McGraw-Hill/Irwin
McGraw-Hill/Irwin
McGraw-Hill/Irwin
C1
Semiannually
1 2
3 4 5 6 7
3
8 9 10
4
11 12
Quarterly
1 2
Jan
Feb
Mar
Apr
Nov Dec
Monthly
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2010
C2
Revenues are recognized when cash is received and expenses recorded when cash is paid.
Not GAAP
Accounting
McGraw-Hill/Irwin
C2
Example:
$ 2,400
On the cash basis the entire $2,400 would be recognized as insurance expense in 2009. No insurance expense from this policy would be recognized in 2010 or 2011, periods covered by the policy.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2010
C2
Insurance Expense 2010 Jan Feb Mar Apr $ $ $ 100 May 100 Sep 100 $ $ $ 100 Jun 100 Oct 100 $ $ $ 100 Jul 100 Nov 100 $ $ $ 100 Aug 100 Dec 100
Insurance Expense 2011 Jan Feb Mar Apr $ $ 100 May 100 Sep $ $ 100 Jun 100 Oct 100 $ $ $ 100 Jul 100 Nov 100 $ $ $ 100 Aug 100 Dec -
On the accrual basis $100 of insurance expense is recognized in 2009, $1,200 in 2010, and $1,100 in 2011. The expense is matched with the periods benefited by the insurance coverage.
McGraw-Hill/Irwin $ 100 $
C2
Recognizing Revenues
Revenue Recognition
We have delivered the product to our customer, so I think we should record the revenue earned.
McGraw-Hill/Irwin
C2
Recognizing Expenses
recognized the revenue, lets see what expenses we incurred to generate that revenue.
McGraw-Hill/Irwin
C3
Adjusting Accounts
An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.
Accrued expense
Accrued revenues
*including depreciation
P1
Expense
Debit Adjustment
McGraw-Hill/Irwin
P1
Prepaid Insurance
On December 1, 2009, Scott Company paid $12,000 to cover insurance for December 2009 through May 2010. Scott recorded the expenditure as Prepaid Insurance on December 1. What adjustment is required?
Dec. 31 Insurance Expense Prepaid Insurance 2,000 2,000
128
637
2,000
P1
Supplies
During 2009, Scott Company purchased $15,500 of supplies. Scott recorded the expenditures as Supplies. On December 31, a count of the supplies indicated $2,655 on hand. What adjustment is required?
Dec. 31 Supplies Expense Supplies
126 Supplies Bought 15,500 Dec. 31 12,845 Bal. 2,655
12,845 12,845
652
McGraw-Hill/Irwin
P1
Depreciation
Depreciation is the process of computing expense from allocating the cost of plant and equipment over their expected useful lives.
Straight-Line Asset Cost - Salvage Value Depreciation = Useful Life Expense
McGraw-Hill/Irwin
P1
Depreciation
On January 1, 2009, Barton, Inc. purchased equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Barton expects to sell the equipment at the end of its life for $2,000 cash. Lets record depreciation expense for the year ended December 31, 2009.
2009 $62,000 - $2,000 Depreciation = = Expense 5
$12,000
McGraw-Hill/Irwin
P1
Depreciation
On January 1, 2009, Barton, Inc. purchased equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Barton expects to sell the equipment at the end of its life for $2,000 cash. Lets record depreciation expense for the year ended December 31, 2009.
12,000 12,000
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Depreciation
12,000 12,000
Equipment
1/1 62,000
Depreciation Expense
12/31 12,000
Accumulated Depreciation
12/31 12,000
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Depreciation
Barton, Inc. Partial Balance Sheet At December 31, 2009 Assets Cash . Equipment Less: accumulated deprec. . . Total Assets
$ 62,000 (12,000)
50,000
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P1
Buy your season tickets for all home basketball games NOW!
Go Big Blue
Liability
Debit Adjustment Unadjusted Balance
Revenue
Credit Adjustment
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P1
On October 1, 2009, Ox University sold 1,000 season tickets to its 20 home basketball games for $100 each. Ox University makes the following entry:
Oct. 1 Cash Unearned Revenue
Unearned Revenue Oct.1 100,000
100,000 100,000
Basketball revenue received in advance
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50,000
P1
Accrued Expenses
Costs incurred in a period that are both unpaid and unrecorded.
