financial accounting lecture

FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTINGLecture 1-2

LEARNING OBJECTIVES

Accounting and business environmentgAccounting cycle

To start a business you need:• An idea that will become a product or service

A k t f t h t th d t i• A market of customers who want the product or service you offer

TYPES OF BUSINESS ORGANIZATIONSTYPES OF BUSINESS ORGANIZATIONS

Service companiesMerchandise companiesMerchandise companiesManufacturing companies

FORMS OF BUSINESS ORGANIZATION

P i hiProprietorshipPartnershipCorporationCorporation

BUSINESS ACTIVITIES

Financing activitiesgInvesting activitiesOperating activities

Accountingg

- a process of identifying, recording summarizing and recording, summarizing, and reporting economic information to decision makers information to decision makers in the form of financial t t tstatements.

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fTypes of accounting

Financial accounting

Cost and management

Tax accountingaccounting g

accounting

Users of Accounting InformationUsers of Accounting InformationUsers of Accounting InformationUsers of Accounting Information

investors• investorsdicreditors

regulatorsEXTERNAL USERS

Financial AccountingFinancial Accounting • creditors• regulators• customers

customerscompetitors

• competitors

s

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Users of Accounting InformationUsers of Accounting InformationUsers of Accounting InformationUsers of Accounting Information

• investorsdi

EXTERNAL USERS

Financial AccountingFinancial Accounting • creditors• regulators• Customers• Suppliers

ownersFinancialFinancial AccountingAccounting

• Ownersmanagersemployees

INTERNAL USERS • Managers• Employees

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ACCOUNTING CONCEPTS AND PRINCIPLES

What is the primary objective of financial p y jAccounting and Reporting?

Accountants follow professional guidelines.

The rules that govern accounting are called GAAP(generally accepted accounting principles)(generally accepted accounting principles).

Financial Accounting Standards Board (FASB)Financial Accounting Standards Board (FASB)

GENERALLY ACCEPTED ACCOUNTINGPRINCIPLES AND CONCEPTSPRINCIPLES AND CONCEPTS

Entity - Every entity is a separate economic unit and should be kept distinct from the activities of its owners and other companiesMonetary Unit - only economic events that have o eta y U t o y eco o c eve ts t at ave monetary transactions will be reported in the financial statementsCost Principle assets are presented at their Cost Principle - assets are presented at their original (historical) costGoing Concern - companies are established with th l th t th ill t f i d fi it l the goal that they will operate for an indefinitely long period of time

1111-52

Periodicity - economic activities of yany firm can be divided into discrete time periods for reporting purposes M hi P i i l ll Matching Principle -all revenues must be recorded in the accounting period in which the goods are sold or period in which the goods are sold or services are rendered and all expenses must be recorded in the

ti i d i hi h th accounting period in which they are incurred to produce such revenues

Basic Accounting Equation

AssetsAssets LiabilitiesLiabilities Owner’s Owner’s = +

Basic Accounting Equation

AssetsAssets LiabilitiesLiabilities EquityEquity= +

The basic tool of accounting is the accounting equation. It measures the economic resources of a business and claims to those resourcesclaims to those resources.

The accounting equation shows how assets, liabilities, and owner’s equity are related.

The accounting equation shows the financial position ofThe accounting equation shows the financial position of the business.

ASSETS , LIABILITIES, AND OWNER’S EQUITY

Assets are the economic resources of a business that are expected to provide benefits to the b i i th f t business in the future.

Assets are what the business owns. For example: Cash merchandise inventory For example: Cash, merchandise inventory,

furniture, and land.

ASSETS , LIABILITIES, AND OWNER’S EQUITYClaims to those assets come from two sources:

Liabilities are outsider claims to the assets of a Liabilities are outsider claims to the assets of a business.Owner’s equity or capital represents the insider claims q y p pto the assets of a business.

AssetsAssets = LiabilitiesLiabilities + Owner’s Owner’s EquityEquityq yq y

Economic Economic resourcesresources Claims to economic resourcesClaims to economic resources

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

OWNER’S EQUITY

decreased bydecreased by increased byincreased by

Owner’s withdrawals Owner’s investments

Expenses Revenues

16

EFFECTS OF A BUSINESS TRANSACTION ONACCOUNTING EQUATIONACCOUNTING EQUATION

1. Investment by owner. Kay Torres invests $20,000 of her own money to start business The Kay Torres Travel Agency

A t Li biliti O ’ E it

own money to start business . The Kay Torres Travel Agency began an activity on June 1, 2011.

