FINANCIAL REPORTING PROCESS

1. FINANCIAL REPORTING PROCESS Chapter Three

2. PRINCIPLE – Revenue Recognition • Revenue is recognized when it is earned not paid • Expenses are recognized when it happens

3. Accrual vs Cash Basis • All individuals are on a cash basis. Record the revenue and expense when it is paid in cash. • Small business may also use cash basis. • Accrual – “It is a cruel thing not to pay”. • Record when it happens not when it paid. • Corporations report on an accrual basis

4. PRINCIPLE - Matching • To get a true net income expenses should match the revenue earned in the same period of time. • Most important at the end of the year. If you receive the revenue in December 2012 but don’t pay your employees until January 2013—the revenue is in December 2012 but the expense for that revenue is in January 2013.

5. Tool to match revenue and expenses • Adjusting entries • One account must be a balance sheet account, the other must be an income statement account • NO CASH in adjusting entries • repayments – covers more than one month • Rent, supplies, insurance, depreciation

6. Types of adjusting entries • Prepayments • Accrued Expenses and revenue

7. Prepayments covers more than one month Rent, supplies, insurance, depreciation • Rent – Original Entry • Prepaid Rent • Cash • Adjusting Entry to record Rent for the current month • Rent Expense – income statement account • Prepaid Rent – Balance Sheet account • Page 137 Be3-7

8. Supplies • Original Entry • Supplies • Cash • Record what was used during the month • Supplies Expense – income statement • Supplies - balance sheet • Page 137 BE 3-6

9. Insurance • Original Entry for 6 months of insurance • Prepaid Insurance • Cash • Record insurance used up for the month • Insurance Expense – Income Statement • Prepaid Insurance – Balance Sheet • Page 143 BE 3-8

10. Depreciation • Original Entry • Plant Asset • N/P • Adjusting Entry • Depreciation Expense – income statement • Accumulated Depreciation - Balance Sheet • DON”T TOUCH THE ASSET!!! Don’t change the cost of the asset put it in a contra asset account – accumulated depreciation • Pg 143 BE 3-9

11. Prepayments - Revenue • Cash is received before the service is performed. • Original Entry • Cash • Unearned Revenue • Adjusting Entry • Unearned Revenue – Liability – Balance Sheet • Service Revenue - Revenue – Income Statement • BE10 pg 143

12. Accruals • Cash is received after the expense has incurred or the revenue has been earned. • Accrued Expenses • Accrued Wages, Utilities, Interest Expense • Accrued Revenue • Interest Receivable, A/R (I disagree with this one. Should be other than A/R like fees receivable or service receivable)

13. Unpaid (Accrued)Wages • Need to record the expense in the same month as the revenue • No original Entry since it was not paid • Adjusting Entry • Wages Expense – Income Statement • Wages Payable – Balance Sheet • BE11 pg 143

14. Interest Expense • Owe interest on a note but will not pay it until the note comes due. • Interest Expense • Interest Payable - has not been paid

15. Accrued Revenue • Need to record the revenue but will not be paid for it until a later date. • Note receivable has interest accumulating until the due date, must record the interest when it is earned not paid • Interest receivable • Interest Receivable – Balance Sheet • Interest Income – Income Statement • BE 13 pg144

16. Service Revenue performed in advance • Contractor: Builder • Performed the work but can’t be paid until the project is 75% complete. The project at end of year is 70% complete. Have expenses during this time so must record the revenue to match it. • Can’t record an invoice so shouldn’t put it in A/R – won’t reconcile with A/R master account. • Fees Receivable • Service Revenue

17. Exercises • E8 pg 147 • E10 pg 147

18. Accounting Cycle so far • General Journal – Daily Transactions • Post to General Ledger • Trial Balance • General Journal – Adjusting Entries • Post to General Ledger • Adjusted Trial Balance • Financial Statements: IN, SE, BS

19. Closing Entries • Assets, Liabilities, Stockholders Equity = Permanent Accounts. Always open, never close • Revenue and Expenses= Net Income • By the Year so you must close at the end of each year. • To close means to make zero by transfering it somewhere. • Do the opposite of the normal balance. • Close to Retained Earnings • Entries are recorded on General Journal – Closing Entries

20. RED • Close revenue to Retained Earnings (R) • Service Revenue • Consulting Revenue • Retained Earnings • Close expenses to Retained Earnings (E) • Rent Expense • Salary Expense • Utitlity Expense • Retained Earnings

21. Close Dividends to Retained Earnings • Retained Earnings (reduces retained earnings) • Dividends • Example : page 132 Illustration 3-15 • Post entries to General Ledger • Post Closing Trial Balance • Will only have A, L , SE No revenue and expenses • BE 3-19 and BE 3-20 pg 145

22. Last part of accounting cycle • After Financial Statements at end of year • Record closing entries to General Journal • Post to General Ledger • Prepare Post Closing Trial Balance