FASRI Roundtable: Doron Nissim, Columbia University

 

The FASRI Roundtable series continues at 4pm eastern time on Tuesday, October 11. Our guest speaker will be Doron Nissim, from Columbia University.  Doron received his Ph.D. from UC Berkeley in 1998 and has since published extensively in top-tier journals, including manuscripts that are related to the valuation of financial instruments, which is the topic of this week’s Roundtable discussion.  Hal Schroeder, a FASB Board Member, provided some interesting views last week on the current FASB/IASB deliberations on financial instruments.  Doron will follow up on that discussion with some updated empirical evidence on loan-loss reserves and discuss implications of the proposed approach.  The discussion should provide interesting perspectives, and generate new research ideas for the attendees. 

 Even if you were unable to attend Hal’s session last week, please plan to join us for the upcoming Roundtable with Doron.   

Participation (PLEASE NOTE DIRECTIONS FOR PARTICIPATION HAVE CHANGED):

 To participate in the FASB Roundtable,

1)  go to http://intercall.webex.com anytime after 2:00 pm (New York time) on Tuesday, October 7. 

2)  Type in the following meeting number: 596 198 403 and click “Join Now”.

3)  On the next page, fill in your name, email address, and the password “Fasri001” (case sensitive).  Then click “Join”. 

4)  After joining the meeting, you will be prompted for your telephone number.  Insert your telephone number and click the “Call Me” button.  Your phone will ring, which you can use to hear and speak.  Please remember to put yourself on mute when you are not speaking (can be done by clicking the mic next to your name).

 NOTE: We no longer have the option of using computer headphones.  The FAF is working on gaining access to this option in the future.

 If you receive an error message or need help at any time, contact me at 203-956-3472.

Lynn

View the original article here

Accounting Degree Programs at Brigham Young University (BYU)

Accrual vs. Cash

For the non-accountant, accrual accounting can seem as mysterious as Egyptian hieroglyphics. When working with basic small business financial statements, the accrual concept is easy to understand. However, in more complex business environments accrual accounting can become as exacting and tedious in its application as deciphering hieroglyphics. Fortunately, we are going to be discussing the
former, not the latter.

Let’s say you are in the business of selling T-shirts. Today you sold four T-shirts for $10 each. Two of the T-shirts sold were paid for with cash,i.e., $20. The other two were sold “on account”. In other words, the customers said they would pay you later. These two transactions have to be recorded differently on your books. Here is the journal entry for the first transaction.

DESCRIPTION	DEBIT	CREDIT
Cash	20.00
T-Shirt Sales		20.00
To record Cash sales

Does this make sense? Check it against the Accounting Model. You increased Cash and you increased Sales, so are the amounts recorded properly in the debit and credit columns?

How about the “pay you later” transaction? We call that a “receivable” because money is owed to the business. Here is how it looks in journal entry form:

ESCRIPTION	DEBIT	CREDIT
Accounts Receivable	20.00
T-Shirt Sales		20.00
To record Accrual sales

Sales are said to be “accrued” when the payment for the goods or services is deferred to a later date. But, you might ask: Why are both the Cash and Accounts Receivable amounts listed in the debit column? It should be obvious that the General Ledger (GL) Sales account belongs in the Revenue section, but what section do the GL accounts, Cash and Accounts Receivable belong? They are Assets. Why? Because both of the items represent an economic resource that your company has possession and control over that will provide a future benefit. What happens when an Asset is increased? The Accounting Model tells us that
an increase of an Asset belongs on the “debit” side of the ledger.

Thirty days later your customers send you checks totaling $20 to pay for the T-Shirts. Here is how the transaction is booked:

DESCRIPTION	DEBIT	CREDIT
Cash	20.00
Accounts Receivable		20.00
To record Cash “received on account” (ROA).

What happened here? You received $20 Cash, put it in the bank, and you eliminated or canceled out the amount owed to you on the books.

Let’s look at Accounts Payable next. In this situation, we will assume that you bought some inventory (T-Shirts) for resale. You bought four T-Shirts altogether. You paid cash for two shirts and the other two you bought “on account”. Here is what it looks like in journal entry form:

DESCRIPTION	DEBIT	CREDIT
Inventory	20.00
Cash		20.00
To record cash purchase of T-Shirts

DESCRIPTION	DEBIT	CREDIT
Inventory	20.00
Accounts Payable		20.00

DESCRIPTION	DEBIT	CREDIT
Accounts Payable	20.00
Cash		20.00
To record payment “on account”.

You decreased the Liability and decreased Cash. These are examples of the difference between an Accrual transaction and a Cash transaction.

Which one is better? It is not a question of better, it is a question of accuracy. If you include all accrual transactions on your books, the reader will have a more complete understanding of what is going on in your business than if only Cash transactions are recorded. Think about it with our examples. The Accrual
transactions would show more Assets, more Liabilities and more Revenue than the strictly Cash transactions. This reflects all the activity going on instead of just a portion. This is why the Financial Accounting Standards Board (FASB) requires that financial statements that are prepared using Generally Accepted Accounting Principles (GAAP) use the Accrual method of accounting.

Top Accounting Degree Programs: University of Illinois Urbana-Champaign (UIUC)

Detail of the General Ledger Report

The Detail of the General Ledger Report:
Your most valuable analytic tool

How in the world could anyone working in accounting get along without a Detail of the General Ledger report? That would be like working with your hands tied and your eyes blindfolded. Without this report you would have a very difficult time determining how a final balance in a particular account was derived. Here is why:

Picture this: Back in the not-to-distant past (before computers really caught on) we accountants recorded each transaction of the business manually into a great big hard-bound, three-leaf binder book with yellow pre-printed ledger pages. Obviously, this was a very time-consuming, tedious process. Each page not only recorded the numbers associated with the transaction, it also recorded where the numbers came from, the date, and, when appropriate, a very brief note to the side describing additional detail. Here is an example of a general ledger account page:

Account 1010 – Cash-in-Bank

Date	Source	Debit	Credit	Balance
12/31	Balance Forward			3,450.21
01/05	General Journal pg 2	54.00		3,504.21
01/17	General Journal pg 4		27.00	3,477.21
01/31	Cash Receipts pg1	8,025.34		11,502.55
01/31	Cash Disbursements pg 4		7,945.87	3,556.68

Transactions may come from a variety of journals, but they all pyramid into the General Ledger. I use the word “pyramid” because it is helpful to visualize the shape of a pyramid with all the source documents spread out at the base. The information is being summarized from each document and “migrates” upward to the General Ledger and eventually to the financial statements, which are at the top of the pyramid:

Fin State
Trial Balance
General Ledger
Gen Jour, Cash Rec, Cash Disb, Acct Rec, Acct Pay
Sales Invoices, Purchase Invoices, Bank Rec, Check Register

If I wanted to find out how a particular balance came to be, all I had to do was look at the detail on the general ledger page. That detail would then tell me which source documents contained the numbers that contributed to the final balance. I did not have search all over kingdom come to find what I was looking for.

Nowadays, your computer accounting software should give you a report of the detail in your General Ledger that is laid out as cleanly and clearly as presented above. Just like you would find in a manual general ledger. The report should not be encumbered with all kinds of other information that makes it hard to decipher. Some software programs don’t call this report a Detail of the General Ledger, they call it a transaction report or something similar.

Furthermore, you should be able to print a report for any period your heart desires, for instance: a year-to-date report; from February to July; for just one month; or whatever. You need that flexibility. If you need to see all twelve months of activity for a particular account, then you need to see all twelve months. You should not have to print out each month separately and then manually piece them together. And, if you only need to look at one month, you don’t want to have to print out the entire year.

A good report will enable you to use it as an analytic tool to find mistakes. Let’s assume that after printing your financial statements you looked at the Cash-in-Bank account and it said the balance was $3,556.38. Being the good accountant that you are, you verified that balance with the bank reconciliation balance and found that it said the balance should be $3,583.38. The difference between the two totals is $27.00. Your first step should be to run a Detail of the General Ledger report for the month, which you do and it is our example above. The first thing you notice is a $27.00 credit entry. This is suspicious and worth investigating. You can see that this entry came from the General Journal so you turn to page 4. Let’s hypothesize and assume that you really meant for this credit entry to go to Employee Advance, which is 1110. You simply wrote the wrong GL Account number.

We used to call this procedure “smoking out the error”. Sometimes the errors are easy to find, sometimes not so easy. The process consists of verifying the final balances that are on the financial statements. What is in the General Ledger should be what is on the financial statements. Therefore, you must use another document as a means of verifying the account balance. In our example above, we used the Bank Reconciliation. Other documents used to verify balances could be the Accounts Payable Ledger, Accounts Receivable Ledger, Sales Tax Report, Payroll History Report, Inventory Control Report, Notes Payable Amortization Schedule, and so on.