Financial Accounting & Information
System (2)
Session Objectives:
•Quiz
•Last
Session Recap
•Accounting Adjustments
•Case Study C3_Basis for bookkeeping….
•Closing & Classified Financial Statements
•Course Instructions (using Wikispaces.com)
•Closer look to annual report(s)
By M Asif Jaffer
Chapter
2-1
1
Financial Accounting & Information
System
Recap (Session-1):
•Accounting
Books, General Journal & General Ledger
•Rules of Debits & Credits
ADE +++
LCR - - On LHS (Debit)
ADE - - LCR +++
•The Ledger ‘ T ‘ Accounts
•Chart of Accounts (Account Numbering)
•Trial Balance
•Financial Statements
Chapter
2-2
On RHS (Credit)
2
By M Asif Jaffer
Adjusting the
Accounts
Chapter
2-3
Accounting Principles, Ninth Edition
Study Objectives
1.
Explain the time period assumption.
2. Explain the accrual basis of accounting.
3. Explain the reasons for adjusting entries.
4. Identify the major types of adjusting entries.
5. Prepare adjusting entries for deferrals.
6. Prepare adjusting entries for accruals.
7. Describe the nature and purpose of an adjusted
trial balance.
Chapter
2-4
Adjusting the Accounts
Timing Issues
Chapter
2-5
The Basics of
Adjusting Entries
Fiscal and
calendar years
Types of adjusting
entries
Accrual- vs. cashbasis accounting
Adjusting entries
for deferrals
Recognizing
revenues and
expenses
Adjusting entries
for accruals
Summary of
journalizing and
posting
The Adjusted Trial
Balance and
Financial
Statements
Preparing the
adjusted trial
balance
Preparing
financial
statements
Timing Issues
Accountants divide the economic life of a
business into artificial time periods
(Time Period Assumption).
Jan.
Feb.
Mar.
Apr.
. . . . .
Dec.
Generally a month, a quarter, or a year.
Fiscal year vs. calendar year
Also known as the “Periodicity Assumption”
Chapter
2-6
SO 1 Explain the time period assumption.
Timing Issues
Review
The time period assumption states that:
a. revenue should be recognized in the accounting
period in which it is earned.
b. expenses should be matched with revenues.
c.
the economic life of a business can be divided
into artificial time periods.
d. the fiscal year should correspond with the
calendar year.
Chapter
2-7
SO 1 Explain the time period assumption.
Timing Issues
Accrual- vs. Cash-Basis Accounting
Accrual-Basis Accounting
Transactions recorded in the periods in which
the events occur
Revenues are recognized when earned, rather
than when cash is received.
Expenses are recognized when incurred, rather
than when paid.
Chapter
2-8
SO 2 Explain the accrual basis of accounting.
Timing Issues
Accrual- vs. Cash-Basis Accounting
Cash-Basis Accounting
Revenues are recognized when cash is received.
Expenses are recognized when cash is paid.
Cash-basis accounting is not in accordance with
generally accepted accounting principles (GAAP).
Chapter
2-9
SO 2 Explain the accrual basis of accounting.
Timing Issues
Accrual Basis of Recognizing Revenues
and Expenses
Revenue Recognition Principle
Companies recognize
revenue in the accounting
period in which it is
earned.
In a service enterprise,
revenue is considered to
be earned at the time the
service is performed.
Chapter
2-10
Or goods delivered in trading
SO 2 Explain the accrual basis of accounting.
concern
Timing Issues
Recognizing Revenues and Expenses
Matching Principle
Match expenses with
revenues in the period
when the company makes
efforts to generate
those revenues.
“Let the expenses follow
the revenues.”
Chapter
2-11
SO 2 Explain the accrual basis of accounting.
Timing Issues
GAAP relationships
in revenue and
expense recognition
Illustration 3-1
Non-compliance
Worldcom
scandal
Chapter
2-12
SO 2 Explain the accrual basis of accounting.
Chapter
2-13
SO 2 Explain the accrual basis of accounting.
