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Adjusting Accounts & Preparing Financial Statements. Chapter 3. Accounting period. Time principle period Specific time periods for accounting activities Fiscal year Consisting of any 12 months period other than ending on December 31 Natural year Ends December 31. Accounting basis.

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Accounting period l.jpg
Accounting period

  • Time principle period

    • Specific time periods for accounting activities

    • Fiscal year

      • Consisting of any 12 months period other than ending on December 31

    • Natural year

      • Ends December 31


Accounting basis l.jpg
Accounting basis

  • Accrual basis

    • Uses the adjusting process to recognize revenues when earned and to match expenses with revenues

  • Cash Basis

    • Recognized revenues when cash is received and records expenses when cash is paid


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Revenue Recognition

  • Matching principle

    • Aims to record expenses in the same accounting period as the revenues that are earned as a result of these expenses


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Adjustments

  • Adjusting entries

    • To correct for transactions and events that extend over more than one period

      • Deferred – wait till cash is paid

      • Accrual –

    • Rule

      • Debit the expense

      • Credit the asset or liabilities

      • For the amount used up


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Prepaid insurance

  • Suppose that we purchase $2,400 for insurance for one year on May 1. Record the adjustments on December 31.

  • $2,400/12 = $200 x 8months = $1,600

  • Insurance expense 1600

  • Prepaid insurance1600


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Supplies

  • Suppose that supplies account has a balance of $4,000 and inventory shows $1,000. Record the supplies used up.

  • Balance 4,000

  • Inventory1,000

  • Used up 3,000


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Supplies

  • Supplies expense 3,000

  • Supplies 3,000


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Depreciation

  • Plant assets/Fixed Assets

    • Assets which are tanigble and long lived

    • Building and machinery

  • Depreciation

    • The reduction in value of an asset due to its use


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Depreciation

  • Depreciation expense

    • Annual reduction in value of asset

  • Accumulated depreciation

    • Contra asset

    • Increases with a credit

    • Total reduction in value of an asset


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Unearned revenues

  • Refers to cash received in advance of services provided

  • Suppose that unearned revneue has a balance of $7,000 but records shows only $3,000 is unearned

  • Balance $7,000

  • Should be 3,000

  • Earned 4,000


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Unearned Revenues

  • Unearned revenues

    • A liability

    • If we do not complete the work then we are liable to refund the monies.

    • Once the work is completed then the liability does not exist

  • Unearned revenues 4,000

  • Fees earned4000


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Accrued expenses

  • Refers to costs that are incurred in a period that are unpaid and unrecorded

  • Accrued salaries

    • Salaries owed at the end of the period to be made next period

    • Suppose year ends on Wed, do we pay on Wed or wait until Friday


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Salaries

  • Suppose salaries at year end is $400

  • Salaries expense 400

  • Salaries payable 400


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Accrued revenues

  • Refers to revenues earned in a period that are both unrecorded and not yet received in cash

  • Unrecorded accounts receivable


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Trial Balance

  • Unadjusted trial balance

    • is a list of account balances before adjustments

    • Used to make adjusting entries

  • Adjusted trial balance

    • Used to prepare financial statements


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Financial Statements

  • Four basic financial statements

    • Income statement

    • Statement of Retained Earnings

    • Balance Sheet

    • Statement of Cash flows


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Income Statement

  • Results of operations for a business

  • Shows revenues minus expenses

Rob Co

Income Statement

For period ending 12/31/04


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Statement of Retained Earnings

Changes in net worth and equity

Rob Co

Statement of Retained Earnings

For period ending 12/31/04

Beginning Retained Earnings $60,000

+Net income 40,000

100,000

-Dividends 20,000

Ending Retained Earnings $80,000


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Balance sheet

Rob Co

Balance Sheet

December 3, 2004


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Statement of Cash Flows

  • Inflows and outflow of cash from

    • Operations

    • Investments

    • Financing


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Accounting Cycle

  • Record entries in the journal

  • Post to ledger

  • Prepare unadjusted Trial Balance

  • Record and post adjusting entries

  • Prepare adjusted trial balance

  • Prepare financial statements

  • Record and post closing entries


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Closing Entries

  • Temporary accounts

    • Accumulate data related to one accounting period

      • Revenue

      • Expense

      • Dividends

      • Income summary


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Close revenues

  • RevenuesDR

    • Income summaryCr

  • Debit whatever revenue accounts you have on the trial balance for their ending balance and the total is credited to income summary


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Close Expenses

  • Income summary DR

  • Expenses CR

  • Credit each expense account separately for the amount of the balance in the account and debit income summary for the total


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Close Income Summary

  • Income Summary DR

  • Retained earnings CR

For the balance in the income summary account

Income Summary

Debit

Credit

Total expenses

Total revenues

Net income


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Close Dividends

  • Dividends reduce the equity of the business and the amount retained in the business

  • Retained earnings DR

  • Dividends CR

  • For the amount of the balance in the dividend account


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Transactions

  • Fees earned $50,000

  • Rent expense 10,000

  • Supplies expense 5,000

  • Dividends 2,000

  • Retained earnings $30,000

  • Record the closing entries


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Close revenues

  • Fees earned 50,000

  • Income summary 50,000


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Close Expenses

  • Income Summary $15,000

  • Rent expense $10,000

  • Supplies expense 5,000


Close income summary31 l.jpg
Close Income Summary

  • Income Summary $35,000

  • Retained earnings $35,000

Income Summary

DR

CR

$50,000

Expenses

$15,000

Revenues

$35,000 net income


Close dividends32 l.jpg
Close Dividends

  • Retained earnings $2,000

  • Dividends $2,000

Retained Earnings

CR

$30,000 Balance

$35,000 net income

DR

$2,000

Dividends

$63,000 ending balance


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Current assets

Expected to be collected in less than one year

Cash

Accounts receivable

Supplies

Inventory

Plant Asset

Long lived tangible assets

Factory building

Machinery and equipment

Classification of Accounts


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