Assets = Liabilities + Owner’s EquityCash Owner’s Equity

(1) +$20,000 = + $20,000( ) $ , $ ,Bal. $20,000 = $20,000

2. Purchase an equipment for cash. The travel agency purchases equipment paying cash of $9 000purchases equipment, paying cash of $9,000.

A t Li biliti O ’ E itAssets = Liabilities + Owner’s EquityCash + Equipment = Owner’s Equity

(1) +$20,000 + $20,000( ) $ , $ ,(2) -$9,000 +$9,000

Bal. $11,000 + $9,000= $20,000

3. Borrow cash from the bank. The travel agency borrows $15,000 cash from the bank and signs a 2 year note payable to the bank.

Assets = Liabilities + Owner’s EquityCash + Equipment = Notes payable Owner’s Equity

(1) +$20,000 + $20,000(2) -$9,000 +$9,000

(3) +$15,000 +$15,000(3) $15,000 $15,000Bal. $26,000 + $9,000= $15,000 + $20,000

4. Purchase supplies on credit. The travel agency purchases office supplies for the agency, agreeing to pay $1,200 within pp g y, g g p y ,30 days.

Assets = Liabilities Owner’s E it+ Equity

Cash + Supplies Equipment =

AccountsPayable

Notes payable

Owner’s Equity

(1) +$20,000

+ $20,000

(2) -$9,000 +$9,000(2) $9,000 $9,000(3)

+$15,000+$15,000

(4) +$1 200 +$1 200(4) +$1,200 +$1,200Bal.

$26,000 + $1,200+ $9,000= $1,200+ $15,000 + $20,000

5. Provide services for cash. The travel agency makes $2,300 of travel arrangements and collects this amount in , gcash.

Assets = Liabilities Owner’s E it+ Equity

Cash + Supplies Equipment =

AccountsPayable

Notes payable

Owner’s Equity

(1) +$20,000

+ $20,000

(2) -$9,000 +$9,000(2) $9,000 $9,000(3)

+$15,000+$15,000

(4) +$1 200 +$1 200(4) +$1,200 +$1,200(5) +$2,300 +$2,300

Bal. $28,300 + $1,200+ $9,000= $1,200+ $15,000 + $22,300

6. Provide services on credit. The travel agency performs $5,200 of services and ,in return, receives clients promises to pay this $5,200 within one month.

Assets = Liabilities +

Owner’s Equity

Cash + Accounts Receivable

Supplies Equipment =

AccountsPayable

Notes payable

Owner’s Equity

(1) + +$20,000 $20,000

(2) -$9,000

+$9,000

(3) +$15,000

+$15,000

(4) +$1 200 +$1 200(4) +$1,200 +$1,200(5)

+$2,300+$2,300

$ $(6) +$5,200 +$5,200Bal.

$28,300 $5,200 $1,200+ $9,000= $1,200+ $15,000 $27,500

7. Partial payments of accounts payable. The travel agency pays $600 to the store where it purchased $1,200 worth of supplies in transaction (4).


Owner’s Equity+ Equity



AccountsPayable

Notes payable

Owner’s Equity

(4) +$1 200 +$1 200(4) +$1,200 +$1,200(5)

+$2,300+$2,300

(6) +$5,200 +$5,200(7)-$600 -$600

Bal.Bal. $27,700

+ $5,200+ $1,200+ $9,000= $600+ $15,000

+$27,500

8. (8),(9),(10). Payments of expenses. During the month, the travel agency pays $900 in cash for building rent, $1,100 for salaries, and $300 for utilities.


Owner’s Equity+ Equity



AccountsPayable

Notes payable

Owner’s Equity

(4) +$1 200 +$1 200(4) +$1,200 +$1,200(5)

+$2,300+$2,300

(6) +$5,200 +$5,200(7)-$600 -$600(8) -$900 -$900(8) $900 $900

(9)-$1,100 -$1,100

(10) $300 $300(10)-$300 -$300Bal.

