PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Review of the Accounting Process

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Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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The Accounting Equation

A = L + OE- Owner Withdrawals+ Owner Investments

- Expenses- Losses

+ Revenues+ Gains

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Accounting Equation for a Corporation

A = L + SE+ Retained Earnings+ Paid-in Capital

- Expenses- Losses

+ Revenues+ Gains

- Dividends

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Accounting Equation, Debits and Credits, Increases and Decreases

Permanent Accounts—assets, liabilities, paid-in capital, retained earningsTemporary Accounts-revenues, gains, expenses, losses

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The Accounting Processing

Cycle

Source documents

Record in Journal

Transaction Analysis

Post to Ledger

During the Accounting Period

Financial Statements

Unadjusted Trial Balance

Adjusted Trial Balance

At the End of the Accounting Period

Record & Post Adjusting

Entries

Close Temporary Accounts

Post-Closing Trial Balance

At the End of the Year

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The Accounting Processing Cycle

On July 1, two individuals each invested $30,000 in a new business, Dress Right Clothing Corporation. Each

investor was issued 3,000 shares of common stock.

Two accounts are affected:Cash (an asset) increases by $60,000.Common stock (a shareholders’ equity) increases

by $60,000.

July 1Cash 60,000

Common stock 60,000

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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.

Adjusting Entries

Prepayments Accruals Estimates

Accountants must often make estimates in order

to comply with the accrual accounting

model.

At the end of the period, adjusting entries are required to satisfy the realization principle and

the matching principle.

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Asset Expense

UnadjustedBalance

CreditAdjustment

DebitAdjustment

Prepaid Expenses

Today, I will payfor my first

6 months’ rent. Prepaid Expenses

Items paid for in advance of receiving their benefits

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Depreciation

Depreciation is the process of allocating the cost of plant and equipment over their expected

useful lives.

Straight-LineDepreciation =

Asset Cost - Salvage Value

Useful Life

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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, 2011.

Asset Cost 12,000$ Salvage Value - Useful Life 60 months

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JulyDepreciation

Expense=

$12,000 - $0

60 months= $200 per month

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

Asset Cost 12,000$ Salvage Value - Useful Life 60 months

Depreciation

July 31Depreciation expense 200

Accumulated depreciation-furniture and fixtures 200

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Liability RevenueUnadjusted

BalanceCredit

AdjustmentDebit

Adjustment

Unearned Revenues

“Go Big Red”

Buy your season tickets forall home basketball games NOW! Unearned Revenue

Cash received in advance of performing

services

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Estimates

• Examples– Depreciation – Uncollectible accounts

$$

Accountants often must make estimates of future events to comply with the accrual

accounting model.

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Estimates

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.

July 31Bad debt expense 500

Allowance for uncollectible accounts 500

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The income statement summarizes the results of profit-generating activities of the company.

The Income Statement

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Current assets: Cash 68,500$ Accounts receivable 2,000$ Less: Allowance for uncollectible accounts 500 1,500 Supplies 1,200 Inventory 38,000 Prepaid rent 22,000 Total current assets 131,200 Property and equipment: Furniture and fixtures 12,000 Less: Accumulated depreciation 200 11,800 Total assets 143,000$

Dress Right Clothing CorporationBalance SheetAt July 31, 2011

Assets

The balance sheet presents the financial position of the company on a particular date.

The Balance Sheet

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Current liabilities: Accounts payable 35,000$ Salaries payable 5,500 Unearned rent revenue 750 Interest payable 333 Note payable 10,000 Total current liabilities 51,583 Long-term liabilities: Note payable 30,000 Shareholders' equity: Common stock 60,000$ Retained earnings 1,417 Total shareholders' equity 61,417 Total liabilities and shareholders' equity 143,000$

Dress Right Clothing CorporationBalance SheetAt July 31, 2011

Liabilities and Shareholders' Equity

Notice that assets of $143,000 equals total liabilities plus shareholders’ equity of $143,000.

The Balance Sheet

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The statement of shareholders’ equity presents the changes in permanent

shareholder accounts.

Common Stock

Retained Earnings

Total Shareholders'

EquityBalance at July 1, 2011 -$ -$ -$ Issue of capital stock 60,000 60,000 Net income for July 2011 2,417 2,417 Less: Dividends (1,000) (1,000) Balance at July 31, 2011 60,000$ 1,417$ 61,417$

Dress Right Clothing CorporationStatement of Shareholders' Equity

For the Month of July 2011

The Statement of Shareholders’ Equity

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Temporary Accounts

Revenues

Income Summary

Exp

ense

s

Divid

end

s

Permanent Accounts

Assets

Lia

bili

ties

Sh

areho

lders’

Eq

uity

The closing process applies only to temporary accounts.

The Closing Process

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Post-Closing Trial Balance

Lists permanent accounts and their

balances.

Total debits equal total credits.

DRESS RIGHT CLOTHING CORPORATIONPost-Closing Trial Balance

July 31, 2011Account Title Debits CreditsCash 68,500$ Accounts receivable 2,000 Allowance for uncollectible accounts 500$ Supplies 1,200 Prepaid rent 22,000 Inventory 38,000 Furniture and fixtures 12,000 Accumulated depr.-furniture & fixtures 200 Accounts payable 35,000 Note payable 40,000 Unearned rent revenue 750 Salaries payable 5,500 Interest payable 333 Common stock 60,000 Retained earnings 1,417 Totals 143,700$ 143,700$

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Sales JournalSales 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.

SALES JOURNAL Page 1

Date

Accounts Receivable Subsidiary

Account No. Customer Name

Sales Invoice Number

Cr. Sales Revenue

(400)Dr. Accounts Receivable

(110)

Aug. 5 801 Leland High School 10-221 1,500

9 812 Mr. John Smith 10-222 200

18 813 Greystone School 10-223 825

22 803 Ms. Barbara Jones 10-224 120

29 805 Hart Middle School 10-225 650

3,295

2011

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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.CASH RECEIPTS JOURNAL Page 1

DateExplanation or Account Name

Dr. Cash (100)

Cr. Accounts

Receivable (110)

Cr. Sales

Revenue (400)

Cr. Other

Other Accounts

Aug. 7 Cash sale 500 500

11 Borrowed cash 10,000 10,000

Notes payable

(220)

17 Leland High School 750 750

20 Cash sale 300 300

25 Mr. John Smith 200 200

11,750 950 800 10,000

2011

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End of Chapter 2