AB113 Unit 41 Welcome to AB113 Accounting For Non-Majors Unit 4 Professor David Levenstam Unit 4 Seminar

AB113 Unit 42 Welcome to AB113 Accounting For Non-Majors Unit 4 Professor David Levenstam Unit 4 Seminar

AB113 Unit 43 Reading: Survey of Accounting, Chapter 3 Author: Warren Tech Support (or free online) Contact info: – –AIM: LFCCEconinstruct (sign up for AIM at –Office Hours: Wednesdays 8-10 pm ET When ing, please include your full name & course number (AB113) Reading, Help & Contact

AB113 Unit 44 This Week’s Assignments Discussion (Don’t forget to post your initial response by Saturday! :-)) Quiz (You can take only once.) Homework Assignment: Submit to Dropbox We have an Excel template in Doc Sharing for each homework set Templates show you wrong answers (*) :-)

AB113 Unit 45 Quiz Weeks worth 20 each for a total of 160 (16% of your grade) 10 multiple-choice questions You can take it only once You have 1 hour You can see the results 7 days after a quiz closes

Please Read the Announcements! :-) Located on the Course Home page Contain important administrative and accounting material Please check the announcements and the syllabus first for administrative questions you might have AB113 Unit 46

Please Read My “Hi Students” Posts! :-) Typically located early on the board Occasionally come later too Could say “Hi Class” or “Warning, Warning, Danger, Will Robinson!!” :-D Please give my tired old eyes a break and LABEL your multi-part answers! :-) AB113 Unit 47

Jing Links and Scripts To help you with the homework the course leads have created some voice presentations called Jings. You can find all the Jings in Doc Sharing by downloading the file named AC113-AB113 Jing Links.docx. After downloading, click on the link for this week’s chapter to see and hear the presentation. You can also download a script of each week’s presentation so that you can read the spoken words from the presentation later without reviewing the whole Jing presentation. For this week you can download AC113- AB113 Jing Chapter 4 Script.docx. AB113 Unit 28

Accrual Basis Accounting AB113 Unit 49

10 What is GAAP?

AB113 Unit 411 What Is GAAP? Inexpensive clothing store Oh wait, that’s GAP. :-)

AB113 Unit 412 What Is GAAP? Generally Accepted Accounting Principles

AB113 Unit 413 Why does GAAP require the use of accrual basis accounting rather than cash basis?

AB113 Unit 414 Why does GAAP require the use of accrual basis accounting rather than cash basis? Adjustments at end of period to follow several interrelated core accounting principles (some mentioned in Chapter 1) included in GAAP:

AB113 Unit Periodicity To make accounting information meaningful and comparable, we divide it into regular periods: months, quarters or years. In Renaissance Italy, by contrast, where people invented double-entry bookkeeping, a merchant often accounted for each sailing journey not in regular periods, but at the end, when the vessel returned from its journey. Our authors refer to periodicity as the accounting period concept.

AB113 Unit 416 Under the matching principle we match the benefits from the business (i.e. the revenues) to the period in which we earned them. We match the efforts of the business (i.e. expenses) to the benefits that the efforts earn. Where we can’t match an expense to a benefit we match the effort to the period in which we incurred it (such as when an oil company drills a dry hole). 2. Matching Principle

AB113 Unit Revenue Recognition In order to match revenue to the period in which we earned it, we record (accrue) revenue when we earn it rather than when the customer pays for it. If a customer purchases goods (or services) from the business on credit, for instance, we record, or recognize, the revenue at the time of the purchase, even if the customer pays in the next period.

Because the rest of AB113, and indeed most financial accounting in general, uses accrual based accounting, it’s critical that you understand the material in Chapter 3. AB113 Unit 418

What are five general categories of accounts requiring adjusting entries at the end of a period? AB113 Unit 419

What are five general categories of accounts requiring adjusting entries at the end of a period? 1. Prepaid Expenses (assets) 2. Unearned Revenues (liabilities) 3. Accrued Revenues (assets) 4. Accrued Expenses (liabilities) 5. Depreciation (an expense and a contra-asset account) AB113 Unit 420

What Are Prepaid Expenses? AB113 Unit 421

1. Prepaid Expenses Pay in advance for an expense that benefits more than one period, debit an asset called Prepaid (Something) Expense. Example: pay 2 years’ worth of rent up front (perhaps to get a lower rate), debit the whole amount to Prepaid Rent. End of Year 1 adjustment : remove first year’s portion of the rent from Prepaid Rent and put it in Rent Expense. AB113 Unit 422