$25,400 $5,200+ $1,200+ $9,000= $600+ $15,000 $25,200

TTHEHE AACCOUNTINGCCOUNTING CCYCLEYCLE

Transactions

1. Journalization

8 P l l

9. Reversing entries

8. Post-closing trail balance

l b l

2. Posting

6. Financial

7. Closing entries 3. Trial balance

4 Adj stm tsWork 6. Financial

Statements5. Adjusted trial

4. AdjustmentsSheet

LO 3 Identify steps in the accounting cycle.LO 3 Identify steps in the accounting cycle.

balance

TTRANSACTIONSRANSACTIONS ANDAND EEVENTSVENTS

What to Record?What to Record?

FASB states, “transactions and other events and circumstances that affect a business enterprise.”

Types of Events:Types of Events:

External – between a business and its environmentExternal between a business and its environment.

Internal – event occurring entirely within a business.

DDEBITSEBITS ANDAND CCREDITSREDITS

An arrangement that shows the effect of transactions on AccountAccount the effect of transactions on an account.Debit = “Left”

Account Name

Credit = “Right”

An Account canAn Account can Account NameDebit / Dr. Credit / Cr.

An Account can An Account can be illustrated in a be illustrated in a TT--Account form.Account form.

Assets +Liabilit=Owner

’s + Revenu - Expens+y

s equity

+e

pe

+ + + + +- - - - -Bal.

Bal.

Bal.

Bal.

Bal.

DDEBITSEBITS ANDAND CCREDITSREDITS

An AccountAccount shows the effect of transactions on a given asset, liability, equity, revenue, or expense account.

DoubleDouble entryentry accounting system (two sided effect)DoubleDouble--entry entry accounting system (two-sided effect).

Recording done by debiting at least one account and crediting anothercrediting another.

DEBITS must equalmust equal CREDITS.

LO 2 Explain doubleLO 2 Explain double--entry rules.entry rules.

1. J1. JOURNALIZINGOURNALIZING

General JournalGeneral Journal – a chronological record of transactions Journal Entries areof transactions. Journal Entries are recorded in the journal.

ANALYSIS OF TRANSACTIONANALYSIS OF TRANSACTIONANALYSIS 1. Investment by owner. Kay Torres invests

$20,000 of her own money to start business . Th K T T l A b ti itThe Kay Torres Travel Agency began an activity on June 1, 2011.

DEBIT-CREDIT RULES

Increases in assets are recorded by debits; debit cash $20,000Increases in owner’s equity are recorded by credits;Increases in owner s equity are recorded by credits; credit owner’s equity

JOURNAL 06 01 C h 20 000JOURNAL ENTRY

06.01. Cash 20,000Owner’s equity 20,000

ENTRIES IN C h O ’ itENTRIES INLEDGER ACCOUNTS

Cash Owner’s equity

06/01. 20,000 20,000 06/01

GENERAL JOURNAL Page 1C№ Date Description PR Debit Credit

1 June 1 Cash 20,000Owner's equity 20,000

to record owner's investmentto record owner s investment

2 June 3 Equipment 9,000Cash 9,000

to record purchasing equipment by cash3 June 6 Cash 15,000

Notes payable 15 000Notes payable 15,000to record bank loan

GENERAL JOURNAL Page 1P

№ Date DescriptionPR Debit Credit

4 June 11 Supplies 1,200pp ,Accounts payable 1,200

to record purchasing supplies on creditto record purchasing supplies on credit

5 June 13 Cash 2,300Service revenue 2,300Service revenue 2,300

to record providing services for cash6 June 19 Accounts receivable 5,2006 June 19 Accounts receivable 5,200

Service revenue 5,200to record providing services on creditto record providing services on credit

GENERAL JOURNAL Page 1C№ Date Description PR Debit Credit

7 June 21 Accounts payable 600Cash 600

to record partial payment of accounts payable

8 June 26 Building rent expense 900Cash 900

to record building rent expense9 June 28 Salary expense 1,1009 June 28 Salary expense 1,100

Cash 1,100to record salary expenseto record salary expense

GENERAL JOURNAL Page 1

№ Date Description PR Debit Credit10 June 30 Utilities expense 30010 June 30 Utilities expense 300

Cash 300to record utilities expenseto record utilities expense

2. P2. POSTINGOSTING TOTO THETHE GENERALGENERAL LEDGERLEDGER

The Ledger contains the entire group of accounts maintained by a company.

LEDGER AND CHART OF ACCOUNTSLEDGER AND CHART OF ACCOUNTSThe chart of accounts is a list of all accounts and includes an

identifying number for each account.