Timing Issues
Review
One of the following statements about the accrual basis
of accounting is false. That statement is:
a. Events that change a company’s financial
statements are recorded in the periods in which
the events occur.
b. Revenue is recognized in the period in which it is
earned.
c. The accrual basis of accounting is in accord with
generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and
expenses are recorded only when cash is paid.
Chapter
2-14
SO 2 Explain the accrual basis of accounting.
The Basics of Adjusting Entries
Adjusting entries make it possible to report
correct amounts on the balance sheet and on
the income statement.
A company must make adjusting entries
every time it prepares financial statements.
Chapter
2-15
SO 3 Explain the reasons for adjusting entries.
The Basics of 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.
Chapter
2-16
SO 3 Explain the reasons for adjusting entries.
Timing Issues
Review
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which
they are incurred.
b. revenues are recorded in the period in which
they are earned.
c. balance sheet and income statement accounts
have correct balances at the end of an
accounting period.
d. all of the above.
Chapter
2-17
SO 3 Explain the reasons for adjusting entries.
Timing Issues
Starting with expenses, there may be three timing
scenarios for incurrence and payment of
expense
Example
Expense related to February paid in February
(no timing difference, no adjusting entry required)
Expense related to February paid in January
(Prepaid Scenario, adjusting entry required)
Expense related to February paid in March
(Accrual Scenario, adjusting entry required)
Chapter
2-18
SO 3 Explain the reasons for adjusting entries.
Timing Issues
So for Revenues, there may be three timing
scenarios for earning and receipt of expense
Example
Revenue related to February received in February
(no timing difference, no adjusting entry required)
Revenue related to February received in January
(Unearned Scenario, adjusting entry required)
Expense related to February received in March
(Accrual Scenario, adjusting entry required)
Chapter
2-19
SO 3 Explain the reasons for adjusting entries.
Types of Adjusting Entries
Illustration 4-2
Categories of adjusting entries
Deferrals
Accruals
1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.
3. Accrued Revenues.
Revenues earned but not
yet received in cash or
recorded.
2. Unearned Revenues.
Revenues received in cash
and recorded as liabilities
before they are earned.
4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or
recorded.
Chapter
2-20
SO 4 Identify the major types of adjusting entries.
Trial Balance
Trial Balance – Each account is analyzed to determine whether
it is complete and up-to-date.
Illustration 3-3
Chapter
2-21
SO 4 Identify the major types of adjusting entries.
Adjusting Entries for Deferrals
Deferrals are either:
Prepaid expenses
OR
Unearned revenues.
Chapter
2-22
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Payment of cash that is recorded as an asset because
service or benefit will be received in the future.
Cash Payment
BEFORE
Expense Recorded
Prepayments often occur in regard to:
insurance
supplies
advertising
Chapter
2-23
rent
maintenance on equipment
fixed assets (depreciation)
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Prepaid Expenses
Costs that expire either with the passage of time
or through use.
Adjusting entries (1) to record the expenses that
apply to the current accounting period, and (2) to
show the unexpired costs in the asset accounts.
Chapter
2-24
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Adjusting entries for prepaid expenses
Illustration 3-4
Increases (debits) an expense account and
Decreases (credits) an asset account.
Chapter
2-25
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Illustration: Pioneer Advertising Agency purchased advertising
supplies costing $2,500 on October 5. Sierra recorded the
payment by increasing (debiting) the asset Advertising Supplies.
This account shows a balance of $2,500 in the October 31 trial
balance. An inventory count at the close of business on October
31 reveals that $1,000 of supplies are still on hand.
Oct. 31
Advertising supplies expense
Advertising supplies
1,500
1,500
Illustration 3-5
Chapter
2-26
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Illustration: On October 4, Pioneer Advertising Agency paid
$600 for a one-year fire insurance policy. Coverage began on
October 1. Pioneer recorded the payment by increasing (debiting)
Prepaid Insurance. This account shows a balance of $600 in the
October 31 trial balance. Insurance of $50 ($600 / 12) expires
each month.
Oct. 31
Insurance expense
Prepaid insurance
50
50
Illustration 3-6
Chapter
2-27
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Depreciation
Buildings, equipment, and vehicles (long-lived
assets) are recorded as assets, rather than an
expense, in the year acquired.
