cash-Basis Accounting
Accrual-Basis Accounting
• Transactions recorded in the periods in which the events occur
• Companies recognize revenues when earned by performing
services or delivering products (rather than when they receive cash)
• Expenses are recognized when incurred (rather than when paid)
• In accordance with International Financial Reporting Standards
(IFRS)

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References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

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