Account Number Account Name Account Number Account Name1001 Cash 4301 Owner's withdrawal1201 Accounts receivable 5101 Revenues1601 Supplies 7101 Rental revenue1801 Prepaid insurance 7102 Salaries expense2001 Equipment 7103 Insurance expense3101 Accounts payable 7104 Rent expense3101 Accounts payable 7104 Rent expense3201 Unearned revenue 7105 Supplies expense4101 Owner's equity 7105 Utilities expense

GENERAL JOURNAL Page № Date Description PR Debit Cred№ Date Description PR Debit Cred1 June 1 Cash 1001 20,000

O ' it 20 00Owner's equity 20,00to record owner's investment

2 June 3 Equipment 9,000Cash 9,00Cash Acct. No. 1001

General Ledger

to record purchasing equipment by cash3 June 6 Cash 15,000№ Date Explanation Ref. Debit Credit Balance1 1-Jun GJ 1 20,000 20,000

Notes payable 15,00to record bank loan

J J , ,

to record bank loan

GENERAL JOURNAL Page 1D t D i ti PR D bit C ditDate Description PR Debit Credit

June 1 Cash 20,000Owner's equity 20,000

to record owner's investment

June 3 Equipment 9,000Cash 9,000

to record purchasing equipment by cashJune 6 Cash 15,000

O ' i l A N Notes payable 15,000

to record bank loan

Owner's capital Acct. No. Date Explanation Ref. Debit Credit Balance

1 Jun GJ1 20 000 20 000 1-Jun GJ1 20,000 20,000

CashOwner’s equityCash equity

(1) 20,000 20,000 (1)

3. T3. TRIALRIAL BBALANCEALANCE

Trial BalanceTrial Balance – a list of each account and its balance; used to prove equality of debit and to prove equality of debit and credit balances.

Acct No Account Debit CreditTRIAL BALANCE

Acct. No. Account Debit CreditCash 25,400$ Accounts receivable 5 200 Accounts receivable 5,200 Supplies 1,200 Equipment 9 000 Equipment 9,000 Accounts payable 600$ Note payable 15 000 Note payable 15,000 Owner's equity 20,000 Service revenue 7 500 Service revenue 7,500 Building rent expense 900 Salary expense 1 100 Salary expense 1,100 Utilities expense 300

43 100$ 43 100$

4. A4. ADJUSTINGDJUSTING EENTRIESNTRIES

RevenuesRevenues -- recorded in the period in which recorded in the period in which ppthey are earnedthey are earned.

ExpensesExpenses -- recognized in the period inrecognized in the period inExpenses Expenses -- recognized in the period in recognized in the period in which they are incurredwhich they are incurred.

Adjusting entriesAdjusting entries -- needed to ensure that needed to ensure that the the revenue recognitionrevenue recognition and and matching matching

i i li i l f ll df ll dprinciplesprinciples are followed.are followed.

PROBLEMS IN ACCOUNTING MEASUREMENTS

The identification of the accounting periodaccounting period.

The proper point in time to The proper point in time to recognize revenue.

The appropriate moment to record an expensean expense. 44

Identification of the Identification of the Accounting Period

TIME PERIOD PRINCIPLE

For reporting purposes an For reporting purposes, an organization’s life can be divided i t t ti i dinto separate accounting periods

months, quarters, years etcyears, etc.

46

THE ACCOUNTING PERIOD

AnnualAnnual

1 21 2Semiannual

1 2 3 4Quarter

1 2 3 4 5 6 7 8 9 10 11 12

MonthMonth

The proper point in The proper point in time to recognize

revenues.

REVENUE RECOGNITION . . .

Revenue is generally recognized Revenue is generally recognized At the time services are performed; p ;or

Wh d ld d d li d When goods are sold and delivered to a customer.

49

The proper point in The proper point in time to recognize

expenses.

THE MATCHING PRINCIPLE

The matching principleThe matching principlerequires that all expenses i d t t th incurred to generate the revenues recognized in an accounting period be matchedwith those revenues.

51

Accrual Basis Accountingg

Revenue Accrual Basis Recognition Accrual Basis Accounting

M t hi Matching Principle

ACCRUAL BASIS ACCOUNTING

Revenues are recognized (recorded) when earned without (recorded) when earned, without regard to when cash is received;

Expenses are recorded as incurred without regard to when incurred without regard to when they are paid.

