the mechanics of financial accounting
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The Mechanics of Financial Accounting. Presentations for Chapter 4 by Glenn Owen. Key Points. Two criteria necessary for economic events to be reflected in the financial statements. - PowerPoint PPT PresentationTRANSCRIPT
The Mechanics ofThe Mechanics of Financial Accounting Financial Accounting
Presentations for Chapter 4 by Glenn Owen
Key PointsKey Points Two criteria necessary for economic events to be reflected in the
financial statements. The accounting equation and how it relates to the balance sheet,
income statement, statement of retained earnings, and statement of cash flows.
Journal entries (and T-accounts) and how they express the effect of economic events on the basic accounting equation and the financial statements.
Why managers need to understand how economic events affect the financial statements.
Why the financial statements are adjusted periodically to reflect certain economic events.
Economic EventsEconomic EventsRelevant events have economic significance
to a company and include any occurrence that affects its financial condition.
The dollar values assigned to these events must be determined in an objective manner.
The Fundamental The Fundamental Accounting EquationAccounting Equation
Assets = Liabilities + Stockholders’ Equity
= +
The Journal Entry BoxThe Journal Entry Box
2. What is the directionof the effect?
Increase
Decrease
3. What is the dollar value of the transaction?
Asset Accounts
$Debit(left)
Asset Accounts
$Credit(right)
1. What accounts are affected?
AssetsLiabilities andStockholders’ Equity=
Liab/Stock Eq. Accounts
$Credit(right)
Liab/Stock Eq. Accounts
$Debit(left)
Recognizing Gains Recognizing Gains and Lossesand Losses
Often investments and noncurrent assets are sold for more or less than the amounts at which they are carried on the balance sheet.
In such cases a gain or loss must be recognized.
Periodic AdjustmentsPeriodic Adjustments Accruals Deferrals and cost expirations Revaluation adjustments
AccrualsAccruals The term accrue means to build up gradually. Accruals refer to amounts in asset and liability
accounts that build up over time. Adjustments to record accruals are made at the
end of an accounting period. Examples include
– accrued wages.– accrued interest revenue.
Deferrals and Cost ExpirationsDeferrals and Cost Expirations Deferrals are recorded to achieve an appropriate
matching of revenues and expenses and do not reflect cash exchanges.
Expense or capitalize?– Current expenses– Supplies inventory– Merchandise inventory– Prepaid expenses– Unearned revenue– Property, plant, and equipment– Intangible assets
Expense or CapitalizeExpense or CapitalizeIncur cost in
current periodDecide what
period revenue is generated
If current then expense, if future, capitalize
Cost Expiration
Salaries Current period (expense)
Salary Exp XX
Salary Pay XX
None required
Interest Current period (expense)
Interest Exp XX
Interest Pay XX
None required
Receive Utility Bill
Current period (expense)
Utilities Exp XX
Accounts Pay XX
None required
Purchase Supplies
Future period
(asset)
Supplies XX
Cash XX
Supplies Exp XX
Supplies XX
Purchase Inventory
Future period
(asset)
Inventory XX
Accounts Pay XX
COGS XX
Inventory XX
Expense or CapitalizeExpense or CapitalizeIncur cost in
current periodDecide what
period revenue is generated
If current then expense, if future, capitalize
Cost Expiration
Prepaid Rent Future period
(asset)
Prepaid Rent XX
Cash XX
Rent Exp XX
Prepaid Rent XX
Advance Payments
Future period
(liability)
Cash XX
Unearned Rev XX
Unearned Rev XX
Revenue XX
Purchase Equipment
Future period
(asset)
Equipment XX
Note Pay XX
Depreciation XX
Acc. Dep. XX
Purchase Patent
Future period
(asset)
Patent XX
Cash XX
Amort. Exp XX
Acc. Amort. XX
Revaluation AdjustmentsRevaluation Adjustments These are adjustments that do not fall into the
categories of accruals or cost expirations. They serve to restate certain accounts to keep their
reported values in line with existing facts. Examples include the revaluation of:
– short-term investments – accounts receivable– inventories
Review ProblemReview Problem Kelly Supply Beginning Balance Sheet as of December 31, 2002 Daily journal entries and T-accounts Adjusting journal entries and T-accounts Income Statement for the year ended December 31, 2003 Statement of Retained Earnings for the year ended
December 31, 2003 Ending Balance Sheet as of December 31, 2003 Statement of Cash Flows for the year ended December 31,
2003
Kelly SupplyBalance SheetDecember 31, 2002
Assets:Cash $12,000 Accounts receivable 15,000 Merchandise inventory 12,000 Prepaid rent 3,000 Machinery $25,000 Less: Accumulated depreciation . 5,000 20,000 Patent . 5,000 Total assets $67,000
Kelly SupplyBalance SheetDecember 31, 2002
Liabilities and Stockholders’ Equity:Accounts payable $ 8,000Wages payable 3,000Interest payable 1,000Dividends payable 2,000Unearned revenue 3,000Short-term notes payable 5,000Long-term notes payable 10,000Common stock 30,000Retained earnings . 5,000Total liabilities and stockholders’ equity $67,000
(1) Cash (+A) 10,000Accounts Receivable (+A) 15,000
Sales (R, +SE) 25,000Sold merchandise for cash and on account.
