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Chapter 2. Review of the Accounting Process. + Owner Investments. - Owner Withdrawals. + Revenue + Gains. - Expenses - Losses. The Accounting Equation. A = L + OE. + Paid-in Capital. + Retained Earnings. + Revenues + Gains. - Expenses - Losses. - Dividends.

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the accounting equation

+ Owner Investments

- Owner Withdrawals

+ Revenue+ Gains

- Expenses- Losses

The Accounting Equation

A = L + OE

accounting equation for a corporation

+ Paid-in Capital

+ Retained Earnings

+ Revenues

+ Gains

- Expenses

- Losses

- Dividends

Accounting Equation for a Corporation

A = L + SE

account relationships

Paid-in

Capital

Assets

Retained Earnings

Liabilities

Dr.

+

Cr.

-

Dr.

-

Cr.

+

Dr.

-

Cr.

+

Dr.

-

Cr.

+

Revenues and Gains

Expenses and Losses

Dr.

-

Cr.

+

Dr.

+

Cr.

-

Account Relationships

Debits and credits affect the Balance Sheet Model as follows:

A =L+PIC+RE

Permanent Accounts

Temporary Accounts

slide5

During the Accounting Period

Source documents

Transaction Analysis

Record in Journal

Post to

Ledger

At the End of the Accounting Period

Financial Statements

Adjusted Trial Balance

Record & Post Adjusting Entries

Unadjusted Trial Balance

The Accounting Processing Cycle

At the End of the Year

Close Temporary Accounts

Post-Closing Trial Balance

accounting processing cycle
Accounting Processing Cycle

On January 1, $40,000 was borrowed from a bank and a note payable was signed.

  • Two accounts are affected:
    • Cash (an asset) increases by $40,000.
    • Notes Payable (a liability) increases by $40,000.

Prepare the journal entry.

general ledger
General Ledger

The “T” account is a shorthand format of an account used by accountants to analyze transactions. It is notpart of the bookkeeping system.

posting journal entries
On July 1, the owners invest $60,000 in a new business, Dress Right Clothing Corporation. Posting Journal Entries

Post the debit portion of the entry to the Cash ledger account.

posting journal entries10
Posting Journal Entries

We follow the same procedure to post the credit portion of the entry to the Common Stock account.

slide11

After recording all entries for the period, Dress Right’s Unadjusted Trial Balance would be as follows:

A Trial Balance is a listing of all accounts and their balances at a point in time.

Debits = Credits

slide12

Transactions where cash is paid or received beforea related expense or revenue is recognized.

Transactions where cash is paid or received after a related expense or revenue is recognized.

prepaid expenses
Prepaid Expenses

Expense

Asset

Unadjusted

Balance

Credit

Adjustment

Debit

Adjustment

Today, I will pay

for my first

6 months’ rent.

Prepaid Expenses

Items paid for in advance of receiving their benefits

depreciation

Straight-Line

Depreciation

Expense

Asset Cost - Salvage Value

Useful Life

=

Depreciation

Depreciation is the process of computing expense by allocating the cost of plant and equipment over their expected useful lives.

depreciation15
Depreciation

Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance. Assume the following:

Let’s calculate the depreciation expense for the month ended July 31, 2009.

depreciation16
Depreciation

Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance.

July

Depreciation

Expense

$12,000 - $0

60 months

=

=

$200 per month

depreciation17
Depreciation

After posting, the accounts look like this:

unearned revenues
Unearned Revenues

Revenue

Liability

Debit

Adjustment

Unadjusted

Balance

Credit

Adjustment

Buy your season tickets for

all home basketball games NOW!

Unearned Revenue

Cash received in advance of performing services

“Go Big Blue”

alternative approach to record prepayments
Alternative Approach to Record Prepayments

Prepaid ExpensesRecord initial cash payments as follows:

Expense $$$ Cash $$$

Adjusting EntryRecord the amount for the prepaid expense as follows:

Prepaid expense $$$ Expense $$$

Unearned RevenueRecord initial cash receipts as follows:

Cash $$$ Revenue $$$

Adjusting EntryRecord the amount for the unearned liability as follows:

Revenue $$$ Unearned revenue $$$

accrued liabilities
Accrued Liabilities

Liability

Expense

Debit

Adjustment

Credit

Adjustment

I won’t pay you

until the job is done!

