1. Participation Questions Chap. 3
Which publicly traded Company is used as example #1 in class for the revenue recognition principle?
Apple Computers, JC Penney, Sears, or Walmart
The second example discussing a cruise for the revenue recognition principle discusses Calvin actually taking a cruise in which month?
April 2015, November 2014, March 2015, or May 2015
Which depreciation method did we discuss for the $24,000 in Equipment purchased by Eagle Golf Academy, where the depreciation expense equals $1,000 per month if the useful life of the equipment is 24 months?
Straight-line, Double declining balance, or Activity based depreciation
After all of the adjusting entries were completed for Eagle Golf Academy and the Income Statement was prepared, was the income for Golf Eagle positive or negative? (Please wait until we have completed the chapter to answer this question.)
Positive or Negative
The example of Eagle Golf Academy showed that companies can pay dividends even when there is a net loss for the month – T/F

2. Announcements Connect link to Webcourses
Use the Handout in Webcourses Chapter 3 Class Materials to help follow along today.
Instructor video tutorials for this chapter available in Chapter 3 Class Materials
Assignments – January 31st
Participation Questions for Chapter #2 questions (Webcourses) – 1 attempt
Connect Homework Assignment #2 (Connect) – unlimited attempts
Materia Homework Assignment #2 (Webcourses) – unlimited attempts
Definitions Quiz (Webcourses) – 2 attempts
Links for Materia flash Cards – In Chapter 2 Introduction & Below:
Practice Flash Cards – Part 1:
Practice Flash Cards – Part 2: 2/15/15
Learn Smart – 5 points Extra Credit for Block 1 ends 2/7/16 at 11:59 PM
FINANCIAL AID VERIFICATION – FACULTY INFORMATION
Student Center in the myUCF portal to view their academic activity in courses for federal financial aid.
Association of Certified Fraud Examiners (ACFE) – Orientation 2/2/16 in HPA 1 Room 107 from 4:30-5:30pm
Connect link to Webcourses

3. J.C. Penney brings back home appliances after 30 years
Department store operator J.C. Penney said it will start selling home appliances from February, re-entering the business after a gap of more than 30 years. The chain will sell kitchen and laundry appliances in a range of price points from GE, Hotpoint, LG Electronics Inc and Samsung Electronics in 22 pilot stores starting Feb. 1. "The introduction of major appliances will help us continue to significantly improve sales and gross profit per square foot in our home department," Chief Executive Marvin Ellison said in a statement. Sales of home goods accounted for about 12 percent of the company's total sales in Appliances were popular shopping items this holiday season. Best Buy reported a 13.4 percent rise in appliance sales at comparable stores in the 9 weeks ended Jan. 2. J.C. Penney also said it plans to make appliances available at its online store starting spring.

5. Questions to be Answered
Overall - How has society shaped today’s financial reporting?
Chapter 3 – Once we have all of the transactions aggregated, how do we communicate this information to decision-makers?

6. Debit and Credit Effects on Accounts in the Expanded Accounting Equation – Page 56
Permanent Accounts
Temporary Accounts
Remember that accounts on the left side of the accounting equation (assets) increase with debits or the left side of an account. Accounts on the right side of the accounting equation (liabilities and stockholders’ equity) increase with credits or the right side of an account.
We can expand the basic accounting equation to include the components of stockholders’ equity (common stock and retained earnings) and the components of retained earnings (revenues, expenses, and dividends). Because common stock and retained earnings are part of stockholders’ equity, it follows directly that we increase both with a credit.
Revenues increase retained earnings (“there’s more to keep”). Retained earnings is a credit account, so we increase revenues with a credit. Expenses, on the other hand, decrease retained earnings (“there’s less to keep”). Thus, we do the opposite of what we do with revenues: We increase expenses with a debit. A debit to an expense is essentially a debit to retained earnings, decreasing the account. Similarly, dividends decrease retained earnings, so we also record an increase in dividends with a debit.
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7. Chapter 3 End of Period (Internal) Transactions
Learning Objectives:
1.) Revenue and expense reporting –
2.) Accrual versus cash accounting
3.) Complete the remaining portion of the accounting cycle
a.) Adjusting Entries (end of period – internal transactions)
b.) Adjusted Trial Balance
c.) Financial Statements
i.) Income Statement
ii.) Statement of Stockholders’ Equity
iii.) Balance Sheet
iv.) Statement of Cash Flows
d.) Closing Entries
Chapter 3: The Financial Reporting Process
The chapter is divided into 4 parts.
Part A gives a brief overview of accrual-basis accounting.
Part B describes the measurement process.
Part C specifies the reporting process.
Part D throws light on the closing process.
Lets start with Part A.