54

An adjusting entry is recorded t b i t li bilit to bring an asset or liability

account balance to its proper amount.

FRAMEWORK FOR ADJUSTMENTS

Exh.3.4

Framework for Adjustments

PrepaidExpenses

Depreciation UnearnedRevenues

AccruedExpenses

AccruedRevenues

Adjustments

Expenses Revenues Expenses Revenues

Transactions where cash is paid orpreceived before a related expense

or revenue is recognized.

Transactions where cash is paid orreceived after a related expense

or revenue is recognized.


Exh.3.4


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustments


Transaction where cash is paid before a related expense is before a related expense is

recognized.

ADJUSTING PREPAID EXPENSES

Here is the checkf fi t

Resources paid for my first

6 months’ rent.

pfor prior to

receiving the gactual benefits.

Asset ExpenseUnadjusted Credit DebitUnadjusted

BalanceCredit

AdjustmentDebit

Adjustment


On December 1, 2011, Scott Company paid $12 000 to cover rent for paid $12,000 to cover rent for December 2011 through May 2012.

Let’s look at the adjusting journal entry needed on December 31, 2011.

GENERAL JOURNAL Page 34D t D i ti PR D bit C dit

GENERAL JOURNAL Page 34D t D i ti PR D bit C ditDate Description PR Debit CreditDate Description PR Debit Credit

Dec. 31 Rent Expense 2,000Prepaid Rent 2,000

to record monthly rent


After posting, the accounts involved look p g,like this:

Prepaid Rent Rent Expense12/1 $12 000 12/31 $2 00012/31 $2 00012/1 $12,000 12/31 $2,00012/31 $2,000


Exh.3.4


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustments


Transaction where cash is received before a related received before a related revenue is recognized.

ADJUSTING UNEARNED REVENUE

Cash received in d f Buy your season tickets for

all home basketball games NOW!

“GO SEAWOLVES”

advance of providing

products or “GO SEAWOLVES”

pservices.

Liability RevenueUnadjusted CreditDebit

Balance AdjustmentAdjustment


On October 1, 2011, UAA sold 1,000 season , , ,tickets to its 20 home basketball games for $100 each. UAA makes the following entry:

GENERAL JOURNAL Page 34Date Description PR Debit Credit

Oct. 1 Cash 100,000Unearned Basketball Revenue 100,000

Receipts for 1,000 season tickets


On December 31 UAA has played 10 of its On December 31, UAA has played 10 of its regular home games, winning 8 and

losing 2.

GENERAL JOURNAL Page 34GENERAL JOURNAL Page 34Date Description PR Debit Credit

Dec. 31 Prepare the appropriate Adjusting Entry on December 31


On December 31 UAA has played 10 of its On December 31, UAA has played 10 of its regular home games, winning 8 and

losing 2.


Dec. 31 Unearned Basketball Revenue 50,000Basketball Revenue 50 000Basketball Revenue 50,000

to recognize basketball revenue

ADJUSTING UNEARNED REVENUEADJUSTING UNEARNED REVENUE

After posting, the accounts involved look p g,like this

Unearned BasketballRevenue Basketball Revenue

10/1 $100,000 12/31 $50,00012/31 $50,000


Exh.3.4


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustments


Transaction where cash is paid before a related expense is before a related expense is

recognized.

ADJUSTING FOR DEPRECIATIONADJUSTING FOR DEPRECIATION

Depreciation is the process of Depreciation is the process of computing expense from allocating the cost of plant and equipment over the cost of plant and equipment over its expected useful lives.

Straight-Line Depreciation =

Asset Cost – Salvage Valuef l L fDepreciation Useful Life

ADJUSTING FOR DEPRECIATION2. Purchase an equipment for cash. The travel agency purchases equipment paying cash ofagency purchases equipment, paying cash of $9,000.

• Let’s compute depreciation expense for the year ended June 30, 2011.

2011 Depreciation =

$9,000 - $0Depreciation Expense 5

$1 800/12 150 f m nth 69= $1,800/12=150. for month


Prepare the journal entry.p j y


June 31 Depreciation Exp. 12,000Accum Depreciation 12 000Accum. Depreciation 12,000

To record annual depreciation

Accumulated depreciation ispa contra asset account.


