Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Review of the Accounting Process Chapter 2

2-2 The Accounting Equation A = L + OE - Owner Withdrawals+ Owner Investments - Expenses - Losses + Revenues + Gains

2-3 Accounting Equation for a Corporation A = L + SE + Retained Earnings+ Paid-in Capital - Expenses - Losses + Revenues + Gains - Dividends

2-4 Accounting Equation, Debits and Credits, Increases and Decreases Permanent Accounts—assets, liabilities, paid-in capital, retained earnings Temporary Accounts-revenues, gains, expenses, losses

2-5 The Accounting Processing Cycle Source Documents Record in Journal Transaction Analysis Post to Ledger During the Accounting Period Financial Statements Unadjusted Trial Balance Adjusted Trial Balance At the End of the Accounting Period Record & Post Adjusting Entries Close Temporary Accounts Post-Closing Trial Balance At the End of the Year

2-6 The Accounting Processing Cycle On July 1, two individuals each invested $30,000 in a new business, Dress Right Clothing Corporation. Each investor was issued 3,000 shares of common stock. Two accounts are affected: Cash (an asset) increases by $60,000. Common stock (a shareholders’ equity) increases by $60,000. July 1 Cash60,000 Common stock 60,000

2-7 General Ledger The “T” account is a shorthand format of an account used by accountants to analyze transactions. It is not part of the bookkeeping system.

2-8 Posting Journal Entries

After recording all entries for the period, Dress Right Clothing’s Unadjusted Trial Balance would be as follows: Debits = Credits A Trial Balance is a list of all accounts and their balances at a particular date.

2-10 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. Adjusting Entries Prepayments Accruals Estimates Accountants must often make estimates in order to comply with the accrual accounting model. At the end of the period, adjusting entries are required to satisfy the realization principle and the matching principle.

2-11 Asset Expense Unadjusted Balance Credit Adjustment Debit Adjustment Prepaid Expenses Today, I will pay for my first 6 months’ rent. Prepaid Expenses Items paid for in advance of receiving their benefits

2-12 Prepaid Expenses – Journal Entries  On July 1, 2013 ABC purchases a 2-year insurance policy valid until June 30 th, 2015 for $2400. What journal entries does ABC make on: - July 1, 2013? - December 31, 2013? - December 31, 2014? - June 30, 2015? - December 31, 2015?

2-13 Liability Revenue Unadjusted Balance Credit Adjustment Debit Adjustment Unearned Revenues “Go Big Red” Buy your season tickets for all home basketball games NOW! Unearned Revenue Cash received in advance of performing services

2-14 Unearned Revenues – Journal Entries  On January 1, 2013, ABC company sells a five-year subscription to its online services for $5000.  What journal entries does ABC make on:  January 1, 2013?  December 31, 2013?  December 31, ?

2-15 Alternative Approach to Record Prepayments Unearned Revenue Record initial cash receipts as follows: Cash $$$ Revenue $$$ Adjusting Entry Record the amount for the unearned liability as follows: Revenue $$$ Unearned revenue $$$ Prepaid Expenses Record initial cash payments as follows: Expense $$$ Cash $$$ Adjusting Entry Record the amount for the prepaid expense as follows: Prepaid expense $$$ Expense $$$

2-16 Prepaid Expenses – Journal Entries  On July 1, 2013 ABC purchases a 2-year insurance policy valid until June 30 th, 2015 for $2400. Using the alternative approach, what journal entries does ABC make on: - July 1, 2013? - December 31, 2013? - December 31, 2014? - June 30, 2015? - December 31, 2015?

2-17 Unearned Revenues – Journal Entries  On January 1, 2013, ABC company sells a five-year subscription to its online services for $5000.  Using the alternative approach, what journal entries does ABC make on:  January 1, 2013?  December 31, 2013?  December 31, ?

2-18 Expense Liability Credit Adjustment Debit Adjustment Accrued Liabilities I won’t pay you until the job is done! Accrued Liabilities Liabilities recorded when an expense has been incurred prior to cash payment.

2-19 Accrued Liabilities – Journal Entries  Employees are owed $10,000 for work performed during the month of June, but will not be paid until July 5 th.  What journal entries does ABC make on:  June 30?  July 5?

