Fin acc l1
description
Transcript of Fin acc l1
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FINANCIAL ACCOUNTING
Lecture 1-2
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LEARNING OBJECTIVES
Accounting and business environment Accounting cycle
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TYPES OF BUSINESS ORGANIZATIONS
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 offer
Service companies Merchandise companies Manufacturing companies
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FORMS OF BUSINESS ORGANIZATION Proprietorship Partnership Corporation
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BUSINESS ACTIVITIES
Financing activities Investing activities Operating activities
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- a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements.
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Accounting
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Financial accounting
Cost and management accounting
Types of accounting
Tax accounting
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investors creditors regulators customers competito
rs
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EXTERNAL USERS
Financial Accounting
Users of Accounting InformationUsers of Accounting Information
• investors• creditors• regulators• customers• competitor
s
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owners managers employees
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EXTERNAL USERS
Financial Accounting
• investors• creditors• regulators• Customers• Suppliers
INTERNAL USERS
Financial Accounting
Users of Accounting InformationUsers of Accounting Information
• Owners• Managers• Employees
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ACCOUNTING CONCEPTS AND PRINCIPLES
What is the primary objective of financial Accounting and Reporting?
Accountants follow professional guidelines.Accountants follow professional guidelines.
The rules that govern accounting are called GAAP(generally accepted accounting principles).
The rules that govern accounting are called GAAP(generally accepted accounting principles).
Financial Accounting Standards Board (FASB)
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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND 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
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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
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AssetsAssets LiabilitiesLiabilitiesOwner’s Equity
Owner’s Equity
= +
Basic Accounting Equation
The basic tool of accounting is the accounting equation. It measures the economic resources of a business and claims to those resources.
The accounting equation shows how assets, liabilities, and owner’s equity are related.
The accounting equation shows the financial position of the business.
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ASSETS , LIABILITIES, AND OWNER’S EQUITY
Assets 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.
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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.
AssetsAssets =LiabilitiesLiabilities + Owner’s
EquityOwner’s Equity
Economic resourcesEconomic resources Claims to economic resourcesClaims to economic resources
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Owner’s investments
Revenues
decreased by increased by
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EFFECTS OF A BUSINESS TRANSACTION ON ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
Cash Owner’s Equity
(1) +$20,000 = + $20,000
Bal. $20,000 = $20,000
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.
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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 +$9,000
Bal. $11,000 + $9,000= $20,000
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3. Borrow cash from the bank. The travel agency borrows $15,000 cash from the bank and signs a 2 year note payable to 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 +$15,000
Bal. $26,000 + $9,000= $15,000 + $20,000
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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 Equity
Cash + Supplies Equipment =
AccountsPayable
Notes payable
Owner’s 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
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5. Provide services for cash. The travel agency makes $2,300 of travel arrangements and collects this amount in cash.
Assets = Liabilities +
Owner’s Equity
Cash + Supplies Equipment =
AccountsPayable
Notes payable
Owner’s 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
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6. Provide services on credit. The travel agency performs $5,200 of services and ,in return, receives clients promises to pay this $5,200 within one month.
Assets = Liabilities +
Owner’s Equity
Cash + Accounts Receivable
Supplies Equipment =
AccountsPayable
Notes payable
Owner’s 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
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7. Partial payments of accounts payable. The travel agency pays $600 to the store where it purchased $1,200 worth of supplies in transaction (4).
Assets = Liabilities +
Owner’s Equity
Cash + Accounts Receivable
Supplies Equipment =
AccountsPayable
Notes payable
Owner’s 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
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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 Equity
Cash + Accounts Receivable
Supplies Equipment =
AccountsPayable
Notes payable
Owner’s 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
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THE ACCOUNTING CYCLETHE ACCOUNTING CYCLE
LO 3 Identify steps in the accounting cycle.
