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McGraw-Hill /Irwin 2009 The McGraw-Hill Companies, Inc.
REVIEW OF THEACCOUNTING PROCESS
Chapter 2
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Slide 2
2-2
Accounting Equation for a Corporation
A = L + SE+ Retained Earnings+ Paid-in Capital
- Expenses- Losses
+ Revenues+ Gains
- Dividends
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Account Relationships
Debits and credits affect the Balance SheetModel as follows:
A = L + PIC + REAssets
Dr.
+
Cr.
-
Liabilities
Dr.
-
Cr.
+
Paid-inCapitalDr.-
Cr.+
RetainedEarnings
Dr.
-
Cr.
+
Revenuesand GainsDr.-
Cr.+
Expensesand Losses
Dr.+ Cr.-
Permanent AccountsTemporary Accounts
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Sourcedocuments
Record inJournal
FinancialStatements
TransactionAnalysis
Post toLedger
UnadjustedTrial Balance
Record & PostAdjusting
Entries
AdjustedTrial Balance
Close TemporaryAccounts
Post-ClosingTrial Balance
TheAccountingProcessing
Cycle
During the Accounting Period
At the End of the Accounting Period
At the Endof the Year
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Accounting Processing Cycle
On January 1, $40,000 was borrowed from abank and a note payable was signed.
Prepare the journal entry.
Two accounts are affected:
Cash (an asset) increases by $40,000. Notes Payable (a liability) increases by $40,000.
GENERAL JOURNAL Page 1
Date Description
Post.
Ref. Debit Credit
Jan 1 Cash 40,000
Notes Payable 40,000
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General Ledger
The T accountis a shorthand format of an accountused by accountants to analyze transactions.
It is not part of the bookkeeping system.
GENERAL LEDGER
Account: Acct. No. ##
Balance
Date Item
Post.
Ref. Debit Credit DR (CR)
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Posting Journal Entries
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Account Title Debits Credits
Cash 68,500$
Accounts receivable 2,000
Supplies 2,000Prepaid rent 24,000
Inventory 38,000
Furniture and fixtures 12,000
Accounts payable 35,000$
Notes payable 40,000
Unearned rent revenue 1,000Common stock 60,000
Retained earnings 1,000
Sales revenue 38,500
Cost of goods sold 22,000
Salaries expense 5,000
Total 174,500$ 174,500$
Dress Right Clothing Corporation
Unadjusted Trial Balance
July 31, 2009
After recording all entries for the period, Dress RightsUnadjusted Trial Balance would be as follows:
Debits = Credits
A TrialBalanceis alisting of all
accountsand their
balances ata point in
time.
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Slide 9
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Transactions wherecash is paid or received
beforea relatedexpense or revenue is
recognized.
Transactions wherecash is paid or receivedaftera related expense
or revenue isrecognized.
Adjusting Entries
Prepayments Accruals Estimates
Accountants must oftenmake estimatesin order
to comply with theaccrual accounting
model.
At the end of the period, adjusting entries arerequired to satisfy the realization principle and
the matching principle.
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Asset Expense
UnadjustedBalance
CreditAdjustment
DebitAdjustment
Prepaid Expenses
Today, I will pay
for my first
6 months rent. Prepaid Expenses
Items paid for in advanceof receiving their benefits
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Depreciation is the process of computingexpense by allocating the cost of plant andequipment over their expected useful lives.
Straight-LineDepreciationExpense
=Asset Cost - Salvage Value
Useful Life
Depreciation
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Liability Revenue
UnadjustedBalance
CreditAdjustment
DebitAdjustment
Unearned Revenues
Go Streaks
Buy your season tickets for
all home basketball games NOW! Unearned Revenue
Cash received inadvance of performing
services
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Alternative Approach to Record Prepayments
Unearned RevenueRecord initial cash receipts
as follows:
Cash $$$
Revenue $$$
Adjusting Entry
Record the amount for the
unearned liability as
follows:
Revenue $$$
Unearned revenue $$$
Prepaid ExpensesRecord initial cash
payments as follows:
Expense $$$
Cash $$$
Adjusting Entry
Record the amount for the
prepaid expense as
follows:
Prepaid expense $$$
Expense $$$
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Expense Liability
CreditAdjustment
DebitAdjustment
Accrued Liabilities
I wont pay you
until the job is done!