After posting the accounts involved After posting, the accounts involved look like this:

Equipment Depreciation Expense

6/3 $9,000 6/30 $150

Accumulated Depreciation

6/30 $150

ADJUSTING FOR DEPRECIATION

Kay Torres Co.LtdBalance Sheet

ADJUSTING FOR DEPRECIATION

Balance SheetAt June 30, 2011

Assets ThAssets Cash .

The equipment account is .

.Equipment 9,000$ Less: accumulated deprec (150) 8 850

account is shown on

the balance Less: accumulated deprec. (150) 8,850 . .

sheet like this.

.Total Assets

ADJUSTING FOR SUPPLIES

At the end of current period balance of Supplies p ppwas $900 . So we must adjust supplies expense.

– Prepare the journal entry.Prepare the journal entry.

GENERAL JOURNAL Page 2Date Description PR Debit Credit

June 30 Supplies expense 300pp pSupplies 300

To record supplies expence

ADJUSTING FOR SUPPLIESADJUSTING FOR SUPPLIES

After posting the accounts involved After posting, the accounts involved look like this:

Supplies Supplies Expense

6/11 $1,200 6/30 $300$300 6/30


Exh.3.4


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustments


Transaction where cash is paid after a related expense is after a related expense is

recognized.

ADJUSTING FOR ACCRUED EXPENSES

Its accrued bank loanCosts incurred in a

ADJUSTING FOR ACCRUED EXPENSES

interest!period that areboth unpaid and

unrecorded.

Expense LiabilityCreditDebit

AdjustmentAdjustment

ADJUSTING FOR ACCRUED EXPENSESADJUSTING FOR ACCRUED EXPENSES

3. Borrow cash from the bank. The travel agency g yborrows $15,000 cash from the bank and signs a 2 year note payable to the bank. Interest rate 12%. Must pay at the end yearthe end year.

06/30/11Month end

First paymentDate of interest

31/12/11

06/05/11

31/12/11

06/05/11 Record adjustingjournal entry.


3. Borrow cash from the bank. The travel agency borrows g y$15,000 cash from the bank and signs a 2 year note payable to the bank. Interest rate 12%. Must pay at the end year.

GENERAL JOURNAL Page 34Date Description PR Debit CreditDate Description PR Debit Credit

June 30 Interest expense 150

Interest payable 150

t d i t t lto record interest accrual


After posting, the accounts involved p g,will look like this . . .

Interest Expense Interest Payable06/30 $150 06/30 $150


Exh.3.4


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustments


Transaction where cash is received after a related revenue received after a related revenue

is recognized.

ADJUSTING FOR ACCRUED REVENUES

Yes, you can pay mefor your tax return


Revenues earned i i d h for your tax return

when I finish the work.in a period that are both

unrecorded andunrecorded and not yet received.

Asset RevenueCreditDebit Credit

AdjustmentDebit

Adjustment


Smith & Jones, CPAs, had $31,200 of work completed but


not yet billed to clients. Let’s make the adjusting entry necessary on December 31, 2002, the end of the

company’s fiscal year.p y y


Dec. 31 Accounts Receivable 31,200

S i R 31 200Service Revenues 31,200

Revenues earned but not received

Exh.3.18Exhibit 3.18

Summary of Adjustments and

Before Adjusting Adj ti

Summary of Adjustments and Financial Statement Links

CategoryBefore Adjusting Adjusting

EntryB/S I/S

Prepaid Expense Asset ExpenseDr. Expense

Prepaid Expense Asset ExpenseCr. Asset

Unearned Revenue Liability RevenueDr. LiabilityCr RevenueCr. Revenue

Accrued Expenses Liability ExpenseDr. ExpenseCr. Liability

Accrued Revenues Asset RevenueDr. AssetCr. Revenue

Overstated

Understated

UUSINGSING A WA WORKSHEETORKSHEETUUSINGSING A WA WORKSHEETORKSHEET

WorksheetWorksheetA multiple-column form used in preparing financial statements.

Not a permanent accounting record.

Fi Five step process.

Use of worksheet is optional.

LO 1 Prepare a worksheet.LO 1 Prepare a worksheet.

SSTEPSTEPS ININ PPREPARINGREPARING AA WWORKSHEETORKSHEETSSTEPSTEPS ININ PPREPARINGREPARING AA WWORKSHEETORKSHEET

Illustration 4-2

1. Prepare a Trial Balance on the Worksheet1. Prepare a Trial Balance on the Worksheet

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Balance Sheet

Adjusted IncomeTrial Balance Adjustments Trial Balance Statement

Cash 25,400 Accounts Receivable 5,200 Supplies 1,200

Trial balance amounts come directly from pp ,

Equipment 9,000 Accumulated DepreciationAccounts Payable 600

come directly from ledger accounts.