TransactionsTransactions
1. Journalization1. Journalization
6. Financial Statements6. Financial Statements
7. Closing entries7. Closing entries
8. Post-closing trail balance8. Post-closing trail balance
9. Reversing entries9. Reversing entries
3. Trial balance3. Trial balance
2. Posting2. Posting
5. Adjusted trial balance
5. Adjusted trial balance
4. Adjustments4. AdjustmentsWork SheetWork Sheet
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TRANSACTIONS AND EVENTSTRANSACTIONS 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.
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Account Name
Debit / Dr. Credit / Cr.
DEBITS AND CREDITSDEBITS AND CREDITS
An arrangement that shows the effect of transactions on an account.Debit = “Left”Credit = “Right”
Account
An Account can be illustrated in a T-Account form.
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Assets +Liability
=Owne
r’s equity
+ Revenue
- Expense
+ + + + +- - - - -
Bal.
Bal.
Bal.
Bal.
Bal.
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DEBITS AND CREDITSDEBITS AND CREDITS
LO 2 Explain double-entry rules.
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.
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General Journal – a chronological record of transactions. Journal Entries are recorded in the journal.
1. JOURNALIZING1. JOURNALIZING
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ANALYSIS OF TRANSACTIONANALYSIS
DEBIT-CREDIT RULES
Increases in assets are recorded by debits; debit cash $20,000Increases in owner’s equity are recorded by credits; credit owner’s equity
JOURNAL ENTRY
06.01. Cash 20,000 Owner’s equity 20,000
ENTRIES IN LEDGER ACCOUNTS
Cash Owner’s equity
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.
06/01. 20,000 20,000 06/01
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GENERAL JOURNAL Page 1№ Date Description PR Debit Credit
1 June 1 Cash 20,000
Owner's equity 20,000
to record owner's investment
2 June 3 Equipment 9,000
Cash 9,000
to record purchasing equipment by cash
3 June 6 Cash 15,000
Notes payable 15,000
to record bank loan
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GENERAL JOURNAL Page 1
№ Date DescriptionPR Debit Credit
4 June 11 Supplies 1,200
Accounts payable 1,200
to record purchasing supplies on credit
5 June 13 Cash 2,300
Service revenue 2,300
to record providing services for cash
6 June 19 Accounts receivable 5,200
Service revenue 5,200
to record providing services on credit
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GENERAL JOURNAL Page 1№ Date Description PR Debit Credit
7 June 21 Accounts payable 600
Cash 600
to record partial payment of accounts payable
8 June 26 Building rent expense 900
Cash 900
to record building rent expense
9 June 28 Salary expense 1,100
Cash 1,100
to record salary expense
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GENERAL JOURNAL Page 1
№ Date Description PR Debit Credit
10 June 30 Utilities expense 300
Cash 300
to record utilities expense
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The Ledger contains the entire group of accounts maintained by a
company.
2. POSTING TO THE GENERAL LEDGER2. POSTING TO THE GENERAL LEDGER
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LEDGER AND CHART OF ACCOUNTS
The chart of accounts is a list of all accounts and includes anidentifying number for each account.
The chart of accounts is a list of all accounts and includes anidentifying number for each account.
Account Number Account Name Account Number Account Name1001 Cash 4301 Owner's withdrawal1201 Accounts receivable 5101 Revenues1601 Supplies 7101 Rental revenue1801 Prepaid insurance 7102 Salaries expense2001 Equipment 7103 Insurance expense
3101 Accounts payable 7104 Rent expense
3201 Unearned revenue 7105 Supplies expense4101 Owner's equity 7105 Utilities expense
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GENERAL JOURNAL Page 1№ Date Description PR Debit Credit
1 June 1 Cash 1001 20,000
Owner's equity 20,000
to record owner's investment
2 June 3 Equipment 9,000
Cash 9,000
to record purchasing equipment by cash
3 June 6 Cash 15,000
Notes payable 15,000
to record bank loan
Cash Acct. No. 1001
№ Date Explanation Ref. Debit Credit Balance
1 1-J un GJ 1 20,000 20,000
General Ledger
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GENERAL JOURNAL Page 1Date Description PR Debit Credit
June 1 Cash 20,000
Owner's equity 20,000
to record owner's investment
June 3 Equipment 9,000
Cash 9,000
to record purchasing equipment by cash
June 6 Cash 15,000
Notes payable 15,000
to record bank loan
Owner's capital Acct. No.
