Prepare Income Statement and Balance Sheet According to Accrual Basis Principles of Cost Analysis and Management

Did Lacy Really Make $70? Revenues – Expenses = Cash Other Assets Liabilities (+) 200 15 5 50 -------------- 130 (-) 20 10 5 65 40 ---------------- (+) 20 65 40 -------------- 140 (-) 5 --------------- (-) 40 ---------------- (+) 40 --------------- Financial Position Revenues Expenses (-) (+) 200 (-) (+) 15 20 50 --------------- 85 (+) 10 5 --------------- 15 (-) Revenues – Expenses = Change in Financial Position

Terminal Learning Objective Action: Prepare Income Statement and Balance Sheet according to Accrual Basis Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international learners): Explain purpose of adjusting transactions Describe types of adjusting transactions Record adjusting transactions in tabular format Identify and enter relevant report data (using macros provided in Excel template) to prepare Income Statement and Balance Sheet according to Accrual Basis

Review: The Accounting Cycle Record Transactions Post-Closing Trial Balance Post to Ledger Close Accounts Prepare Trial Balance Prepare Statements Adjust Accounts Adjusted Trial Balance

Why Adjust Accounts? Purpose: Allows financial statements to accurately represent financial position of the entity. Statement of Activities: Correctly report revenues and expenses for the period. Statement of Financial Position: Correctly state ending balances for assets, liabilities, and financial position

Purpose for Adjustments Assign activity to proper time period Revenue recognition principle: Revenue is reported on the Statement of Activities in the period in which it is Earned. Revenue is earned when service is provided or product is sold. Plan Take Orders Complete Service or Ship Product Collect Cash Revenue & Non-Cash Asset

Purpose for Adjustments Assign activity to proper time period Matching principle: Expenses are reported on the Statement of Activities in the period Resource Are Consumed Plan Order Consume Receive Pay Asset & Liability  Remove Liability  Expense

LSA #1 Check on Learning Q1. What is the accounting principle that defines when expenses should be reported? Q2. In what period should revenues be reported? A1. Q1. What is the accounting principle that defines when expenses should be reported? A1. Matching principle Q2. In what period should revenues be reported? A2. In the period earned – when product is shipped or services are completed. A2.

2 Basic Types of Adjustments Prepayments: Cash is paid before the resource is consumed. When cash is paid in advance, an asset is created At the end of the period, some of the asset may have been consumed  expense. Consume Pay Record Asset  Reduce Asset, Record Expense

2 Basic Types of Adjustments Accruals: Resources have been consumed but no cash has been paid. Results in a liability Consume Pay Expense & Liability  Remove Liability

Inventory and Cost of Goods Sold Goods and materials that are manufactured or purchased for resale. Hold as assets on the Statement of Financial Position until sold. Record as expense “Cost of Goods Sold” on the Statement of Activities when sold.

Equipment and Depreciation Depreciation is the accounting process of assigning a portion of equipment’s cost to the periods in which it is used. A portion of the benefit of owning the equipment has been received in the current period  expense. The future benefit is reduced.

Rules for Adjustments Each adjustment will affect One Account from the Statement of Activities and One Account from the Statement of Financial Position. Adjustments will NEVER affect the cash account.

LSA #2 Check on Learning Q1. Which type of adjustment is called for when resources are consumed before cash is paid? Q2. Which account will never be affected by adjusting transactions? A1. Q1. Which type of adjustment is called for when resources are consumed before cash is paid? A1. Accrual Q2. Which account will never be affected by adjusting transactions? A2. Cash A2.

Lacy’s Ledger Other Assets consist of: Supplies $105 Utensils 20 Expenses (+) 20 65 40 -------------- 140 (-) 5 --------------- 10 15 Other Assets consist of: Supplies $105 Utensils 20 IOUs 15

Lacy’s Ledger (Cont.) Other Assets Expenses (+) 20 65 40 -------------- 80 (-) 5 60 --------------- 10 75 Lacy determines that $60 of supplies have been used

Lacy’s Ledger (Cont.) Other Assets Expenses (-) 5 60 --------------- (+) 10 75 (+) 20 65 40 -------------- 80 Other Assets decrease and Expenses increase. Remaining assets are: Supplies $45 Utensils 20 IOUs 15

Recording Adjustments Record the use of supplies in the accounting equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 140 200 85 - 15 Supplies used -60 +60 New Balance 80 75 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 140 200 85 - 15

