Adjusting Accounts
Chapter and Preparing
Financial Statements
3
McGraw-Hill/Irwin1
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Explain the importance of periodic reporting and the
time period principle.
 Explain accrual accounting and how it makes financial
statements more useful.
 Identify the types of adjustments and their purpose.
 Explain how accounting adjustments link to financial
statements.
 Explain and prepare an adjusted trial balance.
 Prepare financial statements from an adjusted trial
balance.
 Use adjusted trial balance to prepare the company’s
financial statements.
McGraw-Hill/Irwin2
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Explain the importance of periodic reporting
and the time period principle.
McGraw-Hill/Irwin3
© The McGraw-Hill Companies, Inc., 2006
The Accounting Period
Annual
1
2
Semiannual
1
2
3
4
Quarterly
1
Jan
2
3
4
Feb
Mar
Apr
5
6
7
May Jun Jul
8
9
10
Aug Sep Oct
11
12
Nov Dec
Monthly
McGraw-Hill/Irwin4
© The McGraw-Hill Companies, Inc., 2006
The Time Period Principle
 The time period principle assumes that an
organization’s activities can be divided into
specific time periods such as a month, a
quarter, a six-month interval, or a year.
 Fiscal year versus calendar year (Jan. 1 ~
Dec. 31).
McGraw-Hill/Irwin5
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Explain accrual accounting and how it makes
financial statements more useful.
McGraw-Hill/Irwin6
© The McGraw-Hill Companies, Inc., 2006
Accrual Basis vs. Cash Basis
Accrual Basis
Cash Basis
Revenues are
recognized when
earned and expenses
are recognized when
incurred.
Revenues are
recognized when
cash is received and
expenses recorded
when cash is paid.
Not GAAP
Accounting
McGraw-Hill/Irwin7
© The McGraw-Hill Companies, Inc., 2006
Accrual Basis vs. Cash Basis
Example:
FastForward paid $2,400 for a 24-month insurance
policy beginning December 1, 2004.
Insurance Expense 2004
Jan
Feb
Mar
Apr
$
May
$
Jun
$
Jul
$
Aug
$
Sep
$
Oct
$
Nov
$
Dec
$
-
$
-
$
-
$ 2,400
On the cash basis the entire $2,400 would be
recognized as insurance expense in 2004. No
insurance expense from this policy would be recognized
in 2005 or 2006, periods covered by the policy.
McGraw-Hill/Irwin8
© The McGraw-Hill Companies, Inc., 2006
Accrual Basis vs. Cash Basis
Insurance Expense 2004
Jan
Feb
Mar
Apr
$
May
$
Jun
$
Jul
$
Aug
$
Sep
$
Oct
$
Nov
$
Dec
$
-
$
-
$
-
$
100
Insurance Expense 2005
Jan
Feb
Mar
Apr
$
100
May
$
100
Jun
$
100
Jul
$
100
Aug
$
100
Sep
$
100
Oct
$
100
Nov
$
100
Dec
$
100
$
100
$
100
$
100
Insurance Expense 2006
Jan
Feb
Mar
Apr
$
100
May
$
100
Jun
$
100
Jul
$
100
Aug
$
100
Sep
$
100
Oct
$
100
Nov
$
100
Dec
McGraw-Hill/Irwin9
$
100 $
100
$
100
$
-
On the accrual basis
$100 of insurance
expense is recognized in
2004, $1,200 in 2005,
and $1,100 in 2006. The
expense is matched with
the periods benefited by
the insurance coverage.
© The McGraw-Hill Companies, Inc., 2006
Recognizing Revenues and Expenses
 Revenue Recognition
We have delivered the
product to our customer,
so I think we should record
the revenue earned.
McGraw-Hill/Irwin10
© The McGraw-Hill Companies, Inc., 2006
Recognizing Revenues and Expenses
 Revenue Recognition
 Matching
Summary
of Expenses
Rent
Gasoline
Advertising
Salaries
Utilities
and . . . .
McGraw-Hill/Irwin11
$1,000
500
2,000
3,000
450
....
Now that we have
recognized the revenue,
let’s see what expenses
we incurred to
generate that revenue.
© The McGraw-Hill Companies, Inc., 2006
Recognizing Revenues and Expenses
 Revenue recognition principle requires that
revenue be recorded when earned, not before or
after.
 Matching principle intends to record expenses in
the same accounting period as the revenues that
are earned as a result of these expenses.