1. Prepaid Expenses, continued End of year adjusting entry transfers the first year’s rent from Prepaid Rent to Rent Expense. (since we’ve gotten the benefit of first year’s rent). A prepaid expense is an asset (because it has future value, in this case, the use of the building in the future). AB113 Unit 423

What are Unearned Revenues? AB113 Unit 424

2. Unearned Revenues If you were accounting for the business that leased the building to the business in my example in number 1: Record the advance rent payment as a credit to Unearned Rent. End of the year adjustment : Transfer the first year’s portion from Unearned Rent to credit Rent (or Rent Revenue) AB113 Unit 425

2. Unearned Revenues, continued End of the year adjustment : Transfer the first year’s portion from Unearned Rent to credit Rent (or Rent Revenue) Unearned revenue is a liability (because it obligates us to something—in this case, to let the lessee use the building—in a future period). AB113 Unit 426

What Are Accrued Revenues? AB113 Unit 427

3. Accrued Revenues Perform services or ship goods without getting paid yet: accrue the earned but unpaid revenue Unpaid lawyer’s fee: lawyer must accrue revenue. Adjustment: Add amount to Accounts Receivable and Fee Revenue (or Fees Earned, or just Fees) AB113 Unit 428

3. Accrued Revenues, continued Unpaid lawyer’s fee: lawyer must accrue revenue Adjustment: Add amount to Accounts Receivable and Fee Revenue (or Fees Earned, or just Fees) Accrued revenue is an asset (because it has future value—customer will pay later) AB113 Unit 429

What Is An Accrued Expense? AB113 Unit 430

4. Accrued Expenses Receive goods or services without paying for them yet, accrue the incurred but unpaid expense. Example: End of year owe your employees for the work they’ve done since last pay day AB113 Unit 431

4. Accrued Expenses, continued Example: End of year owe your employees for the work they’ve done since the last pay day Accrue unpaid wages Adjustment: add amount to Wages Expense & Wages Payable AB113 Unit 432

4. Accrued Expenses, continued again :-) Accrue unpaid wages Adjustment: add amount to Wages Expense & Wages Payable Accrued expenses are liabilities (because they represent an obligation to pay in a future period) AB113 Unit 433

What Is Depreciation? AB113 Unit 434

5. Depreciation Depreciation is the systematic and rational allocation of a portion of the cost of an asset to each period the asset benefits. AB113 Unit 435

5. Depreciation 2 Example: A delivery truck may benefit the company for 5 years. We don’t expense the whole truck in Year 1. We expense part of the cost in each of the 5 years of the truck’s life. AB113 Unit 436

5. Depreciation 3 Depreciation follows both the periodicity and matching principles. (They’re the same reasons we set up prepaid expenses as assets instead of expensing prepaid assets all in the year of payment.) We use depreciation for long-term assets like buildings and equipment. AB113 Unit 437

5. Depreciation 4 LAND Since land has an unlimited or indefinite useful life, we don’t depreciate it, but keep the cost as an asset. Exception: Use land for extractive industry, (oil & gas, coal mining, etc.): land declines in usefulness, we expense over estimated useful life: Depletion AB113 Unit 438

5. Depreciation 5 Chapter 7 (Unit 8) deals with depreciation (and depletion) For now the authors calculate it for you Adjustment for depreciation: + Depreciation Expense (-Equity) + Accumulated Depreciation (-Asset) AB113 Unit 439

5. Depreciation 6 Accumulated Depreciation is a contra- asset account. (Contra: opposite balance) Accumulated Depreciation is thus a negative asset account AB113 Unit 440

5. Depreciation 7 Depreciation is NOT an attempt to value the asset. We use depreciation merely to allocate the historical cost of the fixed asset to each of the years of income it helps produce AB113 Unit 441

AB113 Unit 442 E3-1 a. Owner invested $20,000 for capital stock. b. Paid $7,200 on May 1 for 1-year insurance policy. c. Purchased supplies on account, $1,200. d. Received fees of $32,500 during May. e. Paid expenses as follows: wages $8,000; rent $2,500; utilities $1,000; miscellaneous $850. f. Paid dividends to owner of $3,000.

AB113 Unit 443 E3-1 (a) a. Owner invested $20,000 for capital stock. Which accounts? Which financial statements?

AB113 Unit 444 E3-1 (a) a. Owner invested $20,000 for capital stock. Cash +$20,000 (Asset) Capital Stock + $20,000 (Equity) Balance Sheet Statement of Cash Flows (Financing) +$20,000

AB113 Unit 445 E3-1 (b) b. Paid $7,200 on May 1 for 1-year insurance policy. Which accounts? Which financial statements?

