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FINANCIAL ACCOUNTING             Lecture 1-2
LEARNING OBJECTIVES   Accounting and business environment   Accounting cycle
To start a business you need:• An idea that will become a product or service• A market of customers who want the product o...
FORMS OF BUSINESS ORGANIZATION   Proprietorship   Partnership   Corporation
BUSINESS ACTIVITIES Financing activities Investing activities Operating activities
Accounting- a process of  identifying, recording, summarizi  ng, and reporting economic  information to decision makers  i...
Types of accountingFinancial      Cost and     Tax accountingaccounting     management               accounting
Users of Accounting Information                                • investors                                 investors    F...
Users of Accounting Information                                    •   investors    Financial Accounting            •   cr...
ACCOUNTING CONCEPTS AND PRINCIPLES   What is the primary objective of financial    Accounting and Reporting?    Accountan...
GENERALLY ACCEPTED ACCOUNTING PRINCIPLESAND CONCEPTS  Entity - Every entity is a separate economic unit and   should be k...
 Periodicity - economic activities of any  firm can be divided into discrete time  periods for reporting purposes Matchi...
Basic Accounting Equation                                            Owner’s   Assets       =     Liabilities   +         ...
ASSETS , LIABILITIES, AND OWNER’S EQUITYAssets are the economic resources of a business that  are expected to provide bene...
ASSETS , LIABILITIES, AND OWNER’S EQUITYClaims to those assets come from two sources: Liabilities are outsider claims to ...
Effects of Transactions on Owner’s Equity                    OWNER’S EQUITY        decreased by           increased by    ...
EFFECTS OF A BUSINESS TRANSACTION ONACCOUNTING EQUATION1. Investment by owner. Kay Torres invests $20,000 of herown money ...
2. Purchase an equipment for cash. The travel agency purchases equipment, paying cash of $9,000.           Assets =       ...
3. Borrow cash from the bank. The travel agency borrows$15,000 cash from the bank and signs a 2 year note payableto the ba...
4. Purchase supplies on credit. The travel agency purchases   office supplies for the agency, agreeing to pay $1,200 withi...
5. Provide services for cash. The travel agency makes   $2,300 of travel arrangements and collects this amount in   cash. ...
6. Provide services on credit. The travel agency performs $5,200of services and ,in return, receives clients promises to p...
7. Partial payments of accounts payable. The travel agency pays$600 to the store where it purchased $1,200 worth of suppli...
8. (8),(9),(10). Payments of expenses. During the month, the  travel agency pays $900 in cash for building rent, $1,100 fo...
THE ACCOUNTING CYCLE                     Transactions9. Reversing entries                      1. Journalization8. Post-cl...
TRANSACTIONS AND EVENTS What to Record?    FASB states, “transactions and other events and    circumstances that affect a ...
DEBITS AND CREDITS                      An arrangement that shows    Account           the effect of transactions on      ...
Owner’Assets     =   Liability    +   s    +   Revenu     - Expense                              equity       e +     -   ...
DEBITS AND CREDITS   An Account shows the effect of transactions on a   given asset, liability, equity, revenue, or expens...
1. JOURNALIZINGGeneral Journal – a chronological record of transactions. Journal Entries are recorded in the journal.
ANALYSIS OF TRANSACTIONANALYSIS               1. Investment by owner. Kay Torres invests                  $20,000 of her o...
GENERAL JOURNAL                       Page 1№ Date           Description            PR Debit Credit1 June 1 Cash          ...
GENERAL JOURNAL                             Page 1                                             P№   Date               Des...
GENERAL JOURNAL                              Page 1№   Date              Description           PR Debit Credit7 June 21 Ac...
GENERAL JOURNAL                    Page 1№   Date               Description       PR Debit Credit10 June 30 Utilities expe...
2. POSTING TO THE GENERAL LEDGERThe Ledger contains the entire group of accounts maintained by acompany.
LEDGER AND CHART OF ACCOUNTSThe chart of accounts is a list of all accounts and includes an            identifying number ...
GENERAL JOURNAL                              Page№   Date               Description             PR     Debit Cred1 June 1 ...
GENERAL JOURNAL                          Page 1 Date                 Description           PR Debit CreditJune 1 Cash     ...
Owner’s             Cash    equity(1) 20,000               20,000 (1)
3. TRIAL BALANCETrial Balance – a list of each account and its balance; used to prove equality of debit and credit balances.
TRIAL BALANCEAcct. No.        Account           Debit    Credit            Cash                  $ 25,400            Accou...
4. ADJUSTING ENTRIES   Revenues - recorded in the period in which   they are earned.   Expenses - recognized in the period...
PROBLEMS IN ACCOUNTING MEASUREMENTSThe  identification of the accounting period.The proper point in time to recognize re...
Identification of the Accounting Period
TIME PERIOD PRINCIPLEFor  reporting purposes, an organization’s life can be divided into separate accounting periods  mo...
THE ACCOUNTING PERIOD                    Annual            1                            2    Semiannual    1              ...
The proper point in timeto recognize revenues.
REVENUE RECOGNITION . . .Revenue       is generally recognized   At   the time services are performed;   or   When  goo...
The proper point in timeto recognize expenses.
THE MATCHING PRINCIPLEThe  matching principle requires that all expenses incurred to generate the revenues recognized in ...
