Review of the Accounting Process

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Review of the Accounting Process

• CHAPTER 2

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The Accounting Equation
A L OE
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Accounting Equation for a Corporation
A L SE
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Account Relationships
Debits and credits affect the Balance Sheet Model
as follows
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Source documents
Record in Journal
Transaction Analysis
Post to Ledger
Financial Statements
Unadjusted Trial Balance
Record Post Adjusting Entries
Adjusted Trial Balance
The Accounting Processing Cycle
Close Temporary Accounts
Post-Closing Trial Balance
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Accounting Processing Cycle

• On January 1, 2000, CWC, Inc. borrows 10,000
  from the bank.
• Two accounts are affected
• Cash (an asset) is increased by 10,000.
• Notes Payable (a liability) is increased by
  10,000.

Prepare the journal entry.
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Accounting Processing Cycle

• Two accounts are affected
• Cash (an asset) is increased by 10,000.
• Notes Payable (a liability) is increased by
  10,000.

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Accounting Processing Cycle

• Two accounts are affected
• Cash (an asset) is increased by 10,000.
• Notes Payable (a liability) is increased by
  10,000.

Account numbers are references for posting to the
General Ledger.
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General Ledger
The T account is a shorthand used
by accountants to analyze transactions. It is
not part of the bookkeeping system.
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Posting Journal Entries

• On December 1, 2000, Terry Dow invested 30,000
  in his new business, Clear Copy, Inc.

Post the debit portion of the entry to the Cash
ledger account.
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Posting Journal Entries
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Posting Journal Entries
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Posting Journal Entries
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Posting Journal Entries
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Posting Journal Entries
Post the credit portion of the entry to the
Common Stock ledger account.
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Posting Journal Entries
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Posting Journal Entries
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Posting Journal Entries
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The Trial Balance is a listing of all accounts
and their balances at a point in time.
Debits Credits
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Adjusting Entries

• At the end of the period, some transactions or
  events remain unrecorded.
• Because of this, several accounts in the ledger
  need adjustments before their balances appear in
  the financial statements.

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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.
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Prepaid Expenses
Expense
Asset
Unadjusted Balance
Credit Adjustment
Debit Adjustment
Today, I will pay for my first 6 months rent.
Prepaid Expenses Items paid for in advance of
receiving their benefits
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Prepaid Expenses

• On December 1, 2000, Scott Company paid 12,000
  to cover rent for December 2000 through May 2001.
  Lets look at the adjusting journal entry needed
  on December 31, 2000.

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Prepaid Expenses

• On December 1, 2000, Scott Company paid 12,000
  to cover rent for December 2000 through May 2001.
  Lets look at the adjusting journal entry needed
  on December 31, 2000.

12,000 6 months 2,000 per month
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Prepaid Expenses

• After posting, the accounts look like this

Prepaid Rent
Rent Expense
12/31 2,000
12/1 12,000
12/31 2,000
Bal. 10,000
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Depreciation

• Depreciation is the process of computing
  expense by allocating the cost of plant and
  equipment over their expected useful lives.

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Depreciation

• On January 1, 2000, Monroe, Inc. purchased the
  following oil pumping equipment
• Lets record depreciation expense for the year
  ended December 31, 2000.

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Depreciation
On January 1, 2000, Monroe, Inc. purchased the
following oil pumping equipment
2000 Depreciation Expense
62,000 - 2,000 5


12,000
Now, prepare the adjusting entry for December 31,
2000.
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Depreciation
Contra Asset
Lets see how the accounts would look after
posting!
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Depreciation

• After posting, the accounts look like this

Equipment
Depreciation Expense
1/1 62,000
12/31 12,000
Accumulated Depreciation
12/31 12,000
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Depreciation
The equipment account is shown on the balance
sheet like this.
The equipment account is shown on the balance
sheet like this.
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Unearned Revenue
Revenue
Liability
Unadjusted Balance
Credit Adjustment
Debit Adjustment
Buy your season tickets for all home
basketball games NOW!
Unearned Revenue Cash received in advance of
performing services
Go Big Blue
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Unearned Revenue

• On December 1, 2000, Ox University sold 1,000
  seasons tickets to its 20 home basketball games
  for 100 each. OxU makes the following entry

Liability Account
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Unearned Revenue

• By December 31, OxU has played 8 of its regular
  home games, winning 6 and losing 2.