9. LO1 Revenue and Expense Reporting
Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).
1.) Revenue Recognition Principle:
This principle directs us to record revenues when they are earned. The principle also provides guidance on when revenues are earned and can be recorded. Principle reveals the following two items:
When is revenue earned? When goods or services have been delivered to customers
What amount of revenue do we recognize? Cash value of goods or services transferred to customers.
2.) Matching Principle
Recognize expenses in the same period as the revenue they help generate.
Net income is an essential aspect of good investment decisions. Proper computation of net income requires considerable attention to be paid to the proper measurement of the two primary components of net income – revenues and expenses.
If accounting information is to be useful in making decisions, accountants must measure and report revenues and expenses in a way that clearly reflects the ability of the company to create value for its owners, the stockholders.
To do this, we use accrual-basis accounting, where we record revenues when we earn them (the revenue recognition principle) and expenses with related revenues (the matching principle).
We discuss these principles next.

10. Walmart
Statement of Income

11. Walmart – Revenue Recognition – Example #1 (Financial Statement Notes)
Sales
Walmart recognizes sales revenue, net of sales taxes and estimated sales returns, at the time it sells merchandise to the customer.
Membership Fee Revenue
Walmart recognizes membership fee revenue both in the United States and internationally over the term of the membership, which is typically 12 months.
Membership fee revenue is included in membership and other income in Walmart's Consolidated Statements of Income. The deferred membership fee is included in accrued liabilities in Walmart's Consolidated Balance Sheets.
Shopping Cards
Customer purchases of shopping cards are not recognized as revenue until the card is redeemed and the customer purchases merchandise using the shopping card
Depreciation allocates the cost of a plant asset to expense over the asset’s useful life. Depreciation is the most common long-term deferral. Many businesses buildings and equipment. As a company uses the assets, it records depreciation for wear-and-tear and obsolescence. The accounting adjustment records Depreciation expense and decreases the asset’s book value over its life. The process is identical to a deferral-type adjustment; the only difference is the type of asset involved. Plant assets are long-lived tangible assets, such as land, buildings, furniture, and equipment. All plant assets but land decline in usefulness, and this decline is an expense. Accountants spread the cost of each plant asset, except land, over its useful life. Depreciation is the process of allocating cost to expense for a long-term plant asset.

12. Revenue Recognition Principle – Example #2
Recognize revenue when it is earned
Calvin books a cruise with Carnival Cruise Lines, the world’s largest cruise line. He makes reservations and pays for the cruise in November 2014, but the cruise is not scheduled to sail until April 2015.
When does Carnival report revenue from the ticket sale?
The revenue recognition principle states that we should recognize revenue in the period in which we earn it, not necessarily in the period in which we receive cash.
This principle is explained with an example.
Calvin books a cruise with Carnival Cruise Lines, the world’s largest cruise line. He makes reservations and pays for the cruise in November 2012, but the cruise is not scheduled to sail until April 2013.
When does Carnival report revenue from the ticket sale?

