Ch3 - Intermediate Accounting Chapter 3 The Accounting...

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Unformatted text preview: Intermediate Accounting Chapter 3 The Accounting Information System Learning Objectives Learning 2 Understand basic accounting terminology Explain double­entry rules Identify steps in the accounting cycle Record transactions in journals, post to ledger accounts, and prepare a trial balance Explain the reasons for preparing adjusting entries Prepare financial statements from the adjusted trial balance Prepare closing entries Conceptual Framework Conceptual Accounting Information System (AIS) 3 Collects and processes transaction data Disseminates the information to interested parties Accounting Information System Accounting Helps management answer such questions as: •How much and what kind of debt is outstanding? •Were sales higher this period than last? •What assets do we have? •What were our cash inflows and outflows? •Did we make a profit last period? 4 Basic Terminology Basic 5 Event Transaction Account Real Account Nominal Account Ledger Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries LO 1: Understand basic accounting terminology Debits and Credits Debits An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. Double-entry accounting system (two­sided effect). 6 Recording done by debiting at least one account and crediting another. DEBITS must equal CREDITS LO 2: Explain double­entry rules Debits and Credits Debits Account • An arrangement that shows the effect of transactions on an account •Debit = “Left” •Credit = “Right” An Account can be illustrated in a T­ Account form. 7 LO 2: Explain double –entry rules Account Name Debit/Dr. Credit/Cr. Debits and Credits Debits If Debit entries are greater than Credit entries, If the account will have a debit balance. the Account Name Debit/Dr. Transaction #1 Transaction #3 Balance 8 $10,000 Credit/Cr. $3,000 8,000 $15,000 LO 2: Explain double­entry rules Transaction #2 Debits and Credits Debits If Credit entries are greater than Debit entries, If the account will have a credit balance. the Account Name Debit/Dr. Transaction #1 $10,000 Credit/Cr. $3,000 8,000 Balance 9 $1,000 LO 2: Explain double­entry rules Transaction #2 Transaction #3 Liabilities Debits and Credits Summary Debits No rm a l Ba la n c e Credit/Cr. No rm a l Balance Debit Assets Debit/Dr. Debit/Dr. Credit Normal Balance Credit/Cr. Equity Debit/Dr. Credit/Cr. Normal Balance Expense Debit/Dr. Credit/Cr. Normal Balance Revenu Debit/Dr.e Credit/Cr. Normal Balance 10 LO 2: Explain double­entry rules Normal Balance The Accounting Equation The Relationship among the assets, liabilities, and stockholders’ equity of a business: Basic Equation Expanded Equation Debit/Cr edit Rules = Assets Assets Dr. + Cr. _ Liabilities Dr. _ Cr. + Stockholders’ Equity Common Stock Liabilities = + + Dr. _ Cr. + Retained Earnings + Dr. _ Cr. + Dividends - Dr. + Cr. _ Expenses Revenues + Dr. _ Cr. + - Dr. + Cr. _ The equation must be in balance after every transaction. For every Debit there must be a Credit. 11 LO 2:Explain double­entry rules. Double-Entry System Illustration Double-Entry 1. Owners invest $40,000 in exchange for common stock. Assets = Liabilities + + 40,000 12 Stockholders’ Equity + 40,000 LO 2: Explain double­entry rules Double-Entry System Illustration Double-Entry 2. Disburse $600 cash for secretarial wages. Assets = Liabilities + Stockholders’ Equity ­600 - 600 (expense) 13 LO 2: Explain double­entry rules Double-Entry System Illustration Double-Entry 3. Purchase office equipment priced at $5,200, giving a promissory note in exchange. Assets + 5,200 14 = Liabilities + + 5,200 LO 2: Explain double­entry rules 10 percent Stockholders’ Equity Double-Entry System Illustration