Companies report a portion of the cost of a longlived asset as an expense (depreciation) during
each period of the asset’s useful life (Matching
Principle).
Chapter
2-28
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Illustration: Pioneer Advertising estimates depreciation on the
office equipment to be $480 a year, or $40 per month.
Oct. 31
Depreciation expense
Accumulated depreciation
40
40
Illustration 3-7
Chapter
2-29
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Depreciation (Statement Presentation)
Accumulated Depreciation is a contra asset account.
Appears just after the account it offsets
(Equipment) on the balance sheet.
Illustration 3-8
Chapter
2-30
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses”
Summary
Chapter
2-31
Illustration 3-9
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Revenues”
Receipt of cash that is recorded as a liability because
the revenue has not been earned.
Cash Receipt
BEFORE
Revenue Recorded
Unearned revenues often occur in regard to:
rent
airline tickets
school tuition
Chapter
2-32
magazine subscriptions
customer deposits
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Revenues”
Unearned Revenues
Company makes an adjusting entry to record the
revenue that has been earned and to show the
liability that remains.
The adjusting entry for unearned revenues results
in a decrease (a debit) to a liability account and an
increase (a credit) to a revenue account.
Chapter
2-33
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Revenues”
Adjusting entries for unearned revenues
Illustration 3-10
Decrease (a debit) to a liability account and
Increase (a credit) to a revenue account.
Chapter
2-34
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Revenues”
Illustration: Pioneer Advertising Agency received $1,200 on
October 2 from R. Knox for advertising services expected to be
completed by December 31. Unearned Service Revenue shows a
balance of $1,200 in the October 31 trial balance. Analysis reveals
that the company earned $400 of those fees in October.
Oct. 31
Unearned service revenue
Service revenue
400
400
Illustration 3-11
Chapter
2-35
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Revenues”
Summary
Illustration 3-12
Chapter
2-36
SO 5 Prepare adjusting entries for deferrals.
Chapter
2-37
SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for Accruals
Made to record:
Revenues earned and
OR
Expenses incurred
in the current accounting period that have not
been recognized through daily entries.
Chapter
2-38
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”
Revenues earned but not yet received in cash or
recorded.
Adjusting entry results in:
Revenue Recorded
BEFORE
Cash Receipt
Accrued revenues often occur in regard to:
rent
interest
services performed
Chapter
2-39
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”
Accrued Revenues
An adjusting entry serves two purposes:
(1) It shows the receivable that exists, and
(2) It records the revenues earned.
Chapter
2-40
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”
Adjusting entries for accrued revenues
Illustration 3-13
Increases (debits) an asset account and
Increases (credits) a revenue account.
Chapter
2-41
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”
Illustration: In October Pioneer Advertising Agency earned
$200 for advertising services that had not been recorded.
Oct. 31
Accounts Receivable
Service Revenue
200
200
Illustration 3-14
Chapter
2-42
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”
Summary
Illustration 3-15
Chapter
2-43
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”
Expenses incurred but not yet paid in cash or
recorded.
Adjusting entry results in:
Expense Recorded
BEFORE
Cash Payment
Accrued expenses often occur in regard to:
rent
interest
Chapter
2-44
taxes
salaries
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) It recognizes the expenses.
Chapter
2-45
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”
Adjusting entries for accrued expenses
Illustration 3-16
Increases (debits) an expense account and
Increases (credits) a liability account.
Chapter
2-46
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”
Illustration: Pioneer Advertising Agency signed a three-month
note payable in the amount of $5,000 on October 1. The note
requires Pioneer to pay interest at an annual rate of 12%.
Illustration 3-17
Oct. 31
Interest expense
Interest payable
50
50
Illustration 3-18
Chapter
2-47
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”
Illustration: Pioneer Advertising Agency last paid salaries on
October 26; the next payment of salaries will not occur until
November 9. The employees receive total salaries of $2,000 for a
five-day work week, or $400 per day. Thus, accrued salaries at
October 31 are $1,200 ($400 x 3 days).