13. Revenue Recognition Principle – Example #3
Suppose that, anticipating the cruise, Calvin buys a Jimmy Buffet CD from Best Buy. Rather than paying cash, Calvin uses his Best Buy credit card to buy the CD on account. When does Best Buy recognize revenue?
Suppose that, anticipating the cruise, Calvin buys a Jimmy Buffet CD from Best Buy.
Rather than paying cash, Calvin uses his Best Buy card to buy the CD on account.
When does Best Buy recognize revenue?
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14. Matching Principle
Recognize expenses in the same period as the revenue they help generate.
Identify expenses incurred
Measure the expenses
Match against revenues earned
The matching principle is the basis for recording expenses. Expenses are the costs of assets used up, and of liabilities created, in the earning of revenue. Expenses have no future benefit to the company. The matching principle includes two steps:
1. Identify all the expenses incurred during the accounting period.
2. Measure the expenses, and match expenses against the revenues earned.
To match expenses against revenues means to subtract expenses from revenues to compute net income or net loss.
Prepaid Insurance. Depreciation. Salary Expense. Prepaid rent. Supplies 14 14

15. Considering the previous example about Carnival Cruise Lines, the cost of generating revenue in April (ship supplies, the fuel used, and crew members’ salaries) should be expensed in April even though the cash flows occur in March, April, and May.
The matching principle states that we recognize expenses in the same period as the revenues they help to generate. Expenses include those directly and indirectly related to producing revenues.

16. LO2 Accrual–Basis Compared with Cash–Basis Accounting
There are no receivables or payables in the cash basis of accounting.

17. Special Bonus Material – 100 Points for correct answer …
What is an extroverted accountant like?
He’ll look at your shoes while talking to you instead of his own.
Two accountants are in a bank when armed robbers burst in. While several of the robbers take the money from the tellers, others line the customers up against a wall and proceed to take their wallets, watches, and other valuables. In the midst of the chaos, accountant No. 1 jams something in accountant No. 2’s hand. Without looking down, accountant No. 2 whispers, "What is this?" to which accountant number one replies, "It's that $50 I owe you."
Chapter 3: The Financial Reporting Process
The chapter is divided into 4 parts.
Part A gives a brief overview of accrual-basis accounting.
Part B describes the measurement process.
Part C specifies the reporting process.
Part D throws light on the closing process.
Lets start with Part A.

