Accounting

ACCT 201
Reporting and
3
Chapter
Preparing Financial
Statements
ACCT 201
UAA – ACCT 201

ACCT 201
Principles of Financial Accounting

Dr. Fred Barbee
ACCT 201 ACCT 201 ACCT 201
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What Have We Learned?
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I have
some bad
news . . .
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Dr. Fred Barbee 3

ACCT 201
What Have We Learned?
I have
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some good
news . . .
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Dr. Fred Barbee 4

ACCT 201
We Have Learned . . .
The basic accounting equation -

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and the definition of each of its

components
Assets =
Liabilities +
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Owners’ Equity
Dr. Fred Barbee 5

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Double-entry accounting
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Assets = Liabilities + Owners’

Equity
Debits=Credits
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Dr. Fred Barbee 6

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The debit/credit rules and how

each impacts accounting.
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ncrease
Debit = “Left”
side of an account ebits
- Nothing more,
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nothing less. xpenses

Acronym:
ssets
Dr. Fred Barbee 7

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The debit/credit rules and how

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each impacts accounting.

evenue
quity Credit = “Right”
side of an account
iabilities - Nothing more,
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ncrease nothing less.

Acronym:
redits
Dr. Fred Barbee 8

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Net Income
Income
Statement
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Retained
Stmt of Earnings
Retained
Earnings
About the
basic financial
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Balance
statements and how Sheet
they interrelate.
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The first five

steps in the
accounting
Prepare
cycle.
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Trial Balance
Post Transactions
Record Transactions
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Analyze Transactions
Examine Source Documents

Preparing Financial Statements
ACCT 201
Financial
Prepare
ACCT 201
Statements
Trial Balance
Post Transactions
Record Transactions
ACCT 201
Analyze Transactions
Examine Source Documents

Problems in Accounting
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Measurements
The identification of the

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accounting period.
The proper point in time to

recognize revenue.
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The appropriate moment to

record an expense.
Dr. Fred Barbee 13
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Identification of the
Accounting Period
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Time Period Principle
For reporting purposes, an

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organization’s life can be divided

into separate accounting periods
months,
quarters,
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years, etc.
Dr. Fred Barbee 15

Time Period Principle
Discrete (separate) accounting
B periods.
E E
G N
I 96 97 98 99 00 01 02 03 04 05 D
N I
N Life of the Firm N
I G
N
G
Exh.
The Accounting Period

3.1
Annual
1 2
Semiannual
1 2 3 4
Quarter
1 2 3 4 5 6 7 8 9 10 11 12
Month
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The proper point in time

to recognize revenues.
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Revenue Recognition . . .
Revenues are recorded when two

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main criteria have been met:

The earnings process is
substantially complete (a sale has
taken place or service has been
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rendered); and
An exchange has taken place.

Dr. Fred Barbee 19
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Revenue Recognition . . .
Revenue is generally recognized

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At the time services are

performed; or
When goods are sold and delivered
to a customer.
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Dr. Fred Barbee 20

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The proper point in time

to recognize expenses.
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The Matching Principle
The matching principle requires

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that all expenses incurred to

generate the revenues
recognized in an accounting
period be matched with those
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revenues.
Dr. Fred Barbee 22

ACCT 201
The Matching Principle
Another view . . .
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Let the expense follow the revenue.

First the revenue . . .
Then the expense.
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Sometimes referred to as “The

Expense Recognition Principle.”
Dr. Fred Barbee 23
Accrual Basis
Accounting
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Revenue
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Accrual Basis
Recognition
Accounting
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Matching
Principle
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Yikes!! What
is Accrual
Basis
Accounting?
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Accrual Basis Accounting
Revenues are recognized

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(recorded) when earned, without

regard to when cash is received;
Expenses are recorded as
incurred without regard to when
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they are paid.
Dr. Fred Barbee 28

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The time period principle
Gives rise to the need for
The Revenue Recognition
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Principle and the Matching

Principle
Resulting in . . .
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The accrual basis of

accounting
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Whoa! Let’s
back up a bit
here -- this
really does
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make sense?
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Periodicity
Assumption
96 97 98 99 00 01 02 03 04 05
? ? ? ? ? ?
How do we recognize revenues?

