ACCOUNTING WORKSHOP-2010 Objectives of this Workshop
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ACCOUNTING WORKSHOP-2010 Objectives of this Workshop ACCOUNTING WORKSHOP-2010 Objectives of this Workshop Presentation Transcript

  • ACCOUNTING WORKSHOP-2010
  • Objectives of this Workshop
    • Obtain a basic understanding of the accounting process
    • Obtain general understanding of financial statements and related financial reporting process
    • Obtain overview of the audit process
  • Table of Contents
    • Basic Accounting Concepts
    • Types of Accounting/Accounting systems
    • Accounting Methods
    • Financial Statements
    • Key Accounting Concepts
    • Accounting Workflow
    • Audit Preparation
    • Glossary of Commonly Used Terms
    View slide
  • ACCOUNTING DEBITS CREDITS BALANCE SHEETS STATEMENTS CASH JOURNALS LIABILITIES ASSETS AUDITS View slide
  • Basic Accounting Concepts What is Accounting?
    • Accounting is defined as:
    • The systematic recording, reporting and analysis of the financial transactions of a business.
      • Accounting is often called the “language of business”
        • People who perform accounting procedures speak the language of debits and credits.
      • The process of accounting provides useful information that describe specific things about a company’s financial position.
  • Basic Accounting Concepts Accounting Systems An Accounting System (Accounting Cycle) is a series of processes that connects a business transaction from its source to the financial statements. Best described by the following picture:
    • The basic accounting cycle includes:
      • Recording business transactions
      • Posting debits and credits to a general ledger
      • Making Adjustments to the general ledger
      • Closing the books and preparing the trial balance
      • Preparing the Financial Statements
    Business Transaction (source document) Journal Entry General Ledger Trial Balance Financial Statements (Balance Sheet & Income Statement) 1 2 3 4 5
  • Basic Accounting Concepts The Accounting Cycle (cont’d)
    • What are the Characteristics of a good accounting system?
      • Accurate and timely information
      • Fulfillment of management’s requirements for financial reporting and analysis
      • User Friendly
    Business Transaction (source document) Journal Entry General Ledger Trial Balance Financial Statements (Balance Sheet & Income Statement) 1 2 3 4 5
  • Basic Accounting Concepts The Accounting Equation
    • The basic foundation of the accounting cycle is the accounting equation:
    • Assets = Liabilities + Stockholder’s Equity (of Fund Balance)
      • At any point in time, the above equation must be proven
    • Transactions recorded in accordance with the accounting equation follows the debit/credit rules listed below:
    Assets Liabilities Fund Balance = + Assets Liabilities Net Income/Loss Opening Balance Equity Fund Balance Dr. + Cr. - Dr. + Cr. - Dr. - Cr. + Dr. + Cr. - Dr. - Cr. + Dr. - Cr. +
  • TYPES OF ACCOUNTING
  • Types of Accounting
    • Two types:
      • Fund ( not-for-profit ) Ex: GoodCity, United Way
      • Commercial ( for-profit) Ex: Microsoft, IBM
    Differences:
    • Procedures
    • Management Objectives
    • Reporting Requirements
    Non Profit (Fund) Accounting For-Profit Accounting Emphasis on controlling funds and showing sources and uses Emphasis on Profit determination Multiple accounting/business entities in form of “funds” One accounting/business entity Encumbrances are used Encumbrances are not used Information is segregated Information can be aggregated
  • FUND ACCOUNTING What is it? "A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations." What does this mean???
  • FUND ACCOUNTING What is it?
    • In other words … fund accounting uses:
      • Separate funds based on regulations , restrictions and limitations .
    • Funds MUST:
      • Be treated as separate entities
      • Have their own general ledger
      • Provide individual Revenue , Expense , Income and Statement of Financial Position reports
      • Be reported on in-total for the entire organization
    • Budgeting is the process whereby the plans of an institution are translated into an itemized, authorized, and systematic plan of operation, expressed in dollars, for a given period. Budgets are the blueprints for the orderly execution of program plans; they serve as control mechanisms to match anticipated and actual revenues and expenditures
      • Can be a time-intensive project due to the large number of accounts
      • Budgets typically executed at the line item level
      • Fund accounting systems offer tools to apply mass changes to categories quickly.
      • Salaries, travel, utility expenses can be adjusted for all funds & departments with minimum effort
      • Routine line items quickly handled so you can concentrate on more complex budget issues
    FUND ACCOUNTING Budgeting
    • Fund accounting systems offer tools to apply mass changes to categories quickly.