Accrual BasisAccounting
Revenue              Accrual BasisRecognition               Accounting Matching Principle
ACCRUAL BASIS ACCOUNTING   Revenues   are recognized    (recorded) when earned, without    regard to when cash is receive...
An adjusting entry is recorded tobring an asset or liability account  balance to its proper amount.
Exh.                                                                3.4            FRAMEWORK FOR ADJUSTMENTS              ...
Exh.                                                              3.4           FRAMEWORK FOR ADJUSTMENTS               Fr...
ADJUSTING PREPAID EXPENSESResources paid                  Here is the check                                   for my first...
ADJUSTING PREPAID EXPENSES OnDecember 1, 2011, Scott Company paid $12,000 to cover rent for December 2011 through May 201...
ADJUSTING PREPAID EXPENSES After posting, the accounts involved look like this:       Prepaid Rent                Rent Ex...
Exh.                                                              3.4           FRAMEWORK FOR ADJUSTMENTS               Fr...
ADJUSTING UNEARNED REVENUECash received in  advance of                    Buy your season tickets for   providing         ...
ADJUSTING UNEARNED REVENUE       On October 1, 2011, UAA sold 1,000 season       tickets to its 20 home basketball games f...
ADJUSTING UNEARNED REVENUE     On December 31, UAA has played 10 of its        regular home games, winning 8 and          ...
ADJUSTING UNEARNED REVENUE     On December 31, UAA has played 10 of its        regular home games, winning 8 and          ...
ADJUSTING UNEARNED REVENUE After posting, the accounts involved look like this     Unearned Basketball          Revenue  ...
Exh.                                                              3.4           FRAMEWORK FOR ADJUSTMENTS               Fr...
ADJUSTING FOR DEPRECIATION Depreciation is the process of computing expense from allocating the cost of plant and equipme...
ADJUSTING FOR DEPRECIATION2. Purchase an equipment for cash. The travelagency purchases equipment, paying cash of$9,000.• ...
ADJUSTING FOR DEPRECIATION Prepare    the journal entry.            GENERAL JOURNAL                               Page 2 ...
ADJUSTING FOR DEPRECIATION Afterposting, the accounts involved look like this:           Equipment                   Depr...
ADJUSTING FOR DEPRECIATION                Kay Torres Co.Ltd                 Balance Sheet                 At June 30, 2011...
ADJUSTING FOR SUPPLIES At the end of current period balance of Supplies was $900 . So we must adjust supplies expense. – P...
ADJUSTING FOR SUPPLIES Afterposting, the accounts involved look like this:           Supplies               Supplies Expe...
Exh.                                                              3.4           FRAMEWORK FOR ADJUSTMENTS               Fr...
ADJUSTING FOR ACCRUED EXPENSESCosts incurred in a          Its accrued bank loan  period that are                   intere...
ADJUSTING FOR ACCRUED EXPENSES3. Borrow cash from the bank. The travel agencyborrows $15,000 cash from the bank and signs ...
ADJUSTING FOR ACCRUED EXPENSES3. Borrow cash from the bank. The travel agency borrows$15,000 cash from the bank and signs ...
ADJUSTING FOR ACCRUED EXPENSES Afterposting, the accounts involved will look like this . . .          Interest Expense   ...
Exh.                                                              3.4           FRAMEWORK FOR ADJUSTMENTS               Fr...
ADJUSTING FOR ACCRUED REVENUES Revenues earned          Yes, you can pay me                           for your tax return ...
ADJUSTING FOR ACCRUED REVENUESSmith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make...
Exh.                 Exhibit 3.18                                   3.18         Summary of Adjustments and          Finan...
USING A WORKSHEETWorksheet   A multiple-column form used in preparing   financial statements.   Not a permanent accounting...
STEPS IN PREPARING A WORKSHEET                                 Illustration 4-2
1. Prepare a Trial Balance on the Worksheet                                                                  Adjusted     ...
2. Enter the Adjustments in the Adjustments Columns                                                                      A...
3. Complete the Adjusted Trial Balance Columns                                                                      Adjust...
4. Extend Amounts to Financial Statement Columns                                                                       Adj...
5. Total Columns, Compute Net Income (Loss)                                                                       Adjusted...
5. Total Columns, Compute Net Income (Loss)                                                                          Adjus...
FINANCIAL STATEMENTS            BALANCE SHEET           INCOME STATEMENT      STATEMENT OF OWNER’S EQUITY        STATE...
PREPARE THE FINANCIAL STATEMENTS                                                Prepare the               Kay Torres Co.l...
Kay Torres Co.ltd              Income Statement                                                           Prepare the    ...
Kay Torres Co.ltd     Statement of Changes in Owners Equity                                                   Prepare the...
CLOSING THE BOOKSAt the end of the accounting period, the companymakes the accounts ready for the next period.            ...
CLOSING THE BOOKSClosing entries formally recognize, in the generalledger, the transfer of       Income tax expense to Tax...
RECORDING CLOSING ENTRIES                            Let’s see how theClose Revenue accounts      closing process to Inco...
CLOSING PROCESSIncome Summary                         Service revenue                                                   7,...
GENERAL JOURNAL                         Page 1№    Date               Description            PR Debit Credit    June 30 Se...
