PDF_PP_Slides_02_(APSCW_-_F2009)

PDF_PP_Slides_02_(APSCW_-_F2009) - Objectives: Handout 02...

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Unformatted text preview: Objectives: Handout 02 1) 2) 3) 4) 5) 6) Identify steps in the accounting cycle Understand the basic T‐account structure and how that structure is reflected in different types of accounts. Discuss the relationship between the accounting equation and T‐ accounts Understand how different transactions affect the financial statements (using the accounting equation template) Explain the need for adjusting entries and identify the common types of adjusting entries. Understand why closing entries are needed for income statement accounts. Handout 02, pp. 1, 2 The Accounting Cycle The accounting cycle is the process by which accountants produce the financial statements for a specific period of time. Steps During the Accounting Period: 1. 2. 3. Collecting Source Documents Record Journal Entries Post JE to the General Ledger (T‐Accounts) 1 Handout 02, p. 2 The Accounting Cycle The accounting cycle is the process by which accountants produce the financial statements for a specific period of time. Steps at the End of the Accounting Period: 1. 2. 3. 4. Prepare Unadjusted Trial Balance Record and Post Adjusting Entries Prepare Adjusted Trial Balance Record and Post Closing Entries, Prepare Financial Statements, Prepare Post‐Closing Trial Balance Handout 02, p. 2 The Accounting Cycle The first step in preparing F/S is the accounting recognition of The economic events Entries indicate the financial effects of events on accounts that Entries appear in the financial statements When entries are made, the accounting equation equality must When always be maintained: Assets = Liabilities + Equity Double Double‐entry accounting expresses account balances using the terms debit and credit, which mean left and right, respectively. 2 Handout 02, p. 2 The Accounting Equation & T‐Accounts Assets Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenues – Expenses + Gains – Losses – Dividends Rearranging Rearranging Terms: Assets + Expenses = + Losses + Dividends Liabilities + Contributed Capital + Beg. Retained Earnings + Revenues + Gains LHS LHS = Debit Side Increase in Assets, Expenses, Losses, and Dividends. Decrease in Liabilities. Increase RHS RHS = Credit Side Increase Increase in Liabilities, CC, Revenues, and Gains. Decrease in Assets. Handout 02, p. 2 T‐Account Structure For any account, we always have: For Beginning Balance + Additions during the Period – Reductions during the Period = Ending Balance 3 Handout 02, p. 3 T‐Accounts Asset Accounts Beg Balance + Additions – Reductions End Balance Handout 02, p. 3 T‐Accounts Liability Accounts Beg Balance – Reductions + Additions End Balance 4 Handout 02, p. 3 T‐Accounts Equity Accounts Beg Balance – Reductions + Additions End Balance Handout 02, p. 3 T‐Accounts Revenue and Gain Accounts Beg Balance – Reductions + Additions End Balance 5 Handout 02, p. 3 T‐Accounts Expense, Loss, and Dividend Accounts Beg Balance + Additions – Reductions End Balance Handout 02, p. 3 The Accounting Cycle Balance sheet accounts = Permanent accounts. – Provide an ongoing, cumulative record of assets, liabilities, and owners’ equity. Income Income statements accounts = Temporary accounts – Used to accumulate changes in assets and liabilities that arise from earnings activities during each accounting period. Temporary accounts are closed (i.e., their balance is reduced to zero) at the end of each accounting period. 6 Handout 02, p. 4 The Accounting Equation & T‐Accounts Assets Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenues – Expenses + Gains – Losses – Dividends The accounting equation can also be expressed in terms of T‐accounts [the The accounting treatment of gains (losses) is the same as that of a revenue (expense), so I omit gains and losses below]: “Account Effect” Assets Dr Cr (+) (–) = Liabilities + Dr Cr (–) (+) CC Dr Cr (–) (+) + RE Dr Cr (–) (+) + Revenues – Expenses – Dividends Dr Cr (–) (+) Dr Cr (+) (–) Dr Cr (+) (–) (+) (–) (– (–) (+) (–) (+) (–) (+) (–) (+) (–) (+) (–) (+) “Equation Effect” Handout 02, p. 4 T‐Accounts Contra Asset Accounts BB – Reductions + Additions Contra Liability Accounts BB + Additions – Reductions Contra Equity Accounts BB + Additions – Reductions EB EB EB A contra account accumulates subtractions to an associated account (i.e., contra accounts reduce either an asset, liability, or equity account). Therefore, the debit and credit rules are opposite that of the associated account. However, debiting or crediting a contra account has the same effect on the accounting equation as a debit or credit to the associated account. 