Double-Entry 4. Received $4,000 cash for services rendered. Assets = Liabilities + + 4,000 Stockholders’ Equity +4,000 (revenue) 15 LO 2: Explain double­entry rules Double-Entry System Illustration Double-Entry 5. Pay off a short­term liability of $7,000. Assets - 7000 16 = Liabilities + - 7,000 LO 2: Explain double­entry rules Stockholders’ Equity Double-Entry System Illustration Double-Entry 6. Declared a cash dividend of $5,000. Assets = Liabilities + + 5,000 17 LO 2: Explain double­entry rules Stockholders’ Equity - 5,000 Double-Entry System Illustration Double-Entry 7. Convert a long­term liability of $80,000 into common Assets = Liabilities + - 80,000 18 LO 2: Explain double­entry rules stock. Stockholders’ Equity + 80,000 Double-Entry System Illustration Double-Entry 8. Pay cash of $16,000 for a delivery van. Assets = Liabilities + Stockholders’ Equity - 16,000 + 16,000 Note that the accounting equation equality is maintained after recording each transaction. 19 LO 2: Explain double­entry rules Financial Statements and Ownership Structure Financial Ownership structure dictates the types of accounts that are part of the equity section. Proprietorship Proprietorship or Partnership or • Capital Account •Drawing Account Corporation • Common Stock • Additional Paid­in Capital • Dividends Declared • Retained Earnings 20 LO 2: Explain double­entry rules. Financial Statements and Ownership Structure Financial Illustration 3­4 Balance Sheet Stockholders’ Equity Common Stock (Investment by stockholders) Dividends Retained Earnings (Net (Net income retained in business) income Net income or Net loss (Revenues less expenses) (Revenues Income Statement Income Statement of Retained Earnings 21 LO 2: Explain double­entry rules The Accounting Cycle The Illustration 3­6 Transactions 9. Reversing entries 1. Journalization 8. Post­closing trial balance 2. Posting 7. Closing entries 3. Trial balance 6. Financial Statements Work Sheet 5. Adjusted trial balance 22 LO 3: Identify steps in the accounting cycle 4. Adjustments Identify and Recording Transactions Identify What to Record? FASB states, “transactions and other events circumstances that affect a business enterprise.” enterprise.” Types of Events: External - between a business and its environment External between a business and its environment Internal - event occurring entirely within a business Internal event occurring entirely within a business 23 LO 3: Identify steps in the accounting cycle and and 1. Journalizing 1. General Journal ­ a chronological record of transactions. Journal Journal Entries are recorded in the journal. Entries September 1: Stockholders invested $15,000 cash in the corporation in exchange for shares of shock. Illustration 3­7 General Journal Date 2010 Sept. 1 Accounting Titles and Explanation Cash Common Stock J1 Ref. Debit Credi t 15,000 (Issued shares of stock for cash) 24 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 15,000 2. Posting 2. Posting - the process of transferring amounts from the journal to the ledger accounts. Illustration 3­7 J1 General Journal Date 2010 Sept. 1 Accounting Titles and Explanation Cash Ref. Debit Credi t 15,000 Common Stock 15,000 (Issued shares of stock for cash) General Ledger Illustration 3­7 No.101­ Cash Date 2010 Sept. 1 25 Explanatio n Ref. Debit Credi 15,000 t J1 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 1. October 1: Stockholders invest $100,000 cash in an advertising venture to be known as Pioneer Advertising Agency Inc. Oct. 1 Cash 100,000 Common Stock Debit 100,000 26 Cash Credit 100,000 Common Stock Debit Credit 100,000 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 2. October 1: Pioneer Advertising purchases office equipment costing $50,000 by signing a 3­month, 12%, $50,000 note payable. Oct. 