Accrued Liabilities

Liabilities recorded when an expense has been incurred prior to cash payment.

accrued receivables
Accrued Receivables

Revenue

Asset

Debit

Adjustment

Credit

Adjustment

Yes, you can pay me

in May for your April 15 tax return.

Accrued Receivables

Revenue earned in a period prior to the cash receipt.

estimates
Uncollectible accounts and depreciation of fixed assets are estimated.

An estimated item is a function of future events and developments.

Estimates

$

estimates23
Estimates

The estimate of bad debt expense at the end of the period is an example of an adjusting entry that requires an estimate.

Assume that Dress Right’s management determines that of the $2,000 of accounts receivable recorded at July 31, only $1,500 will ultimately be collected. Prepare the adjusting entry for July 31.

slide24

This is the Adjusted Trial Balance for Dress Right after all adjusting entries have been recorded and posted.

Dress Right will use these balances to prepare the financial statements.

temporary and permanent accounts

Revenues

Assets

Shareholders’ Equity

Permanent Accounts

Temporary Accounts

Liabilities

Dividends

Expenses

Income Summary

The closing process applies only to temporary accounts.

Temporary and Permanent Accounts
post closing trial balance
Post-Closing Trial Balance

Lists permanent accounts and their balances.

Total debits equal total credits.

conversion from cash basis to accrual basis
Conversion From Cash Basis to Accrual Basis

Jeter, Inc. paid $20,000 cash for insurance during the current period. On Jan. 1, Prepaid Insurance was $5,000, and on Dec. 31, the account balance was $3,000.

appendix 2a use of a worksheet
Appendix 2A: Use of a Worksheet

A worksheet can be used as a tool to facilitate the preparation of adjusting and closing entries and the financial statements.

  • Steps to Follow for Worksheet Completion:
  • Enter account titles in column 1 and the unadjusted account balances in columns 2 and 3.
  • Determine end-of-period adjusting entries and enter them in columns 4 and 5.
  • Add or deduct the effects of the adjusting entries on the account balances and enter in columns 6 and 7.
  • Transfer the temporary retained earnings account balances to columns 8 and 9.
  • Transfer the balances in the permanent accounts to columns 10 and 11.

Let’s look at the completed worksheet for Dress Right.

appendix 2b reversing entries
Appendix 2B: Reversing Entries

Reversing entries remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period. Reversing entries are optional and are used most often with accruals.

appendix 2c subsidiary ledgers
Appendix 2C: Subsidiary Ledgers

Subsidiary ledgers contain a group of subsidiary accounts associated with particular general ledger control accounts. Subsidiary ledgers are commonly used for accounts receivable, accounts payable, plant and equipment, and investments.

For example, there will be a subsidiary ledger for accounts receivable that keeps track of the increases and decreases in the accounts receivable balance for each of the company’s customers purchasing goods and services on credit.

After all of the postings are made from the appropriate journals, the balance in the accounts receivable control account should equal the sum of the balances in the accounts receivable subsidiary ledger accounts.

appendix 2c special journals
Appendix 2C: Special Journals

Special journals are used to capture the dual effect of repetitive types of transactions in debit/credit form.

  • Special journals simplify the recording process in the following ways:
  • Journalizing the effects of a particular transaction is made more efficient through the use of specifically designed formats.
  • Individual transactions are not posted to the general ledger accounts but are accumulated in the special journals and a summary posting is made on a periodic basis.
  • The responsibility for recording journal entries for the repetitive types of transactions is placed on individuals who have specialized training in handling them.

Let’s look at some special journals.

sales journal
Sales Journal

Sales journals record all credit sales. Every entry in the sales journal has the same effect on the accounts; the sales revenue account is credited and the accounts receivable control account is debited.

Other columns capture information needed for updating the accounts receivable subsidiary ledger.

cash receipts journal
Cash Receipts Journal

Cash receipts journals record all cash receipts, regardless of the source. Every entry in the cash receipts journal produces a debit to the cash account with the credit to various other accounts.