Welcome to AB113
Accounting For Non-Majors
Unit 4
Professor David Levenstam
Unit 4 Seminar
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Welcome to AB113
Accounting For Non-Majors
Unit 4
Professor David Levenstam
Unit 4 Seminar
AB113 Unit 4
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Reading, Help & Contact
•
•
•
•
Reading: Survey of Accounting, Chapter 3
Author: Warren
Tech Support 866-522-7747 (or free online)
Contact info:
– Email: DLevenstam@kaplan.edu
– AIM: LFCCEconinstruct (sign up for AIM at
http://www.aim.com)
– Office Hours: Wednesdays 8-10 pm ET
• When emailing, please include your full
name & course number (AB113)
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This Week’s Assignments
• Discussion (Don’t forget to post your initial
response by Saturday! :-))
• Quiz (You can take only once.)
• Homework Assignment:
• Submit to Dropbox
• We have an Excel template in Doc Sharing
for each homework set
• Templates show you wrong answers (*) :-)
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Quiz
• Weeks 2-9.
• 8 worth 20 each for a total of 160 (16% of your
grade)
• 10 multiple-choice questions
• You can take it only once
• You have 1 hour
• You can see the results 7 days after a quiz
closes
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Please Read the
Announcements! :-)
• Located on the Course Home page
• Contain important administrative and
accounting material
• Please check the announcements and the
syllabus first for administrative questions
you might have
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Please Read My “Hi Students”
Posts! :-)
• Typically located early on the board
• Occasionally come later too
• Could say “Hi Class” or “Warning,
Warning, Danger, Will Robinson!!” :-D
• Please give my tired old eyes a break and
LABEL your multi-part answers! :-)
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Jing Links and Scripts
• To help you with the homework the course leads have
created some voice presentations called Jings. You can
find all the Jings in Doc Sharing by downloading the file
named AC113-AB113 Jing Links.docx.
• After downloading, click on the link for this week’s
chapter to see and hear the presentation.
• You can also download a script of each week’s
presentation so that you can read the spoken words from
the presentation later without reviewing the whole Jing
presentation. For this week you can download AC113AB113 Jing Chapter 4 Script.docx.
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Accrual Basis
Accounting
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What is GAAP?
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What Is GAAP?
Inexpensive clothing store
Oh wait, that’s GAP. :-)
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What Is GAAP?
Generally Accepted
Accounting Principles
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Why does GAAP require the
use of accrual basis
accounting rather than cash
basis?
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Why does GAAP require the use of accrual basis
accounting rather than cash basis?
Adjustments at end of period
to follow several interrelated
core accounting principles
(some mentioned in Chapter 1)
included in GAAP:
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1. Periodicity
To make accounting information
meaningful and comparable, we divide
it into regular periods: months, quarters
or years.
In Renaissance Italy, by contrast, where people invented
double-entry bookkeeping, a merchant often accounted for
each sailing journey not in regular periods, but at the end,
when the vessel returned from its journey.
Our authors refer to periodicity as the accounting period
concept.
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2. Matching Principle
Under the matching principle we match the
benefits from the business (i.e. the revenues) to
the period in which we earned them. We match
the efforts of the business (i.e. expenses) to the
benefits that the efforts earn.
Where we can’t match an expense to a benefit we
match the effort to the period in which we incurred
it (such as when an oil company drills a dry hole).
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3. Revenue Recognition
In order to match revenue to the period in
which we earned it, we record (accrue)
revenue when we earn it rather than
when the customer pays for it.
If a customer purchases goods (or services) from the
business on credit, for instance, we record, or recognize,
the revenue at the time of the purchase, even if the
customer pays in the next period.
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Because the rest of AB113, and indeed
most financial accounting in general,
uses accrual based accounting, it’s
critical that you understand the
material in Chapter 3.
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What are five general
categories of accounts
requiring adjusting entries
at the end of a period?
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What are five general categories of accounts requiring
adjusting entries at the end of a period?
1. Prepaid Expenses (assets)
2. Unearned Revenues (liabilities)
3. Accrued Revenues (assets)
4. Accrued Expenses (liabilities)
5. Depreciation (an expense and a
contra-asset account)
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What Are Prepaid Expenses?
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1. Prepaid Expenses
Pay in advance for an expense that benefits more
than one period, debit an asset called Prepaid
(Something) Expense.
Example: pay 2 years’ worth of rent up front
(perhaps to get a lower rate), debit the whole
amount to Prepaid Rent.
End of Year 1 adjustment : remove first year’s
portion of the rent from Prepaid Rent and put it in
Rent Expense.
