Ch03-The Accounting Information System

120
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description

Accounts

Transcript of Ch03-The Accounting Information System

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3-1

Prepared byCoby Harmon 

University of California, Santa Barbara

Intermediate Accounting

Intermediate

 Accounting

Prepared by

Coby Harmon 

University of California, Santa BarbaraWestmont College

INT!"#IAT ACC$UNTIN%

& I & T N T ' # I T I $ N

Prepared by

Coby Harmon

University of California Santa Barbara

Westmont College

(ieso)eygandt)arfieldteam for success

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3-2

PREVIEW OF CHAPTER 

Intermediate Accounting

15th Edition

Kieso Weygandt Warfield 

3

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3-3

1. Understand basic acconting

terminology.

2. !"plain doble-entry rles.

3. #dentify steps in t$e acconting cycle.

%. &ecord transactions in 'ornals( post to

ledger acconts( and prepare a trial

balance.

). !"plain t$e reasons for preparing

ad'sting entries and identify ma'or types

of ad'sting entries.

*. Prepare financial statements from t$e

ad'sted trial balance.

+. Prepare closing entries.

,. Prepare financial statements for a

merc$andising company.

 After studying this chapter, you should be able to:

$e cconting

#nformation System3/!&0#0 B!C#4!S

/!&0#0 B!C#4!S

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3-%

cconting information system

Collects and processes transaction data*

#isseminates t+e financial information to interested parties*

cconting #nformation System

LO 1 Understand basic accounting terminology.

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3-)

Helps management ans)er suc+ uestions as-'o) muc+ and )+at (ind of debt is outstanding.

Were sales +ig+er t+is period t+an last.

W+at assets do )e +ave.W+at )ere our cas+ inflo)s and outflo)s.

#id )e ma(e a profit last period.

 Are any of our product lines or divisions operating at a loss.

Can )e safely increase our dividends to stoc(+olders.

Is our rate of return on net assets increasing.

cconting #nformation System

LO 1 Understand basic accounting terminology.

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3-* LO 1 Understand basic accounting terminology.

/ournal

Posting

Trial Balance

 Ad0usting ntries

&inancial Statements

Closing ntries

Basic erminology vent

Transaction

 Account

!eal Account

Nominal Account

1edger 

cconting #nformation System

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3-+

1. Understand basic acconting

terminology.

2. !"plain doble-entry rles.

3. #dentify steps in t$e acconting cycle.

%. &ecord transactions in 'ornals( post to

ledger acconts( and prepare a trial

balance.

). !"plain t$e reasons for preparing

ad'sting entries and identify ma'or types

of ad'sting entries.

*. Prepare financial statements from t$e

ad'sted trial balance.

+. Prepare closing entries.

,. Prepare financial statements for a

merc$andising company.

 After studying this chapter, you should be able to:

$e cconting

#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S

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3-, LO 2 Explain doubleentry rules.

 An accont s+o)s t+e effect of transactions on a given

asset, liability, euity, revenue, or e2pense account*

5oble-entry accounting system 3t)o4sided effect5*

!ecording done by debiting at least one account and

crediting anot+er*

5!B#S mst e6al C&!5#S*

5ebits and Credits

cconting #nformation System

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ccont 0ame

5ebit 8 5r. Credit 8 Cr.

5ebits and Credits

 An arrangement t+at s+o)s t+eeffect of transactions on an

account*

#ebit 6 71eft8

Credit 6 7!ig+t8

ccontccont

LO 2 Explain doubleentry rules.

n ccont cann ccont can

be illstrated in abe illstrated in a

-ccont form.-ccont form.

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ccont 0ame

5ebit 8 5r. Credit 8 Cr.

LO 2 Explain doubleentry rules.

:19(999 ransaction ;2:3(999

:1)(999

,(999

Balance

ransaction ;1

ransaction ;3

#f t$e sm of 5ebit entries are greater t$an t$e sm ofCredit entries( t$e accont <ill $ave a debit balance.

5ebits and Credits

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ccont 0ame

5ebit 8 5r. Credit 8 Cr.

#f t$e sm of Credit entries are greater t$an t$e sm of5ebit entries( t$e accont <ill $ave a credit balance.

LO 2 Explain doubleentry rules.

:19(999 ransaction ;2:3(999

:1(999

,(999 ransaction ;3

Balance

ransaction ;1

5ebits and Credits

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NormalBalanceCredit

Normal

BalanceCredit

Normal

Balance5ebit

Normal

Balance5ebit

5ebits and Credits Smmary

LO 2 Explain doubleentry rules.

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Balance S$eet

6 9 4sset /iability !6ity &evene !"pense

5ebit

Credit

5ebits and Credits Smmary

LO 2 Explain doubleentry rules.

#ncome Statement

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$e cconting !6ation

LO 2 Explain doubleentry rules.

!elations+ip among t+e assets, liabilities and stoc(+olders:euity accounts of a business-

T+e euation must be in balance after every transaction* &or

every 5ebit t+ere must be a Credit*

#llstration 3-3

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3-1)

5oble-!ntry System #llstration

 Assets Assets 1iabilities1iabilities Stoc(+olders:

uity

Stoc(+olders:

uity= >

;* $)ners invest <=>,>>> in e2c+ange for commonstoc(*

> %9(999 > %9(999

LO 2 Explain doubleentry rules.

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3-1*

 Assets Assets 1iabilities1iabilities

= >

?* #isburse <@>> cas+ for secretarial )ages*

- *99 - *99?e"pense@

LO 2 Explain doubleentry rules.

Stoc(+olders:

uity

Stoc(+olders:

uity

5oble-!ntry System #llstration

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 Assets Assets 1iabilities1iabilities

= >

* Purc+ase office euipment priced at <,?>>, giving a;> percent promissory note in e2c+ange*

> )(299 > )(299

LO 2 Explain doubleentry rules.

Stoc(+olders:

uity

Stoc(+olders:

uity

5oble-!ntry System #llstration

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3-1,

 Assets Assets 1iabilities1iabilities

= >

=* !eceived <=,>>> cas+ for services performed*

> %(999 > %(999?revene@

LO 2 Explain doubleentry rules.

Stoc(+olders:

uity

Stoc(+olders:

uity

5oble-!ntry System #llstration

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 Assets Assets 1iabilities1iabilities

= >

* Pay off a s+ort4term liability of <,>>>*

- +(999 - +(999

LO 2 Explain doubleentry rules.

