1) The document describes the accounting cycle and accrual accounting. It explains adjusting entries for unrecorded receivables, liabilities, prepared expenses, and unearned revenues. 2) The accounting cycle includes preparing financial statements and notes, and the closing process of closing revenue, expense, and dividend accounts to retained earnings. 3) Real and nominal accounts are closed in the accounting cycle to determine net income and retained earnings for the period.

3. Why Use Accrual Accounting?

4. Define the Time Period Concept. Time Period

6. Define Accrual Accounting

7. Revenue Recognition Revenues are recorded when two main criteria are met: What are they?

8. Define The Matching Principle

9. Define Cash-Basis Accounting

10. Example: Accrual- vs. Cash-Basis Accounting Crown Consulting Reported Income for 2006 During 2006, Crown Consulting billed its client for $48,000. On December 31, 2006, it had received $41,000, with the remaining $7,000 to be received in 2007. Total expenses during 2006 were $31,000 with $3,000 of these costs not yet paid at December 31. Determine net income under both methods.

12. What Are the Steps in the Accounting Cycle?

13. Why DO Adjusting Entries? WHY?

16. What Is the 3-Step Process for Adjusting Entries?

17. Bullseye Management earns a rent revenue of $500 in 2006 but will not receive the payment until January 10, 2007. An adjustment will be needed. What is the adjusting entry? Example: Unrecorded Receivables Original entry none none Correct balances 500 500 Rent Receivable Rent Revenue

18. Original entry none none Correct balances 1,000 1,000 MoneyTree Inc. is assessed property taxes of $1,000 for 2006, but will not make this payment until January 5, 2007. An adjustment will be needed. What is the adjusting entry? Property Tax Expense Property Tax Payable Example: Unrecorded Liabilities

19. Example: Prepaid Expenses Rent Expense Prepaid Rent Original entry 3,600 3,600 Adjusting entry 1,800 1,800 Correct balances 1,800 1,800 Cash On July 1, 2006, I Think I Can Inc. pays $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry ?

20. Example: Unearned Revenues On July 1, 2006, Clean As A Whistle Co. received $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry? Original entry 3,600 3,600 Adjusting entry 1,800 1,800 Correct balances 1,800 1,800 Unearned Rent Rent Revenue Cash

22. Review The Steps in the Accounting Cycle

24. Describe the Preparation of Financial Statements

25. What Are The Notes and Why Have Them?

26. Tell Me About The Audit

30. Closing Entries Identify Nominal and Real Accounts Dec. 31 Sales Revenue. . . . . . . . . . . 1,500 Rent Revenue. . . . . . . . . . . . 100 Cost of Goods Sold . . . . . 1,100 Salaries Expense. . . . . . . 200 Other Expenses . . . . . . . . 150 Retained Earnings . . . . . . 150 real (permanent) account nominal or temporary accounts

31. Closing Entries Describe Which Accounts Are Used For Each Entry Step 1. Close all revenue accounts by debiting them. Sales Revenue. . . . . . . . . 15,000 Retained Earnings . . . . 15,000 Step 2. Close all expense accounts by crediting them. Retained Earnings. . . . . . . 13,600 Cost of Goods Sold. . . . 12,800 Insurance Expense. . . . 500 Supplies Expense. . . . . 300

33. Declaration of Dividends : Payment of Dividends : Closing Entry for Dividends : Make All Three Dividends Entries for $200

34. Dividends Bal. xxx Retained Earnings Beg. Bal. xxx The Closing Process Revenues Revenues Bal. xxx Expenses Bal. xxx Since the revenues account is a nominal account, it is closed at the end of the period to Retained Earnings. xxx Revenues

35. The Closing Process Expenses Dividends Bal. xxx Retained Earnings Beg. Bal. xxx Revenues Expenses Bal. xxx The expenses account is also a nominal account and is debited to Retained Earnings to close it. xxx Expenses Revenues Bal. xxx xxx

36. The Closing Process Dividends Dividends Bal. xxx Retained Earnings Beg. Bal. xxx Expenses Revenues xxx Revenues Bal. xxx The dividends account, which is also nominal, is credited to close out the balance. xxx Dividends Expenses Bal. xxx xxx

37. The Closing Process Dividends Bal. xxx Retained Earnings Beg. Bal. xxx xxx Dividends Expenses Revenues xxx Revenues Bal. xxx Expenses Bal. xxx xxx End. Bal. xxx Net income for the period is determined by these two entries. Retained Earnings is a real account and always carries a balance.

39. Example: Post-Closing Trial Balance Three Monkeys Inc. Post-Closing Trial Balance December 31, 2006 Debits Credits Cash $ 8,200 Accounts Receivable 4,000 Inventory 3,000 Supplies 1,000 Accounts Payable $ 5,000 Capital Stock 10,000 Retained Earnings ______ 1,200 Totals $16,200 $16,200

43. Original entry 3,600 3,600 Adjusting entry 1,800 1,800 Correct balances 1,800 1,800 Example: Prepaid Expenses Rent Expense Prepaid Rent Cash On July 1, 2006, Time Flies Company pays $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry using the expense approach?

44. Original entry 3,600 3,600 Adjusting entry 1,800 1,800 Correct balances 1,800 1,800 Example: Prepaid Expenses On July 1, 2006, Pot Of Gold Inc. pays the Rainbow Company $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. Use the revenue approach. Unearned Rent Rent Revenue Cash

45. END CHAPTER 4 "Things which matter most must never be at the mercy of things which matter least."