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Chapter 3 Financial 3 Ed

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Chapter 3 Financial 3 Ed

  1. 1. The Accounting Cycle: End of the Period Financial Accounting Chapter 3 Spiceland | Thomas | Herrmann Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  2. 2. 3-2 Learning Objectives • Understand when revenues and expenses are recorded • Distinguish between accrual-basis and cash-basis accounting • Demonstrate the purposes and recording of adjusting entries • Post adjusting entries and prepare an adjusted trial balance Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  3. 3. 3-3 Learning Objectives • Prepare financial statements using the adjusted trial balance • Demonstrate the purposes and recording of closing entries • Post closing entries and prepare a post-closing trial balance Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  4. 4. 3-4 Part A Accrual-Basis Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  5. 5. 3-5 Learning Objective 1 Understand when revenues and expenses are recorded Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  6. 6. 3-6 Revenue and Expense Reporting • Revenue recognition • Recognize revenue when it is earned • Expense recognition • Expenses are reported with the revenues they help to generate • Revenue recognition principle • Matching principle Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  7. 7. Illustration 3.1—Expense Recognition Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-7
  8. 8. 3-8 Learning Objective 2 Distinguish between accrual-basis and cash-basis accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  9. 9. Accrual-Basis Compared with Cash-Basis Accounting Point of Difference Accrual Basis Cash Basis Revenue Recognition When revenue is earned When cash is received Recording Expenses With related revenues When cash is paid GAAP Part of GAAP Not a part of GAAP Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-9
  10. 10. 3-10 Illustration 3.2—Accrual-Basis Revenue versus Cash-Basis Revenue Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  11. 11. 3-11 Illustration 3.3—Accrual-Basis Expense versus Cash-Basis Expense Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  12. 12. 3-12 Part B The Measurement Process Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  13. 13. 3-13 Learning Objective 3 Demonstrate the purposes and recording of adjusting entries Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  14. 14. 3-14 Illustration 3.4—The Accounting Cycle Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  15. 15. 3-15 Adjusting Entries Prepayments Accruals Prepaid expenses Accrued expenses Unearned revenues Accrued revenues Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  16. 16. 3-16 Purpose of Adjusting Entries • To account for transactions that have not been recorded by the end of the period • To record revenues in the period earned • To record expenses in the period they are incurred to generate those revenues • To correctly state assets and liabilities Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  17. 17. 3-17 Prepaid Expenses • Cost of assets acquired in one period that will be expensed in a future period Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  18. 18. 3-18 Example: Prepaid Expenses Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  19. 19. 3-19 Unearned Revenues • Cash received in advance from a customer for products or services to be provided in the future Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  20. 20. 3-20 Example: Unearned Revenues Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  21. 21. 3-21 Accrued Expenses • Company has incurred a cost but hasn’t yet paid cash or recorded an obligation Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  22. 22. 3-22 Example: Accrued Expenses Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  23. 23. 3-23 Accrued Revenues • Revenue earned but hasn’t yet received cash or recorded an amount receivable Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  24. 24. 3-24 Example: Accrued Revenues Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  25. 25. 3-25 Learning Objective 4 Post adjusting entries and prepare an adjusted trial balance Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  26. 26. 3-26 Adjusted Trial Balance • Lists all account balances after updating them for adjusting entries • Prepared after posting the adjusting entries to the general ledger Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  27. 27. 3-27 Illustration 3.10—Adjusted Trial Balance Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  28. 28. 3-28 Part C The Reporting Process: Financial Statements Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  29. 29. 3-29 Learning Objective 5 Prepare financial statements using the adjusted trial balance Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  30. 30. 3-30 Illustration 3.11—Relationship between Adjusted Trial Balance and Financial Statements Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  31. 31. 3-31 Illustration 3.12—Income Statement Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  32. 32. 3-32 Illustration 3.13—Statement of Stockholders’ Equity Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  33. 33. 3-33 Illustration 3.14—Classified Balance Sheet Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  34. 34. 3-34 Statement of Cash Flows • The final financial statement • Measures activities involving cash receipts and cash payments • Reflecting a company’s operating, investing, and financing activities. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  35. 35. 3-35 Part D The Closing Process Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  36. 36. 3-36 Learning Objective 6 Demonstrate the purposes and recording of closing entries Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  37. 37. 3-37 Closing Entries • To transfer the balances of temporary accounts to the Retained Earnings • To reduce the balances of these temporary accounts to zero Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  38. 38. 3-38 Illustration 3.15—Closing Entries Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  39. 39. 3-39 Learning Objective 7 Post closing entries and prepare a post-closing trial balance Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  40. 40. 3-40 Post-Closing Trial Balance • Lists all accounts balances after updating for closing entries. • Prepared accounts for the next period Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  41. 41. 3-41 Illustration 3.18—Post-Closing Trial Balance Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  42. 42. 3-42 End of Chapter 3 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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