Date Explanation Ref. Debit Credit Balance
1-J un GJ 1 20,000 20,000
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CashOwner’s equity
(1) 20,000 20,000 (1)
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Trial Balance – a list of each account and its balance; used to prove equality of debit and credit balances.
3. TRIAL BALANCE3. TRIAL BALANCE
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Acct. No. Account Debit Credit
Cash 25,400$
Accounts receivable 5,200
Supplies 1,200
Equipment 9,000
Accounts payable 600$
Note payable 15,000
Owner's equity 20,000
Service revenue 7,500
Building rent expense 900
Salary expense 1,100
Utilities expense 300
43,100$ 43,100$
TRIAL BALANCE
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4. ADJUSTING ENTRIES4. 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.
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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.
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Identification of the Accounting Period
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TIME PERIOD PRINCIPLE
For reporting purposes, an organization’s life can be divided into separate accounting periodsmonths, quarters, years, etc.
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1 2 3 4 5 6 7 8 9 10 11 12
1 2 3 4
Annual
1 2
Month
Quarter
Semiannual
THE ACCOUNTING PERIOD
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The proper point in time to recognize
revenues.
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REVENUE RECOGNITION . . .
Revenue is generally recognized At the time services are
performed; or
When goods are sold and delivered to a customer.
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The proper point in time to recognize
expenses.
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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.
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Accrual Basis Accounting
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Revenue Recognition
Matching Principle
Accrual Basis Accounting
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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.
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An adjusting entry is recorded to bring an asset or liability account balance to
its proper amount.
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Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
Transactions where cash is paid orreceived before a related expense
or revenue is recognized.
FRAMEWORK FOR ADJUSTMENTS
Transactions where cash is paid orreceived after a related expense
or revenue is recognized.
Exh.3.4
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Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
FRAMEWORK FOR ADJUSTMENTS
Exh.3.4
Transaction where cash is paid before a related expense
is recognized.
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Here is the checkfor my first
6 months’ rent.
Resources paid for prior to
receiving the actual benefits.
Asset Expense
UnadjustedBalance
CreditAdjustment
DebitAdjustment
ADJUSTING PREPAID EXPENSES
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GENERAL JOURNAL Page 34Date Description PR Debit Credit
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Rent Expense 2,000
Prepaid Rent 2,000
to record monthly rent
ADJUSTING PREPAID EXPENSES
On December 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.
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Prepaid Rent Rent Expense12/1 $12,000 12/31 $2,00012/31 $2,000
ADJUSTING PREPAID EXPENSES
After posting, the accounts involved look like this:
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Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
FRAMEWORK FOR ADJUSTMENTS
Exh.3.4
Transaction where cash is received before a related
revenue is recognized.
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Buy your season tickets forall home basketball games NOW!
“GO SEAWOLVES”
ADJUSTING UNEARNED REVENUE
Cash received in advance of providing
products or services.
Liability RevenueUnadjusted
BalanceCredit
AdjustmentDebit
Adjustment
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GENERAL JOURNAL Page 34Date Description PR Debit Credit
Oct. 1 Cash 100,000
Unearned Basketball Revenue 100,000
Receipts for 1,000 season tickets
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:
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GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31
ADJUSTING UNEARNED REVENUE
On December 31, UAA has played 10 of its regular home games, winning 8
and losing 2.
Prepare the appropriate Adjusting Entry on December 31
Prepare the appropriate Adjusting Entry on December 31
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ADJUSTING UNEARNED REVENUE
On December 31, UAA has played 10 of its regular home games, winning 8
and losing 2.
