acg 2021chapter3
TRANSCRIPT
-
7/29/2019 ACg 2021Chapter3
1/33
Adjusting Accounts & PreparingFinancial Statements
Chapter 3
-
7/29/2019 ACg 2021Chapter3
2/33
Accounting period
Time principle period
Specific time periods for accounting
activities Fiscal year
Consisting of any 12 months period other thanending on December 31
Natural year Ends December 31
-
7/29/2019 ACg 2021Chapter3
3/33
Accounting basis
Accrual basis
Uses the adjusting process to recognize
revenues when earned and to matchexpenses with revenues
Cash Basis
Recognized revenues when cash isreceived and records expenses when cashis paid
-
7/29/2019 ACg 2021Chapter3
4/33
Revenue Recognition
Matching principle Aims to record
expenses in thesame accountingperiod as therevenues that areearned as a result of
these expenses
-
7/29/2019 ACg 2021Chapter3
5/33
Adjustments
Adjusting entries To correct for transactions and events that
extend over more than one period Deferred wait till cash is paid
Accrual
Rule
Debit the expense Credit the asset or liabilities
For the amount used up
-
7/29/2019 ACg 2021Chapter3
6/33
Prepaid insurance
Suppose that we purchase $2,400 forinsurance for one year on May 1.
Record the adjustments on December31.
$2,400/12 = $200 x 8months = $1,600
Insurance expense 1600 Prepaid insurance 1600
-
7/29/2019 ACg 2021Chapter3
7/33
Supplies
Suppose that supplies account has abalance of $4,000 and inventory shows
$1,000. Record the supplies used up. Balance 4,000
Inventory1,000
Used up 3,000
-
7/29/2019 ACg 2021Chapter3
8/33
Supplies
Supplies expense 3,000
Supplies 3,000
-
7/29/2019 ACg 2021Chapter3
9/33
Depreciation
Plant assets/Fixed Assets
Assets which are tanigble and long lived
Building and machinery
Depreciation
The reduction in value of an asset due to
its use
-
7/29/2019 ACg 2021Chapter3
10/33
Depreciation
Depreciation expense
Annual reduction in value of asset
Accumulated depreciation Contra asset
Increases with a credit
Total reduction in value of an asset
-
7/29/2019 ACg 2021Chapter3
11/33
Unearned revenues
Refers to cash received in advance ofservices provided
Suppose that unearned revneue has abalance of $7,000 but records showsonly $3,000 is unearned
Balance $7,000 Should be 3,000 Earned 4,000
-
7/29/2019 ACg 2021Chapter3
12/33
Unearned Revenues
Unearned revenues A liability
If we do not complete the work then we areliable to refund the monies.
Once the work is completed then theliability does not exist
Unearned revenues 4,000 Fees earned 4000
-
7/29/2019 ACg 2021Chapter3
13/33
Accrued expenses
Refers to costs that are incurred in aperiod that are unpaid and unrecorded
Accrued salaries Salaries owed at the end of the period to
be made next period
Suppose year ends on Wed, do we pay onWed or wait until Friday
-
7/29/2019 ACg 2021Chapter3
14/33
Salaries
Suppose salaries at year end is $400
Salaries expense 400
Salaries payable 400
-
7/29/2019 ACg 2021Chapter3
15/33
Accrued revenues
Refers to revenues earned in a periodthat are both unrecorded and not yet
received in cash Unrecorded accounts receivable
-
7/29/2019 ACg 2021Chapter3
16/33
Trial Balance
Unadjusted trial balance
is a list of account balances before
adjustments Used to make adjusting entries
Adjusted trial balance
Used to prepare financial statements
-
7/29/2019 ACg 2021Chapter3
17/33
Financial Statements
Four basic financial statements
Income statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash flows
-
7/29/2019 ACg 2021Chapter3
18/33
Income Statement
Results of operations for a businessShows revenues minus expenses
Rob Co
Income StatementFor period ending
12/31/04Revenues
Sales $75,000
Expense
Salaries exp $25,000
Rent exp $10,000
Total exp 35,000
-
7/29/2019 ACg 2021Chapter3
19/33
Statement of Retained Earnings
Changes in net worth and equity
Rob Co
Statement of Retained Earnings
For period ending 12/31/04
Beginning Retained Earnings $60,000
+Net income 40,000100,000
-Dividends 20,000
Ending Retained Earnings $80,000
-
7/29/2019 ACg 2021Chapter3
20/33
Balance sheetRob Co
Balance Sheet
December 3, 2004Assets
Cash $45,000
Truck 75,000
Total Assets $120,000
Liabilities
Accts pay $10,000
Total liab. $10,000
Stockholders Equity
Common Stock $30,000
Retained Earnings $80,000
-
7/29/2019 ACg 2021Chapter3
21/33
Statement of Cash Flows
Inflows and outflow of cash from
Operations
Investments Financing
-
7/29/2019 ACg 2021Chapter3
22/33
Accounting Cycle
Record entries in the journal Post to ledger
Prepare unadjusted Trial Balance Record and post adjusting entries Prepare adjusted trial balance
Prepare financial statementsRecord and post closing entries
-
7/29/2019 ACg 2021Chapter3
23/33
Closing Entries
Temporary accounts
Accumulate data related to one accounting
period Revenue
Expense
Dividends
Income summary
-
7/29/2019 ACg 2021Chapter3
24/33
Close revenues
Revenues DR
Income summary Cr
Debit whatever revenue accounts youhave on the trial balance for theirending balance and the total is credited
to income summary
-
7/29/2019 ACg 2021Chapter3
25/33
Close Expenses
Income summary DR
Expenses CR
Credit each expense accountseparately for the amount of thebalance in the account and debitincome summary for the total
-
7/29/2019 ACg 2021Chapter3
26/33
Close Income Summary
Income Summary DR
Retained earnings CR
Income Summary
Debit Credit
Total expenses Total revenues
Net income
For the balance in the income summary account
-
7/29/2019 ACg 2021Chapter3
27/33
Close Dividends
Dividends reduce the equity of thebusiness and the amount retained in
the business Retained earnings DR
Dividends CR
For the amount of the balance in thedividend account
-
7/29/2019 ACg 2021Chapter3
28/33
Transactions
Fees earned $50,000
Rent expense 10,000
Supplies expense 5,000
Dividends 2,000
Retained earnings $30,000 Record the closing entries
-
7/29/2019 ACg 2021Chapter3
29/33
Close revenues
Fees earned 50,000
Income summary 50,000
-
7/29/2019 ACg 2021Chapter3
30/33
Close Expenses
Income Summary $15,000
Rent expense $10,000
Supplies expense 5,000
-
7/29/2019 ACg 2021Chapter3
31/33
Close Income Summary
Income Summary $35,000
Retained earnings $35,000
Income Summary
DR CR
$15,000 $50,000
$35,000 net income
RevenuesExpenses
-
7/29/2019 ACg 2021Chapter3
32/33
Close Dividends
Retained earnings $2,000
Dividends $2,000
Retained Earnings
DR
$2,000Dividends
CR
$30,000 Balance
$35,000 net income
$63,000 ending balance
-
7/29/2019 ACg 2021Chapter3
33/33
Classification of Accounts
Current assets Expected to be
collected in less thanone year
Cash
Accounts receivable
Supplies Inventory
Plant Asset Long lived tangible
assets
Factory building
Machinery andequipment