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1. Prepaid Expenses, continued
End of year adjusting entry transfers the first year’s
rent from Prepaid Rent to Rent Expense.
(since we’ve gotten the benefit of first year’s rent).
A prepaid expense is an asset (because it has
future value, in this case, the use of the building in
the future).
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What are Unearned
Revenues?
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2. Unearned Revenues
If you were accounting for the business that leased the building to the
business in my example in number 1:
Record the advance rent payment as a credit to
Unearned Rent.
End of the year adjustment :
Transfer the first year’s portion
from Unearned Rent to
credit Rent (or Rent Revenue)
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2. Unearned Revenues, continued
End of the year adjustment :
Transfer the first year’s portion
from Unearned Rent to
credit Rent (or Rent Revenue)
Unearned revenue is a liability (because it
obligates us to something—in this case, to let the
lessee use the building—in a future period).
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What Are Accrued Revenues?
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3. Accrued Revenues
Perform services or ship goods without
getting paid yet: accrue the earned but
unpaid revenue
Unpaid lawyer’s fee: lawyer must accrue
revenue. Adjustment:
Add amount to Accounts Receivable and
Fee Revenue (or Fees Earned, or just Fees)
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3. Accrued Revenues, continued
Unpaid lawyer’s fee: lawyer must accrue
revenue
Adjustment:
Add amount to Accounts Receivable and
Fee Revenue (or Fees Earned, or just Fees)
Accrued revenue is an asset (because it
has future value—customer will pay later)
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What Is An Accrued
Expense?
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4. Accrued Expenses
Receive goods or services without
paying for them yet, accrue the
incurred but unpaid expense.
Example: End of year owe your
employees for the work they’ve
done since last pay day
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4. Accrued Expenses, continued
Example: End of year owe your
employees for the work they’ve
done since the last pay day
Accrue unpaid wages
Adjustment: add amount to Wages
Expense & Wages Payable
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4. Accrued Expenses, continued again :-)
Accrue unpaid wages
Adjustment: add amount to Wages
Expense & Wages Payable
Accrued expenses are liabilities
(because they represent an
obligation to pay in a future period)
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What Is Depreciation?
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5. Depreciation
Depreciation is the systematic
and rational allocation of a
portion of the cost of an asset to
each period the asset benefits.
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5. Depreciation 2
Example: A delivery truck may benefit
the company for 5 years.
We don’t expense the whole truck in Year
1.
We expense part of the cost in each of
the 5 years of the truck’s life.
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5. Depreciation 3
Depreciation follows both the periodicity
and matching principles.
(They’re the same reasons we set up prepaid expenses as
assets instead of expensing prepaid assets all in the year
of payment.)
We use depreciation for long-term assets
like buildings and equipment.
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5. Depreciation 4
LAND
Since land has an unlimited or indefinite
useful life, we don’t depreciate it, but
keep the cost as an asset.
Exception: Use land for extractive industry,
(oil & gas, coal mining, etc.): land declines in
usefulness, we expense over estimated
useful life: Depletion
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5. Depreciation 5
Chapter 7 (Unit 8) deals with depreciation (and
depletion)
For now the authors calculate it for you
Adjustment for depreciation:
+ Depreciation Expense (-Equity)
+ Accumulated Depreciation (-Asset)
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5. Depreciation 6
Accumulated Depreciation is a contraasset account.
(Contra: opposite balance)
Accumulated Depreciation is thus a
negative asset account
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5. Depreciation 7
Depreciation is NOT an attempt to value
the asset.
We use depreciation merely to allocate the
historical cost of the fixed asset to each of
the years of income it helps produce
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E3-1
a. Owner invested $20,000 for capital stock.
b. Paid $7,200 on May 1 for 1-year insurance policy.
c. Purchased supplies on account, $1,200.
d. Received fees of $32,500 during May.
e. Paid expenses as follows: wages $8,000; rent $2,500;
utilities $1,000; miscellaneous $850.
f. Paid dividends to owner of $3,000.
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E3-1 (a)
a. Owner invested $20,000 for capital stock.
Which accounts?
Which financial statements?
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E3-1 (a)
a. Owner invested $20,000 for capital stock.
Cash +$20,000 (Asset)
Capital Stock + $20,000 (Equity)
Balance Sheet
Statement of Cash Flows (Financing)
+$20,000
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E3-1 (b)
b. Paid $7,200 on May 1 for 1-year insurance policy.
Which accounts?
Which financial statements?