Stoc(+olders:

uity

Stoc(+olders:

uity

5oble-!ntry System #llstration

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 Assets Assets 1iabilities1iabilities

= >

@* #eclared a cas+ dividend of <,>>>*

> )(999 - )(999

LO 2 Explain doubleentry rules.

Stoc(+olders:

uity

Stoc(+olders:

uity

5oble-!ntry System #llstration

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3-21

 Assets Assets 1iabilities1iabilities

= >

* Convert a long4term liability of <D>,>>> into commonstoc(*

- ,9(999 > ,9(999

LO 2 Explain doubleentry rules.

Stoc(+olders:

uity

Stoc(+olders:

uity

5oble-!ntry System #llstration

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 Assets Assets 1iabilities1iabilities

= >

D* Pay cas+ of <;@,>>> for a delivery van*

LO 2 Explain doubleentry rules.

- 1*(999

> 1*(999

Note t+at t+e accounting euation euality ismaintained after recording eac+ transaction*

Note t+at t+e accounting euation euality ismaintained after recording eac+ transaction*

Stoc(+olders:

uity

Stoc(+olders:

uity

5oble-!ntry System #llstration

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$)ners+ip structure dictates t+e types of accounts t+at arepart of or affect t+e euity section*

Proprietors$ip orPartners$ip

Proprietors$ip or

Partners$ip CorporationCorporation

<nerAs Capital

<nerAs 5ra<ing

Common Stoc

Paid-in Capital in

!"cess of Par  5ividends

&etained !arnings

inancial Statements and <ners$ip Strctre

LO 2 Explain doubleentry rules.

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3-2% LO 2 Explain doubleentry rules.

Stoc(+olders: uityStoc(+olders: uityBalance S$eet

Statement of &etained !arnings

Net income or Net loss 

?revenes less e"penses@

#ncome Statement

Net income or Net loss 

?revenes less e"penses@

#ncome Statement#ividends#ividends

!etained arnings

?net income retained in bsiness@

!etained arnings

?net income retained in bsiness@

Common Stoc(

?investments by stoc$olders@

Common Stoc(

?investments by stoc$olders@

#llstration 3-%

inancial Statements and <ners$ip Strctre

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3-2)

1. Understand basic acconting

terminology.

2. !"plain doble-entry rles.

3. #dentify steps in t$e acconting cycle.

%. &ecord transactions in 'ornals( post to

ledger acconts( and prepare a trial

balance.

). !"plain t$e reasons for preparing

ad'sting entries and identify ma'or types

of ad'sting entries.

*. Prepare financial statements from t$e

ad'sted trial balance.

+. Prepare closing entries.

,. Prepare financial statements for a

merc$andising company.

 After studying this chapter, you should be able to:

$e cconting

#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S

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3-2*

$e cconting Cycle

LO ! "dentify steps in the accounting cycle.

TransactionsTransactions

/ournaliEation/ournaliEation

Statement preparationStatement preparation

ClosingClosing

Post4closing trail balancePost4closing trail balance

!eversing entries!eversing entries

Trial balanceTrial balance

PostingPosting

 Ad0usted trial balance Ad0usted trial balance

 Ad0ustments Ad0ustmentsWor(S+eetWor(S+eet

#llstration 3-*

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3-2+

#dentify and &ecording ransactions

W$at to &ecordD

T+e &ASB used t+e p+rase 7transactions and ot+er

events and circumstances t+at affect a business

enterprise*8

LO ! "dentify steps in the accounting cycle.

ypes of !ventsE

!"ternal  F bet)een an entity and its environment*

#nternal F event occurring entirely )it+in an entity*

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3-2,

1. Understand basic acconting

terminology.

2. !"plain doble-entry rles.

3. #dentify steps in t$e acconting cycle.

%. &ecord transactions in 'ornals( post to

ledger acconts( and prepare a trial

balance.

). !"plain t$e reasons for preparing

ad'sting entries and identify ma'or types

of ad'sting entries.

*. Prepare financial statements from t$e

ad'sted trial balance.

+. Prepare closing entries.

,. Prepare financial statements for a

merc$andising company.

 After studying this chapter, you should be able to:

$e cconting

#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S

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eneral ornal F a c+ronological record of transactions*ornal !ntries are recorded in t+e 0ournal*

ornaliFing

LO #

September 1E  Stoc(+olders invested <;,>>> cas+ in t+e corporation

in e2c+ange for s+ares of stoc(* Purc+ased computer euipment for

<,>>> cas+*#llstration 3-+

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Posting  F Transferring amounts from 0ournal to ledger*

Posting

LO #

#llstration 3-,

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3-31

n !"panded !"ample

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

Posting

T+e purpose of transaction analysis is

3;5 to identify t+e type of account involved, and

3?5 to determine )+et+er a debit or a credit is reuired*

Geep in mind t+at every 0ournal entry affects one or more of t+e

follo)ing items- assets, liabilities, stoc(+olders: euity,

revenues, or e2penses*

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3-32

;* $ctober ;- Stoc(+olders invest <;>>,>>> cas+ in anadvertising venture to be (no)n as Pioneer Advertising

 Agency Inc*

Common Stoc( ;>>,>>>

Cas+ ;>>,>>>$ct* ;

#ebit Credit

Cas+

199(999 199(999

#ebit Credit

Common Stoc(

Posting

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

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?* $ctober ;- Pioneer Advertising purc+ases office euipmentcosting <>,>>> by signing a 4mont+, ;?H, <>,>>> note

payable*

Notes Payable >,>>>

uipment >,>>>$ct* ;

#ebit Credit

uipment

)9(999 )9(999

#ebit Credit

Notes Payable

Posting

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

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3-3%

* $ctober ?- Pioneer Advertising receives a <;?,>>> cas+advance from GC, a client, for advertising services t+at are

e2pected to be completed by #ecember ;*

Unearned Service !evenue ;?,>>>

Cas+ ;?,>>>$ct* ?