CLOSING PROCESSSalary expense  1,100    1,100                      Close Expense       Supplies expense                  ...
GENERAL JOURNAL                             Page№    Date               Description            PR Debit Credit    June 30 ...
GENERAL JOURNAL                                 Page№    Date                Description            PR Debit Credit    Jun...
GENERAL JOURNAL                          Page№    Date             Description         PR Debit Credit    June 30 Income s...
Fin acc l1
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  • Great article. Thanks for the info, it’s easy to understand. BTW, if anyone needs to fill out an asset statement form, I found a blank form here http://pdf.ac/6LC3w
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  1. 1. FINANCIAL ACCOUNTING Lecture 1-2
  2. 2. LEARNING OBJECTIVES Accounting and business environment Accounting cycle
  3. 3. To start a business you need:• An idea that will become a product or service• A market of customers who want the product or service you offerTYPES OF BUSINESS ORGANIZATIONS  Service companies  Merchandise companies  Manufacturing companies
  4. 4. FORMS OF BUSINESS ORGANIZATION Proprietorship Partnership Corporation
  5. 5. BUSINESS ACTIVITIES Financing activities Investing activities Operating activities
  6. 6. Accounting- a process of identifying, recording, summarizi ng, and reporting economic information to decision makers in the form of financial statements.6
  7. 7. Types of accountingFinancial Cost and Tax accountingaccounting management accounting
  8. 8. Users of Accounting Information • investors  investors Financial Accounting • creditors  creditors • regulators  regulators EXTERNAL USERS • customers  customers • competitors  competitors8
  9. 9. Users of Accounting Information • investors Financial Accounting • creditors • regulators EXTERNAL USERS • Customers • Suppliers Financial Accounting • owners  Owners INTERNAL USERS • managers  Managers • employees  Employees9
  10. 10. ACCOUNTING CONCEPTS AND PRINCIPLES What is the primary objective of financial Accounting and Reporting? Accountants follow professional guidelines. The rules that govern accounting are called GAAP (generally accepted accounting principles). Financial Accounting Standards Board (FASB)
  11. 11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLESAND CONCEPTS  Entity - Every entity is a separate economic unit and should be kept distinct from the activities of its owners and other companies  Monetary Unit - only economic events that have monetary transactions will be reported in the financial statements  Cost Principle - assets are presented at their original (historical) cost  Going Concern - companies are established with the goal that they will operate for an indefinitely long period of time 11- 52
  12. 12.  Periodicity - economic activities of any firm can be divided into discrete time periods for reporting purposes Matching Principle -all revenues must be recorded in the accounting period in which the goods are sold or services are rendered and all expenses must be recorded in the accounting period in which they are incurred to produce such revenues
  13. 13. Basic Accounting Equation Owner’s Assets = Liabilities + EquityThe basic tool of accounting is the accounting equation. Itmeasures the economic resources of a business andclaims to those resources.The accounting equation shows howassets, liabilities, and owner’s equity are related.The accounting equation shows the financial position ofthe business.
  14. 14. ASSETS , LIABILITIES, AND OWNER’S EQUITYAssets are the economic resources of a business that are expected to provide benefits to the business in the future.Assets are what the business owns.For example: Cash, merchandise inventory, furniture, and land.
  15. 15. ASSETS , LIABILITIES, AND OWNER’S EQUITYClaims to those assets come from two sources: Liabilities are outsider claims to the assets of a business. Owner’s equity or capital represents the insider claims to the assets of a business. = + Owner’s Assets Liabilities Equity Economic resources Claims to economic resources
  16. 16. Effects of Transactions on Owner’s Equity OWNER’S EQUITY decreased by increased by Owner’s withdrawals Owner’s investments Expenses Revenues 16
  17. 17. EFFECTS OF A BUSINESS TRANSACTION ONACCOUNTING EQUATION1. Investment by owner. Kay Torres invests $20,000 of herown money to start business . The Kay Torres Travel Agencybegan an activity on June 1, 2011. Assets = Liabilities + Owner’s Equity Cash Owner’s Equity (1) +$20,000 = + $20,000 Bal. $20,000 = $20,000
  18. 18. 2. Purchase an equipment for cash. The travel agency purchases equipment, paying cash of $9,000. Assets = Liabilities + Owner’s Equity Cash + Equipment = Owner’s Equity (1) +$20,000 + $20,000 (2) -$9,000 +$9,000Bal. $11,000 + $9,000= $20,000
  19. 19. 3. Borrow cash from the bank. The travel agency borrows$15,000 cash from the bank and signs a 2 year note payableto the bank. Assets = Liabilities + Owner’s Equity Cash + Equipment = Notes payable Owner’s Equity (1) +$20,000 + $20,000 (2) -$9,000 +$9,000 (3) +$15,000 +$15,000Bal. $26,000 + $9,000= $15,000 + $20,000
