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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 14—Distributing Dividends and Preparing a Work Sheet for a Merchandising Business 1 LESSON 14-1 Objectives: Define accounting terms and identify accounting concepts and practices related to distributing dividends and preparing a work sheet for a merchandising business Journalize the declaration and payment of a dividend Begin a work sheet for a merchandising business Plan work sheet adjustments for merchandise inventory, supplies, prepaid insurance, uncollectible accounts, and depreciation Calculate federal income tax and plan the work sheet adjustments for federal income tax Complete a work sheet for a merchandising business
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TERMS REVIEW retained earnings dividends board of directors declaring a dividend merchandise inventory uncollectible accounts allowance method of recording losses from uncollectible accounts book value book value of accounts receivable current assets plant assets depreciation expense estimated salvage value straight-line method of depreciation accumulate accumulated depreciation book value of a plant asset 2 LESSON 14-1
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-1: Distribute Corporate Earnings to Stockholders Each unit of ownership in a corporation is known as a share of stock. An owner of one or more shares of a corporation is known as a stockholder. Net income of a corporation can be retained in the business or paid to stockholders. A single owners’ equity account, titled Capital Stock, is used for the investment of all owners. Retained Earnings—an amount earned by a corporation and not yet distributed to stockholders; used to record a corporation’s earnings Dividends—earnings distributed to stockholders; is a temporary account that is closed to Retained Earnings at the end of the fiscal period
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 4 LESSON 14-1 STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION page 405 (3000) STOCKHOLDERS’ EQUITY 3110Capital Stock 3120Retained Earnings 3130Dividends 3140Income Summary
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 LESSON 14-1 DECLARING A DIVIDEND page 406 Board of Directors—a group of persons elected by the stockholders to manage a corporation; determines the amount of dividends Most corporations issue quarterly dividends. Number of shares outstanding X quarterly dividend per share = total quarterly dividend Declaring a dividend—action by a board of directors to distribute corporate earnings to stockholders Declared dividends cannot exceed the balance of the retained earnings account Dividends are declared on one date and paid on a later date Are a liability to the corporation Dividends are a distribution of net income and are not an expense of the corporation
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 14-1 DECLARING A DIVIDEND 1 2 3 4 56 page 406 December 15. Hobby Shack’s board of directors declared a quarterly dividend of $2.00 per share; capital stock issued is 2,500 shares; total dividend, $5,000.00. Date of payment is January 15. Memorandum No. 79. 4.Write the debit amount. 3.Write the memorandum number. 2.Write the title of the account debited. 1.Write the date. 5.Write the title of the account credited. 6.Write the credit amount.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 7 LESSON 14-1 PAYING A DIVIDEND page 407 Dividends Payable is a current liability The check written transfers cash into a special account used solely for dividend checks Dividends are declared on one date and paid on a later date. Only stockholders owning the stock on the date of record specified by the board of directors receive the dividend. Stockholders owning the stock on the date of record receive the entire dividend, regardless of how long they have owned the stock.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 8 LESSON 14-1 PAYING A DIVIDEND 12345 page 407 January 15. Paid cash for quarterly dividend declared December 15, $5,000.00. Check No. 379. 1. Write the date. 2. Write the account title. 3. Write the check number. 4. Write the debit amount. 5. Write the credit amount.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-1 Let’s do Work Together 14-1 and On Your Own 14-1 on textbook page 408.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-2--Beginning an 8-Column Work Sheet for a Merchandising Business A work sheet is used to plan adjustments and sort financial statement information. A work sheet may be prepared whenever a business wishes to summarize and report financial information. To begin the preparation of a work sheet, all the general ledger account balances are transferred to the work sheet.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 14-2 RECORDING A TRIAL BALANCE ON A WORK SHEET page 410 General ledger account balances are recorded in the Trial Balance columns of the work sheet. Care must be taken to record general ledger accounts with debit balances in the Debit column of the Trial Balance columns and general ledger accounts with credit balances in the Credit column of the Trial Balance columns. All general ledger account titles should be listed in the Account Title column of the work sheet, including those accounts that do not have a balance. This will ensure that all accounts are accounted for in the summarizing process.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 12 LESSON 14-2 RECORDING A TRIAL BALANCE ON A WORK SHEET page 410 1 3 2 1.Account title 2.Account balance 3.Total, prove, and rule the debit and credit columns
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 13 LESSON 14-2 ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS page 411 Four questions are asked to analyze the adjustments for the supplies accounts: 1.What is the balance of the Supplies account? 2.What should the balance be for these accounts? 3.What must be done to correct the account balances? 4.What adjustment is made? The adjustment for supplies is the value of supplies used. The new correct balance will be the amount reported on the financial statements.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 14 LESSON 14-2 ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS page 411 Adj. (a)2,730.00 Supplies Expense—Office Dec. 31 Bal.3,480.00Adj. (a)2,730.00 (Adj Bal. 750.00) Supplies — Office Adj. (b)2,910.00 Supplies Expense — Store Dec. 31 Bal.3,944.00Adj. (b) 2,910.00 (Adj Bal.1,034.00) Supplies — Store