Accounts Payable 600 Notes payable 15,000 Owner's equity 20,000 Service Revenue 7 500Service Revenue 7,500 Salaries Expense 1,100 Rent expense 900 Utilities expense 300

Include all accounts with balances.Utilities expense 300

Totals 43,100 43,100

Adj t d I

2. Enter the Adjustments in the Adjustments 2. Enter the Adjustments in the Adjustments ColumnsColumns

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 Accounts Receivable 5 200

Balance SheetAdjusted Income

Trial Balance Adjustments Trial Balance Statement

Accounts Receivable 5,200 Supplies 1,200 a. 300Equipment 9,000 Accumulated Depreciation b. 150Accounts Payable 600 Adjustments Key:Accounts Payable 600 Notes payable 15,000 Owner's equity 20,000

Service Revenue 7,500

Adjustments Key:(a) Supplies used.(b) Depreciation

,Salaries Expense 1,100 Rent expense 900 Utilities expense 300

Totals 43,100 43,100

expense.(c) Interest expense

accruedSupplies expense a. 300Depr. Expense b. 150Interest expense c. 150

Interest payable c. 150Enter adjustment amounts, total

Totals 600 600 Add additional accounts as needed.

,adjustments columns,and check for equality.

3. Complete the Adjusted Trial Balance Columns3. Complete the Adjusted Trial Balance Columns

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 24,400 24,400 A t R i bl 5 200 5 200



Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000 Accumulated Depreciation b. 150 150 A t P bl 600 600Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Owner's withdrawal 1,000 1,000 S i R 7 500 7 500 Total the adjusted trial Service Revenue 7,500 7,500 Salaries Expense 1,100 1,100 Rent expense 900 900 Utilities expense 300 300

T t l 43 100 43 100

Total the adjusted trial balance columns and check for equality.

Totals 43,100 43,100 Supplies expense a. 300 300 Depr. Expense b. 150 150 Interest expense c. 150 150

I t t bl 150 150Interest payable c. 150 150 Totals 600 600 43,400 43,400

4. Extend Amounts to Financial Statement 4. Extend Amounts to Financial Statement ColumnsColumns

Adjusted IncomeExtend all asset Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash 25,400 25,400 Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000

Balance SheetTrial Balance Adjustments Trial Balance StatementExtend all asset, liability, and equity account balances to the balance sheet q p , ,

Accumulated Depreciation b. 150 150 Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Service Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100

the balance sheet columns.

Salaries Expense 1,100 1,100 1,100 Rent expense 900 900 900 Utilities expense 300 300 300

Totals 43,100 43,100 Supplies expense a. 300 300 300 Depr. Expense b. 150 150 150 Interest expense c 150 150 150Interest expense c. 150 150 150

Interest payable c. 150 150 Totals 600 600 43,400 43,400 2,900 7,500

5. Total Columns, Compute Net Income (Loss)5. Total Columns, Compute Net Income (Loss)

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 Acco nts Recei able 5 200 5 200



Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000 Accumulated Depreciation b. 150 150 Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Retained EarningsService Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100 Rent expense 900 900 900 Utilities expense 300 300 300

Totals 43,100 43,100 Supplies expense a. 300 300 300 Depr. Expense b. 150 150 150 Interest expense c. 150 150 150

Interest payable c. 150 150 Totals 600 600 43,400 43,400 2,900 7,500Totals 600 600 43,400 43,400 2,900 7,500 Income before tax 4,600 Income tax expense 460

Net Income 4,140

Total 7,500 7,500

Compute Net Income or Net Loss.