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Unearned Basketball Revenue 50,000
Basketball Revenue 50,000
to recognize basketball revenue
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Unearned BasketballRevenue Basketball Revenue
10/1 $100,000 12/31 $50,00012/31 $50,000
ADJUSTING UNEARNED REVENUE
After posting, the accounts involved look like this
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Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
FRAMEWORK FOR ADJUSTMENTS
Exh.3.4
Transaction where cash is paid before a related expense
is recognized.
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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 Depreciation =
Asset Cost – Salvage Value
Useful Life
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69
ADJUSTING FOR DEPRECIATION2. Purchase an equipment for cash. The travel agency purchases equipment, paying cash of $9,000.
• Let’s compute depreciation expense for the year ended June 30, 2011.
2011 Depreciation Expense
=
$9,000 - $0
5
= $1,800/12=150. for month
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ADJUSTING FOR DEPRECIATION
Prepare the journal entry.
GENERAL JOURNAL Page 2Date Description PR Debit Credit
June 31 Depreciation Exp. 12,000
Accum. Depreciation 12,000
To record annual depreciation
Accumulated depreciation isa contra asset account.
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Equipment Depreciation Expense
6/3 $9,000 6/30 $150
Accumulated Depreciation
6/30 $150
ADJUSTING FOR DEPRECIATION
After posting, the accounts involved look like this:
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Kay Torres Co.LtdBalance Sheet
At June 30, 2011
Assets Cash . . .Equipment 9,000$ Less: accumulated deprec. (150) 8,850 . . .Total Assets
The equipment account is shown on
the balance sheet like
this.
ADJUSTING FOR DEPRECIATION
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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 2Date Description PR Debit Credit
June 30 Supplies expense 300
Supplies 300
To record supplies expence
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Supplies Supplies Expense
6/11 $1,200 6/30 $300
ADJUSTING FOR SUPPLIES
After posting, the accounts involved look like this:
$300 6/30
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Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
FRAMEWORK FOR ADJUSTMENTS
Exh.3.4
Transaction where cash is paid after a related expense
is recognized.
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Its accrued bank loan interest!
Costs incurred in a period that are
both unpaid and unrecorded.
ADJUSTING FOR ACCRUED EXPENSES
Expense LiabilityCredit
AdjustmentDebit
Adjustment
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06/05/11
06/30/11Month end
First paymentDate of interest
31/12/11
Record adjustingjournal entry.
ADJUSTING FOR ACCRUED EXPENSES
3. Borrow cash from the bank. The travel agency borrows $15,000 cash from the bank and signs a 2 year note payable to the bank. Interest rate 12%. Must pay at the end year.
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ADJUSTING FOR ACCRUED EXPENSES
GENERAL JOURNAL Page 34Date Description PR Debit Credit
June 30 Interest expense 150
Interest payable 150
to record interest accrual
3. Borrow cash from the bank. The travel agency borrows $15,000 cash from the bank and signs a 2 year note payable to the bank. Interest rate 12%. Must pay at the end year.
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Interest Expense Interest Payable06/30 $150 06/30 $150
ADJUSTING FOR ACCRUED EXPENSES
After posting, the accounts involved will look like this . . .
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Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
FRAMEWORK FOR ADJUSTMENTS
Exh.3.4
Transaction where cash is received after a related revenue is recognized.
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Yes, you can pay mefor your tax return
when I finish the work.
ADJUSTING FOR ACCRUED REVENUES
Revenues earned in a period that
are both unrecorded and not yet received.
Asset Revenue
CreditAdjustment
DebitAdjustment
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Smith & 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.
ADJUSTING FOR ACCRUED REVENUES
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Accounts Receivable 31,200
Service Revenues 31,200
Revenues earned but not received
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Exh.3.18
CategoryBefore Adjusting
Adjusting EntryB/S I/S
Prepaid Expense
Asset ExpenseDr. Expense Cr. Asset
Unearned Revenue Liability Revenue
Dr. Liability Cr. Revenue
Accrued Expenses
Liability ExpenseDr. Expense Cr. Liability
Accrued Revenues Asset Revenue
Dr. Asset Cr. Revenue
Exhibit 3.18
Summary of Adjustments and
Financial Statement Links
Overstated
Understated
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A multiple-column form used in preparing financial statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.