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 15 LESSON 14-2 RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET page 412 2 1 1.Write the debit amounts in the Adjustments Debit column. 2.Write the credit amounts in the Adjustments Credit column. 3.Label the two parts of the Supplies—Office adjustment with small letter a and small letter b in parentheses. 3 3
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 16 LESSON 14-2 ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT page 413 Four questions are asked to analyze the adjustment for the prepaid insurance account: 1.What is the balance of Prepaid Insurance? 2.What should the balance be for this account? 3.What must be done to correct the account balance? 4.What adjustment is made? The adjustment for Prepaid Insurance is the amount of insurance used or expired. The new correct balance will be the amount reported on the financial statements.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 17 LESSON 14-2 ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT 1 2 3 3 page 413 1.Enter the amount of insurance used in the Adjustments Credit column. 2.Enter the same amount in the Adjustments Debit column. 3.Label the two parts of the adjustment with a small letter c in parentheses.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-2 Let’s do Work Together 14-2 and On Your Own 14-2 on textbook page 414.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-3: Planning and Recording a Merchandise Inventory Adjustment Merchandise Inventory—the amount of goods on hand for sale to customers; is an asset account with a normal debit balance The balance in Merchandise Inventory is the beginning of the year balance. All purchases during the year have been recorded in the purchases account, and all sales have been recorded in the sales account. Therefore, Merchandise Inventory must be brought up to date.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 20 LESSON 14-3 MERCHANDISE INVENTORY page 415
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 21 LESSON 14-3 ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT page 416 At the end of the year, Merchandise Inventory is counted to determine how much is on hand at year-end. The amount of ending inventory is the amount that must show on the balance sheet at the end of the year. Income Summary is the related temporary account used for adjusting Merchandise Inventory. The difference between the beginning Merchandise Inventory and the ending inventory will be transferred to Income Summary. 1.What is the balance of Merchandise Inventory? 2.What should the balance be for this account? 3.What must be done to correct the account balance? 4.What adjustment is made?
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 22 LESSON 14-3 ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT 1 2 3 3 page 416 1.Write the debit amount. 3.Label the two parts of this adjustment with a small letter d in parentheses. 2.Write the credit amount.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 23 LESSON 14-3 ANALYZING AN ADJUSTMENT WHEN ENDING MERCHANDISE INVENTORY IS GREATER THAN BEGINNING MERCHANDISE INVENTORY page 417 Jan. 1 Bal.294,700.00 Adj. (d)4,200.00 (New Bal.298,900.00) Merchandise Inventory Adj. (d)4,200.00 Income Summary Remember: When an account that requires adjusting does not have a related expense account, the temporary account Income Summary is used.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-3 Let’s do Work Together 14-3 and On Your Own 14-3 on textbook page 418.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-4: Planning and Recording an Allowance for Uncollectible Accounts Adjustment Uncollectible accounts—accounts receivable that cannot be collected; this risk is a cost of doing business that should be recorded as an expense in the same accounting period that the revenue is earned. A business can calculate and record an estimated amount of uncollectible accounts expense. This accomplishes two objectives: 1.It reports a balance sheet amount for Accounts Receivable that reflects the amount the business expects to collect in the future. 2.It recognizes the expense of uncollectible accounts in the same period in which the related revenue is recorded.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 26 LESSON 14-4 ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS page 419 To record estimated uncollectible accounts, an adjusting entry is made affecting the two accounts. The estimated amount of uncollectible accounts is debited to Uncollectible Accounts Expense and credited to Allowance for Uncollectible Accounts. An account that reduces a related account is known as a contra account. Allowance for Uncollectible Accounts is a contra account to its related asset account, Accounts Receivable.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 27 LESSON 14-4 ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS page 419 Allowance method of recording losses from uncollectible accounts—crediting the estimated value of uncollectible accounts to a contra account Book value—difference between an asset’s account balance and its related contra account balance Book value of accounts receivable—the difference between the balance of Accounts Receivable and its contra account, Allowance for Uncollectible Accounts; represents the total amount of accounts receivable the business expects to collect in the future