#ebit Credit

Cas+

;>>,>>> 12(999

#ebit Credit

Unearned Service !evenue

Posting

12(999

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

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3-3)

=* $ctober - Pioneer Advertising pays <,>>> office rent, incas+, for $ctober*

Cas+ ,>>>

!ent 2pense ,>>>$ct*

#ebit Credit

Cas+

;>>,>>> 7(999

#ebit Credit

!ent 2pense

Posting

;?,>>>

7(999

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

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3-3*

* $ctober =- Pioneer Advertising pays <@,>>> for a one4yearinsurance policy t+at )ill e2pire ne2t year on September >*

Cas+ @,>>>

Prepaid Insurance @,>>>$ct* =

#ebit Credit

Cas+

;>>,>>> *(999

#ebit Credit

Prepaid Insurance

Posting

;?,>>>

,>>>

*(999

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

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3-3+

@* $ctober - Pioneer Advertising purc+ases, for <?,>>> onaccount, an estimated 4mont+ supply of advertising materials

from Aero Supply*

 Accounts Payable ?,>>>

Supplies ?,>>>$ct*

#ebit Credit

Supplies

2)(999 2)(999

#ebit Credit

 Accounts Payable

Posting

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

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3-3,

* $ctober - Pioneer Advertising signs a contract )it+ a localne)spaper for advertising inserts 3flyers5 to be distributed

starting t+e last Sunday in November* Pioneer )ill start )or(

on t+e content of t+e flyers in November* Payment of <,>>> is

due follo)ing delivery of t+e Sunday papers containing t+e

flyers*

Posting

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

bsiness transaction $as not occrred. $ere is only an

agreement bet<een Pioneer dvertising and t$e ne<spaper for

t$e services to be performed in 0ovember. $erefore( no 'ornalentry is necessary in ctober.

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3-37

D* $ctober ?>- Pioneer Advertising:s board of directors declaresand pays a <,>>> cas+ dividend to stoc(+olders*

Cas+ ,>>>

#ividends ,>>>$ct* ?>

#ebit Credit

Cas+

;>>,>>> )(999

#ebit Credit

#ividends

Posting

;?,>>>

,>>>

@,>>>

)(999

LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.

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3-%9 LO #

* $ctober ?@- mployees are paid every four )ee(s* T+e totalpayroll is <?,>>> per day* T+e pay period ended on &riday,

$ctober ?@, )it+ salaries and )ages of <=>,>>> being paid*

Cas+ =>,>>>

Salaries and Wages 2pense =>,>>>$ct* ?@

#ebit Credit

Cas+

;>>,>>> %9(999

#ebit Credit

Salaries and Wages 2pense

Posting

;?,>>>

,>>>

@,>>>

,>>>

%9(999

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3-%1

;>* $ctober ;- Pioneer Advertising receives <?D,>>> in cas+ and

bills Copa Company <?,>>> for advertising services of<;>>,>>> performed in $ctober*

 Accounts !eceivable ?,>>>

Cas+ ?D,>>>$ct* ;

#ebit Credit

Cas+

;>>,>>> +2(999

#ebit Credit

 Accounts !eceivable

;?,>>>,>>>@,>>>

,>>>

=>,>>>

Service !evenue ;>>,>>>

199(999

#ebit Credit

Service !evenue

2,(999

,9(999

Posting

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3-%2

rial Balance  F A list of eac+

account and its

balanceJ used to

prove euality ofdebit and credit

balances*

rial Balance

LO #

#llstration 3-17

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3-%3

1. Understand basic acconting

terminology.

2. !"plain doble-entry rles.

3. #dentify steps in t$e acconting cycle.

%. &ecord transactions in 'ornals( post to

ledger acconts( and prepare a trial

balance.

). !"plain t$e reasons for preparing

ad'sting entries and identify ma'or types

of ad'sting entries.

*. Prepare financial statements from t$e

ad'sted trial balance.

+. Prepare closing entries.

,. Prepare financial statements for a

merc$andising company.

 After studying this chapter, you should be able to:

$e cconting

#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S

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3-%%

d'sting !ntries

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

"a(es it possible to- !eport on t+e balance s+eet t+e appropriate assets,

liabilities, and o)ner:s euity at t+e statement date*

!eport on t+e income statement t+e proper revenues

and e2penses for t+e period*

K &evenes are recorded in t+e period in )+ic+ services

are performed*

K !"penses are recogniEed in t+e period in )+ic+ t+ey areincurred*

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3-%)

ypes of d'sting !ntries

;* Prepaid !"penses. 2penses paid in cas+

before t+ey are used orconsumed*

5eferrals

* ccred &evenes. 

!evenues for services

performed but not yetreceived in cas+ or

recorded*

=* ccred !"penses. 

2penses incurred but not

yet paid in cas+ or recorded*

?* Unearned &evenes. 

Cas+ received before

services are performed*

ccrals

#llstration 3-29

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

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3-%*

5eferrals areeit+er

prepaid

e"penses 

or  nearned

revenes*

d'sting !ntries for 5eferrals

#llstration 3-21

LO & 

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3-%+

'repaid Expenses. Assets paid for and recorded before acompany uses t+em*

d'sting !ntries for Prepaid !"penses

insurance

supplies advertising

Cas+ PaymentCas+ Payment 2pense !ecorded2pense !ecordedB!&!

rent

buildings and euipment

Prepayments often occur in regard to-

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

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3-%,

(upplies. Pioneer Advertising purc+ased advertising suppliescosting <?,>>> on $ctober * Prepare t+e 0ournal entry to

record t+e purc+ase of t+e supplies*

Cas+ ?,>>>

Supplies ?,>>>$ct*

#ebit Credit

Supplies

2)(999 2)(999

#ebit Credit

Cas+

d'sting !ntries for Prepaid !"penses

LO &

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3-%7

(upplies.  An inventory count at t+e close of business on$ctober ; reveals t+at <;>,>>> of t+e advertising supplies are

still on +and*

Supplies ;,>>>

Supplies 2pense ;,>>>$ct* ;

#ebit Credit

Supplies

?,>>>?,>>> 1)(999

#ebit Credit

Supplies 2pense

1)(999

19(999

LO &

d'sting !ntries for Prepaid !"penses

P#0!!& 54!&#S#0 !0CG #0C

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3-)9

d'sting !ntries forPrepaid !"penses

Statement

PresentationE

Supplies identifies t+at

portion of t+e asset:s

cost t+at )ill provide

future economic benefit*

#llstration 3-3)

#llstration 3-3)

P#0!!& 54!&#S#0 !0CG #0C.Balance S$eet

ctober 31( 291%

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3-)1

StatementPresentationE

Supplies e2pense

identifies t+at portion of

t+e asset:s cost t+at

e2pired in $ctober*

#llstration 3-3)

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

P#0!!& 54!&#S#0 !0CG #0C.