The Revenue Recognition
Principle
How do we recognize expenses?
The Matching Principle
Accrual Basis Accounting
Accrual Accounting . . .
BOP EOP
Recognized
Revenues
Matched
Expenses
Recognized Matched Accrual Net

Revenues  Expenses  Income
Bertha, are
there any other
bases for
accounting?
Yikes! I don’t
know Claude. We
probably better
ask the professor!
ACCT 201
Absolutely.
You don’t
think we
would make it
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that easy, do
you?
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Cash Basis
Accounting
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Cash Basis Accounting
With the cash basis . . .

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Revenues are recognized in the

period cash is received; and
Expenses are recognized in the

period when cash is paid out.
ACCT 201
Dr. Fred Barbee 36

Cash Basis Accounting . . .
BOP EOP
Revenue (Cash)
Expenses (Cash)
Revenue Expenses Cash Basis

(Cash)  (Cash)  Net Income
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Ahhh, but
there is yet
another one!
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Fun! Fun!
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Modified Cash
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Basis Accounting
Modified Cash Basis
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Accounting
With the Modified Cash Basis . . .

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Current period revenues and

expenses are treated exactly as in
the cash basis;
Expenses covering more than one
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accounting period are allocated

over the useful life of the asset.
Dr. Fred Barbee 40
Exh.
ACCT 201 3.4
Adjusting Accounts
An adjusting entry is recorded to

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bring an asset or liability account

balance to its proper amount.
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Dr. Fred Barbee 42

Exh.
Framework for Adjustments

3.4
Adjustments
Prepaid Depreciation Unearned Accrued Accrued

Expenses Revenues Expenses Revenues
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.
Exh.

3.4
Adjustments

Transaction where cash is paid

before a related expense is
recognized.
Adjusting Prepaid Expenses
Resources paid Here is the check
for my first
for prior to 6 months’ rent.
receiving the
actual benefits.
Asset Expense
Unadjusted Credit Debit
Balance Adjustment Adjustment
On December 1, 2001, Scott Company
paid $12,000 to cover rent for
December 2001 through May 2002.
Let’s look at the adjusting journal
entry needed on December 31, 2001.
GENERAL JOURNAL Page 34

Date Description PR Debit Credit
Dec. 31 Rent Expense 2,000
Prepaid Rent 2,000
to record monthl y rent
After posting, the accounts involved
look like this:
Prepaid Rent Rent Expense

12/1 $12,000 12/31 $2,000 12/31 $2,000
Exh.

3.4
Adjustments


before a related expense is
recognized.
Adjusting for Depreciation
Depreciation is the process of
computing expense from allocating the
cost of plant and equipment over its
expected useful lives.
Straight-Line Asset Cost – Salvage Value

=
Depreciation Useful Life
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On January 1, 2002, Monroe, Inc.

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purchased oil pumping equipment for

$62,000 cash.
The equipment has an estimated
useful life of 5 years.
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Monroe expects to sell the equipment

at the end of its life for $2,000 cash.
Dr. Fred Barbee 51
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Let’s compute depreciation expense

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for the year ended December 31,

2002.
2002 $62,000 - $2,000
Depreciation =
Expense 5
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= $12,000
Dr. Fred Barbee 52

Prepare the journal entry.

Dec. 31 Depreciation Exp. 12,000
Accum. Depreciation 12,000
To record a nnua l depreci a ti on
Accumulated depreciation is
a contra asset account.

look like this:
Equipment Depreciation Expense
1/1 $62,000 12/31 $12,000
Accumulated Depreciation
12/31 $12,000
Monroe, Inc.
Balance Sheet
At December 31, 2002
Assets The
Cash $ 18,000
. equipment
. account is
. shown on
Equipment $ 62,000
Less: accumulated deprec. (12,000) 50,000 the balance
. sheet like
. this.
.
Total Assets $ 249,800
Exh.

3.4
Adjustments

Transaction where cash is

received before a related
revenue is recognized.
Adjusting Unearned Revenue
Cash received in
advance of Buy your season tickets for
providing all home basketball games NOW!
products or
services. “GO SEAWOLVES”
Liability Revenue
Debit Unadjusted Credit
Adjustment Balance Adjustment
On October 1, 2002, UAA sold 1,000
season tickets to its 20 home basketball
games for $100 each. UAA makes the
following entry:

Oct. 1 Cash 100,000
Unearned Basketball Revenue 100,000
Recei pts for 1,000 sea son ti ck ets
On December 31, UAA has played 10 of its

regular home games, winning 8 and
losing 2.