18. External Transactions of Eagle Golf Academy
The best way to understand the impact of a transaction on the accounting equation is to see it demonstrated by a few examples. Let’s return to the Eagle Golf Academy from Chapter 1.
The illustration in the slide summarizes the first five external transactions for Eagle in January, the first month of operations.
Note that business activities usually occur in this same order for a new company—obtain external financing, use those funds to invest in long-term productive assets, and then begin normal operations. We have discussed these business activities in Chapter 1.
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19. Accounting Cycle - Adjusting Entries
Purpose of Adjusting Entries: To recognize transactions that have occurred in an accounting period but we have not yet recorded.
To record revenues earned in the period, but not yet recorded (Revenue Recognition Principle)
To record expenses in the period they are incurred in the generation of those revenues (Matching Principle).
NEVER involved cash.
Types of accounts that will need to be adjusted:
1.) Prepayments (Cash First):
Prepaid expenses – recognize expense based on usage or passage of time.
Long-term Tangible Assets – Depreciation: The process of allocating the cost of long-term plant assets to expense over estimated useful lives.
Unearned revenues – recognize any revenue that has been earned.
2.) Accruals (Cash Second):
Accrued expenses – search for expenses that have been incurred but not recorded. Examples include Payables – inventory, utilities, interest owed, salaries
Accrued revenues – search for revenue earned but not yet recorded – Examples include accounts receivable and interest receivable.
What are the steps???
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20. Adjusting Entries - Steps
Steps: 1.) Adjusting entries are typically only completed at the end of the accounting period to update the accounts prior to preparing the financial statements. 2.) Look at accounts on the unadjusted trial balance to ascertain which accounts need to be adjusted. a.) Prepayments (cash first) i.) Prepaid Expenses – calculate amount of expense based on passage of time or usage. ii.) Long-term Assets – calculate amount of expense incurred based on asset cost and estimate life. iii.) Unearned revenue – calculate the value of revenue earned. b.) Accruals (cash second) i.) Accrued expenses– record expenses that have been incurred, but not recorded. ii.) Accrued revenues – record revenues earned, but not recorded. 3.) Each adjusting entry has different steps for the actual adjusting journal entry, so the steps are contained in the ensuing slides. 4.) The actual adjusting journal entry is recorded in the original cumulative journal entry book we learned about in Chapter 2 in the ‘Measure’ phase of the Accounting cycle.
What are the steps???
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21. Unadjusted Trial Balance of Eagle Golf Academy
Steps:
List account balances from Cumulative General Ledger Postings as debit or credit.
Account ordering:
Balance sheet
Stockholders’ equity
Income Statement
Notice that accounts are listed with the debit balances in one column and the credit balances in another column. Asset, expense, and dividend accounts normally have debit balances, while liability, stockholders’ equity, and revenue accounts normally have credit balances.
It may seem unusual that the retained earnings account has a balance of $0. As we explained earlier, retained earnings is a composite of three other types of accounts—revenues, expenses, and dividends. Those three accounts have balances at this point, but those balances haven’t yet been transferred to retained earnings. This transfer is known as the closing process and we will discuss it in Chapter 3. Since this is the first period of the company’s operations, retained earnings will start at $0. As time goes by, the retained earnings balance will be the accumulated net amount of revenues minus expenses and dividends.
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22. Adjusting Entries - Prepayments (Part 1) - Prepaid Expenses
Assets (resources) acquired in one period may be expensed in a future period based on matching principle.
Examples: Purchase of supplies, payment of rent in advance, payment of insurance in advance.
Steps:
1.) Calculate amount of expense incurred through time or usage.
2.) Record the expense through a Debit to the appropriate account.
3.) Credit the related asset account by the same amount.
Adjusting Entry:
Debit expense account (increase an expense)
Credit original asset account (decrease an asset)
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23. Prepaid Expenses - Future Benefit
Recorded as assets when purchased
JOURNAL
Date
Accounts and explanation
Debit
Credit
Jan 1
Prepaid rent
6,000
Cash
Jan 6
Supplies
2,300
A/P
Prepaid expense is an expense paid in advance. Therefore, prepaid expenses are assets because they provide a future benefit for the owner. Over time, these benefits expire or are used. Examples include prepaid rent and supplies. When these items are purchased, an asset is recorded. The adjustment records an expense for the used portion and decreases the asset. Let’s say a company paid for one year’s rent in advance ($1,000 per month) on June 1. Then, on August 3 purchased $3,500 of supplies. At the time of these purchases, assets are recorded.

24. Example: Prepaid Rent $5,500 $6,000 Remaining prepaid rent
Jan. 31
$6,000
Cash paid for prepaid rent
Jan. 1
End of Period Adjusting
Entry
Debit Rent Expense for $500
Credit Prepaid Rent for $500
Expense is incurred by the passage of time:
Prepaid Rent Expires
$500
The balance in prepaid rent account on Jan.1 is $6,000. The rent expense for the month of January is $500. As such the balance in prepaid rent account is reduced to $5,500 on Jan. 31.

25. creates the ‘Supplies Expense’ Debit Supplies Expense for $1,200
Example: Supplies
$1,100
Supplies On-hand (Ending Supplies)
Jan. 31
$2,300
Cash paid for Supplies
Jan. 6
$1,200 of supplies used during January
creates the ‘Supplies Expense’
End of Period Adjusting
Entry
Debit Supplies Expense for $1,200
Credit Supplies for $1,200
The balance in prepaid rent account on Jan.1 is $6,000. The rent expense for the month of January is $500. As such the balance in prepaid rent account is reduced to $5,500 on Jan. 31.

