BELL RINGER Name the accounting principle that each of the following describes: If $51,000 cash is paid to buy land, the land is reported on the buyer’s balance sheet as $51,000. A person owns more than one company (A B and C). In preparing financial statements for A company, the owner makes sure that expense transactions for B & C companies are kept separate and not reported on A’s financial statements. In December 2013, a company received an order for work that would be completed by March 31 of the following year. The company would record the revenue in March 2014, not December 2013. A trial balance has total debits of $20,000 and total credits of $24,500. Which of the following errors would create this imbalance? A $4,500 debit posting to Equipment was posted mistakenly as a debit to Cash. A $4,500 debit to Salaries Expense in a journal entry is incorrectly posted to the ledger as a $4,500 credit. A $2,250 debit to Utilities Expense in a journal entry is incorrectly posted to the ledger as a credit. A $2,250 credit to Service Fees in a journal entry was incorrectly posted to the ledger as a $2,250 debit.

There are check figures available for Steps 4, 6, & 7. Blue Raider – Accounting Lab Study Groups Exam 1 Study Guide– Available on D2L under “Contents”

CAT: “Increase” “Decrease” or “No Change” Assets Liabilities Equity Net Income The owner invests cash into the company The company buys supplies (with cash) The company performs services on account The company receives cash from a customer who was previously billed The company pays for advertising The owner withdrawals cash The company buys supplies on account The company performs services for cash The company pays bill for supplies previously bought on account

CAT: “Increase” “Decrease” or “No Change” Assets Liabilities Equity Net Income The owner invests cash into the company increase no change The company buys supplies (with cash) No change The company performs services on account The company receives cash from a customer who was previously billed The company pays for advertising decrease The owner withdrawals cash The company buys supplies on account Increase The company performs services for cash The company pays bill for supplies previously bought on account. Decrease

Chapter 3: Accrual Accounting ACTG 2110 Sid C. Bundy

Accrual basis accounting is… …using the adjusting process to recognize revenues when earned and to match expenses with revenues when incurred. …required by GAAP. Cash basis of accounting is… …recognizes revenue when cash is received and expenses when cash is paid. GOAL: Accruals vs Deferrals AJE Examples ANNOUNCEMENTS: EXAM 1 – Next Friday Check due date/time for Homework #3 NABA Meeting Today

…2 types of adjusting entries: …impact at least one account from the balance sheet and one account from the income statement. (this is important!!) …2 types of adjusting entries: Deferrals – Cash comes BEFORE Prepaid expenses Unearned revenues Depreciation Accruals – Cash comes AFTER Accrued expenses (like salaries or interest) Accrued revenue (unbilled, but work complete) QUESTION: Think of two journal entries from Chapter 2 that do NOT impact both the income statement and the balance sheet.

DEFERRALS (cash before) …prepaid expense …unearned revenues …depreciation expense

DEFERRALS …prepaid expense …unearned revenues …depreciation expense

DEFERRALS …prepaid expense …unearned revenues …depreciation expense

What is this depreciation stuff? …expense created by allocating the cost of property or equipment to periods in which they are used …represents the expense of using an asset …this is COST ALLOCATION not MARKET PRICE VALUATION The Adjusting Journal Entry will always debit the expense account and credit the contra-asset account, like so: a Depreciation Expense - Equipment 100 Accumulated Depreciation*-Equipment

What is this depreciation stuff? Office Equipment (Computer) Equipment (Truck) Bought a computer for $500. You expect to use the computer in your company for 4 years. Each year, you depreciate $125. Bought a truck for $30,000 to be used for 6 years. Each year you depreciate $5,000. c Depreciation Expense - Equipment 5,000 Accumulated Depreciation*-Equipment b Depreciation Expense – Office Equipment 125 Accumulated Depreciation*- Office Equipment

Land Does not depreciate since its usefulness and revenue producing ability generally remain intact, or increase. A company doesn’t “use up” land.

WARNING: The balance in Accumulated Depreciation is not a cash fund. CASH

ACCRUALS (cash after) …accrued expenses …accrued revenues

ACCRUALS Accounts Payable Wages/Salaries Payable Interest Payable Accrued Expense Accrued Revenues Accounts Payable Wages/Salaries Payable Interest Payable Accounts Receivable Interest Receivable

On the Board Page 127-128 QS 3:5-6 QS 3:8 QS 3:10 QS 3:12 QS 3:14

Exercise 2-16 page 80 Algorithm A sole proprietorship had the following assets and liabilities at the beginning and end of this year. Assets Liabilities Beginning of the year $ 85,000 $ 35,000 End of the year 130,000 50,000 Determine the net income earned or net loss incurred by the business during the year for each of the following separate cases: a. Owner made no investments in the business and no withdrawals were made during the year. b. Owner made no investments in the business but withdrew $2,000 cash per month for personal use. c. Owner made no withdrawals during the year but did invest an additional $45,000 cash. d. Owner withdrew $2,000 cash per month for personal use and invested an additional $35,000 cash. a. b. c. d. Beginning of the year equity $50,000 $50,000 $50,000 $50,000 Investments by owner 45,000 35,000 Withdrawals by owner (24,000) (24,000) Net income (loss) 30,000 54,000 (15,000) 19,000 End of the year equity $80,000 $80,000 $80,000 $80,000 EX02-16 2 - 18 Exercise 2-16 page 80 Algorithm