Lacy’s Ledger (Cont.) Other Assets Expenses (+) 10 5 60 1 --------------- 76 (-) (+) 20 65 40 -------------- 79 (-) 5 60 1 --------------- Lacy paid $20 for Utensils and plans to use them for 20 months. One month’s benefit has already been received

Lacy’s Ledger (Cont.) Remaining assets are: Supplies $45 Utensils 19 Other Assets Expenses (+) 20 65 40 -------------- 79 (-) 5 60 1 --------------- 10 76 Remaining assets are: Supplies $45 Utensils 19 IOUs 15

Recording Adjustments Record depreciation in the accounting equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 80 200 85 - 75 Depreciation -1 +1 New Balance 79 76 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 80 200 85 - 75

Lacy agrees to reimburse Madge $3 for using the family refrigerator Lacy’s Ledger (Cont.) Liabilities Expenses (+) 10 5 60 1 3 --------------- 79 (-) (-) 40 ---------------- (+) 40 3 --------------- Lacy agrees to reimburse Madge $3 for using the family refrigerator

Lacy’s Ledger (Cont.) Liabilities Expenses (+) 10 5 60 1 3 --------------- 79 (-) (-) 40 ---------------- (+) 40 3 --------------- Both Expenses and Liabilities Increase. Accrued Expense: benefit received but no cash paid.

Recording Adjustments Record refrigerator use in the accounting equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 79 200 85 - 76 Refrigerator use +3 New Balance 3 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 79 200 85 - 76

Lacy‘s Adjusted Trial Balance Account Title dr. cr.  Cash $130     Other Assets 79   Liabilities $ 3  Financial Position 200  Revenues  85  Expenses  79 Totals  $288 $288 

Lacy’s Statement of Activities Revenues: $85 Expenses: 79 Excess of revenues over expenses: $6 Other Financing Source – Equity Transfer from General Fund 200 Change in Financial Position $206 Add: Beginning Financial Position -0- Ending Financial Position $206

Lacy’s Statement of Financial Position Assets: Liabilities & Financial Position: Liabilities: $3 Financial Position: 206 Total: $209 Cash $130 Other Assets 79 Total: $209

LSA #3 Check on Learning Q1. Which adjusting transaction resulted in a liability? Q2. Which adjusting transaction(s) reduced assets? A1. Q1. Which adjusting transaction resulted in a liability? A1. Refrigerator Use Q2. Which adjusting transaction(s) reduced assets? A2. Depreciation, supplies A2.

LSA #1-3 Summary During this lesson, we covered the different types of transactions and their purpose for adjusting. We also covered the two basic adjustment types as well as that of the rules governing those adjustments. Finally, we recorded given numbers to a ledger to view the “statement of financial position.” What are your questions?

3.3 The Accounting Cycle (Excel Spreadsheet)

Accounting Cycle Spreadsheet Post adjusting transactions to T-Accounts. New balances calculate automatically

Accounting Cycle Spreadsheet (Cont.) Remember: Debits = Credits

The Statement of Activity is generated automatically Accounting Cycle Spreadsheet (Cont.) The Statement of Activity is generated automatically

Accounting Cycle Spreadsheet (Cont.) Enter details to complete the Statement of Financial Position Ending financial position is calculated automatically.

LSA #4 Check on Learning The Check on learning will be conducted after the Practical Exercise (PE).

LSA #4 Summary During this lesson, we discussed and conducted hands-on training on the importance of tracking commitments, obligations, accrued expenditures/expenses and disbursements. What are your questions?

Practical Exercise Prepare Income Statement and Balance Sheet According to Accrual Basis is a lesson designed for the learners to apply the steps in managerial cost accounting. Financial Managers must understand and apply the process of accumulating, measuring, analyzing, interpreting, and reporting cost information useful to both internal and external groups concerned with the way in which the organization uses, accounts for, safeguards, and controls it resources to meet its objective. During this lesson, we covered the following Learning Step Activities: 1. Explain purpose of adjusting transactions 2. Describe types of adjusting transactions 3. Record adjusting transactions in tabular format 4. Identify and enter relevant report data (using macros provided in Excel template) to prepare income statement and balance sheet according to accrual basis What are your questions?

TLO Summary Action: Prepare Income Statement and Balance Sheet according to Accrual Basis Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international learners): Explain purpose of adjusting transactions Describe types of adjusting transactions Record adjusting transactions in tabular format Identify and enter relevant report data (using macros provided in Excel template) to prepare Income Statement and Balance Sheet according to Accrual Basis