Financial Accounting Spring 2013 Sias International University

Where are we now? ► Chapter 1 and 2 – The general view of the financial statement,( like taking a non-stop train to bei jing.) we also talked about ► Journal entries, the debit and the credit ► J.E.=Debit(Dr) Cash $XXX ► Credit(Cr) Sales Income $XXX ► To record cash received from sales

► Don’t be confused with the abbreviation: ► SE, RE, A/P, A/R, JE ► AJE = Adjusting journal entry ► FS = Financial statements ► From here we are going to see adjustments to the FS, like a train stopping in a station. ► The sequence is JE, Trial Balance, AJE, adjusted trial balance, the 4 four FS, and Closing the books

Chapter 3 ► Chapter 3 is connected with chapters 1, 2 ► Accrual Accounting- accounting that records the impact of a business event as it occurs, regardless of whether the transaction affected cash ► Cash basis Accounting – accounting that record only transactions in which cash is paid or received ► The GAAP require that business used accrual accounting

3 Principles involved ► # 1 Time period concept – The basic accounting period is 1 year. ► “Fiscal Year” – an accounting cycle that ends ► Other than Dec. 31 ► “For the Fiscal year ended, Jan. 31,2009” ► ► #2 Revenue Principle – Record only revenue after it has been earned. Meaning after it has delivered goods or services ► See exhibit 3-1, page 129

► # 3 –Matching Principle – Expenses are the cost of assets used and liabilities created in other to earn income. Expenses have no future benefit to the Corporation,Page 129,Exhibit 3-2 ► “Maximize Profit, Minimize Cost” ► Look carefully on the Trial Balance, Page 131 and 78 (adjusted and unadjusted)

5 Categories of Adjusting entries ► #1 Page ► Prepaid expenses ( Assets) ► ”Expenses paid in advance“ ► JE: June 1 Prepaid rent 3, ► Cash (3 months) 3, ► June 30 Rent Expense (1 Month) 1, ► Prepaid rent 1,000.00

► # 2 Page ► Unearned Revenues (Liabilities) ► ”received money in advance” 15 days only ► June 15 Cash ► Unearned revenue ► June 30 Unearned revenue ► Revenue

► # 3 Page ► Accrued Expenses (ex: salary is 1,800.00) ► ”Late in paying expenses” ► June 15 Salary Expense ► Cash ► June 30(Holiday) Salary Expense ► Salary Payable

► # 4 Page 140 ► Accrued Revenues (Ex: for 1 month) ► To be received on July 15 ► ”Late in receiving income” ► June 30 A/R ( x ½) ► Service revenue ► To accrue service revenue

► # 5 Page ► Depreciation Expense – The process of allocating cost of PPE except land over its useful life to expense Why? Why? Because PPE loses its value over the years thru wear and tear, and being obsolete) Because PPE loses its value over the years thru wear and tear, and being obsolete)

► Page 135 ► June 3 Equipment 24, ► A/P 24, ► Purchased office furniture on account ► June 30 Depreciation Expense ► Accumulated depreciation ► To record depreciation on equipment

The Straight-line Method,Page 136 ► Cost of asset / expected useful life ► Depreciation =$24, / 5 years ► =$4, per year ► =$ per month ($4, / 12) ► This amount goes to an account called Accumulated depreciation (Acc. Dep)

Accumulated Depreciation ► Page 136 ► It is a Contra asset account ► Listed under Assets but with a Credit balance, usually with an open and close parenthesis ► See Balance sheet Page 138 ► Book Value – the net on the amount of the PPE minus the accumulated depreciation

In Summary, Page 143 ► On June 30 Debit Credit ► Prepaid Expense Expense Asset ► Depreciation Expense Contra A. ► Accrued Expenses Expense Liability ► Accrued Revenue Asset Revenue ► Unearned Revenue Liability Revenue ► Question: Why is unearned Rev. a liability?

Let’s look at the AJE’s for June 30th ► See Unadjusted Trial balance on Page 131 ► See AJE’s on Page 143 ► Question: What kind of expense is letter G ► See Adjusted trial balance on Page 145, Exhibit 3-9

Closing the Books ► Means to prepare the Income, Revenue and dividends accounts for the next period’s transaction, so Closing Entries are: ► 1) Debit each revenue account balance, Credit RE ► 2) Credit expense account balance, and Debit RE ► 3) Credit dividends account and debit RE

Page 154 ► Assets and Liabilities based on Liquidity

Page ► Formats for the FS

Using Accounting Ratios Pages Current Ratio=Current Assets/Current Liability “The ability to pay current L by current A” The higher the better (Normal ratio =1.50) Debt Ratio = Total Liabilities/Total Assets “ The ability to pay Total L by Total A “ The lower,the better (Normal ratio=60,70%) The lower,the better (Normal ratio=60,70%)