      • Salaries, travel, utility expenses can be adjusted for all funds & departments with minimum effort
      • Routine line items quickly handled so you can concentrate on more complex budget issues
      • Accounts Payable in fund accounting allows you to mix items from multiple funds for payment with a single check
      • Fund accounting software will automatically handle the offset postings
    FUND ACCOUNTING System Benefits
      • Most government agencies operate on budgets established by law
      • Administrators not permitted to exceed budget limits without legislated budget amendments
      • Limits for vendors cannot be exceeded without a formal bid or special approval
      • Fund accounting provides mechanisms to monitor these requirements
        • Tests applied during data entry
        • Reports indicate when limits exceeded
        • Can tailor controls to specific needs
        • Controls do not exist in commercial systems
    FUND ACCOUNTING Government Impact
  • COMMERCIAL ACCOUNTING
    • Commercial accounting systems usually have restrictive account numbering schemes which do not accommodate most fund accounting requirements.
    • For Fund Accounting, one needs account numbers with total flexibility . The accounting basis needs to be selectable by fund, Cash or Accrual.
      • Commercial systems do not provide this feature.
    Differences to Fund Accounting
    • Commercial Accounting systems include:
      • Separate chart-of-accounts for each fund
      • Maintain separate revenue and expense accounts
      • Can mix Statement of Financial Position accounts
      • Not permitted in fund accounting.
      • Other functions like encumbrance processing, grant tracking and budget controls often required
    COMMERCIAL ACCOUNTING Differences to Fund Accounting
  • COMMERCIAL ACCOUNTING
    • Requires both current and to-date financial performance
      • Activity for the period, year and to-date since grant was received
      • Lacking in most commercial systems
    Grant reporting Differences to Fund Accounting
  • CHART OF ACCOUNTS
    • Statement of Financial Position Accounts
    • 1011 – Checking Account
    • 1010 - Harris Trust and Saving Bank
    • 1200 - Accounts Receivable
    • 1400 - Prepaid Expense
    • 1500 - Fixed Assets
    • 1505 - Furniture & Fixture
    • 1510 - Computer Equipment
    • 1515 - Vehicle
    • 1600 - Accumulated Depreciation
    • 2000 - Accounts Payable
    • 2100 - Payroll Liabilities
    • 3000 - Opening Balance Equity
    • 3100 - Fund Balance
    •  
    • Income Accounts:
    • 4000 - Revenue
    • 4010 - Individuals
    • 4020 - Board Members
    • 4030 - Foundations/Corporations
    •  
    • 4050 - Restricted
    • 4060 - Gifts In Kinds
    • 4070 - Unrestricted
    • 4080 - Campaign Income
    • 4090 - Membership Dues
    • 4110 - Grants
    • 4150 - Miscellaneous Income
    • 4170 - Program Fees
    • 4190 - Reimburse Expenses  
    • Expense Accounts
    • 5000 - Personnel Expenses
    • 5060 - Gifts N Kind
    • 6030 - Amortization Expenses
    • 6110 - Automobile Expenses
    • 6140 - Contributions
    • 6150 - Depreciation Expense
    • 6160 - Dues and Subscriptions
    • 6170 - Equipment Rental
    • 6180 - Insurance
    • 6200 - Interest Expense
    • 6230 - Licenses and Permits
    • 6240 - Miscellaneous
    • 6250 - Postage and Delivery
    • 6260 - Printing and Reproduction
    • 6270 - Professional Fees
    • 6290 - Rent
    • 6300 - Repairs
    • 6340 - Telephone
    • 6345 - Advertising/Fundraising
    • 6350 - Travel & Entertainment
    • 6390 - Utilities
    • 6550 - Office Supplies
    • 6645 - Audit
    • 6670 - Program Expense
  • ACCOUNTING METHODS
  • ACCOUNTING METHODS
    • Two basic methods to record transactions
    • Cash basis – simpler, used by…
      • Service businesses that don’t maintain inventory
      • Startup businesses that don’t offer credit.
    • Accrual basis – more complex, used by…
      • Businesses that provide for credit sales
      • Businesses that maintain an inventory.
    • Once your method of accounting has been determined you must obtain approval from the IRS to change.
  • CASH BASIS ACCOUNTING
      • Record expenses when they are actually paid
      • Record sales or income when cash is received
        • Accounts receivable are not recorded until they are collected.
      • Much like maintaining a checkbook
    • Example: Jack’s Lighting Company installs a light system in your office on October 10 and hands you an invoice for $100. You write a check for $100 on October 13 and mail it to Jack.