  20. 20. 4. Purchase supplies on credit. The travel agency purchases office supplies for the agency, agreeing to pay $1,200 within 30 days. Assets = Liabilities Owner’s + EquityCash + Supplies Equipment Accounts Notes Owner’s = Payable payable Equity (1) + $20,000+$20,000(2) -$9,000 +$9,000 (3) +$15,000+$15,000 (4) +$1,200 +$1,200 Bal.$26,000 + $1,200+ $9,000= $1,200+ $15,000 + $20,000
  21. 21. 5. Provide services for cash. The travel agency makes $2,300 of travel arrangements and collects this amount in cash. Assets = Liabilities Owner’s + EquityCash + Supplies Equipment Accounts Notes Owner’s = Payable payable Equity (1) + $20,000+$20,000(2) -$9,000 +$9,000 (3) +$15,000+$15,000 (4) +$1,200 +$1,200(5) +$2,300 +$2,300 Bal.$28,300 + $1,200+ $9,000= $1,200+ $15,000 + $22,300
  22. 22. 6. Provide services on credit. The travel agency performs $5,200of services and ,in return, receives clients promises to pay this$5,200 within one month. Assets = Liabilities Owner’s + EquityCash + Accounts Supplies Equipment Accounts Notes Owner’s Receivable = Payable payable Equity (1) ++$20,000 $20,000 (2) - +$9,000 $9,000 (3) +$15,000+$15,000 (4) +$1,200 +$1,200 (5) +$2,300+$2,300 (6) +$5,200 +$5,200 Bal.$28,300 $5,200 $1,200+ $9,000= $1,200+ $15,000 $27,500
  23. 23. 7. Partial payments of accounts payable. The travel agency pays$600 to the store where it purchased $1,200 worth of supplies intransaction (4). Assets = Liabilities Owner’s + EquityCash + Accounts Supplies Equipment Accounts Notes Owner’s Receivable = Payable payable Equity (4) +$1,200 +$1,200 (5) +$2,300+$2,300 (6) +$5,200 +$5,200(7)-$600 -$600 Bal.$27,700 $5,200+ $1,200+ $9,000= $600+ $15,000 $27,500 + +
  24. 24. 8. (8),(9),(10). Payments of expenses. During the month, the travel agency pays $900 in cash for building rent, $1,100 for salaries, and $300 for utilities. Assets = Liabilities Owner’s + EquityCash + Accounts Supplies Equipment Accounts Notes Owner’s Receivable = Payable payable Equity (4) +$1,200 +$1,200 (5) +$2,300+$2,300 (6) +$5,200 +$5,200(7)-$600 -$600(8) -$900 -$900 (9)- $1,100 -$1,100(10)-$300 -$300 Bal.$25,400 $5,200+ $1,200+ $9,000= $600+ $15,000 $25,200
  25. 25. THE ACCOUNTING CYCLE Transactions9. Reversing entries 1. Journalization8. Post-closing trailbalance 2. Posting7. Closing entries 3. Trial balance Work6. Financial 4. Adjustments SheetStatements 5. Adjusted trial balance LO 3 Identify steps in the accounting cycle.
  26. 26. TRANSACTIONS AND EVENTS What to Record? FASB states, “transactions and other events and circumstances that affect a business enterprise.” Types of Events: External – between a business and its environment. Internal – event occurring entirely within a business.
  27. 27. DEBITS AND CREDITS An arrangement that shows Account the effect of transactions on an account. Debit = “Left” Credit = “Right”An Account can Account Namebe illustrated in a Debit / Dr. Credit / Cr.T-Account form.
  28. 28. Owner’Assets = Liability + s + Revenu - Expense equity e + - - + - + - + + -Bal. Bal. Bal. Bal. Bal.
  29. 29. DEBITS AND CREDITS An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. Double-entry accounting system (two-sided effect). Recording done by debiting at least one account and crediting another. DEBITS must equal CREDITS. LO 2 Explain double-entry rules.
  30. 30. 1. JOURNALIZINGGeneral Journal – a chronological record of transactions. Journal Entries are recorded in the journal.
  31. 31. ANALYSIS OF TRANSACTIONANALYSIS 1. Investment by owner. Kay Torres invests $20,000 of her own money to start business . The Kay Torres Travel Agency began an activity on June 1, 2011.DEBIT-CREDIT Increases in assets are recorded by debits; debitRULES cash $20,000 Increases in owner’s equity are recorded by credits; credit owner’s equityJOURNAL 06.01. Cash 20,000ENTRY Owner’s equity 20,000ENTRIES IN Cash Owner’s equityLEDGERACCOUNTS 06/01. 20,000 20,000 06/01
  32. 32. GENERAL JOURNAL Page 1№ Date Description PR Debit Credit1 June 1 Cash 20,000 Owners equity 20,000 to record owners investment2 June 3 Equipment 9,000 Cash 9,000 to record purchasing equipment by cash3 June 6 Cash 15,000 Notes payable 15,000 to record bank loan
  33. 33. GENERAL JOURNAL Page 1 P№ Date Description R Debit Credit4 June 11 Supplies 1,200 Accounts payable 1,200 to record purchasing supplies on credit5 June 13 Cash 2,300 Service revenue 2,300 to record providing services for cash6 June 19 Accounts receivable 5,200 Service revenue 5,200 to record providing services on credit
  34. 34. GENERAL JOURNAL Page 1№ Date Description PR Debit Credit7 June 21 Accounts payable 600 Cash 600 to record partial payment of accounts payable8 June 26 Building rent expense 900 Cash 900 to record building rent expense9 June 28 Salary expense 1,100 Cash 1,100 to record salary expense
  35. 35. GENERAL JOURNAL Page 1№ Date Description PR Debit Credit10 June 30 Utilities expense 300 Cash 300 to record utilities expense
  36. 36. 2. POSTING TO THE GENERAL LEDGERThe Ledger contains the entire group of accounts maintained by acompany.