26. Prepaid Expenses - Benefit Received
Expensed when expired or used
JOURNAL
Date
Accounts and explanation
Debit
Credit
Jan 31
Rent expense
500
Prepaid rent
Supplies expense
1,200
Supplies
Check-in – Same Example with Golf Company
How much is left in the prepaid rent account at the end of January?
a.) $6,000; b.) $500; c.) $5,500; d.) $0.00
How much is left in the supplies account at the end of January?
a.) $1,100; b.) $1,200; c.) $0.00; d.) $3,200

27. Prepaid Rent – Post adjusting entry to GL
Rent expense
$6,000
$500
Jan 1
Jan 31
Jan 31
$500
$5,500
Amount remaining
Amount expired
Balance Sheet
Income Statement
The T-accounts for Prepaid rent and Rent expense show how the purchased and adjustment of the accounts impacts the financial statements.

28. Supplies – Post Adjusting Entry to GL
Supplies expense
$2,300
$1,200
Jan 31
$1,200
Jan 6
Jan 31
$1,100
Amount on hand
Amount used
Balance Sheet
Income Statement
The T-accounts for Supplies and Supplies expense show how the purchased and adjustment of the accounts impacts the financial statements.

29. Adjusting Entries - Prepayments (Part 1) - Long-term Assets
The process of allocating the cost of a long-term tangible asset to depreciation expense over the useful life of the asset based on the Matching Principle. Two new accounts are introduced and used in this adjustment:
Depreciation expense
Accumulated depreciation
Examples of long-term tangible assets:
Buildings, Equipment, Furniture
Steps:
1.) Calculate amount of depreciation expense for the period and debit to depreciation expense.
i.) Straight-line Depreciation Expense calculation = asset cost / useful life of asset
2.) Credit accumulated depreciation in the same amount.
Depreciation allocates the cost of a plant asset to expense over the asset’s useful life. Depreciation is the most common long-term deferral. Many businesses buildings and equipment. As a company uses the assets, it records depreciation for wear-and-tear and obsolescence. The accounting adjustment records Depreciation expense and decreases the asset’s book value over its life. The process is identical to a deferral-type adjustment; the only difference is the type of asset involved. Plant assets are long-lived tangible assets, such as land, buildings, furniture, and equipment. All plant assets but land decline in usefulness, and this decline is an expense. Accountants spread the cost of each plant asset, except land, over its useful life. Depreciation is the process of allocating cost to expense for a long-term plant asset.

30. Equipment Purchased using Cash Jan. 1 – Useful Life = 24 Months
Depreciation Expense: How to allocate the cost of an Asset over the life of the Asset
$24,000
Equipment Purchased using Cash Jan. 1 – Useful Life = 24 Months
As the Asset is used, the cost is transferred to Depreciation Expense – Matching principle
Period …
$1,000
$1,000
$1,000
The balance in prepaid rent account on Jan.1 is $6,000. The rent expense for the month of January is $500. As such the balance in prepaid rent account is reduced to $5,500 on Jan. 31.

31. Accumulated Depreciation Account
Cumulative Sum of all depreciation expense
Increases over plant asset’s life
Contra-asset (New type of account)
Always has a companion account
Normal balance is opposite the companion account
Accumulated Depreciation - Normal credit balance
Book value
Cost of plant asset less accumulated depreciation
Accumulated depreciation account shows the sum of all depreciation expense from using the asset. Therefore, the balance in the Accumulated depreciation account increases over the asset’s life. Accumulated depreciation is a contra asset account—an asset account with a normal credit balance. A contra account has two distinguishing characteristics:
1. It always has a companion account.
2. Its normal balance is opposite that of the companion account.

32. Apartment Investment & Management (AIV)

33. Depreciation – Equipment has a useful life of 24 months – Straight-line Depreciation
JOURNAL
Date
Accounts and explanation
Debit
Credit
Jan 1
Equipment
24,000
Cash
Jan 31
Depreciation expense
1,000
Accumulated depreciation
Check-in – New Example
What is the monthly depreciation expense for the new bicycle repair items vending machine in UCF’s Student Union? Original Cost = $4,800 and useful life = 4 years. Use straight line depreciation calculation.
a.) $100; b.) $1,200; c.) $4,800; d.) $0.00

34. Depreciation – Straight Line
Equipment
Depreciation Expense
Jan 31
$1,000
Jan 1
$24,000
Balance Sheet
Income Statement
Accumulated Depreciation
$1,000
Jan 31
The T-accounts for Equipment, Accumulated Depreciation and Depreciation Expense show the impact of the journal entries. Notice the Equipment account is not affected by the adjusting entry.