7 Handout 02, p. 4 The Accounting Equation & T‐Accounts A contra account accumulates subtractions to an associated account (i.e., contra accounts reduce either an asset, liability, or equity account). Therefore, the debit and credit rules are opposite that of the associated account. However, debiting or crediting a contra account has the same effect on the accounting equation as a debit or credit to the associated account. “Account Effect” Assets Dr Cr (+) (–) – Contra Asset = Liability Dr Cr (–) (+) Dr Cr (–) (+) – Contra Liability + Dr Cr (+) (–) Equity Dr Cr (–) (+) – Contra Equity Dr Cr (+) (–) (+) (–) (– (+) (–) (– (–) (+) (–) (+) (–) (+) (–) (+) “Equation Effect” Handout 02, p. 5 Journal Entries Information from source documents is recorded in the general journal. Journal entries typically have the following form. Date Account Debit $100 Credit Feb 22, 1997 Cash Notes Payable To record… $100 8 Handout 02, p. 5 Ledger Entries (T‐Accounts) The general ledger contains a T account for each account that appears in the general journal. Cash 02/27/97 Notes Payable 02/27/97 $100 $100 Debit Debit Side Credit Side Debit Side Credit Side Handout 02, p. 6 Handout Accounting Equation Template Assets D+[C–] Cash Cash Notes Payable +$100 +$100 = Liabilities D–[C+] + CC D–[C+] + RE D–[C+] Recording transactions using the template allows you to directly Recordin observe how transactions affect each financial statement. 9 Accounting Equation Template You can adapt the template to your liking (this is the template used in You the text) – if you use Excel you can make a column for every account! Example Transactions Handout 02, p. 6 Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– 10 Example Transactions Handout 02, p. 6 Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– Handout 02, p. 11 The Accounting Cycle Steps at the End of the Accounting Period: 1. Prepare Unadjusted Trial Balance The unadjusted trial balance is a list of all the accounts in the general ledger with their balance at the end of the accounting period before any adjusting entries are made. 11 Handout 02, p. 11 The Accounting Cycle Steps at the End of the Accounting Period: 2. Prepare Adjusting Entries Adjusting entries are used to record transactions and other economic events that the firm has not yet recorded or has improperly recorded during the accounting period. Prepayments Cash flows BEFORE earnings activities Prepaid Expenses and Deferred Revenues Accruals Cash flows AFTER earnings activities Accrued Expenses and Accrued Revenues Inventory Adjustments HB Handout 02, p. 11 Adjusting Entries: Prepayments Prepaid Expenses = Transactions in which services that the firm receives are paid for in advance. The adjusting entry allocates a portion (or all) of the prepaid expense asset to an expense account. Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– Example: On 06/01/06 the company paid $2,400 for insurance over the next 2 years. 06/01/06: PPD Ins Cash 12/31/06: Ins Exp PPD Ins 12/31/07: Ins Exp PPD Ins 12/31/08: Ins Exp PPD Ins +$2,400 –$2,400 –$700 –$700 –$1,200 –$1,200 –$500 –$500 12 Handout 02, p. 12 Adjusting Entries: Prepayments Depreciation Expense = Based on the matching principle, the cost of assets that provide benefits over several accounting periods is allocated to an expense account over the periods in which the assets are used. For tangible (intangible) assets, the adjusting entry is to debit depreciation (amortization) expense and credit accumulated depreciation (intangible asset). Example: On 04/02/04 the firm bought a building for $50,000. The building has an estimated useful life of 10 years and an estimated salvage value of $10,000. 04/02/04: Building Cash 12/31/04: Depr Exp AD ‐ Building ‐ 12/31/05: Depr Exp AD ‐ Building ‐ Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– +$50,000 –$50,000 –$3,000 –$3,000 –$4,000 –$4,000 Handout 02, p. 13 Adjusting Entries: Prepayments Deferred Revenues = Obligations to deliver goods or services that result from receiving assets (usually cash) before providing the goods or service. If the revenue (or a portion of it) is earned by EOY, an adjusting entry that eliminates (or reduces) the unearned revenue liability and recognizes revenue is recorded. Example: On 08/20/06 the company received $1,200 for rent for the next year (09/01/06 – 09/01/07. 