PPT3 - Agenda The Accounting Cycle Accrual Basis Accounting...

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Unformatted text preview: Agenda The Accounting Cycle Accrual Basis Accounting Revenue and Expense Recognition Adjustments Financial Statements Closing Entries Cash Basis Accounting (introduction) Chapter 3-1 Basic Terminology Eve nt Transaction Account Re Account al Nom Account inal Le r dge Journal Posting Trial Balance Adjusting Entrie s Financial S m nts tate e Closing Entrie s Chapter 3-2 LO 1 Understand basic accounting terminology. Debits and Credits Account An arrange e that shows thee ct of m nt ffe transactions on an account. De = "Le bit ft" C dit = "Right" re An Account can be illustrated in a T-Account form. Account Name Debit / Dr. Credit / Cr. Chapter 3-3 LO 2 Explain double-entry rules. Debits and Credits Summary Liabilit ies Norm al Balance Debit Asset s Debit / Dr. Credit / Cr. Norm al Balance Credit Equit y Debit / Dr. Chapter 3-24 Debit / Dr. Credit / Cr. Normal Balance Credit / Cr. Normal Balance Normal Balance Chapter 3-23 Expense Debit / Dr. Credit / Cr. Chapter 3-25 Revenue Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-27 Chapter 3-26 Chapter 3-4 LO 2 Explain double-entry rules. The Accounting Equation Re lationship am theasse liabilitie and stockholde e ong ts, s rs' quity of a busine ss: Illustration 3-3 Thee quation m bein balanceafte e ry transaction. For e ry ust r ve ve Debit the m bea Credit. re ust Chapter 3-5 LO 2 Explain double-entry rules. Financial Statements and Ownership Structure Balance Sheet S tockholde Equity rs' C m S om on tock (Investment by stockholders) (Net income retained in business) I llustration 3-4 Re taine Earnings d Ne incom or Ne loss (Revenues t e t Divide nds less expenses) Income Statement Statement of Retained Earnings Chapter 3-6 LO 2 Explain double-entry rules. The Accounting Cycle I llustration 3-6 Transactions 9. Re rsing e s ve ntrie 1. Journalization 8. Post-closing trail balance 2. Posting 7. Closing e s ntrie Work She t e 3. Trial balance 6. Financial S m nts tate e 4. Adjustm nts e 5. Adjuste trial balance d Chapter 3-7 LO 3 Identify steps in the accounting cycle. 3. Trial Balance Illustration 3-19 Trial Balance A list of e ach account and its balance use to ; d provee quality of de and cre bit dit balance s. Chapter 3-8 LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance. 4. Adjusting Entries Revenues - re corde in thepe in which the aree d. d riod y arned Expenses - re cognize in thepe in which the areincurred d riod y d. Adjusting entries - ne de to e e d nsurethat there nue ve re cognition and m atching principle arefollowe s d. Chapter 3-9 LO 5 Explain the reasons for preparing adjusting entries. Types of Adjusting Entries Illustration 3-20 Pre paym nts e 1. Prepaid Expenses. Expe s nse paid in cash and re corde as asse d ts be the areuse or consum d. fore y d e Accruals 3. Accrued Revenues. Re nue ve s e d but not ye re ive in cash arne t ce d or re corde d. 2. Unearned Revenues. Re nue re ive in cash and ve s ce d re corde as liabilitie be the are d s fore y e d. arne 4. Accrued Expenses. Expe s incurre but not ye paid nse d t in cash or re corde d. Chapter 3-10 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for Deferrals Illustration 3-21 Deferrals are e r ithe prepaid expenses or unearned revenues. Chapter 3-11 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Paym nt of cash that is re e corde as an asse be d t cause se rviceor be fit ne will bere ive in thefuture ce d . C Paym nt ash e BEFORE Expe Re nse corde d Pre paym nts ofte occur in re e n gard to: insurance supplie s adve rtising re nt m ainte nanceon e quipm nt e fixe asse d ts Chapter 3-12 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Supplies. Pione r purchase adve e d rtising supplie costing s $25,000 on Octobe 5. Pre thejournal e to re thepurchaseof the r pare ntry cord supplie s. Oct. 5 Adve rtising supplie s C ash Adve rtising S upplie s De bit 25,000 C dit re De bit Cash C dit re 25,000 25,000 25,000 Chapter 3-13 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Supplies. An inve ntory count at thecloseof busine on Octobe 31 re als ss r ve that $10,000 of theadve rtising supplie arestill on hand. s Oct. 31 Adve rtising supplie e nse s xpe Adve rtising supplie s Adve rtising S upplie s De bit 25,000 10,000 Chapter 3-14 15,000 15,000 Adve rtising S upplie Expe s nse C dit re 15,000 De bit 15,000 C dit re LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Illustration 3-35 Statement Presentation: Adve rtising supplie s ide ntifie that portion s of theasse cost that t's will providefuture e conom be fit. ic ne Chapter 3-15 