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 28 LESSON 14-4 Estimated Uncollectible Accounts Expense =Percentage× Total Sales on Account $1,245.00 = 1% × $124,500.00 ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420 A business takes a risk of loss with every sale on account. Net sales can be used if the company’s accounting records do not report total sales on account. A business determines the percentage by looking at past years accounting records. What factors might influence a business to increase or decrease the percentage from the amount indicated from past experience? Changing economic conditions & changes in credit approval policies
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 29 LESSON 14-4 1.Enter the estimated uncollectible amount. ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE 3.Label the two parts with a small letter e in parentheses. 1 2 3 3 page 421 2.Enter the same amount in the Adjustments Debit column.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 14-4 30 LESSON 14-1 Let’s do Work Together 14-4 and On Your Own 14-4 on textbook page 422.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 14-5: Planning and Recording Depreciation Adjustments 31 LESSON 14-1 Current Assets—cash and other assets expected to be exchanged for cash or consumed within a year Plant Assets—assets that will be used for a number of years in the operation of a business Businesses have three major types of plant assets: equipment, buildings, and land. Equipment must be replaced over the years. In order to match revenue with the expenses used to earn the revenue, the cost of plant asset should be expensed over the plant asset’s useful life. Depreciation Expense—the portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during a plant asset’s useful life
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 14-5: Planning and Recording Depreciation Adjustments 32 LESSON 14-1 Three factors are considered in calculating the annual amount of depreciation expense for a plant asset: 1.Original cost 2.Estimated Salvage Value—the amount an owner expects to receive when a plant asset is removed from use 3.Estimated Useful life Two factors affect the useful life of a plant asset: 1.Physical depreciation—wear and tear 2.Functional depreciation—inadequate or obsolute
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 33 LESSON 14-5 CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 (continued on next slide) Straight line method of depreciation— charging an equal amount of depreciation expense for a plant asset in each year of useful life
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 34 LESSON 14-5 CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 Estimated Total Depreciation Expense = Estimated Salvage Value – Original Cost $1,000.00=$250.00–$1,250.00 Annual Depreciation Expense = Years of Estimated Useful Life ÷ Estimated Total Depreciation Expense $200.00=5÷$1,000.00 1.Subtract the asset’s estimated salvage value from original cost. 2.Divide the estimated total depreciation expense by the years of estimated useful life. 1 2 (continued on next slide)
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 35 LESSON 14-5 CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 20X3 Accumulated Depreciation = 20X3 Depreciation Expense + 20X2 Accumulated Depreciation $600.00=$200.00+$400.00 Ending Book Value = Accumulated Depreciation –Original Cost $650.00=$600.00–$1,250.00 (continued from previous slide) Accumulated Depreciation—the total amount of depreciation expense that has been recorded since the purchase of a plant asset Book value of a plant asset—the original cost of a plant asset minus accumulated depreciation
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 36 LESSON 14-5 ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE page 425 1 2 3 3 1.Write the debit amounts. 2.Write the credit amounts. 3.Label the adjustments.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-5 Let’s do Work Together 14-5 and On Your Own 14-5 on textbook page 426
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 14-6: Calculating Federal Income Tax and Completing a Work Sheet How is an individual’s tax withholding similar to a corporation’s quarterly federal income tax payments? Both methods require taxpayers to make periodic tax payments to the government Before federal income tax can be determined, all adjustments must be completed on the work sheet and all amounts except Federal Income Tax Expense must be extended to the appropriate columns.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 39 LESSON 14-6 FEDERAL INCOME TAX EXPENSE ADJUSTMENT page 427 Total of Income Statement Credit column$500,253.10 Less total of Income Statement Debit column before federal income tax–396,049.91 Equals Net Income before Federal Income Tax$104,203.19
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 40 LESSON 14-6 CALCULATING FEDERAL INCOME TAX page 428 Income tax rates increase as the amount of net income increases. The five percentages shown at the top of the illustration are often referred to as tax brackets.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 41 LESSON 14-6 1. Calculate the amount of federal income tax expense adjustment. RECORDING THE FEDERAL INCOME TAX ADJUSTMENT 2 3 3 1 1 page 429 2. Total and rule the Adjustments columns. 3. Extend account balances. The federal income tax payable is the federal income tax less than any estimated tax payments made in previous quarters.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 42 LESSON 14-6 COMPLETING A WORK SHEET 11 page 430 2 4 3 5 1.Total the Income Statement and Balance Sheet columns. 5.Rule double lines. 4.Calculate the column totals. 3.Extend the net income amount. 2.Calculate and enter the net income after federal income tax.
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 43 LESSON 14-6 A COMPLETED 8-COLUMN WORK SHEET page 432
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 44 LESSON 14-6 A 10-COLUMN WORK SHEET page 434-435 1.Trial balance 4 6 23 5 5.Extend balances 2.Adjustments 3.Extend adjusted balances 4.Total, prove, and rule 6.Calculate net income; total, prove and rule 1
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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 14-6 45 LESSON 14-1 Let’s do Work Together 14-6 and On Your Own 14-6 on textbook page 436.
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