Exercise 2-16 page 80 Algorithm A sole proprietorship had the following assets and liabilities at the beginning and end of this year. Assets Liabilities Beginning of the year $ 85,000 $ 35,000 End of the year 130,000 50,000 Determine the net income earned or net loss incurred by the business during the year for each of the following separate cases: a. Owner made no investments in the business and no withdrawals were made during the year. b. Owner made no investments in the business but withdrew $2,000 cash per month for personal use. c. Owner made no withdrawals during the year but did invest an additional $45,000 cash. d. Owner withdrew $2,000 cash per month for personal use and invested an additional $35,000 cash. a. b. c. d. Beginning of the year equity $50,000 $50,000 $50,000 $50,000 Investments by owner 45,000 35,000 Withdrawals by owner (24,000) (24,000) Net income (loss) 30,000 54,000 (15,000) 19,000 End of the year equity $80,000 $80,000 $80,000 $80,000 EX02-16 2 - 19 Exercise 2-16 page 80 Algorithm

ANNOUNCEMENTS: Complete Steps 1-4 in the BRAP Packet and bring to the class before exam. Remember the Review Session… check D2L for details. Homework is due SOON to allow for studying with answer keys. Review exam policies in your syllabus! Don’t forget your ID or room number! ** If you have made up a quiz, you have to submit written documentation of the excuse before it will be graded.** GOALS Finish QS Examples Review AJE How do AJE’s impact the financial statements? (What is wrong with leaving them out?) OR (Why do we record them?) Finishing Steps 1-4 of the accounting cycle. Quiz #4

Depreciation P 1 On December 1, 2013, FastForward purchased equipment for $26,000 cash. The equipment has an estimated useful life of four years (48 months) and FastForward expects to sell the equipment at the end of its life for $8,000 cash. (c) Let’s record depreciation expense for the month ended December 31, 2013. On December 1, 2013, FastForward purchased equipment for $26,000 cash. The equipment has an estimated useful life of four years or 48-months, and an estimated salvage value of $8,000 at the end of the four-year period. Can you determine the depreciation expense for the month of December, 2013? How did you do? The numerator of the equation is $26,000 cost, less $8,000 salvage value, or $18,000. The denominator is 48 months because we are calculating depreciation for one month, so our monthly depreciation expense is $375. Now, let’s record the adjusting journal entry. Dec. 2013 Depreciation Expense = $26,000 - $8,000 48 months $375 per month

What adjustment is required? Supplies P 1 (b) During 2013, FastForward purchased $9,720 of supplies. FastForward recorded the expenditures in the asset account, “Supplies.” On December 31, 2013, a count of the supplies indicated $8,670 on hand, so $1,050 of supplies were used during December. What adjustment is required? In our second transaction, FastForward spent $9,720 on office supplies during December 2013. When the supplies were purchased, an entry was made to debit, or increase, the asset account (Supplies), and the cash account was decreased. On December 31, 2013, the balance in the supplies account was $9,720, when the company conducted an inventory of the office supplies and determined that $8,670 of supplies were on hand. FastForward used $1,050 of supplies during December 2013. Let’s make the adjusting entry required on December 31, 2013, to get the balance in the supplies account stated properly. Debit, or increase, supplies expense $1,050, the amount of the supplies used, and credit, or reduce, the asset account, supplies, by the same amount. Now let’s post our adjusting entry. You can see that we now have the proper balance in the asset account, supplies, and we have fully recognized an expense for the supplies used during 2013. 126 652

The Accounting Cycle Analyze Transactions Journalize Post Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Closing Entries Post Closing Trial Balance Statement of Cash Flows Balance Sheet Statement of Owner’s Equity Income Statement FINANCIAL STATEMENTS

1. Prepare the Income Statement You can see how we took the information directly from the worksheet and prepared the income statement for the month ended December 31, 2013. Net income reported by FastForward for the month is $3,785. We will see this amount again on the statement of Owner's Equity.

2. Prepare the Statement of Owner’s Equity The statement of owner’s equity adds together the net income and the owner’s investment of $30,000. The owner’s withdrawal of $200 reduces owner’s equity to $33,585. a

3. Prepare The Balance Sheet The next step in preparing the financial statements is the preparation of the Balance Sheet. After we have completed the Income Statement and the Statement of Owner’s Equity, we are ready to prepare our last financial statement, which is called the Balance Sheet. Asset and liability balances are transferred over from the adjusted trial balance to the Balance Sheet. The ending capital balance was determined on the Statement of Owner’s Equity shown. The ending balance is transferred from that statement to the Balance Sheet. The Balance Sheet proves that the fundamental accounting equation is in balance and you can see that the Total Assets of $42,745 is equivalent to the sum of the total liabilities and owner’s equity. The final statement to be prepared is the Statement of Cash Flows. We will study this statement in detail later in the course.

END CHAPTER 3 DAY 6-8