08/20/06: Cash Deferred Rev 12/31/06: Deferred Rev Revenue 12/31/07: Deferred Rev Revenue Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– +$1,200 +$1,200 –$400 +$400 –$800 +$800 13 Handout 02, p. 14 Adjusting Entries: Accruals Accrued Revenues = Earned revenues that have not been collected. The accrued revenue (that has not been recorded) adjusting entry is to debit a receivable account and credit a revenue account. The most common example of an accrued revenue is a credit sale. Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– Example: In December 2006, the firm earned $10,000 of revenue that was not billed as of 12/31. The customer paid on 01/10/07. 12/31/06: AR Sales 01/10/07: Cash AR +$10,000 +$10,000 +$10,000 –$10,000 Handout 02, p. 14 Adjusting Entries: Accruals Accrued Expenses = Incurred expenses that have not been paid. The accrued expense (that has not been recorded) adjusting entry is to debit an expense account and credit a payable account. Example: $15,000 in salaries for December of 2006 were paid on 01/10/07. 12/31/06: Salaries Exp Salaries Pybl 01/10/07: Salaries Pybl Cash Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– –$15,000 +$15,000 –$15,000 –$15,000 14 Handout 02, p. 15 Adjusting Entries: Accruals Bad Debt Expense = Based on the matching principle, management should estimate the uncollectible portion of the period’s revenues and recognize a bad debt expense equal to that amount. The EOY adjusting entry is to debit the bad debt expense and credit a contra‐asset account (to accounts receivable) called the allowance for uncollectible accounts. Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– 12/31/06: Bad Debt Exp Allow for UA Example: Mgmt. estimates that 3% of all credit sales are uncollectable. Credit sales in 2006 were $1.2M. –$36,000 –$36,000 Handout 02, p. 15 Adjusting Entry Summary Adjustment Prepaid Expense Examples Prepaid rent, insurance, advertising. Depreciation and amortization. Delivery on customer advances, gift cards, subscriptions Incurred but unpaid wages, interest, taxes, and bad debt expense Earned but not received Earned but not received service, sales, interest revenue Adjusting Entry Dr: Expense Cr: Asset Dr: Liability Cr: Revenue Dr: Expense Cr: Liability Dr: Asset Dr: Asset Cr: Revenue F/S Effects if Not Adjusted Balance Sheet Income Statement Assets Overstated Equity Overstated Liability Overstated Equity Understated Liability Understated Equity Overstated Assets Understated Assets Understated Equity Understated Expense Understated Revenue Understated Expense Understated Revenu Revenue Understated Deferred Revenue Accrued Expense Accrued Revenue Accrued Revenue 15 Handout 02, p. 16 Adjusting Entries Inventory Adjustments: Perpetual System: Inventory account always reflects the cost of inventory on hand. When merchandise is purchased, inventory is debited and cash or accounts payable is credited. When merchandise is sold, in addition to the sale entry (debit A/R or cash and credit sales), inventory is credited and cost of goods sold is debited. Adjusting entries are needed if: Physical Count ≠ Inventory Account Balance Market value of inventory is below cost Handout 02, p. 16 Adjusting Entries Inventory Adjustments: Periodic System: Purchases are debited to a temporary account called purchases; no entries are made during the year to record COGS. At the EOY, a physical count is performed and inventory on hand is valued (at LCM). Based on the value of ending inventory, COGS is recorded, the purchases account is closed, and the balance of the inventory account is adjusted (from the beginning balance to the ending balance). The adjusting entries are: Debit COGS; credit inventory for beginning inventory Debit COGS; credit purchases for yearly purchases Debit inventory for LCM of inventory on hand at EOY; credit COGS 16 Handout 02, p. 16 Adjusting Entries Beginning Inventory = $50, Purchases during the year = $850, Cost of Inventory sold during the year = $800, Ending Inventory based on a physical count = $90. EI = BI + P – COGS EI = 50 + 850 – 800 EI = 100 Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– Example: Record inventory adjustment under a perpetual inventory system. system. 12/31/06: Inv Shortage Inventory –$10 –$10 Handout 02, p. 17 The Accounting Cycle Steps at the End of the Accounting Period: 3. Prepare Adjusted Trial Balance The adjusted trial balance is a listing of all the accounts in the general ledger and their balance after recording and posting the adjusting entries. 17 Handout 02, p. 17 The Accounting Cycle Steps at the End of the Accounting Period: 4. Record and Post Closing Entries, Prepare Financial Statements, Prepare Post‐Closing Trial Balance 1. 2. 3. 4. 5. 6. 