    • Under cash basis accounting, you record an expense for lighting on October 13, the date that you pay the expense.
  • ACCRUAL BASIS ACCOUNTING
      • Record income when it is earned (rather than when received)
      • Record expenses when they are incurred (rather than when paid)
      • Record credit sales as accounts receivable that have not yet been collected.
    • Example: Jack’s Lighting Company installs a light system in your office on October 10 hands you an invoice for $100. You write a check for $100 on October 13 and mail it to Jack.
    • Under accrual basis accounting, you record an expense for lighting on October 10, the date the you incur the expense .
  • FINANCIAL STATEMENTS
  • FINANCIAL STATEMENTS
    • Financial Statements are a set of documents that summarize all the financial activity of a business for a certain period.
      • Statements can be prepared for any period: monthly, quarterly or annually, for example
      • Two types of financial statement users:
    Internal Users External Users Managers External Auditors Analysts/Internal Auditors Creditors/Lenders/Investors Business owners Donors/Foundations Government/IRS
  • FINANCIAL STATEMENTS
    • Financial Statements provide important information about the condition (healthy or unhealthy) of a business.
    • Provide answers to the following questions:
      • Is the business financially healthy?
      • Has the business improved or declined over the period?
      • How does this business compare to other similar businesses?
      • Can the business repay the debt it takes on?
    • Components of the Financial Statements:
    • Balance Sheet
    • Income Statement
    • Statement of Cash Flows
    • Statement of Retained Earnings
  • FINANCIAL STATEMENTS
    • Each month, Goodcity produces two financial statement documents:
      • Statement of Financial Position
        • Tells your current financial position
      • Statement of Financial Position
        • Tells what happened during the period
    • Both statements are drawn from the General Ledger
    Goodcity Financial Statements Agency
    • Information for each journal entry comes from original source documents, such as, sales slips, cash register tapes, check stubs, purchase invoices, etc
    • May need to create subsidiary journals for frequently occurring transactions, like sales and expenses
    JOURNALS
  • FINANCIAL STATEMENTS GENERAL LEDGER Statement of Financial Position Statement of Activities
    • General ledger accrues balances that make up line items on the reports  shows all transactions
      • Core of company’s financial records
      • Central “books” of your system
      • Every transaction flows through the general ledger
      • Remains a permanent record of the history of all financial transactions
      • Summary book that records transactions & balances of individual accounts
      • Order of numerical balances are determined by chart of accounts
    GENERAL LEDGER What is it?
    • The General Ledger contains Five classes of individual accounts
      • Assets - items the business owns. Assets will generate future benefits.
      • Liabilities - debts the business owes. Liabilities will generate future expenses.
      • Capital - ownership or equity
      • Sales - income earned for a specific period
      • Expenses - expenditures incurred during a given period
    GENERAL LEDGER What is it?
    • Creates an audit trail:
      • If called to have an audit, well-maintained general ledger is essential
      • Need internal trail of transactions to trace discrepancies (double billing, unrecorded payments)
      • Must be able to find the origin of any transaction to verify its accuracy
    • Creates the source for the trial balance:
      • At end of the fiscal year or accounting period, the individual accounts in the general ledger are totaled and closed
      • Balances of the individual accounts are summarized in the financial statements
    GENERAL LEDGER Characteristics
  • FINANCIAL STATEMENTS GENERAL LEDGER Statement of Financial Position Statement of Activities
      • Snapshot of a business’ financial condition at a specific moment in time
        • Usually at end of an accounting period.
      • Contains 3 groups:
        • Assets
        • Liabilities
        • Owners ’ (or stockholders’) equity
      • In fund accounting “ Fund Balance ” replaces owners’ or stockholders’ equity.
      • Remember, that the Statement of Financial Position must “balance”  Assets = Liabilities + Fund Balance
    Statement of Financial Position What is it?
    • Helps a business quickly assess the financial strength and capabilities of the business
    • Can identify and analyze trends , in the area of receivables and payables
    • Answers questions like:
      • Is the business in a position to expand ?
      • Can the business handle the financial flows of revenues and expenses?
      • Should the business take steps to bolster cash reserves ?
    • Provides useful information to:
      • Vendors considering how much credit to grant the company
      • Banks
      • Investors
    Statement of Financial Position Why is it important?