Were about one-half done with this job and want to be paid for our work!
Expense
Debit Adjustment
Liability
Credit Adjustment
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Accrued Expenses
Barton, Inc. pays its employees every Friday. Year-end, 12/31/09, falls on a Wednesday. As of 12/31/09, the employees have earned salaries of $47,250 for Monday through Wednesday.
McGraw-Hill/Irwin
P1
Accrued Expenses
Barton, Inc. pays its employees every Friday. Year-end, 12/31/09, falls on a Wednesday. As of 12/31/09, the employees have earned salaries of $47,250 for Monday through Wednesday.
Dec. 31 Salaries Expense Salaries Payable
Salaries Expense Other salaries 657,500 Dec. 31 47,250 Bal. 704,750
47,250 47,250
Salaries Payable Dec. 31 47,250
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Accrued Revenues
Revenues earned in a period that are both unrecorded and not yet received.
Yes, Ive completed your tax return, but have not had time to bill you yet.
Asset
Debit Adjustment
Revenue
Credit Adjustment
McGraw-Hill/Irwin
P1
Accrued Revenues
Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Lets make the adjusting entry necessary on December 31, 2009, the end of the companys fiscal year.
Dec. 31 Accounts Receivable Service Revenue
Accounts Receivable Other receivables 1,325,268 Dec. 31 31,200 Bal. 1,356,468
31,200 31,200
Service Revenue Other revenues 6,589,500 Dec. 31 31,200 Bal . 6,620,700
McGraw-Hill/Irwin
A1
Summary of Adjustments and Financial Statement Links Before Adjustment Income Balance Sheet Statement Account Account Type Adjusting Entry Prepaid Asset Overstated Expense Dr. Expense Expenses Equity Overstated Understated Cr. Asset Unearned Liability Overstated Revenue Dr. Liability Revenues Equity Understated Understated Cr. Revenue Accrued Liability Understated Expense Dr. Expense Expenses Equity Overstated Understated Cr. Liability Accrued Asset Understated Revenue Dr. Asset Revenues Equity Understated Understated Cr. Revenue
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2010
P2
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Common Stock Retained Earnings Dividends Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
600
First, the initial unadjusted amounts are added to the work sheet.
45,300
McGraw-Hill/Irwin
P2
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Common Stock Retained Earnings Dividends Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals McGraw-Hill/Irwin
Cr.
6,200 3,000 d 30,000 0 600 5,800 300 1,400 1,000 230 $45,300 c e a b $45,300
250 1,800
P2
Cr.
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Common Stock Retained Earnings Dividends Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
McGraw-Hill/Irwin
$47,685
P3
McGraw-Hill/Irwin
P3
Adjusted Trial Balance December 31, 2009 Dr. Cr. Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Common Stock Retained Earnings Dividends Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense McGraw-Hill/Irwin Totals
$ 3,950 1,800 8,670 2,300 26,000 $ 375 6,200 210 2,750 30,000 600 7,850 300 375 1,610 100 1,000 1,050 230 $ 47,685 $ 47,685
FastForward Income Statement For the Month Ended December 31, Revenues: Consulting revenue $ Rental revenue Operating expenses: Depr. expense - Equip. $ 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Total expenses Net income $
4,365 3,785
P3
Note: Net Income from the Income Statement carries to the Statement of Retained Earnings.