35. Book Value Partial Balance Sheet January 31, 20xx Equipment $24,000
Less: Accumulated Depreciation
(1,000)
Book value
$23,000
On the balance sheet, plant assets are shown at their book value – the cost of the asset minus the accumulated depreciation.

36. Adjusting Entries - Prepayments (Part 1) - Unearned Revenues
Received cash first from customer before revenue is earned. Recorded as a liability when original cash payment is received.
Once a company has provided products or services, they can record revenue earned and reduce the obligation to the customer.
Steps:
1.) Calculate amount of revenue to recognize and debit unearned revenue.
2.) Credit revenue in the same amount to recognize revenue earned.
Adjusting entry:
Debit liability account (decrease a liability)
Credit revenue account (increase a revenue)
Unearned revenues occur when a company receives cash in advance from a customer for products or services to be provided in the future.
The adjusting entry for an unearned revenue always includes a debit to a liability account (decrease a liability) and a credit to a revenue account (increase a revenue).
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37. Southwest Airlines Revenue recognition
Tickets sold for Passenger air travel are initially deferred as Air traffic liability. Passenger revenue is recognized and Air traffic liability is reduced when the service is provided (i.e., when the flight takes place). Air traffic liability primarily represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The balance in Air traffic liability, which includes a portion of the Company’s liability associated with its frequent flyer program, fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s frequent flyer programs.

38. Unearned Revenue - Cash Received for 10 golf lessons
Receive cash before revenue is earned
Creates a liability
Business owes customer a good or service
Business has to repay cash received from customer if good/service not delivered
JOURNAL
Date
Accounts and explanation
Debit
Credit
Jan 23
Cash
600
Unearned revenue
Some businesses collect cash from customers before earning the revenue. This creates a liability called unearned revenue. Only when the job is completed does the business earn the revenue. For example, suppose an attorney requires her clients to pay in advance before starting work on their cases (often called a retainer). On December 1, a client pays a $1,000 retainer to the attorney. This would create a liability – unearned revenue.
ATTORNEY
KHSS

39. Example: Unearned Legal Revenue
$600
Cash received in advance
Jan. 26 $?
Unearned revenue remains
Jan. 31
$480
Services provided
2 Training Sessions
End of Period Adjusting
Entry
Debit Unearned Revenue for $120
Credit Revenue for $120
$600 is received in advance from customers who will be given services (that is golf training in this case) in the future.
Service worth $60 is provided to the customers during the month.
Unearned training revenue equals $540 as of Jan. 31.

40. Unearned Revenue - Good/Service Delivered – (2 golf lessons taken)
When revenue is earned (i.e. good/service delivered)
Liability for unearned revenue is reduced
Revenue is increased
JOURNAL
Date
Accounts and explanation
Debit
Credit
Jan 31
Unearned Revenue
120
Service Revenue
In order to re

41. Adjusting Entries – Accruals (Part 2) - Accrued Expenses
Record before paying cash
When a company has incurred an expense but hasn’t yet paid cash or recorded an obligation to pay, they still record the expense – matching principle.
Examples: Accrued salaries, accrued interest.
Steps:
1.) Calculate the amount of the expense incurred, but not recorded and debit the expense account.
2.) Credit an associated ‘payable’ account.
Adjusting entry:
Debit expense account (increase an expense)
Credit liability account (increase a liability)
When a company has incurred an expense but hasn’t yet paid cash or recorded an obligation to pay, it still should record the expense. This is referred to as an accrued expense. A few examples are accrued salaries, accrued interest, accrued utility costs.
The adjusting entry for an accrued expense always includes a debit to an expense account (increase an expense) and a credit to a liability account (increase a liability).
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42. Accrued Salaries @ $500 per day
$2,500 weekly salaries
$1,500
$1,000
1-29
Monday
1-30
Tuesday
1-31
Wednesday
2-1
Thursday
2-2
Friday
JOURNAL
Date
Accounts and explanation
Debit
Credit
Jan 31
Salaries expense
1,500
Salaries payable
Consider a company that pays its employees each Friday (weekly). Salaries for the week are $15,000. For the year ending 2010, December 31 falls on a Tuesday – two/fifths of the way through the work week. For the adjusting entry, the portion of the salaries expense incurred before the year end is recorded. The credit is to salaries payable. This will increase expenses on the Income Statement and increase liabilities on the Balance Sheet.