#ncome Statement

or t$e ont$ !nded ctober 31( 291%

d'sting !ntries for Prepaid !"penses

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3-)2

"nsurance. $n $ct* =t+

, Pioneer Advertising paid <@,>>> for aone4year fire insurance policy, coverage beginning $ctober ;*

Prepare t+e entry to record t+e purc+ase of t+e insurance*

Cas+ @,>>>

Prepaid Insurance @,>>>$ct* =

#ebit Credit

Prepaid Insurance

*(999 *(999

#ebit Credit

Cas+

LO &

d'sting !ntries for Prepaid !"penses

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3-)3

"nsurance.  An analysis of t+e policy reveals t+at <>>3<@,>>> L ;?5 of insurance e2pires eac+ mont+* Prepare t+e

entry to record t+e insurance cost e2pired in $ctober*

Prepaid Insurance >>

Insurance 2pense >>$ct* ;

#ebit Credit

Prepaid Insurance

@,>>>@,>>> )99

#ebit Credit

Insurance 2pense

)99

)()99

LO &

d'sting !ntries for Prepaid !"penses

P#0!!& 54!&#S#0 !0CG #0C

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3-)%

d'sting !ntries forPrepaid !"penses

Statement

PresentationE

Prepaid insurance

identifies t+at portion of

t+e asset:s cost t+at )ill

provide future economic

benefit*

#llstration 3-3)

#llstration 3-3)

P#0!!& 54!&#S#0 !0CG #0C.Balance S$eet

ctober 31( 291%

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3-))

StatementPresentationE

Insurance e2pense

identifies t+at portion of

t+e asset:s cost t+at

e2pired in $ctober*

#llstration 3-3)

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

P#0!!& 54!&#S#0 !0CG #0C.

#ncome Statement

or t$e ont$ !nded ctober 31( 291%

d'sting !ntries for Prepaid !"penses

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3-)*

)epreciation. Pioneer Advertising estimates depreciation on itsoffice euipment to be <=>> per mont+* Prepare t+e entry to

record depreciation for t+e mont+ of $ctober*

 Accumulated #epreciation =>>

#epreciation 2pense =>>$ct* ;

#ebit Credit

#epreciation 2pense

%99 %99#ebit Credit

 Accumulated #epreciation

LO &

d'sting !ntries for Prepaid !"penses

P#0!!& 54!&#S#0 !0CG #0C.

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3-)+

d'sting !ntries forPrepaid !"penses

Statement

PresentationE

 Accumulated

#epreciation is a contra

asset account*

#llstration 3-3)

#llstration 3-3)

P#0!!& 54!&#S#0 !0CG #0C.Balance S$eet

ctober 31( 291%

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3-),

StatementPresentationE

#epreciation e2pense

identifies t+at portion of

t+e asset:s cost t+at

e2pired in $ctober*

#llstration 3-3)

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

P#0!!& 54!&#S#0 !0CG #0C.

#ncome Statement

or t$e ont$ !nded ctober 31( 291%

d'sting !ntries for Prepaid !"penses

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3-)7

!eceipt of cas+ before t+e services are performed isrecorded as a liability called nearned revenes*

rent

airline tic(ets tuition

Cas+ !eceiptCas+ !eceipt !evenue !ecorded!evenue !ecordedB!&!

magaEine subscriptions

customer deposits

Unearned revenues often occur in regard to-

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

d'sting !ntries for Unearned &evenes

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3-*9 LO &

Unearned $e*enue. Pioneer Advertising received <;?,>>> on$ctober ?nd from GC for advertising services e2pected to be

completed by #ecember ;* Prepare t+e 0ournal entry to

record t+e receipt on $ctober ?nd*

Unearned Service !evenue ;?,>>>Cas+ ;?,>>>$ct* ?

#ebit Credit

Cas+

12(999 12(999

#ebit Credit

Unearned Service !evenue

d'sting !ntries for Unearned &evenes

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3-*1 LO &

#ebit Credit

Service !evenue

;>>,>>>;>>,>>> ;?,>>>;?,>>>

#ebit Credit

Unearned Service !evenue

%(999

,(999

Unearned $e*enues. Analysis reveals t+at Pioneer Advertisingearned <=,>>> of t+e advertising services in $ctober* Prepare

t+e entry to record t+e revenue for services performed*

Service !evenue =,>>>

Unearned Service !evenue =,>>>$ct* ;

%(999

19%(999

d'sting !ntries for Unearned &evenes

P#0!!& 54!&#S#0 !0CG #0C.

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3-*2

Statement

PresentationE

Unearned servicerevenue identifies t+at

portion of t+e liability for

)+ic+ services +ave not

been performed*

#llstration 3-3)

#llstration 3-3)

Balance S$eetctober 31( 291%

d'sting !ntriesfor Unearned

&evenes

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3-*3

StatementPresentationE

Service !evenue

includes t+e portion of

unearned service

revenue for )+ic+

services )ere

performed in $ctober*

#llstration 3-3)

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

d'sting !ntries for Unearned &evenes

P#0!!& 54!&#S#0 !0CG #0C.

#ncome Statement

or t$e ont$ !nded ctober 31( 291%

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3-*%

d'sting !ntries for ccrals

#llstration 3-2+

ccrals areeit+er

accred

revenes or 

accrede"penses*

LO &

f

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3-*)

!evenues recorded for services performed but cas+ +as yetto be received at t+e statement date are accred revenes*

d'sting !ntries for ccred &evenes

rent

interest

services performed

B!&!

 Accrued revenues often occur in regard to-

Cas+ !eceiptCas+ !eceipt!evenue !ecorded!evenue !ecorded

 Ad0usting entry results in-

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

d' ti ! t i f d &

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3-** LO & 

 Accrued $e*enues. In $ctober Pioneer Advertising performedservices )ort+ <?,>>> t+at )ere not billed clients before $ct* ;*

Prepare t+e entry to revenues for services performed*

Service !evenue ?,>>>

 Accounts !eceivable ?,>>>$ct* ;

#ebit Credit

 Accounts !eceivable

?,>>>?,>>>

#ebit Credit

Service !evenue

;>>,>>>;>>,>>>

=,>>>=,>>>

2(999

19*(999

2(999

+%(999

d'sting !ntries for ccred &evenes

P#0!!& 54!&#S#0 !0CG #0C.

d' ti ! t i

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3-*+ LO &

#llstration 3-3)

#llstration 3-3)

Balance S$eetctober 31( 291%

d'sting !ntriesfor ccred

&evenes

P#0!!& 54!&#S#0 !0CG #0C.