Dec. 31
Prepare the appropriate Adjusting
Entry on December 31
On December 31, UAA has played 10 of its

regular home games, winning 8 and
losing 2.

Dec. 31 Unearned Basketball Revenue 50,000
Basketball Revenue 50,000
to recogni ze ba sk etba l l revenue
look like this
Unearned Basketball
Revenue Basketball Revenue
12/31 $50,000 10/1 $100,000 12/31 $50,000
Exh.

3.4
Adjustments


after a related expense is
recognized.
Adjusting for Accrued Expenses
We’re about one-half
Costs incurred in a done with this job and
period that are want to be paid!
both unpaid and
unrecorded.
Expense Liability
Debit Credit
Adjustment Adjustment
Denton, Inc. pays its employees every Friday.
Year-end, 12/31/02, falls on a Wednesday. As of
12/31/02, the employees have earned salaries of
$47,250 for Monday through Wednesday of the
week ended 1/02/03.
Last pay Next pay

date date
12/26/02 1/2/03
12/1/02 12/31/02 Record adjusting

Year end journal entry.
Denton, Inc. pays its employees every Friday.
Year-end, 12/31/02, falls on a Wednesday. As of
12/31/02, the employees have earned salaries of
$47,250 for Monday through Wednesday of the
week ended 1/02/03.

Dec. 31 Salaries Expense 47,250
Salaries Payable 47,250
to record sa l a ry a ccrua l
will look like this . . .
Salaries Expense Salaries Payable

12/31 $47,250 12/31 $47,250
Exh.

3.4
Adjustments

Transaction where cash is

received after a related
revenue is recognized.
Adjusting for Accrued Revenues
Revenues earned Yes, you can pay me
for your tax return
in a period that
when I finish the work.
are both
unrecorded and
not yet received.
Asset Revenue
Debit Credit
Adjustment 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.

Dec. 31 Accounts Receivable 31,200
Service Revenues 31,200
Revenues ea rned but not recei ved
will look like this . . .
Accounts Receivable Service Revenue

12/31 $31,200 12/31 $31,200
Exhibit 3.18
Exh.
3.18
Summary of Adjustments and

Financial Statement Links
Before Adjusting Adjusting
Category
B/S I/S Entry
Dr. Expense
Prepaid Expense Asset Expense
Cr. Asset
Dr. Liability
Unearned Revenue Liability Revenue
Cr. Revenue
Dr. Expense
Accrued Expenses Liability Expense
Cr. Liability
Dr. Asset
Accrued Revenues Asset Revenue
Cr. Revenue
Overstated
Understated
FastForward Exh.
Trial Balance 3.19
December 31, 2001

Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. - First, the
Accounts payable
Salaries payable
6,200
-
initial
Unearned revenue
Common Stock
3,000
30,000
unadjusted
Retained Earnings
Consulting revenue
600
5,800
amounts are
added to the
Rental revenue 300
Depr. expense - worksheet.
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300
FastForward Exh.
Trial Balance 3.19
December 31, 2001

Unadjusted Adjusted
Trial Balance Adjustments Next,
Trial Balance
Cash
Dr.
3,950
Cr. Dr. Cr.
FastForward’s
Dr. Cr.
Accounts receivable - f 1,800 adjustments

Supplies 9,720 b 1,050 are added.
Prepaid insurance 2,400 a 100
Equipment 26,000
Accum. depr. - Equip. - c 375
Accounts payable 6,200
Salaries payable - e 210
Unearned revenue 3,000 d 250
Common Stock 30,000
Retained Earnings 600
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Totals 45,300 45,300 3,785 3,785
Finally, the totals FastForward Exh.
Trial Balance 3.19
are determined. December 31, 2001
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned revenue 3,000 d 250 2,750
Common Stock 30,000 - 30,000
Retained Earnings 600 600
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals 45,300 45,300 3,785 3,785 47,685 47,685
Preparing Financial
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Statements
Let’s use
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FastForward’s
adjusted trial
balance to prepare
the company’s
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financial
statements.
Dr. Fred Barbee 77
Exh.
3.20
Adjusted Step One:
Trial Balance
Dr. Cr. Prepare the Income
Cash $ 3,950
Accounts receivable 1,800 Statement.
Supplies 8,670
Prepaid insurance 2,300 FastForward
Equipment 26,000 Income Statement
Accum. depr. - Equip. $ 375
For the Month Ended December 31, 2001
Salaries payable 210
Revenues:
Unearned revenue 2,750 Consulting revenue $ 7,850
Common Stock 30,000 Rental revenue 300
Retained Earnings 600 Operating expenses:
Consulting revenue 7,850
Depr. expense - Equip. $ 375
Rental revenue 300
Depr. expense 375
Salaries expense 1,610
Salaries expense 1,610 Insurance expense 100
Insurance expense 100 Rent expense 1,000
Rent expense 1,000 Supplies expense 1,050
Supplies expense 1,050 Utilities expense 230
Total expenses 4,365
Totals $ 47,685 $ 47,685
Net income $ 3,785
Exh.
Step Two: 3.20
FastForward Prepare the Statement

