Conducted by: Mr. Koy Chumnith

Review of the Accounting Process

2

2011, Royal University of Law and EconomicsMcGraw-Hill/Irwin

2 - 2

The Accounting Equation

A = L + OE- Owner Withdrawals+ Owner Investments

- Expenses- Losses

+ Revenues+ Gains

2 - 3

Accounting Equation for a Corporation

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

- Expenses- Losses

+ Revenues+ Gains

- Dividends

2 - 4

Accounting Equation, Debits and Credits, Increases and Decreases

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

2 - 5

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

2 - 6

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

2 - 7

General Ledger

The “T” account is a shorthand format of an account used by accountants to analyze transactions.

It is not part of the bookkeeping system.

2 - 8

Posting Journal Entries

2 - 9

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

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

Debits = Credits

A Trial Balance is a

list of all accounts and their

balances at a particular

date.

A Trial Balance is a

list of all accounts and their

balances at a particular

date.

2 - 10

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.

2 - 11

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

2 - 12

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

2 - 13

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

2 - 14

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

2 - 15

Depreciation

After posting, the accounts look like this:

Beg. bal. - 12,000

Bal. 12,000

Furniture and FixturesBeg. bal. -

200 Bal. 200

Depreciation Expense

- Beg. bal.200 200 Bal.

Accumulated Depreciation

2 - 16

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

2 - 17

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 $$$ Expense $$$

2 - 18

Expense LiabilityCredit

AdjustmentDebit

Adjustment

Accrued Liabilities

I won’t pay youuntil the job is done!

Accrued Liabilities

Liabilities recorded when an expense has been incurred

prior to cash payment.

2 - 19

Asset Revenue

CreditAdjustment

DebitAdjustment

Accrued Receivables

Yes, you can pay mein May for your April

15 tax return.Accrued Receivables

Revenue earned in a period prior to the cash

receipt.

2 - 20

Estimates

• Examples– Depreciation – Uncollectible accounts

$$

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

accounting model.

2 - 21

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

2 - 22

DRESS RIGHT CLOTHING CORPORATIONAdjusted 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 1,000 Sales revenue 38,500 Rent revenue 250 Cost of goods sold 22,000 Salaries expense 10,500 Supplies expense 800 Rent expense 2,000 Depreciation expense 200 Interest expense 333 Bad debt expense 500 Totals 181,033$ 181,033$

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.

2 - 23

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

The Income Statement

2 - 24

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

2 - 25

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

2 - 26

Cash flows from Operating Activities:Cash inflows: From customers 36,500$ From rent 1,000 Cash outflows: For rent (24,000) For supplies (2,000) To suppliers for merchandise (25,000) To employees (5,000) Net cash used by operating activities (18,500)$ Cash flows from Investing Activities: Purchase of furniture and fixtures (12,000) Cash flows from Financing Activities: Issue of capital stock 60,000$ Increase in notes payable 40,000 Payment of cash dividend (1,000) Net cash provided by financing activities 99,000 Net increase in cash 68,500$

Dress Right Clothing CorporationStatement of Cash Flows

For the Month of July 2011

The Statement of Cash Flows

The statement of cash flows discloses the changes in cash during a period.

2 - 27

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

2 - 28

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

2 - 29

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$

2 - 30

Conversion From Cash Basis to Accrual Basis

Increases Decreases

Assets Add Deduct

Liabilities Deduct Add

2 - 31

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:

1. Enter account titles in column A and the unadjusted account balances in columns B and C.

2. Determine end-of-period adjusting entries and enter them in columns E and G.

3. Add or deduct the effects of the adjusting entries on the account balances and enter in columns H and I.

4. Transfer the temporary retained earnings account balances to columns J and K.

5. Transfer the balances in the permanent accounts to columns L and M.

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

2 - 32

A B C D E F G H I J K L MWorksheet, Dress Right Clothing Corporation, July 2011

Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 68,500 68,500 68,500 Accounts receivable 2,000 2,000 2,000

Allowance for uncollectible accounts - (7) 500 500 500 Supplies 2,000 (1) 800 1,200 1,200 Prepaid rent 24,000 (2) 2,000 22,000 22,000 Inventory 38,000 38,000 38,000 Furniture and fixtures 12,000 12,000 12,000 Accumulated depr.- furniture & fixtures - (3) 200 200 200 Accounts payable 35,000 35,000 35,000 Note payable 40,000 40,000 40,000 Unearned rent revenue 1,000 (4) 250 750 750 Salaries payable - (5) 5,500 5,500 5,500 Interest payable - (6) 333 333 333 Common stock 60,000 60,000 60,000 Retained earnings 1,000 1,000 1,000 Sales revenue 38,500 38,500 38,500 Rent revenue - (4) 250 250 250 Cost of goods sold 22,000 22,000 22,000 Salaries expense 5,000 (5) 5,500 10,500 10,500 Supplies expense - (1) 800 800 800 Rent expense - (2) 2,000 2,000 2,000 Depreciation expense - (3) 200 200 200 Interest expense - (6) 333 333 333 Bad debt expense - (7) 500 500 500 Totals 174,500 174,500 9,583 9,583 181,033 181,033

Net income 2,417 2,417 Totals 38,750 38,750 144,700 144,700

Balance SheetUnadjusted Trial

Balance Adjusting Entries Adjusted Trial Balance Income Statement

2 - 33

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.

2 - 34

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.

2 - 35

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:

1. Journalizing the effects of a particular transaction is made more efficient through the use of specifically designed formats.

2. 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.

3. The responsibility for recording journal entries for the repetitive types of transactions is placed on individuals who have specialized training in handling them.

2 - 36

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

2 - 37

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

2 - 38

End of Chapter 2