FastForward Income Statement For the Month Ended December 31, 2009 Revenues: Consulting revenue $ 7,850 Rental revenue 300 Operating expenses: Depr. expense - Equip. $ 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Total expenses 4,365 Net income $ 3,785
McGraw-Hill/Irwin
FastForward Statement of Retained Earnings For the Month Ended December 31, 2009 Retained earnings, 12/1/09 Add: Net income Less: Dividends Retained earnings 12/31/09 $ -03,785 600 $ 3,185
P3
Adjusted Trial Balance Dr. Cr. Cash $ 3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accum. depr. - Equip. $ 375 Accounts payable 6,200 Salaries payable 210 FastForward Unearned revenue 2,750 Statement of Retained Earnings Chuck Taylor, Capital 30,000 For the Month Ended December 31, 2009 Chuck Taylor, Withd'l. 600 Consulting revenue 7,850 Rental revenue Retained earnings, 12/1/07 $ 300 -0Depr. expense 375 Add: Net income 3,785 Salaries expense 1,610 Less: Dividends 600 Insurance expense 100 Rent expenseearnings 12/31/07 1,000 Retained $ 3,185 Supplies expense 1,050 Utilities expense 230 Totals $ 47,685 $ 47,685
Assets
Cash Accounts receivable Supplies Prepaid insurance Equipment Less: accum. depr. Total assets $ 3,950 1,800 8,670 2,300 25,625 42,345
Liabilities
Accounts payable Salaries payable Unearned revenue Total liabilities
Equity
Common stock Retained earnings Total liabilities and equity $
McGraw-Hill/Irwin
C4
Temporary (nominal) accounts accumulate data related to one accounting period. They include all income statement accounts, the dividends account, and the Income Summary account. These accounts are closed at the end of the period to get ready for the next accounting period.
Permanent (real) accounts report activities related to one or more future accounting periods. They carry ending balances to the next accounting period and are not closed.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2010
P4
McGraw-Hill/Irwin
P4
Consulting Revenues
$ 25,000
Income Summary
Retained Earnings
$ 7,000
McGraw-Hill/Irwin
P4
Consulting Revenues
$ 25,000 $ 25,000
Income Summary
$ 25,000
Close revenues with a debit to the revenue account and a credit to Income Summary.
The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
P4
Consulting Revenues
$ 25,000 $ 25,000
Income Summary
$ 18,100 $ 25,000
Close expense accounts with a credit to expenses and a debit to Income Summary.
The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
P4
Consulting Revenues
$ 25,000 $ 25,000
Income Summary
$ 18,100 $ 25,000
$ 6,900
McGraw-Hill/Irwin
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Income Summary
$ 18,100 $ 6,900 $ 25,000 $ 6,900
Retained Earnings
$ 7,000 $ 6,900
McGraw-Hill/Irwin
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Retained Earnings
$ 2,000
$ 7,000 6,900
$ 2,000
McGraw-Hill/Irwin
P4
Retained Earnings
$ 2,000 $ 7,000 6,900 $ 11,900
P5
Trial Balance prepared after the closing entries have been posted. The purpose is to insure that all nominal or temporary accounts have been closed. The only accounts on this trial balance should be assets, liabilities, and equity accounts.
The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
C5
Journalize
Post Prepare unadjusted trial balance
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Prepare statements
Prepare adjusted trial balance
The McGraw-Hill Companies, Inc., 2010
Adjust
C6
Current items are those expected to come due (either collected or owed) within one year or the companys operating cycle, whichever is longer.
McGraw-Hill/Irwin
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McGraw-Hill/Irwin
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McGraw-Hill/Irwin
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McGraw-Hill/Irwin
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Long-term resources that benefit business operations. They usually lack physical form and have uncertain benefits. Examples include patents, trademarks, copyrights, franchises, and goodwill.
McGraw-Hill/Irwin
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Current Liabilities
Obligations due to be paid or settled within one year or the operating cycle, whichever is longer. Current liabilities include: 1. Accounts payable,
2. Notes payable,
3. Taxes payable, 4. Interest payable, 5. Unearned revenues, 6. Wages payable.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2010
C6
Long-Term Liabilities
Obligations not due within one year or the operating cycle, whichever is longer. Long-term liabilities include: 1. Notes payable,
2. Mortgages payable,
3. Bonds payable, and
4. Lease obligations.
McGraw-Hill/Irwin
A2
Profit Margin
The profit margin ratio measures the companys net income to net sales.
McGraw-Hill/Irwin
A3
Current Ratio
This ratio is an important measure of a companys ability to pay its short-term obligations. Current Current assets = ratio Current liabilities
McGraw-Hill/Irwin
End of Chapter 3
McGraw-Hill/Irwin