McGraw-Hill/Irwin12
© The McGraw-Hill Companies, Inc., 2006
Revenues and Expenses
McGraw-Hill/Irwin13
© The McGraw-Hill Companies, Inc., 2006
Revenues and Expenses
McGraw-Hill/Irwin14
© The McGraw-Hill Companies, Inc., 2006
Revenues and Expenses
McGraw-Hill/Irwin15
© The McGraw-Hill Companies, Inc., 2006
Revenues and Expenses
McGraw-Hill/Irwin16
© The McGraw-Hill Companies, Inc., 2006
Recognizing Revenues and Expenses
 Can revenue and expense recognition be used
to manipulate earnings?
 Accelerate revenue recognition
 Postpone expense recognition
 Postpone revenue recognition
 Accelerate expense recognition
Are they all?
McGraw-Hill/Irwin17
© The McGraw-Hill Companies, Inc., 2006
Recognizing Revenues and Expenses
 What are the usual intentions to manipulate
earnings?
 Executive compensation
 Meet certain targets
 Changes of CEO
 Political motivations
 Taxation reasons
 Initial Public Offering
McGraw-Hill/Irwin18
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Identify the types of adjustments and their
purpose.
McGraw-Hill/Irwin19
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts
An adjusting entry is recorded to bring an asset or
liability account balance to its proper amount.
Framework for Adjustments
Adjustments
Paid (or received) cash before
expense (or revenue) recognized
Prepaid
(Deferred)
expenses*
McGraw-Hill/Irwin20
Unearned
(Deferred)
revenues
*including depreciation
Paid (or received) cash after
expense (or revenue) recognized
Accrued
expense
Accrued
revenues
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts – Prepaid expenses
Actually used
Paid Cash
Accounting
Period 1
Accounting
Period 2
Accounting
Period 3
E.g. Paid 4 years
rental fee $ 4 million
Accounting
Period 4
When should expenses be recognized?
Cash basis: At the beginning of period 1 recognize all cash
payment as expense.
Dr. Rent Expense 4 million
Cr. Cash
4 million
No entry at later periods.
McGraw-Hill/Irwin21
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts – Prepaid expenses
E.g. Paid 4 years
rental fee $ 4 million
Actually used
Paid Cash
Accounting
Period 1
Accounting
Period 2
Accounting
Period 3
Accounting
Period 4
Accrual basis: At the beginning of period 1 recognize all cash payment
as prepaid expense (asset account):
Dr. Prepaid Rent Expense 4 million
Cr. Cash
4 million
At the end of each accounting period recognize the portion that is used
Dr. Rent Expense 1 million
Cr. Prepaid Rent Expense 1 million
McGraw-Hill/Irwin22
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts – Unearned revenue
Received Cash
E.g. Long-term contract:
Received $40m in
Revenue Earned
advance to build a ship
Accounting
Period 1
Accounting
Period 2
Accounting
Period 3
Accounting
Period 4
When should revenues be recognized?
Cash basis: At the beginning of period 1 recognize all cash
receipt as revenue.
Dr. Cash
40 million
Cr. Revenue 40 million
No entry at later periods.
McGraw-Hill/Irwin23
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts – Unearned revenue
Received Cash
E.g. Long-term contract:
Received $40m in
Revenue Earned
advance to build a ship
Accounting
Period 1
Accounting
Period 2
Accounting
Period 3
Accounting
Period 4
Accrual basis: At the beginning of period 1 recognize all cash receipt as
unearned revenue (liability account).
Dr. Cash
40 million
Cr. Unearned revenue 40 million
At the end of each accounting period recognize the portion that is earned:
Dr. Unearned revenue 10 million
Cr. Revenue
McGraw-Hill/Irwin24
10 million
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts – Accrued expenses
Actually used
Accounting
Period 1
Accounting
Period 2
Accounting
Period 3
Paid Cash
Accounting
Period 4
When should expenses be recognized?
Cash basis: When borrowing money:
Dr. Cash
40 million
Cr. Bank loan
E.g. Borrow
40 million
from bank.
Annual
interest rate
is 10%.
Interest and
principal are
paid at the
end of 4th
year.