  37. 37. LEDGER AND CHART OF ACCOUNTSThe chart of accounts is a list of all accounts and includes an identifying number for each account. Account Number Account Name Account Number Account Name 1001 Cash 4301 Owners withdrawal 1201 Accounts receivable 5101 Revenues 1601 Supplies 7101 Rental revenue 1801 Prepaid insurance 7102 Salaries expense 2001 Equipment 7103 Insurance expense 3101 Accounts payable 7104 Rent expense 3201 Unearned revenue 7105 Supplies expense 4101 Owners equity 7105 Utilities expense
  38. 38. GENERAL JOURNAL Page№ Date Description PR Debit Cred1 June 1 Cash 1001 20,000 Owners equity 20,00 to record owners investment General Ledger2 June 3 Equipment 9,000 Cash Cash Acct. No. 1001 9,00№ Date to record purchasing equipment by cash Balance Explanation Ref. Debit Credit3 1 1-Jun 6 Cash June GJ 1 20,000 15,000 20,000 Notes payable 15,00 to record bank loan
  39. 39. GENERAL JOURNAL Page 1 Date Description PR Debit CreditJune 1 Cash 20,000 Owners equity 20,000 to record owners investmentJune 3 Equipment 9,000 Cash 9,000 to record purchasing equipment by cashJune 6 Cash 15,000 Owners capital Acct. No. Notes payable 15,000Date Explanation Ref. Debit Credit Balance1-Jun to record bank loan GJ1 20,000 20,000
  40. 40. Owner’s Cash equity(1) 20,000 20,000 (1)
  41. 41. 3. TRIAL BALANCETrial Balance – a list of each account and its balance; used to prove equality of debit and credit balances.
  42. 42. TRIAL BALANCEAcct. No. Account Debit Credit Cash $ 25,400 Accounts receivable 5,200 Supplies 1,200 Equipment 9,000 Accounts payable $ 600 Note payable 15,000 Owners equity 20,000 Service revenue 7,500 Building rent expense 900 Salary expense 1,100 Utilities expense 300
  43. 43. 4. ADJUSTING ENTRIES 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.
  44. 44. PROBLEMS IN ACCOUNTING MEASUREMENTSThe identification of the accounting period.The proper point in time to recognize revenue.The appropriate moment to record an expense. 44
  45. 45. Identification of the Accounting Period
  46. 46. TIME PERIOD PRINCIPLEFor reporting purposes, an organization’s life can be divided into separate accounting periods  months,  quarters,  years, etc. 46
  47. 47. THE ACCOUNTING PERIOD Annual 1 2 Semiannual 1 2 3 4Quarter1 2 3 4 5 6 7 8 9 10 11 12 Month
  48. 48. The proper point in timeto recognize revenues.
  49. 49. REVENUE RECOGNITION . . .Revenue is generally recognized  At the time services are performed; or  When goods are sold and delivered to a customer. 49
  50. 50. The proper point in timeto recognize expenses.
  51. 51. THE MATCHING PRINCIPLEThe matching principle requires that all expenses incurred to generate the revenues recognized in an accounting period be matched with those revenues. 51
  52. 52. Accrual BasisAccounting
  53. 53. Revenue Accrual BasisRecognition Accounting Matching Principle
  54. 54. ACCRUAL BASIS ACCOUNTING Revenues are recognized (recorded) when earned, without regard to when cash is received; Expenses are recorded as incurred without regard to when they are paid. 54
  55. 55. An adjusting entry is recorded tobring an asset or liability account balance to its proper amount.
  56. 56. Exh. 3.4 FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments Prepaid Depreciation Unearned Accrued Accrued Expenses Revenues Expenses RevenuesTransactions where cash is paid orreceived before a related expense or revenue is recognized. Transactions where cash is paid or received after a related expense or revenue is recognized.
  57. 57. Exh. 3.4 FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments Prepaid Depreciation Unearned Accrued AccruedExpenses Revenues Expenses Revenues Transaction where cash is paid before a related expense is recognized.
  58. 58. ADJUSTING PREPAID EXPENSESResources paid Here is the check for my first for prior to 6 months’ rent. receiving theactual benefits. Asset Expense Unadjusted Credit Debit Balance Adjustment Adjustment
  59. 59. ADJUSTING PREPAID EXPENSES OnDecember 1, 2011, Scott Company paid $12,000 to cover rent for December 2011 through May 2012. Let’s look at the adjusting journal entry needed on December 31, 2011. GENERAL JOURNAL Page 34 Date Description PR Debit CreditDec. 31 Rent Expense 2,000 Prepaid Rent 2,000 to record monthl y rent
  60. 60. ADJUSTING PREPAID EXPENSES After posting, the accounts involved look like this: Prepaid Rent Rent Expense12/1 $12,000 12/31 $2,000 12/31 $2,000
  61. 61. Exh. 3.4 FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments Prepaid Depreciation Unearned Accrued AccruedExpenses Revenues Expenses Revenues Transaction where cash isreceived before a related revenue is recognized.