#ncome Statement

or t$e ont$ !nded ctober 31( 291%

d' ti ! t i f d !

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3-*,

2penses incurred but not yet paid in cas+ or recorded*

rent

interest

B!&!

 Accrued e2penses often occur in regard to-

Cas+ PaymentCas+ Payment2pense !ecorded2pense !ecorded

ta2es

salaries

 Ad0usting entry results in-

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

d'sting !ntries for ccred !"penses

d' ti ! t i f d !

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3-*7

 Accrued "nterest.  Pioneer Advertising signed a t+ree4mont+note payable in t+e amount of <>,>>> on $ctober ;* T+e note

reuires interest at an annual rate of ;? percent* T+ree factors

determine t+e amount of t+e interest accumulation-

; ? #llstration 3-27

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

d'sting !ntries for ccred !"penses

d' ti ! t i f d !

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3-+9

Interest Payable >>

Interest 2pense >>$ct* ;

#ebit Credit

Interest 2pense

)99 )99

#ebit Credit

Interest Payable

 Accrued "nterest.  Pioneer signed a t+ree4mont+, ;?H, notepayable in t+e amount of <>,>>> on $ctober ;* Prepare t+e

ad0usting entry on $ct* ; to record t+e accrual of interest*

LO &

d'sting !ntries for ccred !"penses

P#0!!& 54!&#S#0 !0CG #0C.B l S$ td' ti ! t i

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3-+1 LO &

#llstration 3-3)

#llstration 3-3)

Balance S$eetctober 31( 291%

P#0!!& 54!&#S#0 !0CG #0C.

#ncome Statement

or t$e ont$ !nded ctober 31( 291%

d'sting !ntriesfor ccred

!"penses

d' ti ! t i f d !

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3-+2

 Accrued (alaries and +ages.  At $ctober ;, t+e salaries and

)ages for t+ese days represent an accrued e2pense and a

related liability to Pioneer* T+e employees receive total salaries of

<;>,>>> for a five4day )or( )ee(, or <?,>>> per day*

LO &

d'sting !ntries for ccred !"penses

d' ti ! t i f d !

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3-+3

Salaries and Wages Payable @,>>>

Salaries and Wages 2pense @,>>>$ct* ;

#ebit Credit

Salaries and Wages 2pense

=>,>>>=>,>>> *(999

#ebit Credit

Salaries and Wages Payable

 Accrued (alaries.  mployees receive total salaries and )ages

of <;>,>>> for a five4day )or( )ee(, or <?,>>> per day* Prepare

t+e ad0usting entry on $ct* ; to record accrual for salaries*

*(999

%*(999

LO &

d'sting !ntries for ccred !"penses

d' sting !ntries for ccr ed ! penses

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3-+%

Salaries and Wages 2pense =,>>>

Salaries and Wages Payable @,>>>Nov* ?

#ebit Credit

3%(999 @,>>>@,>>>

#ebit Credit

Cas+ =>,>>>

*(999

LO &

Salaries and Wages 2pense Salaries and Wages Payable

d'sting !ntries for ccred !"penses

 Accrued (alaries.  $n November ?, Pioneer )ill again pay

total salaries and )ages of <=>,>>>* Prepare t+e entry to

record t+e payment of salaries on November ?*

P#0!!& 54!&#S#0 !0CG #0C.Balance S$eetd'sting !ntries

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3-+)

#llstration 3-3)

#llstration 3-3)

LO &

Balance S$eetctober 31( 291%

P#0!!& 54!&#S#0 !0CG #0C.

#ncome Statement

or t$e ont$ !nded ctober 31( 291%

d'sting !ntriesfor ccred

!"penses

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3-+*

!at+er t+an purc+asing insurance to cover casualty losses and ot+er

obligations, some companies 7self4insure*8 T+at is, a company decides

to pay for any possible claims, as t+ey arise, out of its o)n resources*

T+e company also purc+ases an insurance policy to cover losses t+at

e2ceed certain amounts* &or e2ample, Almost &amily, Inc*, a

+ealt+care services company, +as a self4insured employee +ealt+4benefit program* 'o)ever, Almost &amily ran into accounting problems

)+en it failed to record an accrual of t+e liability for benefits not

covered by its bac(4up insurance policy* T+is led to restatement of

 Almost &amily:s fiscal results for t+e accrual of t+e benefit e2pense*

WHAT’S YOUR PRINCIPLE  AM I COVERED?

LO & Explain the reasons for preparing ad%usting entries

and identify ma%or types of ad%usting entries.

d'sting !ntries for ccred !"penses

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3-++

ad )ebts.  Pioneer Advertising reasonably estimates a bad

debt e2pense for t+e mont+ of <;,@>>* Prepare t+e entry to

record t+e bad debts for t+e mont+ of $ctober*

LO &

 Allo)ance for #oubtful Accounts ;,@>>

Bad #ebt 2pense ;,@>>$ct* ;

#llstration 3-32

d'sting !ntries for ccred !"penses

P#0!!& 54!&#S#0 !0CG #0C.Balance S$eetd'sting !ntries

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3-+, LO &

#llstration 3-3)

#llstration 3-3)

Balance S$eetctober 31( 291%

P#0!!& 54!&#S#0 !0CG #0C.

#ncome Statement

or t$e ont$ !nded ctober 31( 291%

d'sting !ntriesfor ccred

!"penses

d'sted rial Balance

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3-+7

S+o)s t+e

balance of all

accounts, after

ad0usting entries,

at t+e end of t+e

accounting

period*

d'sted rial Balance

#llstration 3-33

P#0!!& 54!&#S#0 !0CG #0C.d'sted rial Balance

ctober 31( 291%

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3-,9

1. Understand basic acconting

terminology.

2. !"plain doble-entry rles.

3. #dentify steps in t$e acconting cycle.

%. &ecord transactions in 'ornals( post toledger acconts( and prepare a trial

balance.

). !"plain t$e reasons for preparing

ad'sting entries and identify ma'or types

of ad'sting entries.

*. Prepare financial statements from t$e

ad'sted trial balance.

