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Review of the Accounting Process

Review of the Accounting Process. Chapter 2. + Owner Investments. - Owner Withdrawals. + Revenues + Gains. - Expenses - Losses. The Accounting Equation. A = L + OE. Accounting Equation for a Corporation. A = L + SE. + Paid-in Capital. + Retained Earnings. + Revenues + Gains.

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Review of the Accounting Process

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  1. Review of the Accounting Process Chapter 2

  2. + Owner Investments - Owner Withdrawals + Revenues+ Gains - Expenses- Losses The Accounting Equation A = L + OE

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

  4. Accounting Equation, Debits and Credits, Increases and Decreases Permanent Accounts—assets, liabilities, paid-in capital, retained earnings Temporary Accounts-revenues, gains, expenses, losses

  5. During the Accounting Period Source Documents Transaction Analysis Record in Journal Post to Ledger At the End of the Accounting Period Financial Statements Adjusted Trial Balance Record & Post Adjusting Entries Unadjusted Trial Balance The Accounting Processing Cycle At the End of the Year Close Temporary Accounts Post-Closing Trial Balance

  6. On July 1, two individuals each invested $30,000 in a new business, Dress Right Clothing Corporation. Each investor was issued 3,000 shares of common stock. The Accounting Processing Cycle • Two accounts are affected: • Cash (an asset) increases by $60,000. • Common stock (a shareholders’ equity) increases by $60,000. July 1 Cash 60,000 Common stock 60,000

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

  8. Posting Journal Entries

  9. After recording all entries for the period, Dress Right Clothing’s Unadjusted Trial Balance would be as follows: A Trial Balance is a list of all accounts and their balances at a particular date. Debits = Credits

  10. Adjusting Entries At the end of the period, adjusting entries are required to satisfy the realization principle and the matching principle. Transactions where cash is paid or received after a related expense or revenue is recognized. Transactions where cash is paid or received before a related expense or revenue is recognized. Accountants must often make estimates in order to comply with the accrual accounting model. Prepayments Estimates Accruals

  11. 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

  12. Prepaid Expenses – Journal Entries • On July 1, 2013 ABC purchases a 2-year insurance policy valid until June 30th, 2015 for $2400. What journal entries does ABC make on: • July 1, 2013? • December 31, 2013? • December 31, 2014? • June 30, 2015? • December 31, 2015?

  13. Unearned Revenues 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 Red”

  14. Unearned Revenues – Journal Entries • On January 1, 2013, ABC company sells a five-year subscription to its online services for $5000. • What journal entries does ABC make on: • January 1, 2013? • December 31, 2013? • December 31, 2014-2017?

  15. 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 $$$ Unearned revenue $$$

  16. Prepaid Expenses – Journal Entries • On July 1, 2013 ABC purchases a 2-year insurance policy valid until June 30th, 2015 for $2400. Using the alternative approach, what journal entries does ABC make on: • July 1, 2013? • December 31, 2013? • December 31, 2014? • June 30, 2015? • December 31, 2015?

  17. Unearned Revenues – Journal Entries • On January 1, 2013, ABC company sells a five-year subscription to its online services for $5000. • Using the alternative approach, what journal entries does ABC make on: • January 1, 2013? • December 31, 2013? • December 31, 2014-2017?

  18. Accrued Liabilities Liability Expense Debit Adjustment Credit Adjustment I won’t pay you until the job is done! Accrued Liabilities Liabilities recorded when an expense has been incurred prior to cash payment.

  19. Accrued Liabilities – Journal Entries • Employees are owed $10,000 for work performed during the month of June, but will not be paid until July 5th. • What journal entries does ABC make on: • June 30? • July 5?

  20. Accrued Liabilities – Journal Entries • On October 1st, 2013 ABC signs a three-year $100,000 8% note payable with XYZ Bank with interest and principal due September 30, 2016. • What journal entries does ABC make on: • October 1, 2013? • December 31, 2013 • December 31, 2014 and 2015? • September 30, 2016? • December 31, 2016?

  21. Accrued Receivables Revenue Asset Debit Adjustment Credit Adjustment Yes, you can pay me in May for your April 15 tax return. Accrued Receivables Revenue earned in a period prior to the cash receipt.

  22. Accrued Receivables – Journal Entries • On June 1, ABC sells merchandise to Jim Smith for $700 on account. ABC purchased the merchandise for $400 on May 15 in cash. ABC receives the cash from Jim Smith’s sale on July 10. • What journal entries does ABC make on: • May 15? • May 31? • June 1? • June 30? • July 10?

  23. Accrued Receivables – Journal Entries • On October 1st, 2013 ABC signs a three-year $100,000 8% note payable with XYZ Bank with interest and principal due September 30, 2016. • What journal entries does XYZ Bank make on: • October 1, 2013? • December 31, 2013 • December 31, 2014 and 2015? • September 30, 2016? • December 31, 2016?

  24. Examples Depreciation Uncollectible accounts Estimates Accountants often must make estimates of future events to comply with the accrual accounting model. $

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

  26. Depreciation Recall the furniture and fixtures for $12,000 listed on Dress Right Clothing’s unadjusted trial balance. Assume the following: Let’s calculate the depreciation expense for the month ended July 31, 2013.

  27. Depreciation Recall the furniture and fixtures for $12,000 listed on Dress Right Clothing’s unadjusted trial balance. July Depreciation Expense $12,000 - $0 60 months = = $200 per month July 31 Depreciation expense 200 Accumulated depreciation- furniture and fixtures 200

  28. After posting, the accounts look like this: Depreciation

  29. Bad Debts – Journal Entries • In August, ABC has sales of $100,000 on account of which 20% are expected to be uncollectible. • What journal entry does ABC make for bad debts on August 31st?

  30. This is the Adjusted Trial Balance for Dress Right Clothing after all adjusting entries have been recorded and posted. Dress Right Clothing will use these balances to prepare the financial statements.

  31. The Income Statement The income statement summarizes the results of profit-generating activities of the company.

  32. The Statement of Comprehensive Income A few types of gains and losses, called other comprehensive income (OCI) or loss items, are excluded from the determination of net income and the income statement, but are included in the broader concept of comprehensive income. In the single statement approach, net income is a subtotal within the statement followed by these OCI items, culminating in a final total of comprehensive income. In the two statement approach, a company presents an income statement followed by a statement of comprehensive income. We will discuss comprehensive income in more depth in Chapter 4.

  33. The Balance Sheet The balance sheet presents the financial position of the company on a particular date.

  34. The Balance Sheet Notice that assets of $143,500 equals total liabilities plus shareholders’ equity of $143,500.

  35. The Statement of Cash Flows The statement of cash flows discloses the changes in cash during a period.

  36. The Statement of Shareholders’ Equity The statement of shareholders’ equity presents the changes in permanent shareholder accounts.

  37. Revenues Assets Shareholders’ Equity Permanent Accounts Temporary Accounts Liabilities Dividends Expenses Income Summary The closing process applies only to temporary accounts. The Closing Process

  38. Post-Closing Trial Balance Lists permanent accounts and their balances. Total debits equal total credits.

  39. Closing Entries • Prepare journal entries for the following events at ABC Company: • Close Sales Revenue of $500 to Income Summary • Close Interest Revenue of $100 to Income Summary • Close $200 Cost of Goods Sold Expense to Income Summary • Close $300 of Wages Expense to Income Summary • Close Income Summary balance to Retained Earnings which has a beginning balance of $1,000. • ABC declares a common stock dividend of $50 at year-end, and • Pays the dividend before year-end • Does not pay the dividend until next year

  40. Conversion From Cash Basis to Accrual Basis

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