40 million
At the end of period 4:
Dr. Interest Expense 16 million
Dr. Bank loan
Cr. Cash
McGraw-Hill/Irwin25
40 million
56 million
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts – Accrued expenses
Actually used
Accounting
Period 1
Accounting
Period 2
Accounting
Period 3
Paid Cash
Accounting
Period 4
Accrual basis: At the end of each period (1 to 4) recognize the portion
that is due but not paid:
Dr. Interest Expense 4 million
Cr. interest payable 4 million
At the end of the period 4:
Dr. Interest payable 16 million
Dr. Bank loan
Cr. Cash
McGraw-Hill/Irwin26
40 million
56 million
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts – Accrued revenues
Revenue Earned
Received Cash
Long-term
Accounting
Period 1
Accounting
Period 2
Accounting
Period 3
Accounting
Period 4
When should revenues be recognized?
Contract:
Received $40
million after
building one
ship
Cash basis: No entry from accounting period 1 to 3
At the end of period 4:
Dr. Cash 40 million
Cr. Revenue 40 million
McGraw-Hill/Irwin27
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accounts – Accrued revenues
Revenue Earned
Received Cash
Long-term
Contract
Accounting
Period 1
Accounting
Period 2
Accounting
Period 3
Accounting
Period 4
Accrual basis: At the end of each accounting period (1 to 4) recognize the
portion of revenue that is earned but not received:
Dr. Accounts Receivable 10 million
Cr. Revenue
10 million
At the end of period 4:
Dr. Cash
40 million
Cr. Accounts receivable 40 million
McGraw-Hill/Irwin28
© The McGraw-Hill Companies, Inc., 2006
Adjusting Prepaid (Deferred) Expenses
Resources paid
for prior to
receiving the
actual benefits.
Asset
Unadjusted
Balance
McGraw-Hill/Irwin29
Credit
Adjustment
Here is the check
for my first
6 months’ rent.
Expense
Debit
Adjustment
© The McGraw-Hill Companies, Inc., 2006
Prepaid Insurance
On December 1, 2004, Scott Company paid $12,000 to
cover rent for December 2004 through May 2005.
Scott recorded the expenditure as Prepaid Insurance
on December 1. What adjustment is required at
Dec.31, 2004?
Dec. 31 Insurance Expense
Prepaid Insurance
2,000
2,000
To record first month's expired insurance
Prepaid Insurance
Dec. 1 12,000 Dec. 31
Bal.
10,000
McGraw-Hill/Irwin30
637
2,000
Insurance Expense
Dec. 31 2,000
128
© The McGraw-Hill Companies, Inc., 2006
Supplies
During 2004, Scott Company purchase $15,500 of
supplies. Scott recorded the expenditures as Supplies.
At December 31, a count of the supplies indicated
$2,655 on hand. What adjustment is required?
Dec. 31 Supplies Expense
Supplies
12,845
12,845
To record supplies used during 2004
126
Supplies
Bought 15,500 Dec. 31 12,845
Bal.
2,655
McGraw-Hill/Irwin31
Supplies Expense
Dec. 31 12,845
652
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Depreciation
Depreciation is the process of computing expense from
allocating the cost of plant and equipment over their
expected useful lives.
Straight-Line
Asset Cost - Salvage Value
Depreciation =
Useful Life
Expense
McGraw-Hill/Irwin32
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Depreciation
On January 1, 2004, Barton, Inc. purchased equipment
for $62,000 cash. The equipment has an estimated
useful life of 5 years and Barton expects to sell the
equipment at the end of its life for $2,000 cash.
Let’s record depreciation expense for the year ended
December 31, 2004.
2004
$62,000 - $2,000
Depreciation =
=
Expense
5
McGraw-Hill/Irwin33
$12,000
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Depreciation
On January 1, 2004, Barton, Inc. purchased equipment
for $62,000 cash. The equipment has an estimated
useful life of 5 years and Barton expects to sell the
equipment at the end of its life for $2,000 cash.
Let’s record depreciation expense for the year ended
December 31, 2004.
Dec. 31 Depreciation Expense
Accumulated Depreciation - Equipment
12,000
12,000
To record equipment depreciation
Accumulated depreciation is
a contra asset account.
McGraw-Hill/Irwin34
© The McGraw-Hill Companies, Inc., 2006
contra account
 A contra account is an account linked with
another account, it has an opposite normal
balance, and it is reported as a subtraction
from that other account’s balance.
 A contra account allow information users to
know both the full costs of assets and the total
amount of depreciation.
McGraw-Hill/Irwin35
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Depreciation
Dec. 31 Depreciation Expense
Accumulated Depreciation - Equipment
12,000
12,000
To record equipment depreciation
Equipment
1/1 62,000
Depreciation Expense
12/31 12,000
Accumulated Depreciation
12/31 12,000
McGraw-Hill/Irwin36
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Depreciation
Barton, Inc.