+. Prepare closing entries.

,. Prepare financial statements for a

merc$andising company.

 After studying this chapter, you should be able to:

$e cconting

#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S

Preparing inancial Statements

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3-,1

Preparing inancial Statements

LO - 'repare financial statement from the ad%usted trial balance.

&inancial Statements are prepared directly from t+e Ad0usted Trial Balance*

&inancial Statements are prepared directly from t+e Ad0usted Trial Balance*

BalanceS+eet

IncomeStatement

!etainedarnings

Statement

Preparing inancial Statements

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3-,2

Preparing inancial Statements

LO - 

#llstration 3-3%

Preparing inancial Statements

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3-,3

Preparing inancial Statements

#llstration 3-3)

LO - 

WHAT’S YOUR PRINCIPLE

24/7 ACCOUNTING

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3-,%

To ac+ieve t+e vision of 7?=M accounting,8 a company must be able to

update revenue, income, and balance s+eet numbers every day )it+in

t+e uarter and publis+ t+em on t+e Internet* Suc+ real4time reporting

responds to t+e demand for more timely financial information made

available to all investorsnot 0ust to analysts )it+ access to company

management* T)o obstacles typically stand in t+e )ay of ?=Maccounting- +aving t+e necessary accounting systems to close t+e

boo(s on a daily basis, and reliability concerns associated )it+

unaudited real4time data* $nly a fe) companies +ave t+e necessary

accounting capabilities* Cisco Systems, )+ic+ pioneered t+e concept

of t+e ?=4+our close, is one suc+ company*

WHAT’S YOUR PRINCIPLE 24/7 ACCOUNTING

LO - 'repare financial statement from the ad%usted trial balance.

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3-,)

1. Understand basic acconting

terminology.

2. !"plain doble-entry rles.

3. #dentify steps in t$e acconting cycle.

%. &ecord transactions in 'ornals( post toledger acconts( and prepare a trial

balance.

). !"plain t$e reasons for preparing

ad'sting entries and identify ma'or types

of ad'sting entries.

*. Prepare financial statements from t$e

ad'sted trial balance.

+. Prepare closing entries.

,. Prepare financial statements for a

merc$andising company.

 After studying this chapter, you should be able to:

$e cconting

#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S

Closing !ntries

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3-,*

Closing !ntries

LO 'repare closing entries.

To reduce t+e balance of t+e nominal 3temporary5 accounts

to Eero in order to prepare t+e accounts for t+e ne2t

period:s transactions*

To transfer all income statement account balances to t+e

!etained arnings account in o)ner:s euity*

Balance s+eet 3asset, liability, and e6ity5 accounts are

not closed* #ividends are closed directly to t+e !etained arnings

account*

Basic Process

Closing !ntries

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3-,+

Closing !ntries

LO 'repare closing entries.

&etained !arnings )(999  #ividends ,>>>

Service !evenue ;>@,>>>Salaries O Wages 2pense =@,>>>

Supplies 2pense ;,>>>

!ent 2pense ,>>>

Insurance 2pense >>

Interest 2pense >>#epreciation 2pense =>>

Bad #ebt 2pense ;,@>>

&etained !arnings 33(999

#llstration 3-33

Closing ornal !ntriesE

P#0!!& 54!&#S#0 !0CG #0C.d'sted rial Balance

ctober 31( 291%

Post-Closing rial Balance

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3-,,

Post-Closing rial Balance

LO  

#llstration 3-3,

P#0!!& 54!&#S#0 !0CG #0C.

Post-Closing rial Balancectober 31( 291%

cconting Cycle SmmariFed

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3-,7

cconting Cycle SmmariFed

LO 'repare closing entries.

;* nter t+e transactions of t+e period in appropriate 0ournals*

?* Post from t+e 0ournals to t+e ledger 3or ledgers5*

* Ta(e an unad0usted trial balance 3trial balance5*

=* Prepare ad0usting 0ournal entries and post to t+e ledger3s5*

* Ta(e a trial balance after ad0usting 3ad0usted trial balance5*

@* Prepare t+e financial statements from t+e second trial balance*

* Prepare closing 0ournal entries and post to t+e ledger3s5*

D* Ta(e a post4closing trial balance 3optional5** Prepare reversing entries 3optional5 and post to t+e ledger3s5*

!eversing entries arecovered in Appendi2 B*

WHAT’S YOUR PRINCIPLE

HEY IT’S COMPLICATED

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3-79

T+e economic volatility of t+e past fe) years +as left companies +ungering for

more timely and uniform financial information to +elp t+em react uic(ly to fast4c+anging conditions* As one e2pert noted, companies )ere e2tremely focused ontrying to reduce costs and plan for t+e future better, but a lot of t+em discoveredt+at t+ey didn:t +ave t+e information t+ey needed and t+ey didn:t +ave t+e ability toget t+at information* T+e unsteady recession environment also made it ris(y forcompanies to interrupt t+eir operations to get ne) systems up to speed* So )+at todo. Try to piecemeal upgrades eac+ year or start a ma0or over+aul of t+eir internalsystems. Best By, for e2ample, +as standardiEed as many of its systems aspossible and +as been steadily upgrading t+em over t+e past decade* Acuisitionscan )rea( +avoc on reporting systems* Best Buy is c+oosy about )+en tostandardiEe for companies it acuires, but it sometimes +as to implement ne)systems after international deals* In ot+er situations, a ma0or over+aul is needed*&or e2ample, it is common for companies )it+ a steady stream of acuisitions to

+ave > to > general ledger systems* In t+ose cases, a company cannot react )ellunless its systems are made compatible* So is it t+e big bang 3ma0or over+aul5 ort+e piecemeal approac+. It seems to depend* $ne t+ing is certaingoodaccounting systems are a necessity* Wit+out one, t+e ris( of failure is +ig+*

WHAT’S YOUR PRINCIPLE HEY, IT’S COMPLICATED

LO 'repare closing entries.

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3-71

1. Understand basic acconting

terminology.

2. !"plain doble-entry rles.

3. #dentify steps in t$e acconting cycle.

%. &ecord transactions in 'ornals( post toledger acconts( and prepare a trial

balance.

). !"plain t$e reasons for preparing

ad'sting entries and identify ma'or types

of ad'sting entries.

*. Prepare financial statements from t$e

ad'sted trial balance.

+. Prepare closing entries.