Cash
12,000
10,000
Accounts Receivable
15,000
15,000
Sales
25,000
Daily Journal Entries and T-accounts
(2) Cash (+A) 8,000Accounts Receivable (-A) 8,000
Received cash on account.
Cash
12,000
10,000
8,000
Accounts Receivable
15,000
15,000
8,000
Daily Journal Entries and T-accounts
(3) Merchandise Inventory (+A) 10,000Cash (-A) 3,000Accounts Payable (+L) 7,000
Purchased merchandise inventory for cash and on account.
Merchandise Inv.
12,000
10,000
Cash
12,000
10,000
8,000
3,000
Accounts Payable
8,0007,000
Daily Journal Entries and T-accounts
(4) Accounts Payable (-L) 10,000Cash (-A) 10,000
Paid cash on account.
Accounts Payable
10,000
8,0007,000
Cash
12,000
10,000
8,000
3,00010,00
0
Daily Journal Entries and T-accounts
(5) Wages Payable (-L) 3,000Wages Expense (E, -SE) 7,000
Cash (-A) 10,000Paid accrued wages.
Wages Payable
3,0003,000
Wages Expense
7,000
Cash
12,000
10,000
8,000
3,00010,00
010,00
0
Daily Journal Entries and T-accounts
(6) Interest Payable (-L) 1,000Interest Expense (E, -SE) 1,000
Cash (-A) 2,000Paid accrued interest.
Interest Payable
1,0001,000
Interest Expense
1,000
Cash
12,000
10,000
8,000
3,00010,00
010,00
02,000
Daily Journal Entries and T-accounts
(7) Short-Term Notes Payable (-L) 2,500Cash (-A) 2,500
Paid short-term note.
S/T Notes Payable
2,5005,000
Cash
12,000
10,000
8,000
3,00010,00
010,00
02,0002,500
Daily Journal Entries and T-accounts
(8) Cash (+A) 10,000Long-Term Notes Payable (+L) 10,000
Issued long-term note for cash.
L/T Notes Payable
10,000
10,000
Cash
12,000
10,000
8,00010,00
0
3,00010,00
010,00
02,0002,500
Daily Journal Entries and T-accounts
(9) Dividends Payable (-L) 2,000Cash (-A) 2,000
Paid cash dividend.
Dividends Payable
2,0002,000
Cash
12,000
10,000
8,00010,00
0
3,00010,00
010,00
02,0002,5002,000
Daily Journal Entries and T-accounts
(10)Machinery (+A) 1,000Cash (-A) 1,000
Acquired machinery for cash.
Machinery
25,000
1,000
Cash
12,000
10,000
8,00010,00
0
3,00010,00
010,00
02,0002,5002,0001,000
Daily Journal Entries and T-accounts
(11)Dividends (-SE) 1,000Dividends Payable (+L) 1,000
Declared dividends.
