Review of the Accounting Process

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Review of the Accounting Process

• Chapter 2

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The Basic Model
Economic events cause changes in the financial
position of a company.
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The Accounting Equation
A L OE

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Accounting Equation for a Corporation
A L SE
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Account Relationships

Debits and credits affect the Balance Sheet Model
as follows
A L PIC RE
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Account Relationships
Debits and credits affect the Balance Sheet Model
as follows
A L PIC RE R G- E - L
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Source documents
Record in Journal
Transaction Analysis
Post to Ledger
Financial Statements
Unadjusted Trial Balance
Record Post Adjusting Entries
Adjusted Trial Balance
The Accounting Processing Cycle
Close Temporary Accounts
Post-Closing Trial Balance
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General Ledger
The T account is a shorthand used
by accountants to analyze transactions. It is
not part of the bookkeeping system.
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Posting Journal Entries

• On July 1, 2006, the owners invest 60,000 in a
  new business, Dress Right Clothing Corporation.

Post the debit portion of the entry to the Cash
ledger account.
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Posting Journal Entries
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Posting Journal Entries
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Posting Journal Entries
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Posting Journal Entries
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Posting Journal Entries
Post the credit portion of the entry to the
Common Stock ledger account.
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Posting Journal Entries
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Posting Journal Entries
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Posting Journal Entries
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After recording all entries for the period, Dress
Rights 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
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Adjusting Entries

• At the end of the period, some transactions or
  events remain unrecorded.
• Because of this, several accounts in the ledger
  need adjustments before their balances appear in
  the financial statements.

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

• Assume that on July 31, 2006, Dress Right
  determines that at the end of July 1,200 of
  supplies remains. Lets look at the adjusting
  journal entry needed on July 31, 2006.

Prepare the adjusting entry.
2,000 - 1,200 800 supplies used
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Prepaid Expenses

• After posting, the accounts look like this

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Depreciation

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

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Depreciation
Recall the Furniture and Fixtures for 12,000
listed on Dress Rights unadjusted trial balance.
Assume the following Lets calculate the
depreciation expense for the month ended July 31,
2006.
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Depreciation
Recall the Furniture and Fixtures for 12,000
listed on Dress Rights unadjusted trial balance.
Assume the following
2006 Depreciation Expense
12,000 - 0 60 months


200
Now, prepare the adjusting entry for July 31,
2006.
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Unearned Revenues
Revenue
Liability
Unadjusted Balance
Credit Adjustment
Debit Adjustment
Buy your season tickets for all home
basketball games NOW!
Unearned Revenue Cash received in advance of
performing services
Go Big Blue
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Alternative Approach to Record Prepayments
Unearned RevenueRecord initial cash receipts as
follows Cash Revenue
Adjusting EntryRecord the amount for the
unearned liability as follows Revenue
Unearned revenue
Prepaid ExpensesRecord initial cash payments as
follows Expense Cash
Adjusting EntryRecord the amount for the
prepaid expense as follows Prepaid expense
Expense
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Accrued Liabilities
Liability
Expense
Credit Adjustment
Debit Adjustment
I wont pay you until the job is done!
Accrued Liabilities Costs incurred in a period
that are both unpaid and unrecorded
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Accrued Liabilities
Last pay date 7/20/06
Next pay date 8/2/06
7/1/06
Record adjusting journal entry.
7/31/06 Month end
On July 31, 2006, the employees have earned
salaries of 5,500.
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Accrued Liabilities
After posting, the accounts look like this
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Accrued Receivables
Revenue
Asset
Credit Adjustment
Debit Adjustment
Yes, you can pay me in May for your April 15 tax
return.
Accrued Receivables Revenues earned in a period
that are both unrecorded and not yet received
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Accrued Receivables

• Assume that Dress Right loaned another
  corporation 30,000 at the beginning of August.
  Terms of the note call for the payment of
  principal, 30,000, and interest at 8 in three
  months.
• First, lets determine the amount of interest to
  accrue at August 31, 2006.

P R T 30,000 .08
1/12
Interest 200
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Accrued Receivables

• Assume that Dress Right loaned another
  corporation 30,000 at the beginning of August.
  Terms of the note call for the payment of
  principal, 30,000, and interest at 8 in three
  months.
• Now, lets prepare the adjusting entry for August
  31, 2006.

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Accrued Receivables
After posting, the accounts look like this
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Estimates

• Uncollectible accounts and depreciation of fixed
  assets are estimated.
• An estimated item is a function of future events
  and developments.

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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 Rights management determines
that of the 2,000 of accounts receivable
recorded at July 31, 2006, only 1,500 will
ultimately be collected. Prepare the adjusting
entry for July 31, 2006.
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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.
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The income statement summarizes the results of
operating activities of the company.
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The balance sheet presents the financial position
of the company on a particular date.
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The balance sheet presents the financial position
of the company on a particular date.
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The statement of cash flows discloses the changes
in cash during a period.
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The statement of shareholders equity presents
the changes in permanent shareholder accounts.
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The Closing Process

• Resets revenue, expense and dividend account
  balances to zero at the end of the period.
• Helps summarize a periods revenues and expenses
  in the Income Summary account.

Identify accounts for closing.
Record and post closing entries.
Prepare post-closing trial balance.
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Temporary and Permanent Accounts
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Closing Entries

• Close Revenue accounts to Income Summary.
• Close Expense accounts to Income Summary.
• Close Income Summary account to Retained Earnings.

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• Close Revenue accounts to Income Summary.

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Close Revenue Accounts to Income Summary
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Revenue Accounts to Income Summary

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• Close Expense accounts to Income Summary.

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Close Expense Accounts to Income Summary
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Expense Accounts to Income Summary
Net Income
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• Close Income Summary to Retained Earnings.

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Close Income Summary to Retained Earnings
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Income Summary to Retained Earnings
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Post-Closing Trial Balance
Lists permanent accounts and their balances.
Total debits equal total credits.
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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.
Lets consider the following accrual adjusting
entry made by Dress Right.
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Reversing Entries
If reversing entries are used, the following
reversing entry is made on August 1, 2006. This
entry reduces the salaries payable account to
zero and reduces the salaries expense account by
5,500.
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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. What was insurance expense
for the period?
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End of Chapter 2