7. Close Income Statement accounts to a temporary account called Income Summary Prepare the Income Statement Close Income Summary to Retained Earnings Close the Dividend account to Retained Earnings Prepare the Statement of Stockholder’s Equity Prepare the Post‐Closing Trial Balance Prepare the Balance Sheet Handout 02, p. 18 Closing Entries Example: A firm had cash sales of $1,000 and various cash expenses totaling $700 during 2006. On 12/31/06, the firm declared and paid $50 of dividends. Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– 12/31/06: Cash Sales 12/31/06: Expenses Cash 12/31/06: Dividends Cash +$1,000 +$1,000 –$700 –$700 –$50 –$50 18 Handout 02, p. 18 Closing Entries Example: A firm had cash sales of $1,000 and various cash expenses totaling $700 during 2006. On 12/31/06, the firm declared and paid $50 of dividends. 12/31/06: Sales Expenses Income Sum 12/31/06: Income Sum RE 12/31/06: RE Dividends Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– –$1,000 +$700 +$300 –$300 +$300 –$50 +$50 Handout 02, pp. 19, 21 ABC Company 1. Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– Issue 300 shares of $1 par stock for $300. Borrowed $200 from bank. Purchased building for $240 cash. Purchased equipment for $100 cash. Purchased inventory for $260 on account. Paid accounts payable of $160. Sold merchandise costing $70 for $170 cash. 2. 3. 4. 5. 6. 7. 19 Handout 02, pp. 19, 21 ABC Company 8. Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– Sell merchandise costing $45 for $80 on account. Collected $35 of accounts receivable. 10. On 09/22, paid $36 for a year of rent (effective 10/01). 11. Paid $40 salaries. 9. 12. Received a $30 advance for an order that will be delivered next year [product price (cost) = $100 ($76)]. Handout 02, p. 23 02, ABC Company (Unadjusted Trial Balance) Cash AR Inventory Prepaid Rent Building Equipment COGS Salaries Exp. AP Deferred Revenue Loan Payable Common Stock Sales 20 Handout 02, p. 24 ABC Company (Adjusting Entries) Depreciation Expense Interest Expense Rent Expense Bad Debt Expense Handout 02, p. 24 ABC Company (Adjusting Entries) Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– 1. Record depreciation. 2. Record interest expense. Record rent expense. Inventory shortage of $15 is found. Employees earned $12 of salary but were not paid. 5% of all credit sales are uncollectable. Record bad debt expense. 3. 4. 5. 6. 21 Handout 02, p. 25 ABC Company (Adjusted Trial Balance) Cash AR Inventory Prepaid Rent Building Equipment COGS Salaries Exp. Rent Exp. Interest Exp. Depreciation Exp. Inventory Shortage Bad Debt Exp. AP Interest Payable Salaries Payable Deferred Revenue AD – Building AD – Equipment Allowance for UA Loan Payable Common Stock Sales Handout 02, p. 25 ABC Company (Closing Entries) Assets = Liabilities + CC + RE D+ [C–] D– [C+] D– [C+] D– [C+] [C– D– D– D– 1. Close Income Statement accounts to Income Summary. 2. Close Income Summary to Retained Earnings. 22 Handout 02, p. 25 ABC Company (Post‐Closing Trial Balance) Cash AR Inventory Prepaid Rent Building Equipment AP Interest Payable Salaries Payable Deferred Revenue AD – Building AD – Equipment Allowance for UA Loan Payable Common Stock Retained Earnings Handout 02, p. 26 ABC Company (Financial Statements) ABC Company Income Statement For the Year Ended 12/31/1996 Sales COGS Gross Profit SG&A Expenses Operating Income Interest Expense Net Income $ 250 115 135 93 42 12 $ 30 23 Handout 02, p. 26 ABC Company (Financial Statements) ABC Company Statement of Stockholders’ Equity For the Year Ended 12/31/1996 Balance: 12/31/05 Common Stock Issued Net Income Balance: 12/31/06 CC $ 0 300 $ 300 RE $ 0 30 $ 30 Total $ 0 300 30 $ 330 Handout 02, p. 26 ABC Company (Financial Statements) ABC Company Balance Sheet 12/31/06 Current Assets Cash AR (Net of $4 AUA) Inventory Prepaid Rent PP&E Building (Net of $6 AD) Equipment (Net of $7 AD) $ 159 41 130 27 357 234 93 327 Current Liabilities AP Interest Payable Salaries Payable Deferred Revenue $ 100 12 12 30 $ 154 200 $ 354 Loan Payable Total Liabilities Stockholders Equity Common Stock Retained Earnings 300 30 $ 684 Total Assets $ 684 Total Liabilities & SE 24 Objectives: Handout 02 Recap 1) 2) 3) 4) 5) 6) Identify steps in the accounting cycle Understand the basic T‐account structure and how that structure is reflected in different types of accounts. Discuss the relationship between the accounting equation and T‐ accounts Understand how different transactions affect the financial statements (using the accounting equation template) Explain the need for adjusting entries and identify the common types of adjusting entries. Understand why closing entries are needed for income statement accounts. 25 ...
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