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Unformatted text preview: Review of the Accounting Process Event (Transaction) Analysis Identify economic events – any event that Identify directly affects the financial position of the company (i.e., assets, liabilities, or owners’ equity). owners’ External events – involve an exchange External between the company and a separate economic entity. economic Internal events – inside the company (i.e., Internal depreciation, use of supplies, etc.) depreciation, 3 You Be the Accountant Do the following events represent Do transactions? transactions? – A computer is purchased on account – A customer returns merchandise and is given customer credit on account credit – A prospective employee is hired – The owner of a business withdraws cash from The the business for personal use the – Merchandise is ordered for delivery next Merchandise month month Source Documents Can be externally or internally generated – External examples Sale to customer (customer purchase order) Purchase of equipment Purchase of inventory (invoice) – Internal examples Write-off an uncollectible account Purchase order to buy inventory Payroll timecard to record hours worked Timing of Documentation Document prepared before transaction occurs
– – Purchase order Customer purchase order Document prepared at same time that Document transaction occurs transaction
– Receiving report – Bill or lading/Shipping document Document prepared after transaction occurs
– – Sales invoice Vendor’s invoice Basic Accounting Equation Assets = Liabilities + Owners’ Equity Shareholders’ (Owners’) Equity – Shareholders’ consists of two sources: consists
– Amounts invested by shareholders Amounts (contributed or paid-in capital) (contributed – Amounts earned by the corporation Amounts (retained earnings) (retained Basic Accounting Equation Assets = Liabilities + (Paid-In Capital + Assets Retained Earnings) Retained Assets = Liabilities + [Paid-In Capital + Assets Retained Earnings + (Revenues + Gains – Expenses – Losses – Dividends)] Expenses Account Title Account Account Title Account Current Assets – Cash 110 – Accounts Receivable 130 – Allowance for Doubtful Accounts 140 – Inventory 160 Inventory 160 – Prepaid Insurance 180 – Notes Receivable 190 Property, Plant, and Equipment: 200 – Land 210 – Building 220 – Accumulate Depreciation Building 230 – Equipment 240 – Accumulated Deprec. Equipment Accumulated 250 250 Current Liabilities: – Accounts Payable 310 Long-Term Debt: – Bonds Payable 410 Stockholder’s Equity: – Common Stock 510 – Capital in Excess 520 – Retained Earnings 550 – Revenue and Expense Summary 590 Revenue: – Revenue 610 Revenue 610 – Interest Revenue 620 – Rent Revenue 630 Expenses: – Purchases 710 – Freight on Purchases 720 – Purchase Returns 730 – Selling Expenses 740 – General and Admin. Expenses 750 – Interest Expense 760 – Extraordinary Loss (pretax) 770 Our Roots Fr. Luca Pacioli – Monk with order of St. Francis – Wrote mathematics text in 1494 called Wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything Proportioni About Arithmetic, Geometry, and Proportion) About – First to document double-entry bookkeeping First in use by Venetian merchants in Account Relationships Double-entry system is used to process Double-entry transactions – every entry affects at least two accounts. accounts. General Ledger – collection of accounts used to General keep track of increases and decreases in financial statement elements financial
– T-account is the visualization of each general ledger T-account account account – Debits must equal credits within each transaction Debits (must be in balance) (must Debit – left side of the account Credit – right side of the account Rules of Debit and Credit
Accounting Equation Stockholders’ Equity Assets = Liabilities + Contributed Capital + Retained Earnings Debit to increase and Credit to Decrease Credit to increase and Debit to decrease Revenues −
Dividends Types of Accounts Permanent accounts = balance sheet Permanent accounts accounts Temporary accounts = income statement Temporary accounts
– these accounts get closed out at the end of these every accounting cycle. every The Accounting Cycle Transaction occurs Prepare documents Record in General Journal (journal Record entries) entries) Post to General Ledger (taccounts) Prepare unadjusted trial balance Prepare adjusting journal entries Prepare and record in General Journal (journal entries) (journal Post adjusting journal entries in Post General Ledger General Prepare adjusted trial balance Prepare financial statements Prepare closing entries and record Prepare in General Journal in Post closing entries in General Post Ledger Ledger Prepare post-closing trial balance Journal Entry Format Formal journal entry form: Formal (If more than one debit and/or more than one credit it is called a compound entry.) is Date Account name
Account name Account name Explanation XX