5. Total Columns, Compute Net Income (Loss)5. Total Columns, Compute Net Income (Loss)

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Balance Sheet

Adjusted IncomeTrial Balance Adjustments Trial Balance Statement

Cash 25,400 25,400 25,400 Accounts Receivable 5,200 5,200 5,200 Supplies 1,200 a. 300 900 900 Equipment 9,000 9,000 9,000 Accumulated Depreciation b. 150 150 150 Accounts Payable 600 600 600 Notes payable 15,000 15,000 15,000 Owner's equity 20,000 20,000 20,000

Retained Earnings 4,140 Service Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100 R t 900 900 900Rent expense 900 900 900 Utilities expense 300 300 300

Totals 43,100 43,100 Supplies expense a. 300 300 300 Depr. Expense b. 150 150 150 Interest expense c. 150 150 150

I t t bl 150 150 150Interest payable c. 150 150 150 Totals 600 600 43,400 43,400 2,900 7,500 Income before Tax 4,600 Income tax expense 460

Net Income 4,140 460 Tax payable

Total 7,500 7,500 40,500 40,500 , , , ,

FINANCIAL STATEMENTS

BALANCE SHEET

INCOME STATEMENTINCOME STATEMENT

STATEMENT OF OWNER’S EQUITY

STATEMENT OF CASH FLOWSTATEMENT OF CASH FLOW

PREPARE THE FINANCIAL STATEMENTS

Prepare the Income

Statement.

A work sheet does not does not

substitute fo financial for financial statements.

Prepare the Statement of Changes in Owner’s Equity.

Prepare the Balance Sheet.

CCLOSINGLOSING THETHE BBOOKSOOKSCCLOSINGLOSING THETHE BBOOKSOOKS

At the end of the accounting period, the company makes the accounts ready for the next periodmakes the accounts ready for the next period.

LO 2 Explain the process of closing the books.LO 2 Explain the process of closing the books.

CCLOSINGLOSING THETHE BBOOKSOOKSCCLOSINGLOSING THETHE BBOOKSOOKS

Closing entriesClosing entries formally recognize, in the general ledger, the transfer of

Income tax expense to Tax payable Income tax expense to Tax payable

Net income to Retained earnings.

Closing entries are only at the end of the annual Closing entries are only at the end of the annual accounting period.

LO 2 Explain the process of closing the books.LO 2 Explain the process of closing the books.

Let’s see how

RECORDING CLOSING ENTRIES

the closing process works!

Close Revenue accounts to Income Summary.

Close Expense accounts to Income accounts to Income Summary.

Close Income Summary Close Income Summary account to Tax payable.

4 Cl i S yaccount to Retained Earnings

4 Close income Summary account to Retained Earnings

CLOSING PROCESS

Balances

Income Summary Service revenue7,500

CLOSING PROCESS

Balances before

closing. 7,500

Revenue AccountsIncome Summary

Revenue Accounts7,500 7,500 7,500

- 7,500

Close Revenue Close Revenue accounts to Income

Summary.

GENERAL JOURNAL Page 1

№ Date Description PR Debit CreditJune 30 Service revenue 7 500June 30 Service revenue 7,500

Income summary 7,500to record closing entries of revenueto record closing entries of revenue

Close Expense Salary expense

1,100 1,100 CLOSING PROCESSSupplies expensep

accounts to Income Summary.-

pp p300 300

-

Income Summary

Rent expense900 900 Depreciation expense

150 150 y1,100 7,500

900 300

-

Utitilies expense300 300

-

300300150150

300 300

-

Interest expense150 150

150460

4,1400

Tax payable460

-

Retained earnings4 1400

460

4,140

4,140

GENERAL JOURNAL PageGENERAL JOURNAL Page

№ Date Description PR Debit Credit№ Date Description PR Debit CreditJune 30 Service revenue 7,500

Income summary 7 500Income summary 7,500to record closing entries of revenue

I 1 100Income summary 1,100Salary expense 1,100

to record closing entries of salary expenseIncome summary 900

Rent expense 900to record closing entries of rent expense

GENERAL JOURNAL Page

№ Date Description PR Debit CreditJ 30 I 300June 30 Income summary 300

Utilities expense 300to record closing entries of utilities expense

Income summary 300Supplies expense 300

to record closing entries of Supplies expenseIncome summary 150

Depreciation expense 150Depreciation expense 150to record closing entries of rent expense

GENERAL JOURNAL Page № Date Description PR Debit Credit

June 30 Income summary 150yInterest expense 150

to record closing entries of interest expenseto record closing entries of interest expenseIncome summary 460

Tax payable 460Tax payable 460to record closing entries of income tax expenseIncome summary 4,140

retained earnings 4,140to record closing entries of Net income

financial accounting lecture

Documents

basic tool of accounting

h th accounting period

learning objectives

t f t h t th d t

th t th ill t f i d

economic information

ti i d i

merchandise companies