Income Statement
For the Month Ended December 31, 2001 of Retained Earnings.
Revenues:
Consulting revenue $ 7,850
Rental revenue 300
Operating expenses:
Note: The Net Income
Depr. expense - Equip. $
Salaries expense
375
1,610
from the Income
Insurance expense
Rent expense
100
1,000
Statement carries to the
Supplies expense 1,050 Statement of Retained
Total expenses 4,365 Earnings.
Net income $ 3,785
FastForward
Statement of Retained Earnings
For the Month Ended December 31, 2001
Retained Earnings 12/1/01 $ -

Add: Net income 3,785
Less: Dividends (600)
Retained Earnings 12/31/01 $ 3,185
Exh.
Adjusted FastForward 3.20
Trial Balance Balance Sheet
Dr. Cr. December 31, 2001
Cash $ 3,950 Assets
Accounts receivable 1,800 Cash $ 3,950
Supplies 8,670 Accounts receivable 1,800
Prepaid insurance 2,300 Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Equipment 26,000
Accum. depr. - Equip. $ 375
Less: accum. depr. (375) 25,625
Total assets $ 42,345
Liabilities
Unearned revenue 2,750
Accounts payable $ 6,200
Common Stock 30,000
Retained Earnings 600
Unearned revenue 2,750
Consulting revenue 7,850 Total liabilities $ 9,160
Rental revenue FastForward 300
Owner's Equity
Depr. expense Statement of Retained375
Earnings
Common Stock 30,000
Forexpense
Salaries the Month Ended December
1,610 31, 2001
Retained Earnings 3,185
Insurance expense 100 Total liabilities and equity $ 42,345
Retained
Rent expenseEarnings 12/1/01 1,000 $ -
Add: Net income
Supplies expense 1,050 3,785
Utilities
Less: expense
Dividends 230 (600) Step Three:
Totals Earnings 12/31/01$ 47,685
Retained $ 47,685
$ 3,185
Prepare the Balance
Sheet.

Accounting

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ACCT 201

UAA – ACCT 201

Principles of Financial Accounting

Dr. Fred Barbee 3

Dr. Fred Barbee 4

The basic accounting equation -

and the definition of each of its

Dr. Fred Barbee 5

Assets = Liabilities + Owners’

Dr. Fred Barbee 6

The debit/credit rules and how

nothing less. xpenses

Dr. Fred Barbee 7

The debit/credit rules and how

each impacts accounting.

ncrease nothing less.

Dr. Fred Barbee 8

The first five

Examine Source Documents

Examine Source Documents

The identification of the

The proper point in time to

The appropriate moment to

For reporting purposes, an

organization’s life can be divided

Dr. Fred Barbee 15

The Accounting Period

The proper point in time

Revenues are recorded when two

main criteria have been met:

An exchange has taken place.

Revenue is generally recognized

At the time services are

Dr. Fred Barbee 20

The proper point in time

The matching principle requires

that all expenses incurred to

Dr. Fred Barbee 22

Let the expense follow the revenue.

Sometimes referred to as “The

Revenues are recognized

(recorded) when earned, without

they are paid.

Dr. Fred Barbee 28

Principle and the Matching

The accrual basis of

How do we recognize revenues?

Recognized Matched Accrual Net

With the cash basis . . .

Revenues are recognized in the

Expenses are recognized in the

Dr. Fred Barbee 36

Revenue Expenses Cash Basis

With the Modified Cash Basis . . .

Current period revenues and

accounting period are allocated

An adjusting entry is recorded to

bring an asset or liability account

Dr. Fred Barbee 42

Framework for Adjustments

Framework for Adjustments

Prepaid Depreciation Unearned Accrued Accrued

Transactions where cash is paid or

Transactions where cash is paid or