Distributing Dividends & Preparing Financial Reports

1. CHAPTER 14Benchmark 4 The accounting cycle forms the basis for all accounting practices DISTRIBUTING DIVIDENDS AND PREPARING A WORK SHEET FOR A MERCHANDISING BUSINESS*Chapter 6 p. 160– work sheet

2. LESSON 14-1 • retained earnings • dividends • board of directors • declaring a dividend Distributing Corporate Earnings to Stockholders

3. Management decisions about future business operations are based on financial information – profit or loss, prepare tax reports Corporation net income can be retained in business or paid to stockholders

4. STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION (3000) STOCKHOLDERS’ EQUITY 3110 Capital Stock 3120 Retained Earnings 3130 Dividends 3140 Income Summary • Share of stock – unit of ownership in corporation (stockholder) • Capital Stock – investment of all owners • Retained Earnings – corporation’s earnings, not yet distributed to S/H • Dividends – earnings distributed to S/H, temporary account similar to Drawing, DR each time declared

5. DECLARING A DIVIDEND Board of directors – group elected by stockholders to manage corporation Declaring a dividend – board decides to distribute corporate earnings Declared on 1 date Paid on a later date Dividend is liability, normal DR balance

6. DECLARING A DIVIDEND December 15. Hobby Shack’s board of directors declared a quarterly dividend of $2.00 per share; capital stock issued is 2,500 shares; total dividend, $5,000.00. Date of payment is January 15. Memorandum No. 79. 2 4 3 1 5 6 1. Write the date. 4. Write the debit amount. 2. Write the title of the account debited. 5. Write the title of the account credited. 3. Write the memorandum number. 6. Write the credit amount.

7. PAYING A DIVIDEND Hobby Shack issues 1 check for total dividends to be paid – deposited in special dividend checking account, separate check for each stockholder

8. PAYING A DIVIDEND January 15. Paid cash for quarterly dividend declared December 15, $5,000.00. Check No. 379. 1 2 3 4 5 1. Write the date. 2. Write the account title. 3. Write the check number. 4. Write the debit account. 5. Write the credit amount.

9. 14-1 Work Together p. 408

10. 14-1 Work Together p. 408

11. LESSON 14-2 Beginning an 8-Column Work Sheet for a Merchandising Business

12. Work Sheet Information needed to prepare financial statements is summarized Used to plan adjustments Trial balance is entered first, all general ledger accounts and balances entered in same order, even accounts with 0 balances

13. 1 2 RECORDING A TRIAL BALANCE ON A WORK SHEET 1. Account title 2. Account balance 3. Total, prove, and rule the debit and credit columns 3

14. Planning Adjustments Adjustments needed to bring accounts up to date Planned on the worksheet – adjustments columns Balances change when adjusting entries are journalized and posted Adjustments Supplies Prepaid insurance Merchandise inventory Uncollectible accounts expense Depreciation expense Federal income tax expense

15. Analyzing and recording adjustments What is the balance? What should be the balance? What must be done to correct the account balance? What adjustment is made?

16. Supplies Expense—Office Adj. (a) 2,730.00 Supplies—Office Dec. 31 Bal. 3,480.00 Adj. (a)2,730.00 (Adj Bal. 750.00) Supplies Expense—Store Adj. (b) 2,910.00 Supplies—Store Dec. 31 Bal. 3,944.00 Adj. (b)2,910.00 (Adj Bal. 1,034.00) ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS

17. 3 3 RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET 2 1 1. Write the debit amounts in the Adjustments Debit column. 2. Write the credit amounts in the Adjustments Credit column. 3. Label the two parts of the Supplies—Office adjustment with small letter a and small letter b in parentheses.

18. 3 3 ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT 1 2 1. Enter the amount of insurance used in the Adjustments Credit column. 2. Enter the same amount in the Adjustments Debit column. 3. Label the two parts of the adjustment with a small letter c in parentheses.

19. 14-2 Work Together

20. 14-2 Work Together

21. LESSON 14-3 • merchandise inventory – amount of goods on hand for sale to customers • Asset • Normal debit balance Planning and Recording a Merchandise Inventory Adjustment

22. MERCHANDISE INVENTORY • Amount of merchandise increases each time merchandise is purchased, decreases when merchandise is sold • All purchases recorded in purchases account • All sales recorded in sales account • Adjusted to reflect changes from purchases and sales

23. MERCHANDISE INVENTORY ADJUSTMENT • Merchandise inventory account adjusted to show current value of merchandise on hand • Merchandise Inventory and Income Summary accounts • Merchandise Inventory doesn’t have related expense account

24. 3 3 ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT 2 1 1. Write the debit amount. 2. Write the credit amount. 3. Label the two parts of this adjustment with a small letter d in parentheses.

