1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 3 Accrual Accounting Concepts

2 ACCRUAL CONCEPT LG 1 Transactions Are recorded as they occur Are recorded even if cash not received or paid Affect accounting equation (A = L + E)

3 ACCRUAL MEANS Revenue recognized (recorded) when earned Liabilities recognized when obligation incurred Revenue recognized (recorded) when earned Liabilities recognized when obligation incurred LG 1

4 MATCHING PRINCIPLE LG 1 Expenses recognized, recorded in same period as related revenue

5 MATCHING MEANS When revenue is recorded –Expenses incurred in generating revenues are Identified Recorded Matching subtracts expenses from revenue to determine net income or loss When revenue is recorded –Expenses incurred in generating revenues are Identified Recorded Matching subtracts expenses from revenue to determine net income or loss LG 1

6 FAMILY HEALTH CARE, PC Earns revenue when services provided to patients –Earnings process complete –Patient obligated to pay Incurs expenses to earn revenue –Recognize expenses according to matching principle LG 2

7 HEALTH CARE, PC Transactions for November Transactions include –Revenue Cash and on account –Acquiring insurance Incurring insurance expense –Buying equipment Recording depreciation expense –Other LG 2

8 TRANSACTION (a) Family Health Care, PC receives rent in advance. LG 2

9 Assets =Liabilities +Equity Cash + Land =Note + Unearned rev +Stock + Ret Earn Bal Oct7, ,000 =10,0006, ,320 Rent1,800 = 1,800 Bal 9, ,000 =10, ,8006, ,320 Cash Flows Balance Sheet Income Statement IFSF: Advance Rent (a) Operating 1,800 Family Health Care, PC receives rent in advance. LG 2

10 TRANSACTION (b) Family Health Care, PC buys a 2 year policy for general business insurance. LG 2

11 Assets =Liabilities +Equity Cash + Prepaid Ins + Land =Note + Unearned +Equity Balances 9, ,000=10, ,800 9,320 Insurance-2, ,400 = Balances 6, , ,000=10, ,800 +9,320 Cash Flows Balance Sheet Income Statement IFSF: Business Insurance (b) Operating -2,400 Family Health Care, PC buys 2 year business insurance policy LG 2

12 TRANSACTION (c) Family Health Care, PC buys a 6 month malpractice insurance policy. LG 2

13 Assets =Liabilities +Equity Cash + Prepaid Ins + Land =Note + Unearned +Equity Balances 6, , ,000=10, ,800 +9,320 Insurance-6, ,000 = Balances , ,000=10, ,800 +9,320 Cash Flows Balance Sheet Income Statement IFSF: Malpractice Insurance (c) Operating -6,000 Family Health Care, PC buys 6 mo. malpractice insurance policy LG 2

14 TRANSACTION (d) Dr. Landry invests an additional $5,000 in Family Health Care, PC. LG 2

15 Assets =Liabilities +Equity Cash + Other =Note + Unearned +Stock + Ret Earn Balances ,400 =10, ,800 +6, ,320 Issued stock 5,000 =5,000 Balances5, ,400 =10, , , ,320 Cash Flows Balance Sheet Income Statement IFSF: Stock (d) Financing 5,000 Dr. Landry invests in practice LG 2

16 TRANSACTION (e) Family Health Care, PC buys supplies on account. LG 2

17 Assets = Liabilities +Equity Cash + Supplies + Other =Acct Pay + OtherEquity Balances 5, ,400 = + 11, ,320 Supplies = 240 Balances5, ,400 = , ,320 Cash Flows Balance Sheet Income Statement IFSF: Supplies On Account (e) Family Health Care, PC purchased supplies on account. LG 2

18 TRANSACTION (f) Family Health Care, PC buys equipment with $1,700 down payment and a note for $6,800. LG 2

19 Assets = Liabilities +Equity Cash + Equip + Other =Note + OtherEquity Balances 5, ,640 =10, , ,320 Equipment-1, ,500 = 6,800 Balances4, , ,640 =16, , ,320 Cash Flows Balance Sheet Income Statement IFSF: Bought Equipment (f) Family Health Care, PC bought equipment. Investing -1,700 LG 2

20 TRANSACTION (g) Family Health Care, PC provides services to patients on account. LG 2

21 Assets =Liabilities +Equity Cash + Acct rec. + Other =Liabilities +Stock + Ret Earn Balances4, ,140 =18, , ,320 Fees 6,100 = 6,100 Balances4, , ,140 =18, , ,420 Cash Flows Balance Sheet Income Statement IFSF: Services On Account (g) Family Health Care, PC performed services on account. Revenue 6,100 LG 2

22 TRANSACTION (h) Family Health Care, PC provided services to patients and received $5,500 cash. LG 2

23 Assets =Liabilities +Equity Cash + Acct rec. + Other =Liabilities +Stock + Ret Earn Balances4, , ,140 =18, , ,420 Fees5,500 = 5,500 Balances9, , ,140 = 18, , ,920 Cash Flows Balance Sheet Income Statement IFSF: Services For Cash (h) Family Health Care, PC performed services for cash. Revenue 5,500 Operating 5,500 LG 2

24 TRANSACTION (i) Family Health Care, PC received $4,200 from insurance company payment. LG 2

25 LG 2 Assets =Liabilities +Equity Cash + Acct rec. + Other =Liabilities +Stock + Ret Earn Balances9, , ,140 = 18, , ,920 Payment4, ,200 = Balances13, , ,140 = 18, , ,920 Cash Flows Balance Sheet Income Statement IFSF: Received Insurance Payment (i) Family Health Care, PC received insurance payment on account. Operating 4,200

