Chapter 2

1. Chapter 2 Review of the Accounting Process

2. + Owner Investments - Owner Withdrawals + Revenue - Expenses The Accounting Equation A = L + OE

3. + Paid-in Capital + Retained Earnings + Revenues + Gains - Expenses - Losses - Dividends Accounting Equation for a Corporation A = L + SE

4. A = L + PIC + RE + R - E Paid-in Capital Assets Revenues and Gains Dr. + Cr. - Dr. - Cr. + Dr. - Cr. + Retained Earnings Expenses and Losses Liabilities Dr. - Cr. + Dr. - Cr. + Dr. + Cr. - Account Relationships Debits and credits affect the Balance Sheet Model as follows:

5. Permanent accounts represent the basic financial position elements of the accounting equation. Temporary accountskeep track of the changes in the retained earnings component of shareholders’ equity. Account Relationships Debits and credits affect the Balance Sheet Model as follows: A = L + PIC + RE+ R - E

6. Source documents Transaction Analysis Record in Journal Post to Ledger Financial Statements Adjusted Trial Balance Record & Post Adjusting Entries Unadjusted Trial Balance The Accounting Processing Cycle Close Temporary Accounts Post-Closing Trial Balance

7. Accounting Processing Cycle On January 1, 2004, CWC, Inc. borrows $10,000 from the bank. • Two accounts are affected: • Cash (an asset) increases by $10,000. • Notes Payable (a liability) increases by $10,000. Prepare the journal entry.

8. Accounting Processing Cycle Two accounts are affected: • Cash (an asset) increases by $10,000. • Notes Payable (a liability) increases by $10,000.

9. Accounting Processing Cycle Two accounts are affected: • Cash (an asset) increases by $10,000. • Notes Payable (a liability) increases by $10,000. Account numbers are references for posting to the General Ledger.

10. General Ledger The “T” account is a shorthand used by accountants to analyze transactions. It is notpart of the bookkeeping system.

11. On July 1, 2003, the owners invest $60,000 in a new business, Dress Right Clothing Corporation. Posting Journal Entries Post the debit portion of the entry to the Cash ledger account.

12. 1 Posting Journal Entries

13. 2 3 Posting Journal Entries

14. 4 5 Posting Journal Entries

15. 6 Posting Journal Entries

16. 1 Posting Journal Entries Post the credit portion of the entry to the Common Stock ledger account.

17. 2 3 Posting Journal Entries

18. 4 5 Posting Journal Entries

19. 6 Posting Journal Entries

20. After recording all entries for the period, Dress Right’s Trial Balance would be as follows: A Trial Balance is a listing of all accounts and their balances at a point in time. Debits = Credits

21. Additional Consideration Perpetual Inventory System Periodic Inventory System Discussed in more depth in Chapters 8 & 9. Inventory account is continually updated to reflect purchases and sales. Cost of goods sold account is continually updated to reflect sales. Purchases account reflects purchases of inventory. Cost of goods sold and inventory are adjusted at period end.

22. At the end of the period, some transactions or events remain unrecorded. Because of this, several accounts in the ledger need adjustments before their balances appear in the financial statements. Adjusting Entries

23. Transactions where cash is paid or received beforea related expense or revenue is recognized. Transactions where cash is paid or received after a related expense or revenue is recognized.

24. Prepaid Expenses Expense Asset Unadjusted Balance Credit Adjustment Debit Adjustment Today, I will pay for my first 6 months’ rent. Prepaid Expenses Items paid for in advance of receiving their benefits

25. Prepaid Expenses On December 1, 2004, Scott Company paid $12,000 to cover rent for December 2004 through May 2005. Let’s look at the adjusting journal entry needed on December 31, 2004.

26. Prepaid Expenses On December 1, 2004, Scott Company paid $12,000 to cover rent for December 2004 through May 2005. Let’s look at the adjusting journal entry needed on December 31, 2004. $12,000 ÷ 6 months = $2,000 per month

27. Prepaid Expenses After posting, the accounts look like this: Prepaid Rent Rent Expense 12/31 $2,000 12/1 $12,000 12/31 $2,000 Bal. $10,000

28. Straight-Line Depreciation Expense Asset Cost - Salvage Value Useful Life = Depreciation Depreciation is the process of computing expense by allocating the cost of plant and equipment over their expected useful lives.