25. Merchandise Inventory Jan. 1 Bal. 294,700.00 Adj. (d) 4,200.00 (New Bal. 298,900.00) Income Summary Adj. (d) 4,200.00 ANALYZING AN ADJUSTMENT WHEN ENDING MERCHANDISE INVENTORY IS GREATER THAN BEGINNING MERCHANDISE INVENTORY

26. 14-3 Work Together

27. 14-3 Work Together

28. LESSON 14-4 Planning and Recording an Allowance for Uncollectible Accounts Adjustment • uncollectible accounts • allowance method of recording losses from uncollectible accounts • book value • book value of accounts receivable

29. With each sale on account, business takes a risk that customers won’t pay their accounts Uncollectible accounts – account receivables that can’t be collected At the end of the fiscal year, business doesn’t know which accounts will be uncollectible Business can calculate an estimated amount DR Uncollectible Accounts Expense CR Allowance for Uncollectible Accounts Contra account to Accounts Receivable Book value – difference between asset’s account balance and its related contra account balance

30. ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS

31. Total Saleson Account × Percentage = EstimatedUncollectibleAccounts Expense ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE $124,500.00 × 1% = $1,245.00 • Use percentage of total sales on account to estimate uncollectible accounts • Use percentage based on previous experience • Match expenses with revenue

32. 3. Label the two parts with a small letter e in parentheses. 3 3 ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE 1 2 1. Enter the estimated uncollectible amount. 2. Enter the same amount in the Adjustments Debit column.

33. Allowance for Uncollectible Accounts Adjustment is added to previous balance New balance is estimated amount that will eventually become uncollectible Accounts Receivable – Allowance for Uncollectible Accounts = Book Value of Accounts Receivable ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE

34. 14-4 Work Together

35. 14-4 Work Together

36. LESSON 14-5 • current assets • plant assets • depreciation expense • estimated salvage value • straight-line method of depreciation • accumulated depreciation • book value of a plant asset Planning and Recording Depreciation Adjustments

37. Categories of Assets Most businesses use 2 categories for assets Current assets – cash and others that will be used within a year Plant assets – assets used for many years (computer, furniture, cash register) – types: equipment, buildings, land Business buys to use in earning revenue P. 423 3rd paragraph

38. Depreciating Plant Assets Match revenue with expenses Cost of plant asset expensed over plant asset’s useful life Portion of cost transferred to expense account each fiscal period – depreciation expense

39. Factors in calculating depreciation expense Original cost – all costs to make asset usable – price, delivery, installation Estimated salvage value – dispose of asset when no longer usable, amount expected to receive when remove asset (residual or scrap value) Estimated useful life – total amount of depreciation expense distributed over estimated useful life Physical depreciation – wear and tear Functional depreciation – inadequate or obsolete

40. OriginalCost Estimated TotalDepreciationExpense – ÷ EstimatedSalvage Value Years ofEstimatedUseful Life = = Estimated TotalDepreciationExpense AnnualDepreciationExpense CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE – straight-line depreciation (equal amount each year) 1. Subtract the asset’s estimated salvage value from original cost. 2. Divide the estimated total depreciation expense by the years of estimated useful life. 1 $1,250.00 – $250.00 = $1,000.00 2 $1,000.00 ÷ 5 = $200.00

41. 2006AccumulatedDepreciation Original Cost + – 2007DepreciationExpense AccumulatedDepreciation = = 2007AccumulatedDepreciation EndingBook Value CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE • Accumulated depreciation – total amount of depreciation expense since asset purchased • Book value – original cost –accumulated depreciation $400.00 + $200.00 = $600.00 $1,250.00 – $600.00 = $650.00

42. ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE • Important to retain original cost information for plant assets (don’t credit plant asset account) • Record depreciation in Accumulated Depreciation – contra asset account • Normal credit balance

43. ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE 3 3 2 1 1. Write the debit amounts. 2. Write the credit amounts. 3. Label the adjustments.

44. 14-5 Work Together

45. 14-5 Work Together

46. 14-5 Work Together

47. 14-5 On Your Own

48. LESSON 14-6 Calculating Federal Income Tax and Completing a Work Sheet

49. Federal Income Tax Adjustment Corporations who expect annual federal income taxes >$500 must pay estimated taxes each quarter Corporation only form of business organization that pays federal income taxes Actual federal tax owed is calculated at end of fiscal year (must file annual return) Additional tax owed note paid in quarterly installments must be paid when final return is filed Federal income tax is an expense – amount depends on net income before tax is recorded

50. Federal Income Tax Adjustment Before federal income tax can be determined, all adjustments must be completed and all amounts except Federal Income Tax Expense must be extended to the appropriate columns To determine net income before federal income tax expense… Complete all other adjustments Extend all amounts except Federal Income Tax Expense to Income Statement or Balance Sheet columns on separate paper, total work sheet income statement columns Calculate difference between income statement debit column total and income statement credit column total