1 Office equipment 50,000 Notes payable Office Equipment Debit 50,000 27 Credit 50,000 Notes Payable Debit Credit 50,000 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 3. October 2: Pioneer Advertising receives a $12,000 cash advance from KC, a client, for advertising services that are expected to be completed by December 31. Oct. 2 Cash 12,000 Unearned service revenue Cash Debit 100,000 12,000 28 Credit 12,000 Unearned Service Revenue Debit Credit 12,000 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 4. October 3: Pioneer Advertising pays $9,000 office rent, in cash, for October. Oct. 3 Rent expense 9,000 Cash Cash Debit 100,000 12,000 29 Credit 9,000 9,000 Rent Expense Debit 9,000 Credit LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 5. Pioneer Advertising pays $6,000 for a one­year insurance policy that will expire next year on September 30. Oct. 4 Prepaid insurance 6,000 Cash Cash Debit 100,000 12,000 30 Credit 9,000 6,000 6,000 Prepaid Insurance Debit 6,000 Credit LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 6. October 5: Pioneer Advertising purchases, for $25,000 on account, an estimated 3­ month supply of advertising materials from Aero Supply. Oct. 5 Advertising supplies 25,000 Accounts payable Advertising Supplies Debit Credit 25,000 31 25,000 Accounts Payable Debit Credit 25,000 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 7. October 9: Pioneer Advertising signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. Pioneer will start work on the content of the flyers in November. Payment of $7,000 is due following delivery of the Sunday papers containing the flyer. A business transaction has not occurred. There is only an agreement between Pioneer Advertising and the newspaper for the services to be provided in November. Therefore, no journal entry is necessary in October. 32 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 8. October 20: Pioneer Advertising’s board of directors declares and pays a $5,000 cash dividend to stockholders. Oct. 20 Dividends 5,000 Cash Debit Cash Dividends Credit 100,000 12,000 33 5,000 Debit 9,000 6,000 5,000 Credit 5,000 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 9. October 26: Employees are paid every four weeks. The total payroll is $2,000 per day. The pay period ended on Friday, October 26, with salaries of $40,000 being paid. Oct. 26 Salaries expense Cash Cash Debit 100,000 12,000 34 Credit 9,000 6,000 5,000 40,000 40,000 40,000 Salaries Expense Debit 40,000 Credit LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 2. Posting 2. 10. October 31: Pioneer Advertising receives $28,000 in cash and bills Copa Company $72,000 for advertising services of $100,000 provided in October Oct. 31 Cash Accounts receivable Service revenue Cash Accounts Receivable Debit 100,000 12,000 28,000 Credit 9,000 6,000 5,000 40,000 Debit 72,000 Credit 28,000 72,000 100,000 Service Revenue Debit Credit 100,000 80,000 35 LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 3. Trial Balance 3. Trial Balance – A list of each account and its balance; used to prove equality of debit and credit balances. LO 4: Record transactions in journals, post to ledger accounts, and prepare a trial balance 36 PIONEER ADVERTISING AGENCY Trial Balance INC. October 31, 2010 Debit Cash Accounts Receivable Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Service Revenue Common Stock Dividends Salaries Expense Service Revenue Rent Expense Credit $ 80,000 72,000 25,000 6,000 50,000 5,000 40,000 9,000 $287,000 $ 50,000 25,000 12,000 100,000 100,000 $287,000 4. Adjusting Entries 4. Revenues – recorded in the period in which they are earned. Expenses – recognized in the period in which they are incurred. Adjusting entries – needed to ensure that the revenue recognition and matching principles are followed. 