26 TRANSACTION (j) Family Health Care, PC paid money on account. LG 2

27 Assets =Liabilities +Equity Cash + Acct rec. + Other =Acct pay + OtherEquity Balances13, , ,140 = , ,920 Payment -100 = Balances13, , ,140 = , ,920 Cash Flows Balance Sheet Income Statement IFSF: Received Insurance Payment (j) Family Health Care, PC received insurance payment on account. Operating -100 LG 2

28 TRANSACTION (k) Family Health Care, PC provides services to patients on account. LG 2

29 Assets =Liabilities +Equity Cash + Acct rec. + Other =LiabilitiesStock + Ret Earn Balances13, , ,140 = 18, , ,920 Payment -4,690 = -4,690 Balances8, , ,140 = 18, , ,230 Cash Flows Balance Sheet Income Statement IFSF: Paid November Expenses (k) Family Health Care, PC paid November expenses. Operating -4,690 Expenses -4,690 LG 2

30 TRANSACTION (l) Family Health Care, PC paid dividend to Dr. Landry. LG 2

31 Assets =Liabilities +Equity Cash + Acct rec. + Other =LiabilitiesStock + Ret Earn Balances8, , ,140 = 18, , ,230 Payment-1,200 = -1,200 Balances7, , ,140 = 18, , ,030 Cash Flows Balance Sheet Income Statement IFSF: Paid Dividend (l) Family Health Care, PC paid dividend to Dr. Landry. Financing 1,200 LG 2

32 LEARNING GOALS 3 Prepare end of period adjustments.

33 ADJUSTMENT PROCESS Applies matching concept To complete balance sheet, income statement Applies matching concept To complete balance sheet, income statement LG 3

34 LG 3 EXHIBIT 1 1/1/200712/31/20081/1/200812/31/2008 Deferrals Revenue earned, expense incurred Cash received, paid

35 DEFERRALS Cash paid before expense incurred or cash received before revenue recognized Examples: –Prepaid expenses (insurance) –Unearned revenues LG 3

36 FAMILY HEALTH CARE, PC Deferrals Deferred expenses –Prepaid insurance expired, $1,100 –Supplied used, $150 –Depreciation on equipment, $160 Deferred revenues –Unearned rent revenue earned, $360 LG 3

37 Assets =LiabilitiesEquity Cash + Prepaid Ins+ Other =Liabilities+Stock + Ret Earn Balances7, , ,640 = 18, , ,030 Insurance expense - 1,100 = -1,100 Balances7, , ,640 = 18, , ,930 Cash Flows Balance Sheet Income Statement IFSF: Prepaid Insurance ( AJE 1) Family Health Care, PC recognized insurance used up. LG 3 Ins Exp - 1,100

38 Assets =Liabilities+Equity Cash + Supplies + Other =Liabilities+Stock + Ret Earn Balances7, ,700 = 18, , ,930 Supplies expense = -150 Balances7, ,700 = 18, , ,780 Cash Flows Balance Sheet Income Statement IFSF: Supplies ( AJE 2) Family Health Care, PC recognized supplies used up. LG 3 Supp Exp - 150

39 Assets =Liabilities+Equity Cash + Acc Dep + Other =Liabilities+Stock + Ret Earn Balances7, ,790 = 18, , ,780 Depreciation expense = -160 Balances7, ,790 = 18, , ,620 Cash Flows Balance Sheet Income Statement IFSF: Depreciation ( AJE 3) Family Health Care, PC recognized depreciation on equipment. LG 3 Dep Exp - 160

40 Assets =Liabilities+Equity Cash + Other =Unearned + Other +Stock + Ret Earn Balances7, ,630 = 1, , , ,620 Unearned rent = Balances7, ,630 = 1, , , ,980 Cash Flows Balance Sheet Income Statement IFSF: Unearned Rent ( AJE 4) Family Health Care, PC recognized rent revenue. LG 3 Rent Rev 360

41 LG 3 1/1/200712/31/20081/1/200812/31/2008 Accruals Cash received or paid Revenue earned, expense incurred EXHIBIT 1 (cont.)

42 ACCRUALS Recognize expense before cash is paid or recognize revenue before cash is received Examples: –Accrued expenses (interest expense) –Accrued revenues (for services provided but not billed) LG 3

43 FAMILY HEALTH CARE, PC Accruals Accrued expense –Wages owed but not paid, $220 Accrued revenues –Services provided, not billed, $750 LG 3

44 Assets =Liabilities+Equity Cash + Other =Wages pay + Other +Stock + Ret Earn Balances7, ,630 = 18,380+11, ,980 Wages Expense = Balances7, ,630 = , , ,760 Cash Flows Balance Sheet Income Statement IFSF: Wages Expense ( AJE 5) Family Health Care, PC incurred wages expense. LG 3 Wages exp - 220

45 Assets =Liabilities+Equity Cash + Acc Rec + Other =Liabilities+Stock + Ret Earn Balances7, , ,730 =18,60011, ,760 Fees earned 750 = 750 Balances7, , ,730 = 18, , ,510 Cash Flows Balance Sheet Income Statement IFSF: Fees Earned ( AJE 6) Family Health Care, PC earned revenue. LG 3 Fees earned 750

46 ACCOUNTING CYCLE Identify, analyze, record transactions Identify, analyze, record adjustment data Prepare financial statements Prepare accounting records for next period LG 6

47 “I find that the harder I work, the more luck I seem to have.” Thomas Jefferson All those who believe in telekinesis, raise my hand. S. Wright