XX XX 11 Exercise 24, p. 94 Work in class Special Journals Sales Journal Cash Receipts Journal Purchases Journal Cash Disbursements Journal Payroll Journal Subsidiary Ledgers Accounts Receivable (by customer) Accounts Payable (by vendor) Property Plant and Equipment (by asset) Common Stock (by investor) Inventory (by inventory item) Trial Balance Listing of all accounts with their balances – Debit or credit balance (the net amount) – Error if debits don’t equal credits – Errors can exist even if in balance Fail to journalize a transaction Omit posting a journal entry to general ledger Posts a journal entry twice Uses incorrect accounts for journal entry Makes offsetting errors in journalizing or posting Adjusting Entries Performed to achieve accrual accounting – Prepayments (deferrals) – Accruals – Estimates Required by the realization and matching Required principles. All adjusting entries involve at least one All balance sheet account and one income statement account. statement Prepayments Cash comes first (deferrals = dollars first) – Prepaid expenses Prepaid Cash disbursement creates an asset that is not Cash “used” yet “used” – Unearned (or Deferred) revenues Unearned Cash receipt creates a liability for work or service Cash to be performed in the future (a cash deposit) to Prepaid Expenses When cash is paid: prepaid expense (asset) is When debited (increased) and cash (asset) is decreased Adjusting entry: removes portion of asset that is Adjusting “used up” and reclassifies as expense. “used Some companies will record entire prepayment Some as expense when cash is paid – in this case, the adjusting entry involves recording an asset (prepaid expense) for the “unused” portion – debit the asset and credit the expense (or else the expense is overstated) the Unearned Revenues At time cash is received: cash (asset) is debited and At unearned revenue (liability) is increased (credited). unearned Adjusting entry – decreases (debits) a portion of the Adjusting liability (unearned revenue) and increases (credits) earned revenue (revenue). earned Some companies will record the entire deposit as earned Some revenue when cash is received – in this case, the adjusting entry involves recording a liability (unearned revenue) for the “unearned” portion – debit revenue and credit the liability (unearned revenue) (or else revenue is overstated). overstated). Accruals Cash comes after the expense or revenue Cash is recognized. is
– Accrued liabilities (payables) Accrued Expenses are recognized before the cash is paid – Accrued receivables Accrued Revenues are recognized before the cash is Revenues received. received. Accrued Liabilities When expense is incurred (debited), When payable is also increased (credited). Then when the cash is ultimately paid, Then cash is decreased (credited) and the payable is decreased (debited). payable Often, the accounting period ends after Often, before the cash is paid and an adjusting entry must be made (i.e., interest, salaries, etc.) etc.) Accrued Receivables When the revenue is earned (credited), When the receivable is also increased (debited). the Then when the cash is ultimately received, Then cash is increased (debited) and the receivable is decreased (credited). receivable Often, the accounting period ends after Often, before the cash is received and an adjusting entry must be made (i.e., interest, etc.) interest, Estimates Made to achieve matching of expenses to Made revenues (examples include depreciation expense, amortization expense, warranty expense, bad debt expense, etc.) expense, Estimates increase expense and also increase Estimates either liabilities (i.e., Warranties Payable), increase contra-assets (i.e., Accumulated Depreciation, Allowance for Doubtful Accounts, etc.) or decrease assets (i.e., Patents and other intangible assets). intangible Summary of Adjusting Entries
Event → cash Accrued Receivable (asset) Payable (liability) Cash → event Deferred Unearned revenue (liability) Prepaid expense (asset) Revenue Expense *Plus cost allocations and adjustments (i.e., depreciation, amortization, bad debt expense, warranty expense, etc.) Summary of Adjusting Entry Procedures Journalize adjusting entries in General Journalize Journal Journal Post adjusting entries in General Ledger Prepare an Adjusted Trial Balance Exercise 28 and 29, p. 95 Work together in class Preparing the Financial Statements The Income Statement – for a period; describes The changes in assets and liabilities changes The Statement of Shareholders’ Equity – for a The period; describes changes in stockholders’ equity equity The Balance Sheet – a point in time; reports The balances of assets, liabilities, and stockholders’ equity equity The Statement of Cash Flows – for a period; The describes changes in cash describes
– Operating, investing, and financing activities The Closing Process Close temporary accounts to retained Close earnings via the income summary earnings Once completed, a post-closing trial Once balance is prepared.
– These numbers become the beginning These balances for the new accounting period. balances Exercise 213, p. 97 Work in class Use of a Worksheet Combines the unadjusted trial balance, Combines the adjusting entries, the adjusted trial balance, and financial statement categories NOTE: Not responsible for knowing NOTE: reversing entries reversing Exercise 218, p. 98 Work in class Converting Cash to Accrual Revenue Cash receipts from customers minus Cash beginning A/R plus ending A/R = Revenue (accrual-based) Revenue Cash receipts from customers plus Cash beginning unearned revenue minus ending unearned revenue = Revenue (accrual-based) (accrual-based) Converting Cash to Accrual Expenses Cash paid for operating expenses plus Cash beginning prepaid expense minus ending prepaid expense = Expense (accrual-based) Cash paid for operating expenses minus beginning accrued liabilities plus ending accrued liabilities = Expense (accrualaccrued Problem 29 Work together in class ...
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This note was uploaded on 04/08/2009 for the course ACG 3481 taught by Professor Dickinson during the Fall '08 term at University of Florida.
- Fall '08