    • Assets: (items that have monetary value)
      • Current Assets (items easily converted in one year or less)
        • Cash (most liquid) - bank accounts, etc
        • Accounts Receivable - money owed by others for services
        • Notes Receivables - money owed within one year for loans made
      • Long-term assets (harder to convert)
        • Fixed Assets- Buildings, Machinery, Vehicles, etc
    • Liabilities : claims of creditors against your organization
      • Accounts Payable - all short-term obligations owed to creditors, suppliers, and other vendors.  Includes supplies and materials acquired on credit.
    Statement of Financial Position What’s included in it?
  • XYZ Organization Statement of Financial Position Mar 31, 2010 ASSETS Current Assets Cash 19,860.00 Total Current Assets 19,860.00 Total Assets 19,860.00 LIABILITIES & CAPITAL Liabilities Current Liabilities Payroll Liabilities (1,025.44) Due To/From Goodcity 5,061.33 Total Other Current Liabilities 4,035.89 Total Current Liabilities 4,035.89 Total Liabilities 4,035.89 Fund Balance Fund Balance 18,371.11 Net Income (2,547.00) Total Fund Balance 15,824.11 Total Liabilities and Capital 19,860.00
  • FINANCIAL STATEMENTS GENERAL LEDGER Statement of Financial Position Statement of Activities
      • Summary of a company’s profit or loss during any one given period of time, such as a month, three months, or one year
      • Records all revenues and operating expenses for a business during this given period
      • Also known as a profit and loss statement
      • Used to find out what areas of their business are over budget or under budget
      • Can also be used to determine income tax liability
    STATEMENT OF ACTIVITIES What is it?
  • Statement of Activities
  • IMPORTANT ACCOUNTING CONCEPTS
  • DEPRECIATION What it is?
    • Depreciation is the process of measuring the loss of value of an asset.
      • If you purchase a van for $20,000 for your program:
        • it loses value the minute you drive it out of the dealership
        • it is considered an operational asset
      • Every year the van loses some value, until it finally stops running and has no value at all!
      • Depreciation methods are a way for your accounting records to show the decline in value of your van.
  • DEPRECIATION What is it? (cont’d)
      • Listed on income statements under expenses
      • You can depreciate automobiles , office furniture , office equipment , buildings you own, and machinery
      • Land is not considered an expense, nor can it be depreciated because it does not wear out like vehicles or equipment.
      • Two commonly used depreciation methods:
        • Straight-line methods
        • Accelerated methods
  • DEPRECIATION Calculating Straight Line Depreciation
    • STRAIGHT LINE METHOD:
    • Find the initial cost of the asset (what did you pay for it)
    • Determine how many years the asset will retain value ( estimated life ) (can use general accounting rules as guide)
    • Divide the initial cost by the useful life
    • Report this amount on your income statement under operation expenses
    VAN EXAMPLE: Step 1. Initial Cost - You purchase a van for $20,000. Step 2. Estimated life - You determine that your assets useful life is 10 years. Step 3. Divide - $20,000/10 years Step 4. Record expense - $2,000 per year charged to depreciation
  • DEPRECIATION
    • ACCELERATED METHOD:
      • More complex
      • Used by accountants to record larger amounts of depreciation in the early years
  • AMORTIZATION
    • Amortization is the process of measuring the loss of value on intangible assets.
    • Intangible assets are “non-visible” assets such as contracts, prepaid expenses, insurance premiums, etc.
      • Intangible assets : contribute to the revenue growth of your business
      • Can be expensed against future revenues .
      • Example : liability insurance is purchased for a specified time period, this is a prepaid expense and is amortized over the period of the insurance policy.
  • AMORTIZATION Calculation
    • LIKE STRAIGHT LINE METHOD:
    • Find the initial cost of the asset
    • Determine how many years the asset will retain value ( estimated life )
    • Divide the initial cost by the useful life
    • Reported as a deduction under amortized assets
    INSURANCE EXAMPLE: You purchase a 1 year insurance policy and pay the entire premium of $5000 upon purchase. Step 1. Initial Cost - $5000 policy premium Step 2. Determine estimated life – 12 months --> contract length Step 3. Divide - $5000/12 months Step 4. Record expense - $416.66 per month as a deduction
  • ACCOUNTING WORKFLOW
  • ACCOUNTING WORKFLOW
    • Daily Work
      • Processing Account Payables
      • Inputting Accounts Receivables
      • Posting of all cash received
      • The balance of cash on hand
    • Daily Reports
    • Bank balance
    • Daily summaries of sales and cash receipts
    • Any errors or problems that occurred in collections
    • A record of monies paid out by cash and check
  • ACCOUNTING WORKFLOW
    • Weekly Tasks
    • Review Accounts Receivable - (check for slow paying accounts)
    • Accounts Payable - (be aware of the discount period)
    • Payroll - (check for hours accumulation and payroll liability).