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E3-1 (b)
b. Paid $7,200 on May 1 for 1-year insurance policy.
Cash -$7,200 (Asset)
Prepaid Insurance +$7,200 (Asset)
Balance Sheet
Statement of Cash Flows (Operating)
-$7,200
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E3-1 (c)
c. Purchased supplies on account, $1,200.
Which accounts?
Which financial statements?
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E3-1 (c)
c. Purchased supplies on account, $1,200.
Supplies +$1,200 (Asset)
Accounts Payable +$1,200 (Liability)
Balance Sheet
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E3-1 (d)
d. Received fees of $32,500 during May.
Which accounts?
Which financial statements?
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E3-1 (d)
d. Received fees of $32,500 during May.
Cash +$32,500 (Asset)
Fees Earned +$32,500 (Revenue = +Equity)
Balance Sheet
Income Statement +$32,500
Statement of Cash Flows (Operating)
+$32,500
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E3-1 (e)
e. Paid expenses as follows: wages $8,000; rent $2,500;
utilities $1,000; miscellaneous $850.
Which accounts?
Which financial statements?
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E3-1 (e)
e. Paid expenses as follows: wages $8,000; rent $2,500;
utilities $1,000; miscellaneous $850.
Cash -$12,350 (Asset)
Wages Expense, Rent Expense, Utilities Expense, Miscellaneous
Expense,
total +$12,350 (Expenses = -Equity)
Balance Sheet
Income Statement -$12,350
Statement of Cash Flows (Operating)
-$12,350
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E3-1 (f)
f. Paid dividends to owner of $3,000.
Which accounts?
Which financial statements?
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E3-1 (f)
f. Paid dividends to owner of $3,000.
Cash -$3,000 (Asset)
Retained Earnings -$3,000 (Equity)
Balance Sheet
Statement of Cash Flows (Financing)
-$3,000
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E3-1 Balances
What Balances Do We Have in
Our Accounts?
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Assets
=
Prepaid
Cash
+
Supplies
+
Insurance
a.
$20,000
b.
(7,200)
$7,200
Bal.
12,800
7,200
c.
12,800
d.
32,500
Bal.
45,300
e.
+
Accounts
=
Payable
Stockholders' Equity
Capital
+
Stock
32,950
f.
(3,000)
Bal.
29,950
+
Earnings
1,200
20,000
$1,200
7,200
1,200
20,000
$32,500
1,200
7,200
1,200
20,000
(12,350)
Bal.
Retained
$20,000
$1,200
Bal.
Liabilities
32,500
(12,350)
1,200
7,200
1,200
20,000
20,150
(3,000)
1,200
7,200
1,200
20,000
17,150
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E3-2
Make End-of-Month Adjustments For
a1. Insurance Expired
a2. Supplies Used
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E3-2 (a1)
a1. Insurance Expired
Which accounts?
Which financial statements?
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E3-2 (a1)
a1. Insurance Expired
We paid $7,200 for 1 year. We used 1 month:
$7,200/12 = $600 used.
Prepaid Insurance -$600 (Asset)
Insurance Expense +$600 (Expense = -Equity)
Balance Sheet
Income Statement -$600
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E3-2 (a2)
a2. Supplies Used
Which accounts?
Which financial statements?
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E3-2 (a2)
a2. Supplies Used
We started with $1,200. We finished with $650.
$1,200 - $650 = $550 used.
Supplies -$550 (Asset)
Supplies Expense +$550 (Expense = -Equity)
Balance Sheet
Income Statement -$550
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E3-2 Balances
What Balances Do We Have in
Our Accounts After
Adjustments?
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Assets
= Liabilities
Prepaid
Cash
+
Supplies
+
Insurance
a.
$20,000
b.
(7,200)
$7,200
Bal.
12,800
7,200
c.
12,800
d.
32,500
Bal.
45,300
e.
32,950
f.
(3,000)
Bal.
29,950
1,200
+
Stock
a2.
$1,200
7,200
1,200
20,000
1,200
7,200
1,200
20,000
32,500
(12,350)
1,200
7,200
1,200
20,000
20,150
(3,000)
1,200
7,200
1,200
20,000
1,200
6,600
$650
17,150
(600)
1,200
20,000
(550)
$29,950
+ Earnings
20,000
(600)
29,950
Retained
$32,500
a1.
Bal.
= Payable
Capital
(12,350)
Bal.
Bal.
Accounts
Stockholders' Equity
$20,000
$1,200
Bal.
+
16,550
(550)
$6,600
$1,200
$20,000
$16,000
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Questions? :-)
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