Accrued Liabilities
Liabilities recorded when anexpense has been incurred
prior to cash payment.
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Asset Revenue
CreditAdjustment
DebitAdjustment
Accrued Receivables
Yes, you can pay mein May for your April
15 tax return. Accrued ReceivablesRevenue earned in a
period prior to the cashreceipt.
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Estimates
Uncollectibleaccounts anddepreciation of fixed
assets are estimated.
An estimated item isa function of futureevents anddevelopments.
$
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Estimates
Page 30
Date Description
Post.
Ref. Debit Credit
July 31 Bad Debt Expense 500
Allowance for Uncollectible
Accounts 500
GENERAL JOURNAL
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Dress Right Clothing Corporation
Income Statement
For Month Ended July 31, 2009
Sales revenue 38,500$
Cost of goods sold 22,000
Gross profit 16,500
Other expenses:
Salaries 10,500$
Supplies 800
Rent 2,000
Depreciation 200Bad debt 500
Total operating expenses 14,000
Operating income 2,500
Other income (expense):
Rent revenue 250Interest expense (333) (83)
Net income 2,417$
The income statement summarizes the results
of operating activities of the company.
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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 38,000Prepaid 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 Corporation
Balance Sheet
At July 31, 2009
Assets
The balance sheet presents the financial
position of the company on a particular date.
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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 1,417Total shareholders' equity 61,417
Total liabilities and shareholders' equity 143,000$
Dress Right Clothing Corporation
Balance Sheet
At July 31, 2009
Liabilities and Shareholders' Equity
Notice that assets of $143,000 equal total
liabilities plus shareholders equity of $143,000.
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The statement of cash flows discloses the
changes in cash during a period.
Cash flows from operating activities:
Cash inflows:
From customers 36,500$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 Corporation
Statement of Cash Flows
For the Month of July 2009
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TemporaryAccounts
Revenues
IncomeSummary
Expen
ses
Div
idends
PermanentAccounts
Assets
Liabilities
Shareholders
Eq
uity
The closing process applies
only to temporary accounts.
Temporary and Permanent Accounts
RetainedEarnings
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CLOSING ENTRIES
Two Objectives of Closing Entries:
1.Set the Temporary Accounts (Income Statement
accounts and Dividends) to zero.
2.Update the Retained Earnings account (includecurrent period earnings and dividends).
DRESS RIGHT CLOTHING CORPORATION
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Adjusted Trial Balance
July 31, 2009
Account Title Debits Credits
Cash 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 750Salaries 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 22,000Salaries 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 AdjustedTrial Balance for
Dress Right after alladjusting entries have
been recorded andposted.
Dress Right will usethese balances to
prepare the financialstatements.
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Dress Right Closing Entries
Sales revenue 38,500
Rent revenue 250Income Summary 38,750
Income Summary 36,333Cost of goods sold 22,000Salaries expense 10,500
Supplies expense 800Rent expense 2,000Depreciation expense 200Interest expense 333Bad debt expense 500
Income Summary 2,417Retained Earnings 2,417
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Post-Closing Trial Balance
Lists permanentaccounts and their
balances.
Total debits equaltotal credits.
DRESS RIGHT CLOTHING CORPORATION
Post-Closing Trial Balance
July 31, 2009
Account Title Debits Credits
Cash 68,500$
Accounts receivable 2,000
Allowance for uncollectible accounts 500$
Supplies 1,200Prepaid 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 750Salaries payable 5,500
Interest payable 333
Common stock 60,000
Retained earnings 1,417
Totals 143,700$ 143,700$