AB113 Unit 446 E3-1 (b) b. Paid $7,200 on May 1 for 1-year insurance policy. Cash -$7,200 (Asset) Prepaid Insurance +$7,200 (Asset) Balance Sheet Statement of Cash Flows (Operating) -$7,200

AB113 Unit 447 E3-1 (c) c. Purchased supplies on account, $1,200. Which accounts? Which financial statements?

AB113 Unit 448 E3-1 (c) c. Purchased supplies on account, $1,200. Supplies +$1,200 (Asset) Accounts Payable +$1,200 (Liability) Balance Sheet

AB113 Unit 449 E3-1 (d) d. Received fees of $32,500 during May. Which accounts? Which financial statements?

AB113 Unit 450 E3-1 (d) d. Received fees of $32,500 during May. Cash +$32,500 (Asset) Fees Earned +$32,500 (Revenue = +Equity) Balance Sheet Income Statement +$32,500 Statement of Cash Flows (Operating) +$32,500

AB113 Unit 451 E3-1 (e) e. Paid expenses as follows: wages $8,000; rent $2,500; utilities $1,000; miscellaneous $850. Which accounts? Which financial statements?

AB113 Unit 452 E3-1 (e) e. Paid expenses as follows: wages $8,000; rent $2,500; utilities $1,000; miscellaneous $850. Cash -$12,350 (Asset) Wages Expense, Rent Expense, Utilities Expense, Miscellaneous Expense, total +$12,350 (Expenses = -Equity) Balance Sheet Income Statement -$12,350 Statement of Cash Flows (Operating) -$12,350

AB113 Unit 453 E3-1 (f) f. Paid dividends to owner of $3,000. Which accounts? Which financial statements?

AB113 Unit 454 E3-1 (f) f. Paid dividends to owner of $3,000. Cash -$3,000 (Asset) Retained Earnings -$3,000 (Equity) Balance Sheet Statement of Cash Flows (Financing) -$3,000

AB113 Unit 455 E3-1 Balances What Balances Do We Have in Our Accounts?

Assets=Liabilities+Stockholders' Equity Prepaid Accounts Capital Retained Cash+Supplies+Insurance=Payable+Stock+Earnings a. $20,000 b. (7,200) $7,200 Bal. 12,800 7,200 20,000 c. $1,200 Bal. 12,800 1,200 7,200 1,200 20,000 d. 32,500 $32,500 Bal. 45,300 1,200 7,200 1,200 20,000 32,500 e. (12,350) Bal. 32,950 1,200 7,200 1,200 20,000 20,150 f. (3,000) Bal. 29,950 1,200 7,200 1,200 20,000 17,150 56

AB113 Unit 457 E3-2 Make End-of-Month Adjustments For a1. Insurance Expired a2. Supplies Used

AB113 Unit 458 E3-2 (a1) a1. Insurance Expired Which accounts? Which financial statements?

AB113 Unit 459 E3-2 (a1) a1. Insurance Expired We paid $7,200 for 1 year. We used 1 month: $7,200/12 = $600 used. Prepaid Insurance -$600 (Asset) Insurance Expense +$600 (Expense = -Equity) Balance Sheet Income Statement -$600

AB113 Unit 460 E3-2 (a2) a2. Supplies Used Which accounts? Which financial statements?

AB113 Unit 461 E3-2 (a2) a2. Supplies Used We started with $1,200. We finished with $650. $1,200 - $650 = $550 used. Supplies -$550 (Asset) Supplies Expense +$550 (Expense = -Equity) Balance Sheet Income Statement -$550

AB113 Unit 462 E3-2 Balances What Balances Do We Have in Our Accounts After Adjustments?

Assets=Liabilities+Stockholders' Equity Prepaid Accounts Capital Retained Cash+Supplies+Insurance=Payable+Stock+Earnings a. $20,000 b. (7,200) $7,200 Bal. 12,800 7,200 20,000 c. $1,200 Bal. 12,800 1,200 7,200 1,200 20,000 d. 32,500 $32,500 Bal. 45,300 1,200 7,200 1,200 20,000 32,500 e. (12,350) Bal. 32,950 1,200 7,200 1,200 20,000 20,150 f. (3,000) Bal. 29,950 1,200 7,200 1,200 20,000 17,150 a1. (600) Bal. 29,950 1,200 6,600 1,200 20,000 16,550 a2. (550) Bal. $29,950 $650 $6,600 $1,200 $20,000 $16,000 63

AB113 Unit 464 Questions? :-)