Partial Balance Sheet
At December 31, 2004
Assets
Cash
.
Equipment
Less: accumulated deprec.
.
.
Total Assets
McGraw-Hill/Irwin37
$
$ 62,000
(12,000)
50,000
Equipment is
shown net of
accumulated
depreciation.
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Depreciation
 A company spent 42 million to buy a machine,
which can produce 50 million units of LCD
monitor. The useful life is estimated to be 2
years and the salvage value is estimated to be
2 million. The depreciation for each year is 20
million.
 When the company bought the machine:
 Dr. Machinery
 Cr. Cash
McGraw-Hill/Irwin38
42 million
42 million
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Depreciation
 At the end of first year:
Dr. Depreciation expense 20 m
Cr. Machinery
20 m
Correct
Dr. Depreciation expense 20 m
Cr. Accumulated depreciation-machinery 20 m
McGraw-Hill/Irwin39
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Depreciation
 With the contra account, balance sheet indicates:
……
Machinery
42 million
Less accumulated depreciation (20 million) 22 million
 If not:
……
Machinery
22 million
Such information would be misleading, since it could not
indicate the correct production capacity of the company.
McGraw-Hill/Irwin40
© The McGraw-Hill Companies, Inc., 2006
Adjusting Unearned (Deferred) Revenues
Cash received in
advance of
providing
products or
services.
Liability
Debit
Adjustment
McGraw-Hill/Irwin41
Unadjusted
Balance
Buy your season tickets for
all home basketball games NOW!
“Go Big Blue”
Revenue
Credit
Adjustment
© The McGraw-Hill Companies, Inc., 2006
Adjusting Unearned (Deferred) Revenues
On October 1, 2004, Ox University sold 1,000 season
tickets to its 20 home basketball games for $100
each. Ox University makes the following entry:
Oct. 1
Cash
100,000
Unearned Revenue
100,000
Basketball revenue received in advance
Unearned Revenue
Oct. 1 100,000
McGraw-Hill/Irwin42
© The McGraw-Hill Companies, Inc., 2006
Adjusting Unearned (Deferred) Revenues
On December 31, Ox University has played 10 of its
regular home games, winning 2 and losing 8.
Dec. 31 Unearned Revenue
50,000
Basketball Revenue
50,000
To recognized 10-game basketball revenue
Unearned Revenue
Dec. 31 50,000 Oct. 1 100,000
Bal.
50,000
McGraw-Hill/Irwin43
Basketball Revenue
Dec. 31 50,000
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Accrued Expenses
Costs incurred in a
period that are
both unpaid and
unrecorded.
Expense
Debit
Adjustment
McGraw-Hill/Irwin44
We’re about one-half
done with this job and
want to be paid for
our work!
Liability
Credit
Adjustment
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Accrued Expenses
Barton, Inc. pays its employees every Friday. Year-end,
12/31/04, falls on a Wednesday. As of 12/31/04, the
employees have earned salaries of $47,250 for Monday
through Wednesday of the week ended 1/02/05.
Last pay
date
12/26/04
12/1/04
McGraw-Hill/Irwin45
Next pay
date
1/2/05
12/31/04
Year end
Record adjusting
journal entry.
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Accrued Expenses
Barton, Inc. pays its employees every Friday. Year-end,
12/31/04, falls on a Wednesday. As of 12/31/04, the
employees have earned salaries of $47,250 for Monday
through Wednesday of the week ended 1/02/05.
Dec. 31 Salaries Expense
Salaries Payable
47,250
47,250
To accrue 3-days' salary
Salaries Expense
Other salaries
657,500
Dec. 31 47,250
Bal.
704,750
McGraw-Hill/Irwin46
Salaries Payable
Dec. 31 47,250
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accrued Revenues
Revenues earned
in a period that
are both
unrecorded and
not yet received.
Asset
Debit
Adjustment
McGraw-Hill/Irwin47
Yes, I’ve completed your
tax return, but have not had
time to bill you yet.
Revenue
Credit
Adjustment
© The McGraw-Hill Companies, Inc., 2006
Adjusting for Accrued Revenues
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, 2004,
the end of the company’s fiscal year.
Dec. 31 Accounts Receivable
31,200
Service Revenue
31,200
To accrue revenue earned
Accounts Receivable
Other receivables
1,325,268
Dec. 31
31,200
Bal.
1,356,468
McGraw-Hill/Irwin48
Service Revenue
Other revenues
6,589,500
Dec. 31
31,200
Bal .