Oct. 31
Salaries expense
1,200
Salaries payable
1,200
Illustration 3-20
Chapter
2-48
SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”
Summary
Illustration 3-21
Chapter
2-49
SO 6 Prepare adjusting entries for accruals.
The Adjusted Trial Balance
After all adjusting entries are journalized and posted
the company prepares another trial balance from the
ledger accounts (Adjusted Trial Balance).
Its purpose is to prove the equality of debit balances
and credit balances in the ledger.
Chapter
2-50
SO 7 Describe the nature and purpose of an adjusted trial balance.
The Adjusted Trial Balance
Chapter
2-51
The Adjusted Trial Balance
Review Question
Which of the following statements is incorrect concerning
the adjusted trial balance?
a. An adjusted trial balance proves the equality of the
total debit balances and the total credit balances in
the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis
for the preparation of financial statements.
c. The adjusted trial balance lists the account balances
segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the
adjusting entries have been journalized and posted.
Chapter
2-52
SO 7
Describe the nature and purpose of an adjusted trial balance.
Preparing Financial Statements
Financial Statements are prepared directly from the
Adjusted Trial Balance.
Balance
Sheet
Chapter
2-53
Income
Statement
Owner’s
Equity
Statement
SO 7 Describe the nature and purpose of an adjusted trial balance.
Preparing Financial Statements
Illustration 3-25
Preparation of
the income
statement and
owner’s
equity statement
from the
adjusted trial
balance
Chapter
2-54
Preparing Financial Statements
Illustration 3-26
Chapter
2-55
Alternative Treatment of Prepaid Expenses
and Unearned Revenues
Some companies use an alternative treatment
for prepaid expenses and unearned revenues.
When a company prepays an expense, it debits
that amount to an expense account.
Chapter
2-56
When a company receives payment for future
services, it credits the amount to a revenue
account.
Study for
understanding but
leave from official
course
SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Alternative Treatment for “Prepaid Expenses”
Illustration: Pioneer Advertising purchased supplies on
October 5 for $2,500 and debited Advertising
Supplies Expense for the full amount. What if an inventory
of $1,000 of advertising supplies remains on October 31?
Oct. 31
Advertising supplies
1,000
Advertising supplies expense
1,000
Illustration 3A-1
Chapter
2-57
SO 8 Prepare adjusting entries
Study for
understanding but
leave from official
course
for the alternative treatment of deferrals.
Alternative Treatment for “Prepaid Expenses”
Adjustment approaches—a comparison
Illustration 3A-2
Chapter
2-58
SO 8 Prepare adjusting entries
Study for
understanding but
leave from official
course
for the alternative treatment of deferrals.
Alternative Treatment for “Unearned Revenues”
Illustration: Assume that Pioneer Advertising received
$1,200 for future services on October 2 and credited the
entire amount to Service Revenue. If at the statement
date Pioneer has not performed $800 of the services, it
would make an adjusting entry.
Oct. 31
Service revenue
800
Unearned service revenue
800
Illustration 3A-4
Chapter
2-59
SO 8 Prepare adjusting entries
Study for
understanding but
leave from official
course
for the alternative treatment of deferrals.
Alternative Treatment for “Unearned Revenues”
Adjustment approaches—a comparison
Illustration 3A-5
Chapter
2-60
SO 8 Prepare adjusting entries
Study for
understanding but
leave from official
course
for the alternative treatment of deferrals.
Summary of Additional Adjustment Relationships
Illustration 3A-7
Chapter
2-61
SO 8 Prepare adjusting entries
Study for
understanding but
leave from official
course
for the alternative treatment of deferrals.
Financial Accounting & Information
System (2)
Case Study C3_Basis for bookkeeping
and Financial Statements
By M Asif Jaffer
Chapter
2-62
62
Chapter
4
Completing the
Accounting Cycle
Chapter
2-63
Accounting Principles, Ninth Edition
Study Objectives
1.
Prepare a worksheet.
2. Explain the process of closing the books.
3. Describe the content and purpose of a post-closing
trial balance.
4. State the required steps in the accounting cycle.
5. Explain the approaches to preparing correcting
entries.