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Illustration 3-34 Statement Presentation: Adve rtising e nse xpe ide ntifie that portion s of theasse cost that t's e xpire in Octobe d r. Chapter 3-16 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Insurance. On Oct. 4th, Pione r paid $6,000 for a one ar fireinsurance e -ye policy, be ginning Octobe 1. S r how thee to re thepurchaseof the ntry cord insurance . Oct. 4 Pre paid insurance C ash Pre paid I nsurance De bit 6,000 C dit re De bit Cash C dit re 6,000 6,000 6,000 Chapter 3-17 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Insurance. An analysis of thepolicy re als that $500 ($6,000 / 12) of ve insurancee xpire e m s ach onth. Thus, Pione r m s thefollowing adjusting e ake e ntry. Oct. 31 I nsurancee nse xpe Pre paid insurance Pre paid I nsurance De bit 6,000 5,500 Chapter 3-18 500 500 I nsuranceExpe nse De bit C dit re 500 C dit re 500 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Illustration 3-35 Statement Presentation: Pre paid insurance ide ntifie that portion s of theasse cost that t's will providefuture e conom be fit. ic ne Chapter 3-19 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Illustration 3-34 Statement Presentation: I nsurancee nse xpe ide ntifie that portion s of theasse cost that t's e xpire in Octobe d r. Chapter 3-20 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Depreciation. Pione r Adve e rtising e ate de ciation on its office stim s pre e quipm nt to be$400 pe m e r onth. Accordingly, Pione r re e cognize de ciation s pre for Octobe by thefollowing adjusting e r ntry. Oct. 31 De ciation e nse pre xpe Accum ulate de ciation d pre De ciation Expe pre nse De bit 400 C dit re 400 400 Accum ulate De ciation d pre De bit C dit re 400 Chapter 3-21 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Prepaid Expenses" Illustration 3-35 Statement Presentation: Accum ulate d De ciation--is a pre contra asse account. t Chapter 3-22 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Unearned Revenues" Re ipt of cash that is re ce corde as a liability be d causethere nuehas ve not be n e d. e arne C Re ipt ash ce BEFORE Re nueRe ve corde d Une d re nue ofte occur in re arne ve s n gard to: re nt airlineticke ts school tuition m agazinesubscriptions custom r de e posits Chapter 3-23 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Unearned Revenues" Unearned Revenue. Pione r Adve e rtising re ive $12,000 on Octobe 2 ce d r fromKCfor adve rtising se s e cte to becom te by De m r 31. rvice xpe d ple d ce be S how thejournal e to re there ipt on Oct. 2nd. ntry cord ce Oct. 2 C ash Une d adve arne rtising re nue ve Cash De bit 12,000 C dit re 12,000 12,000 Une d Re Re nue arne nt ve De bit C dit re 12,000 Chapter 3-24 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Unearned Revenues" Unearned Revenues. Analysis re als that Pione r e d $4,000 of the ve e arne adve rtising se s in Octobe Thus, Pione r m s thefollowing adjusting rvice r. e ake e ntry. Oct. 31 Une d se arne rvicere nue ve S rvicere nue e ve S rviceRe nue e ve De bit C dit re 100,000 4,000 4,000 4,000 Une d S rviceRe nue arne e ve De bit 4,000 C dit re 12,000 8,000 Chapter 3-25 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for Accruals Illustration 3-27 Accruals are e r ithe accrued revenues or accrued expenses. Chapter 3-26 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Accrued Revenues" Accrued Revenues. I n Octobe Pione r e d $2,000 for adve r e arne rtising se s that it did not bill to clie rvice nts be Octobe 31. Thus, Pione r m s thefollowing adjusting e fore r e ake ntry. Oct. 31 Accounts re ivable ce S rvicere nue e ve Accounts Re ivable ce De bit 72,000 2,000 74,000 C dit re S rviceRe nue e ve De bit C dit re 100,000 4,000 2,000 106,000 2,000 2,000 Chapter 3-27 Adjusting Entries for "Accrued Expenses" Accrued Interest. Pione r signe a thre -m e d e onth, 12% notepayablein the , am ount of $50,000 on Octobe 1. Thenotere r quire inte st at an annual rateof s re 12 pe nt. Thre factors de rm theam rce e te ine ount of theinte st accum re ulation: 1 2 3 Illustration 3-29 Chapter 3-28 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Accrued Expenses" Accrued Interest. Pione r signe a thre -m e d e onth, 12% notepayablein the , am ount of $50,000 on Octobe 1. Pre theadjusting e on Oct. 31 to r pare ntry re theaccrual of inte st. cord re Oct. 31 I nte st e nse re xpe I nte st payable re I nte st Expe re nse De bit 500 C dit re I nte st Payable re De bit C dit re 500 500 500 Chapter 3-29 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Accrued Expenses" Accrued Salaries. At Octobe 31, thesalarie for the days re se an r s se