29. Depreciation On January 1, 2004, Monroe, Inc. purchased the following oil pumping equipment: Let’s record depreciation expense for the year ended December 31, 2004.

30. Depreciation On January 1, 2004, Monroe, Inc. purchased the following oil pumping equipment: 2000 Depreciation Expense $62,000 - $2,000 5 = = $12,000 Now, prepare the adjusting entry for December 31, 2004.

31. Depreciation Contra Asset Let’s see how the accounts would look after posting!

32. Depreciation After posting, the accounts look like this: Equipment Depreciation Expense 1/1 $62,000 12/31 $12,000 Accumulated Depreciation 12/31 $12,000

33. Depreciation The equipment account is shown on the balance sheet like this. The equipment account is shown on the balance sheet like this.

34. Unearned Revenue Revenue Liability Debit Adjustment Unadjusted Balance Credit Adjustment Buy your season tickets for all home basketball games NOW! Unearned Revenue Cash received in advance of performing services “Go Big Blue”

35. Unearned Revenue On December 1, 2004, Ox University sold 1,000 seasons tickets to its 20 home basketball games for $100 each. OxU makes the following entry: Liability Account

36. Unearned Revenue By December 31, OxU has played 8 of its regular home games, winning 6 and losing 2.

37. Unearned Revenue By December 31, OxU has played 8 of its regular home games, winning 6 and losing 2.

38. Unearned Revenue After posting, the accounts will look like this . . . Unearned BasketballRevenue Basketball Revenue 12/31 $40,000 12/1 $100,000 12/31 $40,000 Bal. $60,000

39. Alternative Approach to Record Prepayments Prepaid ExpensesRecord initial cash payments as follows: Expense $$$ Cash $$$ Adjusting EntryRecord the amount for the prepaid expense as follows: Prepaid expense $$ Expense $$ Unearned RevenueRecord initial cash receipts as follows: Cash $$$ Revenue $$$ Adjusting EntryRecord the amount for the unearned liability as follows: Revenue $$ Unearned revenue $$

40. Accrued Liabilities Liability Expense Debit Adjustment Credit Adjustment I won’t pay you until the job is done! Accrued Liabilities Costs incurred in a period that are both unpaid and unrecorded

41. Accrued Liabilities Denton, Inc.’s weekly salaries are $78,750. Last pay date 12/26/04 Next pay date 1/2/05 12/1/04 Record adjusting journal entry. 12/31/04 Year end On December 31, 2004, the employees have earned salaries of $47,250.

42. Accrued Liabilities

43. Accrued Liabilities After posting, the accounts will look like this . . . Salaries Expense Salaries Payable 12/26 $78,750 12/31 $47,250 12/31 47,250 Bal. $126,000

44. Accrued Receivables Revenue Asset Debit Adjustment Credit Adjustment Yes, you can pay me in May for your April 15 tax return. Accrued Receivables Revenues earned in a period that are both unrecorded and not yet received

45. Accrued Receivables At year-end, Smith & Jones, CPAs, had completed $31,200 of work but had not yet billed the clients. Prepare the adjusting entry for December 31, 2004.

46. Accrued Receivables At year-end, Smith & Jones, CPAs, had completed $31,200 of work but had not yet billed the clients. Prepare the adjusting entry for December 31, 2004.

47. Accrued Receivables After posting, the accounts involvedwill look like this . . . Accounts Receivable Service Revenue 12/31 $31,200 12/31 $31,200

48. Estimates • Uncollectible accounts and depreciation of fixed assets are estimated. • An estimated item is a function of future events and developments. $

49. Estimates The estimate of bad debt expense at the end of the year is an example of an adjusting entry that requires an estimate.

50. Let’s look at financial statements.