  62. 62. ADJUSTING UNEARNED REVENUECash received in advance of Buy your season tickets for providing all home basketball games NOW! products or services. “GO SEAWOLVES” Liability Revenue Debit Unadjusted Credit Adjustment Balance Adjustment
  63. 63. ADJUSTING UNEARNED REVENUE On October 1, 2011, UAA sold 1,000 season tickets to its 20 home basketball games for $100 each. UAA makes the following entry: GENERAL JOURNAL Page 34Date Description PR Debit CreditOct. 1 Cash 100,000 Unearned Basketball Revenue 100,000 Recei pts for 1,000 sea son ti ck ets
  64. 64. ADJUSTING UNEARNED REVENUE On December 31, UAA has played 10 of its regular home games, winning 8 and losing 2. GENERAL JOURNAL Page 34 Date Description PR Debit CreditDec. 31 Prepare the appropriate Adjusting Entry on December 31
  65. 65. ADJUSTING UNEARNED REVENUE On December 31, UAA has played 10 of its regular home games, winning 8 and losing 2. GENERAL JOURNAL Page 34 Date Description PR Debit CreditDec. 31 Unearned Basketball Revenue 50,000 Basketball Revenue 50,000 to recogni ze ba sk etba l l revenue
  66. 66. ADJUSTING UNEARNED REVENUE After posting, the accounts involved look like this Unearned Basketball Revenue Basketball Revenue 12/31 $50,000 10/1 $100,000 12/31 $50,000
  67. 67. Exh. 3.4 FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments Prepaid Depreciation Unearned Accrued AccruedExpenses Revenues Expenses Revenues Transaction where cash is paid before a related expense is recognized.
  68. 68. ADJUSTING FOR DEPRECIATION Depreciation is the process of computing expense from allocating the cost of plant and equipment over its expected useful lives. Straight-Line Asset Cost – Salvage Value = Depreciation Useful Life
  69. 69. ADJUSTING FOR DEPRECIATION2. Purchase an equipment for cash. The travelagency purchases equipment, paying cash of$9,000.• Let’s compute depreciation expense for the year ended June 30, 2011. 2011 $9,000 - $0 Depreciation = Expense 5 = $1,800/12=150. for month 69
  70. 70. ADJUSTING FOR DEPRECIATION Prepare the journal entry. GENERAL JOURNAL Page 2 Date Description PR Debit CreditJune 31 Depreciation Exp. 12,000 Accum. Depreciation 12,000 To record a nnua l depreci a ti on Accumulated depreciation is a contra asset account.
  71. 71. ADJUSTING FOR DEPRECIATION Afterposting, the accounts involved look like this: Equipment Depreciation Expense 6/3 $9,000 6/30 $150 Accumulated Depreciation 6/30 $150
  72. 72. ADJUSTING FOR DEPRECIATION Kay Torres Co.Ltd Balance Sheet At June 30, 2011Assets The Cash . equipment . account is . shown onEquipment $ 9,000Less: accumulated deprec. (150) 8,850 the balance . sheet like . this. .Total Assets
  73. 73. ADJUSTING FOR SUPPLIES At the end of current period balance of Supplies was $900 . So we must adjust supplies expense. – Prepare the journal entry. GENERAL JOURNAL Page 2 Date Description PR Debit CreditJune 30 Supplies expense 300 Supplies 300 To record suppl i es expence
  74. 74. ADJUSTING FOR SUPPLIES Afterposting, the accounts involved look like this: Supplies Supplies Expense 6/11 $1,200 $300 6/30 6/30 $300
  75. 75. Exh. 3.4 FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments Prepaid Depreciation Unearned Accrued AccruedExpenses Revenues Expenses Revenues Transaction where cash is paid after a related expense is recognized.
  76. 76. ADJUSTING FOR ACCRUED EXPENSESCosts incurred in a Its accrued bank loan period that are interest! both unpaid and unrecorded. Expense Liability Debit Credit Adjustment Adjustment
  77. 77. ADJUSTING FOR ACCRUED EXPENSES3. Borrow cash from the bank. The travel agencyborrows $15,000 cash from the bank and signs a 2 yearnote payable to the bank. Interest rate 12%. Must pay atthe end year. 06/30/11 First payment Month end Date of interest 31/12/1106/05/11 Record adjusting journal entry.
  78. 78. ADJUSTING FOR ACCRUED EXPENSES3. Borrow cash from the bank. The travel agency borrows$15,000 cash from the bank and signs a 2 year note payableto the bank. Interest rate 12%. Must pay at the end year. GENERAL JOURNAL Page 34 Date Description PR Debit CreditJune 30 Interest expense 150 Interest payable 150 to record i nterest a ccrua l
  79. 79. ADJUSTING FOR ACCRUED EXPENSES Afterposting, the accounts involved will look like this . . . Interest Expense Interest Payable 06/30 $150 06/30 $150
  80. 80. Exh. 3.4 FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments Prepaid Depreciation Unearned Accrued AccruedExpenses Revenues Expenses Revenues Transaction where cash is received after a related revenue is recognized.