2-20 Accrued Liabilities – Journal Entries  On October 1 st, 2013 ABC signs a three-year $100,000 8% note payable with XYZ Bank with interest and principal due September 30,  What journal entries does ABC make on:  October 1, 2013?  December 31, 2013  December 31, 2014 and 2015?  September 30, 2016?  December 31, 2016?

2-21 Asset Revenue Credit Adjustment Debit Adjustment Accrued Receivables Yes, you can pay me in May for your April 15 tax return. Accrued Receivables Revenue earned in a period prior to the cash receipt.

2-22 Accrued Receivables – Journal Entries  On June 1, ABC sells merchandise to Jim Smith for $700 on account. ABC purchased the merchandise for $400 on May 15 in cash. ABC receives the cash from Jim Smith’s sale on July 10.  What journal entries does ABC make on:  May 15?  May 31?  June 1?  June 30?  July 10?

2-23 Accrued Receivables – Journal Entries  On October 1 st, 2013 ABC signs a three-year $100,000 8% note payable with XYZ Bank with interest and principal due September 30,  What journal entries does XYZ Bank make on:  October 1, 2013?  December 31, 2013  December 31, 2014 and 2015?  September 30, 2016?  December 31, 2016?

2-24 Estimates  Examples  Depreciation  Uncollectible accounts $ $ Accountants often must make estimates of future events to comply with the accrual accounting model.

2-25 Depreciation Depreciation is the process of allocating the cost of plant and equipment over their expected useful lives. Straight-Line Depreciation = Asset Cost - Salvage Value Useful Life

2-26 Depreciation Recall the furniture and fixtures for $12,000 listed on Dress Right Clothing’s unadjusted trial balance. Assume the following: Let’s calculate the depreciation expense for the month ended July 31, 2013.

2-27 July Depreciation Expense = $12,000 - $0 60 months =$200 per month Recall the furniture and fixtures for $12,000 listed on Dress Right Clothing’s unadjusted trial balance. Depreciation July 31 Depreciation expense200 Accumulated depreciation- furniture and fixtures200

2-28 Depreciation After posting, the accounts look like this:

2-29 Bad Debts – Journal Entries  In August, ABC has sales of $100,000 on account of which 20% are expected to be uncollectible.  What journal entry does ABC make for bad debts on August 31 st ?

This is the Adjusted Trial Balance for Dress Right Clothing after all adjusting entries have been recorded and posted. Dress Right Clothing will use these balances to prepare the financial statements.

2-31 The income statement summarizes the results of profit-generating activities of the company. The Income Statement

2-32 The Statement of Comprehensive Income We will discuss comprehensive income in more depth in Chapter 4. A few types of gains and losses, called other comprehensive income (OCI) or loss items, are excluded from the determination of net income and the income statement, but are included in the broader concept of comprehensive income. In the single statement approach, net income is a subtotal within the statement followed by these OCI items, culminating in a final total of comprehensive income. In the two statement approach, a company presents an income statement followed by a statement of comprehensive income.

2-33 The balance sheet presents the financial position of the company on a particular date. The Balance Sheet

2-34 Notice that assets of $143,500 equals total liabilities plus shareholders’ equity of $143,500. The Balance Sheet

2-35 The Statement of Cash Flows The statement of cash flows discloses the changes in cash during a period.

2-36 The statement of shareholders’ equity presents the changes in permanent shareholder accounts. The Statement of Shareholders’ Equity

2-37 Temporary Accounts Revenues Income Summary Expenses Dividends Permanent Accounts Assets Liabilities Shareholders’ Equity The closing process applies only to temporary accounts. The Closing Process

2-38 Post-Closing Trial Balance Lists permanent accounts and their balances. Total debits equal total credits.

2-39 Closing Entries  Prepare journal entries for the following events at ABC Company:  Close Sales Revenue of $500 to Income Summary  Close Interest Revenue of $100 to Income Summary  Close $200 Cost of Goods Sold Expense to Income Summary  Close $300 of Wages Expense to Income Summary  Close Income Summary balance to Retained Earnings which has a beginning balance of $1,000.  ABC declares a common stock dividend of $50 at year-end, and  Pays the dividend before year-end  Does not pay the dividend until next year

2-40 Conversion From Cash Basis to Accrual Basis IncreasesDecreases AssetsAddDeduct LiabilitiesDeductAdd