Dividends
1,000
Dividends Payable
2,0002,0001,000
Daily Journal Entries and T-accounts
(12)Cost of Goods Sold (E, -SE) 9,000Merchandise Inventory (-A) 9,000
Recognized $13,000 of inventory on hand.
Cost of Goods Sold
9,000
Merchandise Inventory
12,000
10,000
13,000
9,000
Adjusting Journal Entries and T-accounts
(13)Unearned Revenue (-L) 2,000Sales (R, +SE) 2,000
Recognized 2/3 of goods delivered.
3,000
1,000
Unearned Revenue
2,000
Sales
25,000
2,000
Adjusting Journal Entries and T-accounts
(14)Interest Receivable (+A) 50Interest Revenue (R,+SE) 50
Recognized accrued interest on savings account.
Interest Receivable
50
Interest Revenue
50
Adjusting Journal Entries and T-accounts
(15)Depreciation Expense (E, -SE) 3,000Accumulated Depreciation (-A) 3,000
Recognized depreciation on machinery.
Depreciation Expense
3,000
Accumulated Depr.
5,0003,000
Adjusting Journal Entries and T-accounts
(16)Amortization Expense (E, -SE) 500Patent (-A) 500
Recognized amortization of patent.
Amortization Expense
500
Patent
5,000
4,500500
Adjusting Journal Entries and T-accounts
(17)Wage Expense (E, -SE) 1,000Wages Payable (+L) 1,000
Recognized accrued wages.
Wage Expense
7,0001,000
Wages Payable
3,0003,0001,000
Adjusting Journal Entries and T-accounts
(18)Interest Expense (E, -SE) 2,000Interest Payable (+L) 2,000
Recognized accrued interest on long-term note.
Interest Expense
1,0002,000
Interest Payable
1,0001,0002,000
Adjusting Journal Entries and T-accounts
(19)Rent Expense (E, -SE) 1,000Prepaid Rent (-A) 1,000
Recognized 1/3 of rent period expired.
Rent Expense
1,000
Prepaid Rent
3,000
2,0001,000
Adjusting Journal Entries and T-accounts
Kelly SupplyIncome StatementFor the Year Ended December 31, 2003
Revenues:Sales $27,000Interest revenue 50
Total revenues $27,050Expenses:
Cost of goods sold $ 9,000Wages expense 8,000Rent expense 1,000Interest expense 3,000Depreciation expense 3,000Amortization expense 500
Total expenses . 24,500Net income $ 2,550
Kelly SupplyStatement of Retained EarningsFor the Year Ended December 31, 2003
Beginning balance $5,000 Plus: Net income 2,550 Less: Dividends (1,000)Ending balance $6,550
Kelly SupplyBalance SheetDecember 31, 2003
Assets:Cash $ 9,500 Accounts receivable 22,000 Interest receivable 50 Merchandise inventory 13,000 Prepaid rent 2,000 Machinery $26,000 Less: Accumulated depreciation 8,000 18,000 Patent 4,500 Total assets $69,050
Kelly SupplyBalance SheetDecember 31, 2003
Liabilities and stockholders’ equity:Accounts payable $ 5,000Wages payable 1,000Interest payable 2,000Dividends payable 1,000Unearned revenue 1,000Short-term notes payable 2,500Long-term notes payable 20,000Common stock 30,000Retained earnings 6,550Total liabilities and stockholders’ equity $69,050
Kelly SupplyStatement of Cash FlowsFor the Year Ended December 31, 2003Operating activities:
Collections from sales $10,000 Collections of accounts receivable 8,000 Payment for inventory purchases (3,000)Payments on accounts payable (10,000)Payments for wages (10,000)Payments for interest . (2,000)
Net cash increase (decrease) $(7,000)Investing activities:
Purchase of machinery $(1,000)Net cash increase (decrease) (1,000)
Financing activities:Issuance of long-term notes payable $10,000 Payment of dividend (2,000)Payment of short-term notes payable . (2,500)
Net cash increase (decrease) . 5,500 Net cash increase (decrease) during 2003 $(2,500)Beginning cash balance . 12,000 Ending cash balance $ 9,500
C O P Y R I G H T
C o p y r i g h t © 2 0 0 3 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d .R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .