IntroductiontoAcc Week 4 Lecture

IntroductiontoAcc Week 4 Lecture - Introduction to...

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Introduction to Accounting Module 4 Adjusting the accounts and preparing Financial Statements 1
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CHAPTER 4 Adjusting the accounts and preparing financial statements
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3 EXPANDED ACCOUNTING CYCLE INCLUDING ADJUSTING ENTRIES 2. Journalise transaction 2. Journalise transaction 3. Post to ledger accounts 3. Post to ledger accounts 4. Prepare unadjusted trial balance of general ledger 4. Prepare unadjusted trial balance of general ledger 1. Recognise & record transactions 1. Recognise & record transactions Source documents Source documents General or special journal General or special journal General or subsidiary ledger General or subsidiary ledger Trial balance (unadjusted) Trial balance (unadjusted) Continued Next Slide
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4 EXPANDED ACCOUNTING CYCLE INCLUDING ADJUSTING ENTRIES Work shee t Work shee t 8. Prepare financial statements 6. Post adjusting entries to general ledger 6. Post adjusting entries to general ledger 7. Prepare adjusted trial balance 7. Prepare adjusted trial balance 5. Determine adjusting entries and journalise 5. Determine adjusting entries and journalise General journal General journal General ledger (Accounts Adjusted) General ledger (Accounts Adjusted) Trial balance (Adjusted) Trial balance (Adjusted) Financial Statements Financial Statements
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Cash Basis Income is recorded when cash is received Expenses are recorded when cash is paid Accrual Basis Income recognised when the anticipated inflow of economic benefit can be reliably measured Expenses when the consumption of benefits can be reliably measured Use accrual accounting Record expenses when incurred & income when earned 5 MEASUREMENT OF PROFIT
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In some cases the period in which cash is paid or received does not coincide with period in which expense and income are recognised Therefore, some accounts must be adjusted on the last day of the accounting period to correctly recognise income and expenses not reflected in cash receipts or payments 6 THE NEED FOR ADJUSTING ENTRIES
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7 End of Period Adjustments Example 1 On 30th June a telephone bill was received and paid. The amount of this bill is $550 (GST inclusive). What is the journal entry required to record this entry?
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8 End of Period Adjustment Example 1 Debit Credit Telephone Expense 500 GST Receivable 50 Cash 550
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9 End of Period Adjustment Example 1 What if the bill had not been received or paid?? Income Statement The expense would not have been recorded and therefore the profit would be overstated by $500. Balance Sheet $550 is owed to the telephone company, however this debt would not appear as a liability on the balance sheet.
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10 End of Period Adjustment Example 1 Even though there is no transaction: Record expense on 30th (i.e. period in which expense is incurred).
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