37 LO 5: Explain the reasons for preparing adjusting entries Types of Adjusting Entries Types Illustration 3­20 Prepayments Accruals 1. Prepaid Expenses. 3. Accrued Revenues. 2. Unearned Revenues. 4. Accrued Expenses. Exp e ns e s p a id in c a s h a n d re c o rd e d a s a s s e ts b e fo re th e y a re us e d o r c o n s u m e d . R e ve nue s re c e ive d in c a s h a nd re c o rd e d a s lia b ilitie s b e fo re th e y a re e a rn e d . 38 R e ve n u e s e a rne d b ut no t ye t re c e ive d in c a s h o r re c o rd e d . Exp e n s e s in c urre d b ut no t ye t p a id in c a s h o r re c o rd e d . LO 5: Explain the reasons for preparing adjusting entries Adjusting Entries for Deferrals Deferrals are Deferrals are either prepaid prepaid expenses expenses ADJUSTING ENTRIES Expenses Prepaid Asset Unadjusted Balance Expense Credit Adjusting Entry (­) Debit Adjusting Entry (+) or unearned unearned revenues. revenues. Unearned Revenues Liability Debit Adjusting Unadjusted Entry (­) Balance 39 LO 5: Explain the reasons for preparing adjusting entries Revenue Credit Adjusting Entry (+) Adjusting Entries for “Prepaid Expenses” Adjusting Payment of cash that is recorded as an asset because service or benefit will be received in the future. Cash Payment BEFOR E Expense Recorded Prepayments often occur in regard to: 40 insurance supplies advertising rent maintenance on equipment fixed assets LO 5: Explain the reasons for preparing adjusting entries Adjusting Entries for “Prepaid Expenses” Adjusting Supplies. Pioneer purchased advertising supplies costing $25,000 on October 5. Pioneer purchased advertising supplies costing $25,000 on October 5. Prepare the journal entry to record the purchase of the supplies. Oct. 5 Advertising supplies Cash Advertising Supplies Debit 25,000 41 Credit 25,000 Debit LO 5: Explain the reasons for preparing adjusting entries. 25,000 Cash Credit 25,000 Adjusting Entries for “Prepaid Expenses” Adjusting Supplies. An inventory count at the close of business on October 31 reveals that An inventory count at the close of business on October 31reveals that $10,000 of the advertising supplies are still on hand. Oct.31 Advertising supplies expense Advertising supplies Advertising Supplies Debit 25,000 15,000 Credit 15,000 15,000 Advertising Supplies Expense Debit 15,000 10,000 42 LO 5: Explain the reasons for preparing adjusting entries. Credit Adjusting Entries for “Prepaid Expenses” Adjusting Statement Statement Presentation: Presentation: Advertising supplies identifies that portion of the asset’s cost that will provide future economic benefit. 43 PIONEER ADVERTISING AGENCY Balance Sheet INC. October 31, 2010 Assets Cash $ 74,000 Accounts Receivable Less: Allowance 1,600 Advertising Supplies Prepaid Insurance Office equipment $ 50,000 Less: Accumulated depreciation 400 Total assets LO 5: Explain the reasons for preparing adjusting entries. $ 80,000 72,400 10,000 5,500 $ 49,600 $217,500 Adjusting Entries for “Prepaid Expenses” Adjusting Statement Statement Presentation: Presentation: Advertising supplies expense identifies that portion of the asset’s cost that expired in October. PIONEER ADVERTISING AGENCY Income Statement INC. For the Month Ended October 31, 2010 $ 106,000 Expenses Salaries expense $ 46,000 Advertising supplies expense 15,000 Rent expense 9,000 Insurance expense 500 Interest expense 500 Depreciation expense 400 Bad debt expense 1,600 Total expenses $ 73,000 Net Income 44 Revenues Service Revenue $ 33,000 LO 5: Explain the reasons for preparing adjusting entries. Adjusting Entries for “Prepaid Expenses” Adjusting Insurance. On Oct. 4th, Pioneer paid $6,000 for a one­year fire insurance policy, On Oct. 4 beginning October 1. Show the entry to record the purchase of the insurance. Oct. 4 Prepaid insurance Cash Prepaid Insurance Debit 6,000 45 6,000 Credit Debit LO 5: Explain the reasons for preparing adjusting entries. 