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Unearned Revenue

• By December 31, OxU has played 8 of its regular
  home games, winning 6 and losing 2.

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Unearned Revenue
After posting, the accounts will look like this
. . .
Unearned BasketballRevenue
Basketball Revenue
12/1 100,000
12/31 40,000
12/31 40,000
Bal. 60,000
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Accrued Liabilities
Liability
Expense
Credit Adjustment
Debit Adjustment
I wont pay you until the job is done!
Accrued Liabilities Costs incurred in a period
that are both unpaid and unrecorded
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Accrued Liabilities
Denton, Inc.s weekly salaries of 78,750 are
paid every Friday.
Last pay date 12/26/00
Next pay date 1/2/01
12/1/00
Record adjusting journal entry.
12/31/00 Year end
On Wednesday, December 31, 2000, the employees
have earned salaries of 47,250.
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Accrued Liabilities
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Accrued Liabilities
After posting, the accounts will look like this .
. .
Salaries Expense
Salaries Payable
12/26 78,750
12/31 47,250
12/31 47,250
Bal. 126,000
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Accrued Receivables
Revenue
Asset
Credit Adjustment
Debit Adjustment
Yes, you can pay me in May for your April 15 tax
return.
Accrued Receivables Revenues earned in a period
that are both unrecorded and not yet received
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Accrued Receivables

• At year-end, Smith Jones, CPAs, had completed
  31,200 of work but had not yet billed the
  clients. Prepare the adjusting entry for
  December 31, 2000.

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Accrued Receivables

• At year-end, Smith Jones, CPAs, had completed
  31,200 of work but had not yet billed the
  clients. Prepare the adjusting entry for
  December 31, 2000.

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Accrued Receivables
After posting, the accounts involvedwill look
like this . . .
Accounts Receivable
Service Revenue
12/31 31,200
12/31 31,200
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Estimates

• Uncollectible accounts and depreciation of fixed
  assets are estimated.
• An estimated item is a function of future events
  and developments.

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Estimates
The estimate of bad debt expense at the end of
the year is an example of an adjusting entry that
requires an estimate.
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Lets look at financial statements.
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The income statement summarizes the results of
operating activities of the company.
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The balance sheet presents the financial position
of the company on a particular date.
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The balance sheet presents the financial position
of the company on a particular date.
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The statement of cash flows discloses the changes
in cash during a period.
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The statement of shareholders equity presents
the changes in permanent shareholder accounts.
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The Closing Process

• Resets revenue, expense and withdrawal account
  balances to zero at the end of the period.
• Helps summarize a periods revenues and expenses
  in the Income Summary account.

Identify accounts for closing.
Record and post closing entries.
Prepare post-closing trial balance.
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Temporary and Permanent Accounts
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Closing Entries

• Close Revenue accounts to Income Summary.
• Close Expense accounts to Income Summary.
• Close Income Summary account to Retained
  Earnings.
• Close Dividends to Retained Earnings.

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• Close Revenue accounts to Income Summary.

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Close Revenue Accounts to Income Summary
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Revenue Accounts to Income Summary
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• Close Expense accounts to Income Summary.

If Consulting Inc. had a Cost of Goods Sold
account, it would be closed with the expenses.
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Close Expense Accounts to Income Summary
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Expense Accounts to Income Summary
Net Income
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• Close Income Summary to Retained Earnings.

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Close Income Summary to Retained Earnings
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Income Summary to Retained Earnings
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• Close Dividends to Retained Earnings.

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Close Dividends to Retained Earnings
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Dividends to Retained Earnings
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Post-Closing Trial Balance
Lists permanent accounts and their balances.
Total debits equal total credits.
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Conversion From Cash Basis to Accrual Basis

• Adjusting entries, for the most part, are
  conversions from cash to accrual.
• Lets look at an example.

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Conversion From Cash Basis to Accrual Basis

• Jeter, Inc. paid 20,000 cash for insurance
  during the current period. On 1/1/00, Prepaid
  Insurance was 5,000, and on 12/31/00, the
  account balance was 3,000.Determine Insurance
  Expense for the year 2000.

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Conversion From Cash Basis to Accrual Basis

• Jeter, Inc. paid 20,000 cash for insurance
  during the current period. On 1/1/00, Prepaid
  Insurance was 5,000, and on 12/31/00, the
  account balance was 3,000.

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End of Chapter 2