,. Prepare financial statements for a

merc$andising company.

 After studying this chapter, you should be able to:

$e cconting

#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S

inancial Statements of a erc$andising Company

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3-72

a c a State e ts o a e c a d s g Co pa y

LO / 

#llstration 3-37

UPW0 CB#0! C&P.#ncome Statement

or t$e Gear !nded 5ecember 31( 291%

inancial Statements of a erc$andising Company

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3-73 LO / 'repare financial statements for a merchandising company.

#llstration 3-%9

UPW0 CB#0! C&P.Statement of &etained !arnings

or t$e Gear !nded 5ecember 31( 291%

g p y

inancial UPW0 CB#0! C&P.

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3-7%

inancialStatements of a

erc$andisingCompany

LO / 

#llstration 3-%1

Balance S$eets of 5ecember 31( 291%

WHAT’S YOUR PRINCIPLE

STATEMENTS PLEASE

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3-7)

T+e use of a )or(s+eet at t+e end of eac+ mont+ or uarter enables a

company to prepare interim financial statements even t+oug+ it closes t+eboo(s only at t+e end of eac+ year* &or e2ample, assume t+at oogle closesits boo(s on #ecember ;, but it )ants mont+ly financial statements* To dot+is, at t+e end of /anuary, %oogle prepares an ad0usted trial balance 3using a)or(s+eet as illustrated in Appendi2 C5 to supply t+e information needed forstatements for /anuary* At t+e end of &ebruary, it uses a )or(s+eet again*

Note t+at because %oogle did not close t+e accounts at t+e end of /anuary,t+e income statement ta(en from t+e ad0usted trial balance on &ebruary ?D )illpresent t+e net income for t)o mont+s* If %oogle )ants an income statementfor only t+e mont+ of &ebruary, t+e company obtains it by subtracting t+eitems in t+e /anuary income statement from t+e corresponding items in t+eincome statement for t+e t)o mont+s of /anuary and &ebruary* If %oogle

e2ecutes suc+ a process daily, it can realiEe 7?=M accounting8 3see t+e 7W+at#o t+e Numbers "ean.8 bo2 on page ;;>5*

WHAT S YOUR PRINCIPLE STATEMENTS, PLEASE 

LO / 'repare financial statements for a merchandising company.

PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUS

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3-7*

PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0

"ost companies use accral-basis acconting* T+ey

recogniEe revenue )+en t+e performance obligation is satisfied

and

e2penses in t+e period incurred,

)it+out regard to t+e time of receipt or payment of cas+*

Under t+e strict cas$-basis, companies

record revenue only )+en t+ey receive cas+, and

record e2penses only )+en t+ey disperse cas+*

Cas+ basis financial

statements are not in

conformity )it+ %AAP*LO 0 )ifferentiate the cash basis of accounting

from the accrual basis of accounting.

PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUS

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3-7+

#llstrationE  uality Contractor signs an agreement to construct a

garage for <??,>>>* In /anuary, uality begins construction, incurs

costs of <;D,>>> on credit, and by t+e end of /anuary delivers a

finis+ed garage to t+e buyer* In &ebruary, uality collects <??,>>>

cas+ from t+e customer* In "arc+, uality pays t+e <;D,>>> due t+e

creditors*#llstration 3-1

LO 0 )ifferentiate the cash basis of accounting

from the accrual basis of accounting.

PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0

 Advance slide in presentation

mode to reveal ans)er*

PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUS

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3-7,

#llstrationE  uality Contractor signs an agreement to construct a

garage for <??,>>>* In /anuary, uality begins construction, incurs

costs of <;D,>>> on credit, and by t+e end of /anuary delivers a

finis+ed garage to t+e buyer* In &ebruary, uality collects <??,>>>

cas+ from t+e customer* In "arc+, uality pays t+e <;D,>>> due t+e

creditors*#llstration 3-2

LO 0 )ifferentiate the cash basis of accounting

from the accrual basis of accounting.

PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0

 Advance slide in presentation

mode to reveal ans)er*

PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUS

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3-77

Conversion rom Cas$ Basis o ccral Basis

#llstrationE  #r* #iane Windsor, li(e many small business o)ners,

(eeps +er accounting records on a cas+ basis* In t+e year ?>;=, #r*

Windsor received <>>,>>> from +er patients and paid <;>,>>> for

operating e2penses, resulting in an e2cess of cas+ receipts over

disbursements of <;>,>>> 3<>>,>>> 4 <;>,>>>5* At /anuary ; and#ecember ;, ?>;=, s+e +as accounts receivable, unearned service

revenue, accrued liabilities, and prepaid e2penses as s+o)n in

Illustration A4*#llstration 3-)

LO 0 )ifferentiate the cash basis of accounting

from the accrual basis of accounting.

PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0

PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUSCC&U BS#S CCU0#0

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3-199

#llstrationE  Calculate service revene on an accrual basis*

#llstration 3-)

#llstration 3-,

LO 0 )ifferentiate the cash basis of accounting

from the accrual basis of accounting.

PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0

Conversion rom Cas$ Basis o ccral Basis

 Advance slide in presentation

mode to reveal ans)er*

PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUSCC&U/ BS#S CCU0#0

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3-191

#llstrationE  Calculate operating e"penses on an accrual basis*

#llstration 3-)

#llstration 3-11

LO 0 )ifferentiate the cash basis of accounting

from the accrual basis of accounting.

PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0

Conversion rom Cas$ Basis o ccral Basis

 Advance slide in presentation

mode to reveal ans)er*

PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUSCC&U/ BS#S CCU0#0

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3-192 LO 0

#llstration 3-12

PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0

Conversion rom Cas$ Basis o ccral Basis

PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUSCC&U/ BS#S CCU0#0

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3-193

LO 0 )ifferentiate the cash basis of accounting

from the accrual basis of accounting.

$eoretical Weanesses of t$e Cas$ Basis

Today:s economy is considerably more lubricated by credit t+an

by cas+*

T+e accrual basis, not t+e cas+ basis, recogniEes all aspects of

t+e credit p+enomenon*

Investors, creditors, and ot+er decision ma(ers see( timely

information about a company:s futur cas+ flo)s*

PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0

PP!05#IPP!05#I 3B US#0 &!4!&S#0 !0&#!S

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3-19% LO 1 "dentifying ad%usting entries that may be re*ersed.