6,000 Cash Credit 6,000 Adjusting Entries for “Prepaid Expenses” Adjusting Insurance. An analysis of the policy reveals that $500 ($6,000/12) of insurance An analysis of the policy reveals that $500 ($6,000/12) of insurance expires each month. Thus, Pioneer makes the following adjusting entry. Oct. 31 Insurance expense Prepaid insurance Prepaid Insurance Debit 6,000 500 Credit 500 Insurance Expense Debit 500 5,500 46 500 LO 5: Explain the reasons for preparing adjusting entries. Credit Adjusting Entries for “Prepaid Expenses” Adjusting Statement Statement Presentation: Presentation: Prepaid insurance identifies that portion of the asset’s cost that will provide future economic benefit. 47 PIONEER ADVERTISING AGENCY Balance Sheet INC. October 31, 2010 Assets Cash $ 74,000 Accounts Receivable Less: Allowance 1,600 Advertising Supplies Prepaid Insurance Office equipment $ 50,000 Less: Accumulated depreciation 400 Total assets LO 5: Explain the reasons for preparing adjusting entries. $ 80,000 72,400 10,000 5,500 $ 49,600 $217,500 Adjusting Entries for “Prepaid Expenses” Adjusting Statement Statement Presentation: Presentation: Insurance expense identifies that portion of the asset’s cost that expired in October. PIONEER ADVERTISING AGENCY IIncome Statement NC. For the Month Ended October 31, 2010 $ 106,000 Expenses Salaries expense $ 46,000 Advertising supplies expense 15,000 Rent expense 9,000 Insurance expense 500 Interest expense 500 Depreciation expense 400 Bad debt expense 1,600 Total expenses $ 73,000 Net Income 48 Revenues Service Revenue $ 33,000 LO 5: Explain the reasons for preparing adjusting entries. Adjusting Entries for “Prepaid Expenses” Adjusting Depreciation. Pioneer Advertising estimates depreciation on its office equipment to Pioneer Advertising estimates depreciation on its office equipment to be $400 per month. Accordingly, Pioneer recognizes depreciation for October by the following adjusting entry. Oct. 31 Depreciation expense Accumulated depreciation Depreciation Expense Debit 400 49 400 Credit 400 Accumulated Depreciation Debit LO 5: Explain the reasons for preparing adjusting entries. Credit 400 Adjusting Entries for “Prepaid Expenses” Adjusting Statement Statement Presentation: Presentation: Accumulated Depreciation­­­is a contra asset account. 50 PIONEER ADVERTISING AGENCY Balance Sheet INC. October 31, 2010 Assets Cash $ 74,000 Accounts Receivable Less: Allowance 1,600 Advertising Supplies Prepaid Insurance Office equipment $ 50,000 Less: Accumulated depreciation 400 Total assets LO 5: Explain the reasons for preparing adjusting entries. $ 80,000 72,400 10,000 5,500 $ 49,600 $217,500 Adjusting Entries for “Prepaid Expenses” Adjusting Statement Statement Presentation: Presentation: Depreciation expense identifies that portion of the asset’s cost that expired in October. PIONEER ADVERTISING AGENCY IIncome Statement NC. For the Month Ended October 31, 2010 $ 106,000 Expenses Salaries expense $ 46,000 Advertising supplies expense 15,000 Rent expense 9,000 Insurance expense 500 Interest expense 500 Depreciation expense 400 Bad debt expense 1,600 Total expenses $ 73,000 Net Income 51 Revenues Service Revenue $ 33,000 LO 5: Explain the reasons for preparing adjusting entries. Adjusting Entries for “Unearned Revenues” Adjusting Receipt of cash that is recorded as a liability because the revenue has not been earned. Cash Receipt BEFOR E Revenue Recorded Unearned revenues often occur in regard to: 52 rent airline tickets school tuition magazine subscriptions customer deposits LO 5: Explain the reasons for preparing adjusting entries Adjusting Entries for “Unearned Revenues” Adjusting Unearned Revenue. Pioneer Advertising received $12,000 on October 2 from KC Pioneer Advertising received $12,000 on October 2 from KC for advertising services expected to be completed by December 31. Show the journal entry to record the receipt on Oct. 2nd. Oct. 2 Cash Unearned service revenue Cash Debit 12,000 53 12,000 Credit 12,000 Unearned Service Revenue Debit LO 5: Explain the reasons for preparing adjusting entries. Credit 12,000 Adjusting Entries for “Unearned Revenue” Adjusting Unearned Revenues. Analysis reveals that Pioneer earned $4,000 of the Analysis reveals that Pioneer earned $4,000 of the advertising services in October. Thus, Pioneer makes the following adjusting entry. Oct. 31 Unearned service revenue Service revenue Service Revenue Debit 4,000 Credit 100,000 4,000 4,000 Unearned Service Revenue Debit 4,000 Credit 12,000 8,000 54 LO 5: Explain the reasons for preparing adjusting entries. Adjusting Entries for “Unearned Revenue” Adjusting Statement Statement Presentation: Presentation: Unearned service revenue identifies that portion of the liability that has not been earned. 55 LO 5 PIONEER ADVERTISING AGENCY Balance Sheet October INC. 31, 2010 Assets Cash $ 74,000 Accounts receivable Less: Allowance 1,600 Advertising supplies Prepaid Insurance Office equipment $ 50,000 Less: Accumulated depreciation 400 Total assets $ 80,000 72,400 10,000 5,500 $ 49,600 $217,500 Liabilities and Stockholders’ Equity Liabilities Note payable Accounts payable Unearned service revenue Salaries payable Interest payable Total liabilities Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity $ 50,000 25,000 8,000 6,000 500 89,500 100,000 28,000 217,500 Adjusting Entries for Accruals Accruals are Accruals are either accrued revenues ADJUSTING ENTRIES Revenues Accrued As s e t R e ve nu e Credit Debit Adjusting Entry (+) Adjusting Entry (+) or accrued accrued expenses. expenses. Accrued Expenses Exp e ns e Debit Adjusting Entry (+) 56 LO 5: Explain the reasons for preparing adjusting entries Lia b ility Credit Adjusting Entry (+) Adjusting Entries for “Accrued Revenues” Adjusting Revenues earned but not yet received in cash or recorded. Adjusting entry results in: Revenue Recorded BEFOR E Cash Receipt Accrued revenues often occur in regard to: 57 rent interest services performed LO 5: Explain the reasons for preparing adjusting entries Adjusting Entries for “Accrued Revenues” Adjusting Accrued Revenues. In October Pioneer earned $2,000 for advertising services that In October Pioneer earned $2,000 for advertising services that it did not bill to clients before October 31. Thus, Pioneer makes the following adjusting entry. Oct. 31 Accounts receivable Service revenue Accounts Receivable Debit 72,000 2,000 2,000 Credit 2,000 Service Revenue Debit 74,000 58 LO 5: Explain the reasons for preparing adjusting entries. Credit 100,000 4,000 2,000 106,000 Adjusting Entries for “Unearned Revenues” Adjusting PIONEER ADVERTISING AGENCY INC. Income Statement For the Month Ended October 31, 2010 Revenues $ 106,000 Service Revenue Expenses Salaries expense $ 46,000 Advertising supplies 15,000 Rent expense 9,000 Insurance expense 500 Interest expense 500 Depreciation expense 400 Bad debt expense 1,600 Total expenses 73,000 33,000 Net Income Statement Statement Presentation: Presentation: 59 LO 5 PIONEER ADVERTISING AGENCY INC. Balance Sheet October 31, 2010 Assets Cash $ 74,000 Accounts receivable Less: Allowance 1,600 Advertising supplies Prepaid Insurance Office equipment $ 50,000 Less: Accumulated depreciation 400 Total assets $ 80,000 72,400 10,000 5,500 $ 49,600 $217,500 Liabilities and Stockholders’ Equity Liabilities Note payable Accounts payable Unearned service revenue Salaries payable Interest payable Total liabilities Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity $ 50,000 25,000 8,000 6,000 500 89,500 100,000 28,000 217,500 Adjusting Entries for “Accrued Expenses” Adjusting Expenses incurred but not yet paid in cash or recorded. Adjusting entry results in: Expense Recorded BEFOR E Cash Payment, if any* Accrued expenses often occur in regard to: 60 rent interest taxes salaries bad debts* LO 5: Explain the reasons for preparing adjusting entries Adjusting Entries for “Accrued Expenses” Adjusting Accrued Interest. Pioneer sighed a three­month, 12%, note payable in the amount of $50,000 on October 1. The note requires interest at an annual rate of 12 percent. Three factors determine the amount of the interest accumulation: 1 Time in Terms of One Year = Interest + 12% 3 + 61 Annual Interest Rate + $50,000 + Face Value of Note 2 1/12 = $500 LO 5: Explain the reasons for preparing adjusting entries Adjusting Entries for “Accrued Expenses” Adjusting Accrued Interest. Pioneer signed a three­month, 12%, note payable in the amount Pioneer signed a three­month, 12%, note payable in the amount of $50,000 on October 1. Prepare the adjusting entry on Oct. 31 to record the accrual of interest. Oct. 31 Interest expense Interest payable Interest Expense Debit 500 62 500 Credit 500 Interest Payable Debit LO 5: Explain the reasons for preparing adjusting entries. Credit 500 Adjusting Entries for “Accrued Expenses” Adjusting PIONEER ADVERTISING AGENCY INC. Income Statement For the Month Ended October 31, 2010 Revenues $ 106,000 Service Revenue Expenses Salaries expense $ 46,000 Advertising supplies 15,000 Rent expense 9,000 Insurance expense 500 Interest expense 500 Depreciation expense 400 Bad debt expense 1,600 Total expenses 73,000 33,000 Net Income Statement Statement Presentation: Presentation: 63 LO 5 PIONEER ADVERTISING AGENCY INC. Balance Sheet October 31, 2010 Assets Cash $ 74,000 Accounts receivable Less: Allowance 1,600 Advertising supplies Prepaid Insurance Office equipment $ 50,000 Less: Accumulated depreciation 400 Total assets $ 80,000 72,400 10,000 5,500 $ 49,600 $217,500 Liabilities and Stockholders’ Equity Liabilities Notes payable Accounts payable Unearned service revenue Salaries payable Interest payable Total liabilities Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity $ 50,000 25,000 8,000 6,000 500 89,500 100,000 28,000 217,500 Adjusting Entries for “Accrued Expenses” Adjusting Accrued Salaries. At October 31, the salaries for the days worked in October but At October 31, the salaries for the days worked in October but not yet paid represent an accrued expense and a related liability to Pioneer. The employees receive total salaries of $10,000 for a five­day work week, or $2,000 per day. (Refer to textbook page 88 for a calendar to see which days remain unpaid on October 31. Employees work M­F and were paid on October 26.) 64 LO 5: Explain the reasons for preparing adjusting entries. Adjusting Entries for “Accrued Expenses” Adjusting Accrued Salaries. Employees receive total salaries of $10,000 for a five­ day work Employees receive total salaries of $10,000 for a five­ day work week, or $2,000 per day. Prepare the adjusting entry on Oct.31 to record accrual for salaries. Oct. 31 Salaries expense Salaries payable Salaries Expense Debit 40,000 6,000 6,000 Credit 6,000 Salaries Payable Debit 46,000 65 LO 5: Explain the reasons for preparing adjusting entries. Credit 6,000 Adjusting Entries for “Accrued Expenses” Adjusting PIONEER ADVERTISING AGENCY INC. Income Statement For the Month Ended October 31, 2010 Revenues $ 106,000 Service Revenue Expenses Salaries expense $ 46,000 Advertising supplies 15,000 Rent expense 9,000 Insurance expense 500 Interest expense 500 Depreciation expense 400 Bad debt expense 1,600 Total expenses 73,000 33,000 Net Income Statement Statement Presentation: Presentation: 66 LO 5 PIONEER ADVERTISING AGENCY INC. Balance Sheet October 31, 2010 Assets Cash $ 74,000 Accounts receivable Less: Allowance 1,600 Advertising supplies Prepaid Insurance Office equipment $ 50,000 Less: Accumulated depreciation 400 Total assets $ 80,000 72,400 10,000 5,500 $ 49,600 $217,500 Liabilities and Stockholders’ Equity Liabilities Notes payable Accounts payable Unearned service revenue Salaries payable Interest payable Total liabilities Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity $ 50,000 25,000 8,000 6,000 500 89,500 100,000 28,000 217,500 Adjusting Entries for “Accrued Expenses” Adjusting Accrued Salaries. Employees receive total salaries of $10,000 for a five­day work Employees receive total salaries of $10,000 for a five­day work week, or $2,000 per day. Prepare the journal entry on November 23 to record the payment of salaries. (See page 88) Nov 23 Salaries payable Salaries expense Cash Salaries Expense Debit 34,000 67 Credit 6,000 34,000 Salaries Payable Debit 6,000 LO 5: Explain the reasons for preparing adjusting entries. 40,000 Credit 6,000 Adjusting Entries for “Accrued Expenses” Adjusting Bad Debts. Assume Pioneer reasonably estimates a bad debt expense for the month of Assume Pioneer reasonably estimates a bad debt expense for the month of $1,600. It makes the adjusting entry for bad debts as follows. Oct. 31 Bad Debt Expense Allowance for Doubtful Accounts (To record monthly bad debt expense) 1,600 1,600 After Pioneer posts the adjusting entry, the accounts show the following. Accounts Receivable 10/ 72,000 10/3 Adj. 2,000 1 1 Allowance for Doubtful Accounts 10/ 31 68 Adj. 1,600 Bad Debt Expense 10/ 31 Adj. 1,600 LO 5: Explain the reasons for preparing adjusting entries. 5. Adjusted Trial Balance 5. Adjusted Trial Balance October 31, 2010 Shows the balance of all accounts, after adjusting entries, at the end of the accounting period. 69 LO 5: Cash $ 80,000 Accounts Receivable 74,000 Allowance for Doubtful Accounts 10,000 Advertising Supplies 5,500 Prepaid Insurance 50,000 Office Equipment Accumulated Depreciation-Office Equipment Notes Payable Accounts Payable Interest Payable Unearned Service Revenue Salaries Payable Common Stock Dividends 5,000 Service Revenue Salaries Expense 46,000 Advertising Supplies Expense 15,000 9,000 Rent Expense 500 Insurance Expense 500 Interest Expense 400 Depreciation Expense 1,600 Bad Debt Expense $297,500 $ 1,600 400 50,000 25,000 500 8,000 6,000 100,000 106,000 $297,500 6. Preparing Financial Statements 6. Financial Statements are prepared directly from the Financial Adjusted Trial Balance. Adjusted Income Income Statement Statement 70 Statement Statement of Retained Earnings Earnings LO 6: Prepare financial statement from the adjusted trial balance Balance Balance Sheet Sheet 7. Closing Entries 7. 71 To reduce the balance of the income statement (revenue and expense) accounts to zero. To transfer net income or net loss to owner’s equity. Balance sheet (asset, liability, and equity) accounts are not closed Dividends are closed directly to the Retained Earning account. LO 7: Prepare closing entries 8. Post-Closing Trial Balance 8. PIONEER ADVERTISING AGENCY INC. Post­Closing Trial Balance October 31, 2010 Account Cash Accounts Receivable Allowance for Doubtful Accounts Advertising Supplies Prepaid Insurance Office Equipment Accumulated Depreciation-Office Equipment Notes Payable Accounts Payable Unearned Service Revenue Salaries Payable Interest Payable Common Stock Retained Earnings 72 LO 4: Debit $ 80,000 74,000 10,000 5,500 50,000 Credit $ 1,600 400 50,000 25,000 8,000 6,000 100,000 28,000 $219,500 $219,500 ...
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