6. Identify the sections of a classified balance sheet.
Chapter
2-64
Completing the Accounting Cycle
Using a
Worksheet
Closing the
Books
Steps in
preparation
Preparing closing
entries
Preparing financial
statements
Posting closing
entries
Preparing
adjusting entries
Preparing a postclosing trial
balance
Summary of
Accounting
Cycle
Classified
Balance Sheet
Reversing
entries—An
optional step
Current assets
Correcting
entries—An
avoidable step
Property, plant, and
equipment
Long-term
investments
Intangible assets
Current liabilities
Long-term liabilities
Owner’s equity
Chapter
2-65
Steps in Preparing a Worksheet
Illustration 4-1
Chapter
2-66
SO 1 Prepare a worksheet.
Using A Worksheet
Worksheet
A multiple-column form used in preparing
financial statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.
Chapter
2-67
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Illustration:
Chapter
2-68
Illustration 4-2
Preparing a trial balance
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Revenue
C. R. Byrd, Capital
C. R. Byrd, Drawing
Service Revenue
Trial Balance
Dr.
Cr.
15,200
2,500
600
5,000
5,000
2,500
1,200
10,000
500
10,000
Salaries Expense
Rent
Totals
4,000
900
28,700
Account Titles
Include all accounts
with balances.
Chapter
2-69
Adjustments
Dr.
Cr.
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
28,700
Trial balance amounts come
directly from ledger
accounts.
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Illustration 3-22
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
Chapter
2-70
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns
Trial Balance
Adjustments
Account Titles
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
C. R. Byrd, Capital
10,000
C. R. Byrd, Drawing
500
(d) 400
Service Revenue
10,000
(e) 200
(g)
Salaries Expense
4,000
1,200
Rent
900
Totals
28,700
28,700
(a)1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e)
Accounts Receivable
200
(f)
Interest Expense
50
(f)
Interest Payable
50
(g)
Salaries Payable
1,200
Totals
3,440
3,440
Chapter
2-71
Add additional accounts as needed.
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
Adjustments Key:
(a) Supplies Used.
(b) Insurance Expired.
(c) Depreciation Expensed.
(d) Service Revenue Earned.
(e) Service Revenue Accrued.
(f) Interest Accrued.
(g) Salaries Accrued.
Enter adjustment amounts,
total adjustments columns,
and check for equality.
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns
Trial Balance
Adjustments
Account Titles
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
C. R. Byrd, Capital
10,000
C. R. Byrd, Drawing
500
(d) 400
Service Revenue
10,000
(e) 200
(g)
Salaries Expense
4,000
1,200
Rent
900
Totals
28,700
28,700
(a)1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e)
Accounts Receivable
200
(f)
Interest Expense
50
(f)
Interest Payable
50
(g)
Salaries Payable
1,200
Totals
3,440
3,440
Chapter
2-72
Total the adjusted trial balance
columns and check for equality.
Adjusted
Trial Balance
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
5,200
900
1,500
50
40
40
200
50
30,190
50
1,200
30,190
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Trial Balance
Adjustments
Account Titles
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
C. R. Byrd, Capital
10,000
C. R. Byrd, Drawing
500
(d) 400
Service Revenue
10,000
(e) 200
(g)
Salaries Expense
4,000
1,200
Rent
900
Totals
28,700
28,700
(a)1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e)
Accounts Receivable
200
(f)
Interest Expense
50
(f)
Interest Payable
50
(g)
Salaries Payable
1,200
Totals
3,440
3,440
Chapter
2-73
Adjusted
Trial Balance
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
10,600
5,200
900
5,200
900
1,500
50
1,500
50
40
40
200
50
30,190
Extend all revenue and expense account
balances to the income statement columns.