#llstration of &eversing !ntriesJccrals

#llstration 3B-1

PP!05#IPP!05#I 3B

PP!05#IPP!05#I 3B US#0 &!4!&S#0 !0&#!S

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3-19) LO 1 "dentifying ad%usting entries that may be re*ersed.

#llstration of &eversing !ntriesJ5eferrals

PP!05#IPP!05#I 3B

#llstration 3B-2

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PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5

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3-19+ LO 11 'repare a 1column or3sheet.

 A company prepares a )or(s+eet eit+er on

columnar paper or

)it+in a computer spreads+eet*

 A company uses t+e )or(s+eet to ad0ust account balances and

to prepare financial statements*

PP!05#IPP!05#I 3C CGC/! &!4#S#!5

PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5

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3-19, LO 11 'repare a 1column or3sheet.

Trial Balance Columns

 Ad0ustment Columns

Wors$eet Colmns

PP!05#I CGC/! &!4#S#!5

PP!05#IPP!05#I 3C

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3-197

#llstration 3C-1Wors$eet

US#0 W&KSH!!E H!

CCU0#0CGC/! &!4#S#!5

PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5

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3-119

T+e Wor(s+eet-

provides information needed for preparation of t+e

financial statements*

Sorts data into appropriate columns, )+ic+ facilitates t+e

preparation of t+e statements*

LO 11 'repare a 1column or3sheet.

Preparing inancial Statements from a Wors$eet

CGC/! &!4#S#!5

PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5

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3-111 LO 11

CGC/! &!4#S#!5

#llstration 3-37

UPW0 CB#0! C&P.#ncome Statement

or t$e Gear !nded 5ecember 31( 291%

PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5

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3-112

CGC/! &!4#S#!5

#llstration 3-%9

UPW0 CB#0! C&P.Statement of &etained !arnings

or t$e Gear !nded 5ecember 31( 291%

LO 11 'repare a 1column or3sheet.

PP!05#IPP!05#I 3C UPW0 CB#0! C&P.Balance S$eet

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3-113

US#0

W&KSH!!E H!CCU0#0CGC/! &!4#S#!5

LO 11

#llstration 3-%1

s of 5ecember 31( 291%

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3-11% LO 12 4ompare the accounting information systems under 5AA' and "6$(.

International companies use t+e same set of procedures and records to

(eep trac( of transaction data* T+us, t+e material in C+apter is t+e

same under bot+ %AAP and I&!S*

Transaction analysis is t+e same under I&!S and %AAP but, as you )ill

see in later c+apters, different standards sometimes impact +o)

transactions are recorded*

Bot+ t+e IASB and &ASB go beyond t+e basic definitions provided in t+is

te2tboo( for t+e (ey elements of financial statements, t+at is, assets,

liabilities, euity, revenues, and e2penses*  A trial balance under I&!S follo)s t+e same format as s+o)n in t+e

te2tboo(*

&!/!40 CS 4 Similarities

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3-11) LO 12 4ompare the accounting information systems under 5AA' and "6$(.

!ules for accounting for specific events sometimes differ across

countries* &or e2ample, uropean companies rely less on +istorical cost

and more on fair value t+an U*S* companies* #espite t+e differences, t+e

double4entry accounting system is t+e basis of accounting systems

)orld)ide* Internal controls are a system of c+ec(s and balances designed to

prevent and detect fraud and errors* W+ile most companies +ave t+ese

systems in place, many +ave never completely documented t+em nor

+ad an independent auditor attest to t+eir effectiveness* Bot+ of t+ese

actions are reuired under S$Q* n+anced internal control standardsapply only to large public companies listed on U*S* e2c+anges*

&!/!40 CS 4 #ifferences

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3-11*

0 H! H&#L0

T+e definitional structure of assets, liabilities, euity, revenues, and e2penses

may c+ange over time as t+e IASB and &ASB evaluate t+eir overall conceptual

frame)or( for establis+ing accounting standards* In addition, +ig+4uality

international accounting reuires bot+ +ig+4uality accounting standards and

+ig+4uality auditing* Similar to t+e convergence of %AAP and I&!S, t+ere is amovement to improve international auditing standards* T+e International

 Auditing and Assurance Standards Board 3IAASB5 functions as an independent

standard4setting body* It )or(s to establis+ +ig+4uality auditing and assurance

and uality4control standards t+roug+out t+e )orld* W+et+er t+e IAASB adopts

internal control provisions similar to t+ose in S$Q remains to be seen* Rou can

follo) developments in t+e international audit arena at

!tt"#//$$$%&f'(%)r*/&''+/%

LO 12 4ompare the accounting information systems under 5AA' and "6$(.

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3-11+

#&S S!/-!S MU!S#0Information in a company:s first I&!S statements must-

a* +ave a cost t+at does not e2ceed t+e benefits*

b* be transparent*

c* provide a suitable starting point*

d* All t+e above*

LO 12 4ompare the accounting information systems under 5AA' and "6$(.

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3-11,

#&S S!/-!S MU!S#0T+e transition date is t+e date-

a* )+en a company no longer reports under its national standards*

b* )+en t+e company issues its most recent financial statement

under I&!S*

c* t+ree years prior to t+e reporting date*

d* None of t+e above*

LO 12 4ompare the accounting information systems under 5AA' and "6$(.

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3-117

#&S S!/-!S MU!S#0W+en converting to I&!S, a company must-

a* recast previously issued financial statements in accordance

)it+ I&!S*

b* use %AAP in t+e reporting period but subseuently use I&!S*

c* prepare at least t+ree years of comparative statements*

d* use %AAP in t+e transition year but I&!S in t+e reporting year*

LO 12 4ompare the accounting information systems under 5AA' and "6$(.

Copyrig$t

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Copyrig+t ?>; /o+n Wiley O Sons, Inc* All rig+ts reserved*

!eproduction or translation of t+is )or( beyond t+at permitted in

Section ;; of t+e ;@ United States Copyrig+t Act )it+out t+e

e2press )ritten permission of t+e copyrig+t o)ner is unla)ful*

!euest for furt+er information s+ould be addressed to t+e

Permissions #epartment, /o+n Wiley O Sons, Inc* T+e purc+aser

may ma(e bac(4up copies for +isM+er o)n use only and not for

distribution or resale* T+e Publis+er assumes no responsibility for

errors, omissions, or damages, caused by t+e use of t+ese

programs or from t+e use of t+e information contained +erein*