Chapter 3, Part 1

1
AGRICULUTURAL TECHNICAL INSTITUTEBUS TEC T101
ACCOUNTING

• Chapter 3, Part 1

The Adjusting Process
2
REVIEW
CH 2 RECORDING BUS TRANSACTIONS
2. Procedures a. Journalizing b. Postingc.
Preparing Trial Balance
1. Terms a. T Accounts b. Ledgerc. Journald.
Debits Creditse. Normal Balance f. Trial
Balance
3
The Four-Column Account Format
Account
Account No.

Balance
Date Item Ref. Debit Credit
Debit Credit
4
ACCOUNTING CONCEPTS
Chapter One
Business Transactions
Journal Entries
Chapter Two
Posting to Ledgers
Trial Balance
Chapter Three
Adjustments
Adjusted Trial Balance
Financial Statements
5
ACCOUNTING CONCEPTS

• CH 1 ACCT THE BUS ENVIRONMENT
• CH 2 RECORDING TRANSACTIONS
• CH 3 THE ADJUSTING PROCESS
• CH 4 COMPLETING THE ACCTING CYCLE
• CH 5 MERCHANDISE OPERATIONS
• CH 6 MERCHANDISE INVENTORY
• CH 7 SPECIAL JOURNALS
• CH 8 CONTROLLING CASH
• CH 9 RECEIVABLES
• CH 10 PLANT ASSETS INTANGIBLES
• CH 11 CURRENT LIABILTIES PAYROLL
• CH 17 CASH FLOW

6
LEARNING OBJECTIVES
CH 3 THE ADJUSTING PROCESS

• AFTER COMPLETING THIS LESSON, THE STUDENT SHOULD
  BE ABLE TO
• 1.
• 2.
• 3.
• 4.
• 5.

Accrual-basis vs Cash-basis accounting.
Apply revenue expense matching principles.
Make adjusting entries _at_ end of accting period
Prepare an adjusted trial balance
Prepare fin statements from adjusted trial balance
7
92
ACCRUAL VS CASH ACCOUNTING
1
OBJ
Accrual-basis Transactions are recorded when
revenues are earned or expenses are incurred.
Cash-basis Transactions are recorded when cash
is paid or cash is received.
8
92
ACCRUAL VS CASH ACCOUNTING
1
OBJ
Accrual-basis Transactions are recorded when
revenues are earned or expenses are incurred.
Cash-basis Transactions are recorded when cash
is paid or cash is received.

• Penn Insurance sells a 3 yr health insurance
  policy to a business client.
• The contract specifies payment of 150,000 in
  advance.
• Yearly expenses amount to 20,000.

9
92
ACCRUAL VS CASH ACCOUNTING
1
OBJ
Penn Insurance
Cash-Basis Accounting
2002 2003 2004
(000 omitted)
Cash inflows Cash outflows ____ Net
income (loss)
150
0
0
20
____
____
20
20
130
(20)
(20)
Accrual-Basis Accounting
(000 omitted)
2002 2003 2004
Cash inflows Cash outflows ____ Net
income (loss)
50
50
50
20
20
20
30
30
30
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92
ACCRUAL VS CASH ACCOUNTING
1
OBJ
Cash-Basis Accounting

• Only records cash receipts and cash payments
• Ignores receivables, payables, and depreciation
• Faulty accounting

Accrual-Basis Accounting

• Records the effects of transactions as they
  occur
• Correct way to do accounting

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92
ACCRUAL VS CASH ACCOUNTING EXAMPLE
1
OBJ
Your business collects 3,000 from a customer on
January 1 for services to be provided in Jan.,
Feb., March. How much service revenue would
you record?
Jan. Feb. March
Cash-Basis Accounting 3,000
Accrual-Basis Accounting 1,000 1,000 1,000
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92
ACCRUAL VS CASH ACCOUNTING EXAMPLE
1
OBJ
Your business prepays 6,000 for advertising that
will run during Oct., Nov., and Dec. How much
advertising expense would you record?
Oct. Nov. Dec.
Cash-Basis Accounting 6,000
Accrual-Basis Accounting 2,000 2,000 2,000
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Interim Period Statements
94
THE ACCOUNTING PERIOD
Accounting Period
Managers adopt an artificial period of time to
evaluate performance.
Monthly
Quarterly
Semi-annually
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Apply the revenue expense matching principles.
94-96
2
OBJ
Accounting Principles From Chap 1
GOING CONCERN
ENTITY
STABLE MONETARY UNIT
COST
OBJECTIVITY
Accounting Principles From Chap 3
REVENUE
MATCHING
TIME
15
Apply the revenue expense matching principles.
94
2
OBJ
Revenue Principle
Revenue recognized (recorded) when it is deemed
earned, not necessarily when it was received.
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The Matching Principle
Apply the revenue expense matching principles.
94
2
OBJ

• It is the basis for recording expenses.
• Expenses are the costs of assets the increase
  in liabilities incurred in the earning of
  revenues.
• Expenses are recognized when the benefit from the
  expense is received.
• Directs accountants to
• Identify all expenses incurred during the period
  measure the expenses
• Match the expenses against revenues earned during
  the period

17
Matching Expenses with Revenues Example
Apply the revenue expense matching principles.
94
2
OBJ

• Parker Floor sells a wood floor for 15,000 on
  the last day of May.
• The wood was purchased from the manufacturer for
  8,000 in March of the same year.
• The floor is installed in June.
• When is income recognized?

18
Matching Expenses with Revenues Example
Apply the revenue expense matching principles.
94
2
OBJ
May
Revenues 15,000 Cost of goods sold
8,000 Net income 7,000
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The Time Period Concept
Apply the revenue expense matching principles.
96
2
OBJ

• It requires that accounting information be
  reported at regular intervals.

Interacts with the revenue principle and the
matching principle
Requires that income be measured accurately each
period
20
Next Time

• Well be discussing adjusting entries which are
  key to accrual accounting!