    • Taxes - (check for tax items due and reports required by the government)
  • ACCOUNTING WORKFLOW
    • Monthly Tasks
    • Give records of receipts, disbursements, bank accounts & journals to your accounting firm
        • Lets firm maintain good records and for you to review them and make decisions
    • Prepare income statements
        • Within 15 days of month closing
    • Review Statements of Financial Position
    • Reconcile your bank account to spot variations and make adjustments
    • Balance the petty cash account to avoid bigger problems down the road
    • Review federal tax requirements and make deposits
    • Review and age accounts receivable to spot bad accounts
  • GOODCITY FORMS
  • ACCOUNTING
    • Deposit Form
    •   Date______________ Received From:_____________________
    •  
    • Address: __________________________
    • __________________________
    • Check #: ______________ Date on Check___________ Amount $:________
    • Program Name: ______________Fund #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _
    •  
    • Notes: ____________________________________________________________
    •  
    • Attach Deposit Slip/Copy Approval:________________________
  • ACCOUNTING
    • Request for Payment
    •   Date______________ Invoice #_____________________
    •  
    • Pay to the Order of:___________________________________________
    •  
    • Amount: $ _____________ Address: __________________________
    • __________________________
    • Program Name: ______________Fund. #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _
    •  
    • Notes: ____________________________________________________________
    •  
    • Attach Bill or Invoice__________ Approved by: _________________
  • ACCOUNTING
    • Request for Reimbursement
    •   Date______________ Invoice #_____________________
    •  
    • Pay to the Order of:___________________________________________
    •  
    • Amount: $ _____________ Address: __________________________
    • __________________________
    • Program Name: __________________________________
    • Fund #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _ $___________
    • Fund #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _ $___________
    • Fund #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _ $___________
    • Notes: ____________________________________________________________
    •  
    • Attach Bill or Invoice__________ Approved by: _________________
  • Audit Preparation
  • What is an Audit?
    • An audit is an examination and verification of a company's financial and accounting records and supporting documents by an independent professional, such as a Certified Public Accountant .
    • Three common types of Audits:
      • Financial Statement Audit – examination of whether overall financial statements are presented in accordance with specific criteria (e.g. GAAP)
      • Operational Audit – examination of whether an organizations operating procedures are effective and efficient.
      • Compliance Audit – examination that business is following specific rules, procedures or regulations as defined by a higher authority.
    • Many businesses are required to have a financial statement audit.
  • What happens in an Audit?
    • There are several key phases of an audit:
    • The auditor will plan and design the audit approach
      • They will obtain background information on your business and perform preliminary analysis of your financial statements to determine what accounts they will test in detail
      • They might conduct interviews with you to understand “how” and “when” you perform certain accounting procedures
      • They may also review last year’s financial statements to understand the condition of your business a the beginning of the year.
    • Auditor will perform tests of controls and transactions
      • They will review certain procedures to test that they are working effectively (ex: review bank reconciliations, checking for proper authorizations of purchases or sales)
      • They may also look at journal entries to see that items were posted to the general ledger correctly (ex: review the transaction to record your van purchase or insurance policy).
  • What happens in an Audit? (cont’d)
    • There are several key phases of an audit:
    • The auditor will perform detailed tests of balances
      • The goal is to obtain enough evidence that the balances in the financial statements are fairly stated
      • The auditor may ask for specific invoices to verify the balance (ex: invoices to support the accounts payable balance; or a listing of fixed assets in order to calculate depreciation expense)
    • The auditor will complete the audit and issue a report
      • If there are significant errors found in the audit, the auditor may recommend that adjustments be made.
      • Once the above phases are complete, the auditor will issue a report summarizing the procedures performed as well as giving assurance that the financial statements are fairly stated
      • The auditor may also make recommendations on ways to improve the accounting and financial reporting process
  • How can you prepare for your audit?
    • Preparing for the audit is a continuous process. It is best to develop good recordkeeping and financial reporting procedures and maintain those throughout the year.
    • Be diligent in performing your daily, weekly and monthly tasks
    • Investigate any unusual items or discrepancies in your reports as soon as possible
    • Keep all transaction records, receipts, purchase orders, bank statements, etc. organized and in a safe place
    • To the extent possible, keep open communication with your auditors regarding questions or concerns you have about the accounting process.
  • QUESTIONS?
  • Neighborhoods. Dreams. Reality.