6,620,700
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accrued Revenues
 In the 2nd week of Dec, FastForward agreed to
provide 30 days of consulting services to a local
sports club for a fixed fee of $2700, beginning from
Dec 12. The club agrees to pay FastForward on Jan
10, 2005.
Dec. 31 Dr. Accounts Receivable
Cr. Consulting Revenue
1,800
1,800
To accrue revenue earned
McGraw-Hill/Irwin49
© The McGraw-Hill Companies, Inc., 2006
Adjusting Accrued Revenues
Accounts Receivable
Dec.12 1,900 Dec. 22 1,900
Dec.31
1,800
Bal.
1,800
McGraw-Hill/Irwin50
Consulting Revenue
Dec.5
4,200
Dec. 12
1,600
Dec. 31
250
Dec. 31
1,800
Balance 7,850
© The McGraw-Hill Companies, Inc., 2006
Future receipts of accrued revenues
 FastForward received $2,700 cash on Jan 10
for the entire contract amount.
Jan 10: Dr. Cash
2,700
Cr. Accounts Receivable 1,800
Cr. Consulting Revenue
900
McGraw-Hill/Irwin51
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Explain how accounting adjustments link to
financial statements.
McGraw-Hill/Irwin52
© The McGraw-Hill Companies, Inc., 2006
Links to Financial Statements
Summary of Adjustments and Financial Statement Links
Before Adjustment
Income
Balance
Statement
Sheet Account
Account
Type
Adjusting Entry
Prepaid
Asset
Expense
Dr. Expense
Expenses
Overstated
Understated
Cr. Asset
Unearned
Liability
Revenue
Dr. Liability
Revenues
Overstated
Understated
Cr. Revenue
Accrued
Liability
Expense
Dr. Expense
Expenses
Understated
Understated
Cr. Liability
Accrued
Asset
Revenue
Dr. Asset
Revenues
Understated
Understated
Cr. Revenue
McGraw-Hill/Irwin53
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Explain and prepare an adjusted trial balance.
 Prepare financial statements from an adjusted
trial balance.
McGraw-Hill/Irwin54
© The McGraw-Hill Companies, Inc., 2006
FastForward
Trial Balance
December 31, 2004
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
Chuck Taylor, Capital
Chuck Taylor, Withdrawals
Consulting revenue
$
$
Adjustments
Dr.
6,200
3,000
30,000
600
5,800
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
300
1,400
1,000
230
45,300
$
McGraw-Hill/Irwin55
Unadjusted
Trial Balance
Dr.
Cr.
4,400
9,270
2,400
26,000
Cr.
Adjusted
Trial Balance
Dr.
Cr.
First, the
initial
unadjusted
amounts are
added to the
worksheet.
45,300
$
© The McGraw-Hill Companies, Inc., 2006
FastForward
Trial Balance
December 31, 2004
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
Chuck Taylor, Capital
Chuck Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irwin56
$
Unadjusted
Trial Balance
Dr.
Cr.
4,400
9,270
2,400
26,000
$
Adjustments
Dr.
f $
Cr.
1,800
b
a
6,200
3,000 d
30,000
Adjusted
TrialNext,
Balance
Dr.
Cr.
FastForward’s
$
1,050
100
c
375
e
210
d
f
250
1,800
3,785 $
3,785
adjustments
are added.
250
600
5,800
300
$
1,400
1,000
230
45,300 $
c
e
a
375
210
100
b
1,050
45,300 $
© The McGraw-Hill Companies, Inc., 2006
Finally, the totals are
determined.
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
Chuck Taylor, Capital
Chuck Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irwin57
$
FastForward
Trial Balance
December 31, 2004
Unadjusted
Trial Balance
Dr.
Cr.
4,400
9,270
2,400
26,000
$
Adjustments
Dr.
Cr.
$
f $
1,800
b
a
6,200
3,000 d
30,000
$
1,050
100
c
375
e
210
Adjusted
Trial Balance
Dr.
Cr.
4,400
1,800
8,220
2,300
26,000
$
250
600
600
5,800
d
f
250
1,800
7,850
300
$
1,400
1,000
230
45,300 $
375
6,200
210
2,750
30,000
300
c
e
a
375
210
100
b
1,050
45,300 $
3,785 $
3,785 $
375
1,610
100
1,000
1,050
230
47,685 $
47,685
© The McGraw-Hill Companies, Inc., 2006
Preparing Financial Statements
Let’s use FastForward’s adjusted trial balance to
prepare the company’s financial statements.