40
50
50
1,200
30,190
7,740
10,600
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Trial Balance
Adjustments
Account Titles
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
C. R. Byrd, Capital
10,000
C. R. Byrd, Drawing
500
(d) 400
Service Revenue
10,000
(e) 200
(g)
Salaries Expense
4,000
1,200
Rent
900
Totals
28,700
28,700
(a)1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e)
Accounts Receivable
200
(f)
Interest Expense
50
(f)
Interest Payable
50
(g)
Salaries Payable
1,200
Totals
3,440
3,440
Chapter
2-74
Adjusted
Trial Balance
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
5,200
900
5,200
900
1,500
50
1,500
50
40
40
200
50
30,190
40
40
200
50
50
1,200
30,190
Extend all asset, liability, and equity account
balances to the balance sheet columns.
7,740
10,600
22,450
50
1,200
19,590
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)
Trial Balance
Adjustments
Account Titles
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
C. R. Byrd, Capital
10,000
C. R. Byrd, Drawing
500
(d) 400
Service Revenue
10,000
(e) 200
(g)
Salaries Expense
4,000
1,200
Rent
900
Totals
28,700
28,700
(a) 1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e)
Accounts Receivable
200
(f)
Interest Expense
50
(f)
Interest Payable
50
(g)
Salaries Payable
1,200
Totals
3,440
3,440
Net income
Totals
Chapter
2-75
Adjusted
Trial Balance
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
5,200
900
5,200
900
1,500
50
1,500
50
40
40
200
50
30,190
Compute Net Income or Net Loss.
40
40
200
50
50
1,200
30,190
7,740
2,860
10,600
10,600
22,450
10,600
22,450
50
1,200
19,590
2,860
22,450
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Review Question
Net income is shown on a worksheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance
sheet debit column.
d. income statement debit column and balance
sheet credit column.
Chapter
2-76
SO 1 Prepare a worksheet.
Closing the Books
At the end of the accounting period, the company
makes the accounts ready for the next period.
Illustration 4-5
Chapter
2-77
SO 2 Explain the process of closing the books.
Closing the Books
Closing entries formally recognize, in the general
ledger, the transfer of
net income (or net loss) and
owner’s drawing
to owner’s capital.
Closing entries are only at the end of the annual
accounting period.
Chapter
2-78
SO 2 Explain the process of closing the books.
Closing the Books
Note:
Owner’s Drawing is closed
directly to Capital and not
to Income Summary
because Owner’s Drawing
is not an expense.
Chapter
2-79
Illustration 4-6
Owner’s Capital is a
permanent account; all
other accounts are
temporary accounts.
SO 2 Explain the process of closing the books.
Closing the Books
Illustration 4-7
Closing entries
journalized
Closing
Entries
need
to be
Posted
Chapter
2-80
Preparing a Post-Closing Trial Balance
Purpose is to prove the equality of the permanent account
balances after journalizing and posting of closing entries.
Temporary
accounts
will have
zero
balances.
Illustration 4-9
Chapter
2-81
Chapter
2-82
Summary of the Accounting Cycle
1. Analyze business transactions
Chapter
2-83
Illustration 4-12
9. Prepare a post-closing
trial balance
2. Journalize the
transactions
8. Journalize and post
closing entries
3. Post to ledger accounts
7. Prepare financial
statements
4. Prepare a trial balance
6. Prepare an adjusted trial
balance
5. Journalize and post
adjusting entries
SO 4 State the required steps in the accounting cycle.
Correcting Entries—An Avoidable Step
Correcting entries
are unnecessary if the records are error-free.
are made whenever an error is discovered.
must be posted before closing entries.
Instead of preparing a correcting entry, it is possible
to reverse the incorrect entry and then prepare the
correct entry.
Chapter
2-84
SO 5 Explain the approaches to preparing correcting entries.
Correcting Entries—An Avoidable Step
Illustration (Case 1): On May 10, Mercato Co. journalized and
posted a $50 cash collection on account from a customer as a
debit to Cash $50 and a credit to Service Revenue $50. The
company discovered the error on May 20, when the customer
paid the remaining balance in full.
Incorrect
entry
Cash
Correct
entry
Cash
Correcting
entry
Chapter
2-85
50
Service revenue
50
50
Accounts receivable
Service revenue
Accounts receivable
50
50
50
SO 5 Explain the approaches to preparing correcting entries.