USING A WORKSHEETUSING A WORKSHEET
LO 1 Prepare a worksheet.
Worksheet
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STEPS IN PREPARING A WORKSHEETSTEPS IN PREPARING A WORKSHEET
Illustration 4-2
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Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 Accounts Receivable 5,200 Supplies 1,200 Equipment 9,000 Accumulated DepreciationAccounts Payable 600 Notes payable 15,000 Owner's equity 20,000 Service Revenue 7,500 Salaries Expense 1,100 Rent expense 900 Utilities expense 300
Totals 43,100 43,100
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
1. Prepare a Trial Balance on the Worksheet
Trial balance amounts come directly from ledger accounts.
Include all accounts with balances.
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Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 Accounts Receivable 5,200 Supplies 1,200 a. 300Equipment 9,000 Accumulated Depreciation b. 150Accounts Payable 600 Notes payable 15,000 Owner's equity 20,000
Service Revenue 7,500 Salaries Expense 1,100 Rent expense 900 Utilities expense 300
Totals 43,100 43,100
Supplies expense a. 300Depr. Expense b. 150Interest expense c. 150
Interest payable c. 150Totals 600 600
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
2. Enter the Adjustments in the Adjustments Columns
Add additional accounts as needed.
Enter adjustment amounts, total adjustments columns,and check for equality.
Adjustments Key:(a) Supplies used.(b) Depreciation
expense.(c) Interest expense
accrued
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Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 24,400 24,400 Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000 Accumulated Depreciation b. 150 150 Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Owner's withdrawal 1,000 1,000 Service Revenue 7,500 7,500 Salaries Expense 1,100 1,100 Rent expense 900 900 Utilities expense 300 300
Totals 43,100 43,100
Supplies expense a. 300 300 Depr. Expense b. 150 150 Interest expense c. 150 150
Interest payable c. 150 150 Totals 600 600 43,400 43,400
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
3. Complete the Adjusted Trial Balance Columns
Total the adjusted trial balance columns and check for equality.
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Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000 Accumulated Depreciation b. 150 150 Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Service Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100 Rent expense 900 900 900 Utilities expense 300 300 300
Totals 43,100 43,100
Supplies expense a. 300 300 300 Depr. Expense b. 150 150 150 Interest expense c. 150 150 150
Interest payable c. 150 150 Totals 600 600 43,400 43,400 2,900 7,500
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
4. Extend Amounts to Financial Statement Columns
Extend all asset, liability, and equity account balances to the balance sheet columns.
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Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000 Accumulated Depreciation b. 150 150 Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Retained EarningsService Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100 Rent expense 900 900 900 Utilities expense 300 300 300
Totals 43,100 43,100
Supplies expense a. 300 300 300 Depr. Expense b. 150 150 150 Interest expense c. 150 150 150
Interest payable c. 150 150 Totals 600 600 43,400 43,400 2,900 7,500 Income before tax 4,600 Income tax expense 460
Net Income 4,140
Total 7,500 7,500
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
5. Total Columns, Compute Net Income (Loss)
Compute Net Income or Net Loss.