  81. 81. ADJUSTING FOR ACCRUED REVENUES Revenues earned Yes, you can pay me for your tax return in a period that when I finish the work. are both unrecorded and not yet received. Asset Revenue Debit Credit Adjustment Adjustment
  82. 82. ADJUSTING FOR ACCRUED REVENUESSmith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry necessary on December 31, 2002, the end of the company’s fiscal year. GENERAL JOURNAL Page 34 Date Description PR Debit CreditDec. 31 Accounts Receivable 31,200 Service Revenues 31,200 Revenues ea rned but not recei ved
  83. 83. Exh. Exhibit 3.18 3.18 Summary of Adjustments and Financial Statement Links Before Adjusting Adjusting Category B/S I/S Entry Dr. ExpensePrepaid Expense Asset Expense Cr. Asset Dr. LiabilityUnearned Revenue Liability Revenue Cr. Revenue Dr. ExpenseAccrued Expenses Liability Expense Cr. Liability Dr. AssetAccrued Revenues Asset Revenue Cr. Revenue Overstated Understated
  84. 84. USING A WORKSHEETWorksheet A multiple-column form used in preparing financial statements. Not a permanent accounting record. Five step process. Use of worksheet is optional. LO 1 Prepare a worksheet.
  85. 85. STEPS IN PREPARING A WORKSHEET Illustration 4-2
  86. 86. 1. Prepare a Trial Balance on the Worksheet Adjusted Income Trial Balance Adjustments Trial Balance Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400Accounts Receivable 5,200 Trial balance amountsSupplies 1,200 come directly fromEquipment 9,000 ledger accounts.Accumulated DepreciationAccounts Payable 600Notes payable 15,000Owners equity 20,000Service Revenue 7,500Salaries Expense 1,100 Include all accounts withRent expense 900 balances.Utilities expense 300 Totals 43,100 43,100
  87. 87. 2. Enter the Adjustments in the Adjustments Columns Adjusted Income Trial Balance Adjustments Trial Balance Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400Accounts Receivable 5,200Supplies 1,200 a. 300Equipment 9,000Accumulated Depreciation b. 150Accounts Payable 600 Adjustments Key:Notes payable 15,000Owners equity 20,000 (a) Supplies used. (b) Depreciation expense.Service Revenue 7,500Salaries Expense 1,100 (c) Interest expenseRent expense 900 accruedUtilities expense 300 Totals 43,100 43,100Supplies expense a. 300Depr. Expense b. 150Interest expense c. 150 Enter adjustment Interest payable c. 150 amounts, totalTotals 600 600 Add additional adjustments columns, accounts as and check for equality. needed.
  88. 88. 3. Complete the Adjusted Trial Balance Columns Adjusted Income Trial Balance Adjustments Trial Balance Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 24,400 24,400Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900Equipment 9,000 9,000Accumulated Depreciation b. 150 150Accounts Payable 600 600Notes payable 15,000 15,000Owners equity 20,000 20,000Owners withdrawal 1,000 1,000Service Revenue 7,500 7,500 Total the adjusted trialSalaries Expense 1,100 1,100 balance columns andRent expense 900 900 check for equality.Utilities expense 300 300 Totals 43,100 43,100Supplies expense a. 300 300Depr. Expense b. 150 150Interest expense c. 150 150 Interest payable c. 150 150Totals 600 600 43,400 43,400
  89. 89. 4. Extend Amounts to Financial Statement Columns Adjusted Income Trial Balance Adjustments Trial Balance Extend all asset, Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 liability, and equityAccounts Receivable Supplies 5,200 1,200 a. 300 5,200 900 account balances toEquipment 9,000 9,000 the balance sheetAccumulated Depreciation b. 150 150Accounts Payable 600 600 columns.Notes payable 15,000 15,000Owners equity 20,000 20,000Service Revenue 7,500 7,500 7,500Salaries Expense 1,100 1,100 1,100Rent expense 900 900 900Utilities expense 300 300 300 Totals 43,100 43,100Supplies expense a. 300 300 300Depr. Expense b. 150 150 150Interest expense c. 150 150 150 Interest payable c. 150 150Totals 600 600 43,400 43,400 2,900 7,500
  90. 90. 5. Total Columns, Compute Net Income (Loss) Adjusted Income Trial Balance Adjustments Trial Balance Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900Equipment 9,000 9,000Accumulated Depreciation b. 150 150Accounts Payable 600 600Notes payable 15,000 15,000Owners equity 20,000 20,000Retained EarningsService Revenue 7,500 7,500 7,500Salaries Expense 1,100 1,100 1,100Rent expense 900 900 900Utilities expense 300 300 300 Totals 43,100 43,100Supplies expense a. 300 300 300Depr. Expense b. 150 150 150Interest expense c. 150 150 150 Interest payable c. 150 150Totals 600 600 43,400 43,400 2,900 7,500Income before tax 4,600Income tax expense 460 Net Income 4,140 Total 7,500 7,500 Compute Net Income or Net Loss.