pre nt accrue e nseand a re d liability to Pione r. Thee ploye s re ivetotal d xpe late e m e ce salarie of $10,000 for a five s -day work we k, or $2,000 pe day. e r Chapter 3-30 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Accrued Expenses" Accrued Salaries. Em ploye s re ivetotal salarie of $10,000 for a five e ce s -day work we k, or $2,000 pe day. Pre theadjusting e on Oct. 31 to re e r pare ntry cord accrual for salarie s. Oct. 31 S alarie e nse s xpe S alarie payable s S alarie Expe s nse De bit 40,000 6,000 46,000 Chapter 3-31 6,000 6,000 S alarie Payable s De bit C dit re 6,000 C dit re LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Accrued Expenses" Accrued Salaries. On Nove be 23, Pione r will again pay total salarie of m r e s $40,000. Pre thee to re thepaym nt of salarie on Nove be 23. pare ntry cord e s m r Nov. 23 S alarie payable s S alarie e nse s xpe C ash S alarie Expe s nse De bit 34,000 C dit re 6,000 34,000 40,000 S alarie Payable s De bit 6,000 C dit re 6,000 Chapter 3-32 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries for "Accrued Expenses" Bad Debts. Assum Pione r re e e asonably e ate a bad de e nsefor the stim s bt xpe m onth of $1,600. I t m s theadjusting e for bad de as follows. ake ntry bts Illustration 3-32 Chapter 3-33 LO 5 Explain the reasons for preparing adjusting entries. 5. Adjusted Trial Balance Illustration 3-33 S hows thebalance of all accounts, afte adjusting r e s, at thee ntrie nd of theaccounting pe riod. Chapter 3-34 LO 5 6. Preparing Financial Statements Illustration 3-34 Chapter 3-35 LO 6 6. Preparing Financial Statements Illustration 3-35 Chapter 3-36 LO 6 7. Closing Entries To re ducethebalanceof theincom state e (revenue and e m nt expense) accounts to ze ro. To transfe ne incom or ne loss to owne e r t e t r's quity. Balanceshe t (asset, liability, and equity) accounts arenot e close d. Divide areclose dire to theRe nds d ctly taine Earnings account. d Chapter 3-37 LO 7 Prepare closing entries. 7. Closing Entries Illustration 3-33 Closing Journal Entries: Retained earnings Divide nds S rvicere nue e ve S alarie e nse s xpe Adve rtising e nse xpe Re e nse nt xpe I nsurancee nse xpe I nte st e nse re xpe De ciation e nse pre xpe Bad de e nse bt xpe Retained earnings Chapter 3-38 5,000 5,000 106,000 46,000 15,000 9,000 500 500 400 1,600 33,000 LO 7 Prepare closing entries. 8. Post-Closing Trial Balance Illustration 3-38 Chapter 3-39 LO 7 Prepare closing entries. 9. Reversing Entries Afte pre r paring thefinancial state e and closing the m nts books, a com pany m re rsesom of theadjusting ay ve e e s be re ntrie fore cording there gular transactions of the ne pe xt riod. Chapter 3-40 LO 7 Prepare closing entries. Most com panie useaccrual-basis accounting s re cognizere nuewhe it is e d and ve n arne e nse in thepe incurre xpe s riod d, without re gard to thetim of re ipt or paym nt of cash. e ce e Unde thestrict cash basis, com r panie s re re nueonly whe the re ivecash, and cord ve n y ce re e nse only whe the dispe cash. cord xpe s n y rse C basis financial state e arenot in conform with GAAP. ash m nts ity Chapter 3-41 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. Conversion From Cash Basis To Accrual Basis Illustration: Dr. DianeWindsor, likem sm busine owne ke ps he any all ss rs, e r accounting re cords on a cash basis. In theye 2010, Dr. Windsor re ive $300,000 from ar ce d he patie and paid $170,000 for ope r nts rating e nse re xpe s, sulting in an e ss of cash xce re ipts ove disburse e of $130,000 ($300,000 - $170,000). At January 1 and ce r m nts De m r 31, 2010, shehas accounts re ivable une d se ce be ce , arne rvicere nue accrue ve , d liabilitie and pre s, paid e nse as shown in I llustration 3A-5. xpe s Illustration 3A-5 Chapter 3-42 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. Conversion From Cash Basis To Accrual Basis Illustration: C alculatese rvicere nueon an accrual basis. ve Illustration 3A-8 Illustration 3A-5 Chapter 3-43 S olution on note page s LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. Conversion From Cash Basis To Accrual Basis Illustration: C alculateope rating e nse on an accrual basis. xpe s Illustration 3A-11 Illustration 3A-5 Chapter 3-44 S olution on note page s LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. Conversion From Cash Basis To Accrual Basis Illustration 3A-12 Chapter 3-45 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. ...
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This note was uploaded on 08/31/2009 for the course DRXL 100 taught by Professor All during the Spring '09 term at Drexel.

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