Correcting Entries—An Avoidable Step
Illustration (Case 2): On May 18, Mercato purchased on
account office equipment costing $450. The transaction was
journalized and posted as a debit to Delivery Equipment $45
and a credit to Accounts Payable $45. The error was
discovered on June 3.
Incorrect
entry
Correct
entry
Correcting
entry
Chapter
2-86
Delivery equipment
45
Accounts payable
45
Office equipment
Accounts payable
450
Office equipment
Delivery equipment
Accounts payable
450
450
45
405
SO 5 Explain the approaches to preparing correcting entries.
Chapter
2-87
The Classified Balance Sheet
Presents a snapshot at a point in time.
To improve understanding, companies group
similar assets and similar liabilities together.
Standard Classifications
Illustration 4-17
Assets
Liabilities and Owner’s Equity
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets
Current liabilities
Long-term liabilities
Owner’s (Stockholders’) equity
Chapter
2-88
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Current Assets
Assets that a company expects to convert to
cash or use up within one year or the
operating cycle, whichever is longer.
Operating cycle is the average time it takes
from the purchase of inventory to the
collection of cash from customers.
Chapter
2-89
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Current Assets
Illustration 4-19
Companies usually list current asset accounts in the order they
expect to convert them into cash.
Chapter
2-90
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Review Question
Cash, and other resources that are reasonably
expected to be realized in cash or sold or
consumed in the business within one year or the
operating cycle, are called:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
Chapter
2-91
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Long-Term Investments
Investments in stocks and bonds of other companies.
Investments in long-term assets such as land or
buildings that a company is not currently using in its
operating activities.
Illustration 4-20
Chapter
2-92
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Property, Plant, and Equipment
Long useful lives.
Currently used in operations.
Depreciation - allocating the cost of assets to a
number of years.
Accumulated depreciation - total amount of
depreciation expensed thus far in the asset’s life.
Chapter
2-93
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Property, Plant, and Equipment
Illustration 4-21
Chapter
2-94
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Intangible Assets
Assets that do not have physical substance.
Illustration 4-22
Chapter
2-95
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Review Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
Chapter
2-96
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Current Liabilities
Obligations the company is to pay within the
coming year.
Usually list notes payable first, followed by
accounts payable. Other items follow in order of
magnitude.
Liquidity - ability to pay obligations expected to
be due within the next year.
Chapter
2-97
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Current Liabilities
Illustration 4-23
Chapter
2-98
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Long-Term Liabilities
Obligations a company expects to pay after one year.
Illustration 4-24
Chapter
2-99
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Review Question
Which of the following is not a long-term
liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
Chapter
2-100
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Owner’s Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation - Capital Stock and Retained Earnings.
Illustration 4-25
Chapter
2-101
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Discussion Question
Q4-18: (a) What is the term used to describe the
owner’s equity section of a corporation? (b) Identify
the two owner’s equity accounts in a corporation and
indicate the purpose of each.
See notes page for discussion
Chapter
2-102
SO 6 Identify the sections of a classified balance sheet.
Reversing Entries
Reversing Entries
Appendix
It is often helpful to reverse some of the adjusting
entries before recording the regular transactions of
Leave this
the next period.
Companies make a reversing entry at the beginning
of the next accounting period.
Each reversing entry is the exact opposite of the
adjusting entry made in the previous period.
The use of reversing entries does not change the
amounts reported in the financial statements.
Chapter
2-103
SO 7 Prepare reversing entries.
Copyright
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Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
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and not for distribution or resale. The Publisher assumes no
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use of these programs or from the use of the information
contained herein.”
Chapter
2-104
Financial Accounting & Information
System (2)
•Using
Wikispaces
•Steps
•1
open an account
•2
enroll for the course at http://masif-emba-fais-s12.wikispaces.com/
•3
download ready resources
•4
keep visiting for updates
Assignments and study material for next class shall be uplaoded on the
course wiki
By M Asif Jaffer
Chapter
2-105
105
Financial Accounting & Information
System (2)
Six monthly report …..missed accrual Fateh Textiles Mills Limited
By M Asif Jaffer
Chapter
2-106
106