McGraw-Hill/Irwin58
© The McGraw-Hill Companies, Inc., 2006
Dr.
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
Chuck Taylor, Capital
Chuck Taylor, Withd'l.
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irwin59
$
Cr.
4,400
1,800
8,220
2,300
26,000
Prepare the Income
Statement.
$
600
$
375
1,610
100
1,000
1,050
230
47,685
$
375
6,200
210
2,750
30,000
FastForward
Income Statement
For the Month Ended December 31,
7,850 Revenues:
300
Consulting revenue
$
Rental revenue
Operating expenses:
Depr. expense - Equip. $
375
Salaries expense
1,610
Insurance expense
100
Rent expense
1,000
47,685
Supplies expense
1,050
Utilities expense
230
Total expenses
Net income
$
2004
7,850
300
4,365
3,785
© The McGraw-Hill Companies, Inc., 2006
FastForward
Income Statement
For the Month Ended December 31, 2004
Revenues:
Consulting revenue
$
7,850
Rental revenue
300
Operating expenses:
Depr. expense - Equip. $
375
Salaries expense
1,610
Insurance expense
100
Rent expense
1,000
Supplies expense
1,050
Utilities expense
230
Total expenses
4,365
Net income
$
3,785
Prepare the Statement of
Changes in Owner’s Equity.
Note: Net Income from the Income
Statement carries to the Statement of
Changes in Owner’s Equity.
FastForward
Statement of Changes in Owner's Equity
For the Month Ended December 31, 2004
C. Taylor, Capital 12/1/04
Add: Net income
$ 3,785
Investment by owner
30,000
Total
Less: Withdrawal by owner
C. Taylor, Capital 12/31/04
McGraw-Hill/Irwin60
$
-0-
33,785
33,785
600
$ 33,185
© The McGraw-Hill Companies, Inc., 2006
Cash
$
4,400
Accounts receivable
1,800
Supplies
8,220
Prepaid insurance
2,300
Equipment
26,000
Accum. depr. - Equip.
$
375
Accounts payable
6,200
Salaries payable
210
Unearned revenue
2,750
Chuck Taylor, Capital
30,000
Chuck Taylor, Withd'l.
600
Consulting revenue
7,850
Rental revenue
300
FastForward
Depr. Statement
expense of Changes in Owner's
375 Equity
Salaries
1,61031, 2004
Forexpense
the Month Ended December
Insurance expense
100
C. Taylor, Capital 12/1/01
$
-0Rent expense
1,000
Add: Net income
$
3,785
Supplies expense
1,050
Investment by owner
30,000
33,785
Utilities expense
230
Total
33,785
Totals
$
47,685
$
47,685
Less: Withdrawal by owner
600
C. Taylor, Capital 12/31/01
McGraw-Hill/Irwin61
$ 33,185
FastForward
Balance Sheet
December 31, 2001
Assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Less: accum. depr.
Total assets
$
26,000
(375)
4,400
1,800
8,220
2,300
$
25,625
42,345
$
9,160
$
33,185
42,345
Liabilities
Accounts payable
$ 6,200
Salaries payable
210
Unearned consulting revenues
2,750
Total liabilities
Owner's Equity
Chuck Taylor, Capital
Total liabilities and equity
Prepare the
Balance Sheet.
© The McGraw-Hill Companies, Inc., 2006
Profit Margin
The profit margin ratio measures the company’s
net income to sales.
Year
7.00%
2003
2002
2001
2000
Profit Margin
6.00%
Profit
Net Income
=
Margin
Net Sales
Profit Margin
Limited
Brands, Inc.
5.00%
5.90%
6.20%
4.70%
5.30%
4.00%
3.00%
2.00%
1.00%
0.00%
2003
2002
2001
2000
Year
McGraw-Hill/Irwin62
© The McGraw-Hill Companies, Inc., 2006
Profit Margin





SmarTone: 13.85%
Hutchison Telecom: 0.48%
City Telecom: 4.24%
Sunday: 0.48%
Peoples: 14.96%
McGraw-Hill/Irwin63
© The McGraw-Hill Companies, Inc., 2006
Homework for chapter 3
 Ex 3-1, 3-2, 3-9
 Problem 3-2A
 Due on June 19,2006 (Monday)
McGraw-Hill/Irwin64
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End of Chapter 3
McGraw-Hill/Irwin65
© The McGraw-Hill Companies, Inc., 2006