  91. 91. 5. Total Columns, Compute Net Income (Loss) Adjusted Income Trial Balance Adjustments Trial Balance Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 25,400Accounts Receivable 5,200 5,200 5,200Supplies 1,200 a. 300 900 900Equipment 9,000 9,000 9,000Accumulated Depreciation b. 150 150 150Accounts Payable 600 600 600Notes payable 15,000 15,000 15,000Owners equity 20,000 20,000 20,000Retained Earnings 4,140Service Revenue 7,500 7,500 7,500Salaries Expense 1,100 1,100 1,100Rent expense 900 900 900Utilities expense 300 300 300 Totals 43,100 43,100Supplies expense a. 300 300 300Depr. Expense b. 150 150 150Interest expense c. 150 150 150 Interest payable c. 150 150 150Totals 600 600 43,400 43,400 2,900 7,500Income before Tax 4,600Income tax expense 460 Net Income 4,140 460Tax payable Total 7,500 7,500 40,500 40,500
  92. 92. FINANCIAL STATEMENTS  BALANCE SHEET  INCOME STATEMENT  STATEMENT OF OWNER’S EQUITY  STATEMENT OF CASH FLOW
  93. 93. PREPARE THE FINANCIAL STATEMENTS Prepare the Kay Torres Co.ltd Income Income Statement For the Month Ended June 30, 2011 Statement.Revenues:Service revenue $ 7,500Total revenues 7,500 A work sheetOperating expenses: does not Depr. expense - Equip. $ 150Rent expense $ 900 substitute for Salaries expense 1,100 Supplies expense 300 financialInterest expense 150 statements. Utilities expense 300 Total expenses 2,900Net income $ 4,600
  94. 94. Kay Torres Co.ltd Income Statement Prepare the For the Month Ended June 30, 2011 Statement ofRevenues:Service revenue $ 7,500 Changes in Owner’sTotal revenues 7,500 Equity.Operating expenses: Depr. expense - Equip. $ 150Rent expense $ 900 Salaries expense 1,100 Supplies expense 300 Kay Torres Co.ltdInterest expense 150 Utilities expense 300 Statement of Changes in Owners Equity Total expenses 2,900 For the Month Ended June 30, 2011Income before Tax $ 4,600Income Tax Expense 460 Owners equity 6/1/2011 $ -0-Net Income 4140 Add: Net income $ 4,140 Investment by owner 20,000 24,140 Total 24,140 Less: Withdrawal by owner - Owners equity 6/30/2011 $ 24,140
  95. 95. Kay Torres Co.ltd Statement of Changes in Owners Equity Prepare the For the Month Ended June 30, 2011 Balance Sheet. Kay Torres Co.ltdOwners equity 6/1/2011 $ -0- Balance SheetAdd: Net income $ 4,140 30-Jun-11 Investment by owner 20,000 24,140 AssetsTotal 24,140 Cash $ 25,40 Accounts receivable 5,20Less: Withdrawal by owner - Supplies 90Owners equity 6/30/2011 $ 24,140 Equipment $ 9,000 Less: accum. depr. (150) 8,85 Total assets $ 40,35 Liabilities Accounts payable $ 600 Notes payable 15,000 Income tax payable 460 Interest payable 150 Total liabilities $ 16,21 Owners Equity Owner,s equity 20,00 Retained earnings 4,14 Total Owners Equity 24,14 Total liabilities and equity $ 40,35
  96. 96. CLOSING THE BOOKSAt the end of the accounting period, the companymakes the accounts ready for the next period. LO 2 Explain the process of closing the books.
  97. 97. CLOSING THE BOOKSClosing entries formally recognize, in the generalledger, the transfer of Income tax expense to Tax payable Net income to Retained earnings.Closing entries are only at the end of the annualaccounting period. LO 2 Explain the process of closing the books.
  98. 98. RECORDING CLOSING ENTRIES Let’s see how theClose Revenue accounts closing process to Income Summary. works!Close Expense accounts to Income Summary.Close Income Summary account to Tax payable.4 Close income Summary account to Retained Earnings
  99. 99. CLOSING PROCESSIncome Summary Service revenue 7,500 Balances before closing. 7,500Income Summary Revenue Accounts 7,500 7,500 7,500 7,500 - Close Revenue accounts to Income Summary.
  100. 100. GENERAL JOURNAL Page 1№ Date Description PR Debit Credit June 30 Service revenue 7,500 Income summary 7,500 to record closing entries of revenue
  101. 101. CLOSING PROCESSSalary expense 1,100 1,100 Close Expense Supplies expense accounts to Income 300 300 - Summary. - Rent expense 900 900 Depreciation expense 150 150 Income Summary - 1,100 7,500 900 -Utitilies expense 300 300 300 Interest expense 300 150 150 150 - 150 - 460Tax payable 460 4,140 Retained earnings 0 4,140 460 4,140
  102. 102. GENERAL JOURNAL Page№ Date Description PR Debit Credit June 30 Service revenue 7,500 Income summary 7,500 to record closing entries of revenue Income summary 1,100 Salary expense 1,100 to record closing entries of salary expense Income summary 900 Rent expense 900 to record closing entries of rent expense
  103. 103. GENERAL JOURNAL Page№ Date Description PR Debit Credit June 30 Income summary 300 Utilities expense 300 to record closing entries of utilities expense Income summary 300 Supplies expense 300 to record closing entries of Supplies expense Income summary 150 Depreciation expense 150 to record closing entries of rent expense
  104. 104. GENERAL JOURNAL Page№ Date Description PR Debit Credit June 30 Income summary 150 Interest expense 150 to record closing entries of interest expense Income summary 460 Tax payable 460 to record closing entries of income tax expense Income summary 4,140 retained earnings 4,140 to record closing entries of Net income
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