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Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 25,400 Accounts Receivable 5,200 5,200 5,200 Supplies 1,200 a. 300 900 900 Equipment 9,000 9,000 9,000 Accumulated Depreciation b. 150 150 150 Accounts Payable 600 600 600 Notes payable 15,000 15,000 15,000 Owner's equity 20,000 20,000 20,000
Retained Earnings 4,140 Service Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100 Rent expense 900 900 900 Utilities expense 300 300 300
Totals 43,100 43,100
Supplies expense a. 300 300 300 Depr. Expense b. 150 150 150 Interest expense c. 150 150 150
Interest payable c. 150 150 150 Totals 600 600 43,400 43,400 2,900 7,500 Income before Tax 4,600 Income tax expense 460
Net Income 4,140 460 Tax payable
Total 7,500 7,500 40,500 40,500
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
5. Total Columns, Compute Net Income (Loss)
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BALANCE SHEET
INCOME STATEMENT
STATEMENT OF OWNER’S EQUITY
STATEMENT OF CASH FLOW
FINANCIAL STATEMENTS
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Kay Torres Co.ltdIncome Statement
For the Month Ended June 30, 2011Revenues:Service revenue 7,500$ Total revenues 7,500 Operating expenses: Depr. expense - Equip. 150$ Rent expense 900$ Salaries expense 1,100 Supplies expense 300 Interest expense 150 Utilities expense 300 Total expenses 2,900 Net income 4,600$
Prepare the Income
Statement.
PREPARE THE FINANCIAL STATEMENTS
A work sheet does
not substitute
for financial statements.
A work sheet does
not substitute
for financial statements.
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Prepare the Statement of Changes in Owner’s Equity.
Kay Torres Co.ltdStatement of Changes in Owner's Equity
For the Month Ended June 30, 2011
Owner's equity 6/1/2011 $ -0-Add: Net income 4,140$ Investment by owner 20,000 24,140 Total 24,140 Less: Withdrawal by owner - Owner's equity 6/30/2011 24,140$
Kay Torres Co.ltdIncome Statement
For the Month Ended June 30, 2011Revenues:Service revenue 7,500$ Total revenues 7,500 Operating expenses: Depr. expense - Equip. 150$ Rent expense 900$ Salaries expense 1,100 Supplies expense 300 Interest expense 150 Utilities expense 300 Total expenses 2,900 Income before Tax 4,600$ Income Tax Expense 460Net Income 4140
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Kay Torres Co.ltdBalance Sheet
30-Jun-11
AssetsCash 25,400$ Accounts receivable 5,200 Supplies 900 Equipment 9,000$ Less: accum. depr. (150) 8,850 Total assets 40,350$
LiabilitiesAccounts payable 600$ Notes payable 15,000 Income tax payable 460 Interest payable 150 Total liabilities 16,210$
Owner's EquityOwner,s equity 20,000 Retained earnings 4,140 Total Owner's Equity 24,140 Total liabilities and equity 40,350$
Prepare the Balance Sheet.
Kay Torres Co.ltdStatement of Changes in Owner's Equity
For the Month Ended June 30, 2011
Owner's equity 6/1/2011 $ -0-Add: Net income 4,140$ Investment by owner 20,000 24,140 Total 24,140 Less: Withdrawal by owner - Owner's equity 6/30/2011 24,140$
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At the end of the accounting period, the company makes the accounts ready for the next period.
CLOSING THE BOOKSCLOSING THE BOOKS
LO 2 Explain the process of closing the books.
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Closing entries formally recognize, in the general ledger, the transfer of
Income tax expense to Tax payable
Net income to Retained earnings.
CLOSING THE BOOKSCLOSING THE BOOKS
LO 2 Explain the process of closing the books.
Closing entries are only at the end of the annual accounting period.
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Let’s see how the closing
process works!
RECORDING CLOSING ENTRIES
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Tax payable.
4 Close income Summary account to Retained Earnings
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Tax payable.
4 Close income Summary account to Retained Earnings
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Balances before closing.
Income Summary Service revenue7,500
7,500
CLOSING PROCESS
Revenue Accounts7,500 7,500
-
Income Summary7,500
7,500
Close Revenue accounts to
Income Summary.
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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
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Income Summary1,100 7,500
900 300300150150460
4,1400
Tax payable460
460
Close Expense accounts to
Income Summary.
Salary expense 1,100 1,100
-
CLOSING PROCESS
Rent expense900 900
-
Utitilies expense300 300
-
Supplies expense300 300
-
Depreciation expense150 150
-
Interest expense150 150
-
Retained earnings4,140
4,140
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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
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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
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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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