43. Example: Accrued Interest Costs??
Interest owed
Jan. 31
$100 ??
Cash paid
for Interest
Feb 15
$100
Jan. 1
End of Period Adjusting
Entry
Debit Interest Expense for $100
Credit Interest Payable for $100
Bank Loan $10,000
Interest owed, but not paid - $100
The utilities expense owed on Jan. 31 will be paid on Feb.6. However, the accrued utilities expense should be recorded in the books while preparing the financial statements for the month of January.

44. Example: Accrued Interest Costs
JOURNAL
Date
Accounts and explanation
Debit
Credit
Jan 31
Interest Expense
100
Interest Payable
Check-in – New Example
What is the monthly interest expense for the new bicycle repair items vending machine in UCF’s Student Union? Original loan amount on 1/1/16 = $4,800, loan term = 12 months interest only principal due at maturity, and interest rate = 10%.
a.) $100; b.) $4,800; c.) $480; d.) $40.00
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45. Adjusting Entries – Accruals (Part 2) - Accrued Revenues
When a company has earned revenue but hasn’t yet received cash or recorded an amount receivable, it still should record the revenue. This is referred to as an accrued revenue.
Examples: Accounts receivable, Interest receivable
Steps:
1.) Calculate the amount of the revenue earned, but not recorded and debit accounts receivable.
2.) Credit the revenue account in the same amount.
Adjusting entry:
Debit asset account (increase an asset)
Credit revenue account (increase a revenue)
When a company has earned revenue but hasn’t yet received cash or recorded an amount receivable, it still should record the revenue. This is referred to as an accrued revenue. A few examples include interest receivable, accounts receivable.
The adjusting entry for an accrued revenue always includes a debit to an asset account (increase an asset) and a credit to a revenue account (increase a revenue).
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46. LO4 Post Adjusting Entries
1.) In the same fashion we record the during the month journal entries, we also record the end of the month adjusting entries in the same cumulative journal.
2.) Just as we learned journal entries need to be posted to the general ledger, adjusting journal entries are also posted to the same general ledger account balances.
Steps for the next part of the accounting cycle:
Post adjusting entries to the T-accounts in the general ledger to update the account balances.
Prepare an adjusted trial balance.
An adjusted trial balance is a list of all accounts and their debit and credit balances after we have updated account balances for adjusting entries.
To complete the measurement process, we need to update balances of assets, liabilities, revenues, and expenses for adjusting entries.
An adjusted trial balance is then prepared with updated balances. An adjusted trial balance is a list of all accounts and their balances at a particular date after we have updated account balances for adjusting entries.
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48. Adjusted Trial Balance
Steps:
List Debit and Credit account balances from Cumulative General Ledger after posting adjusting entries.
Account ordering:
Balance sheet
Stockholders’ equity
Income Statement
Once the adjusted trial balance is complete, we prepare financial statements.
Revenue and expense accounts are reported in the income statement. The difference between total revenues and total expenses equals net income.
All asset, liability, and stockholders’ equity accounts are reported in the balance sheet which confirms the equality of the basic accounting equation.
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49. Part C: The Communication (Reporting) Process LO5 Financial Statements
Steps:
Income Statement: using the final account balances shown on the Adjusted Trial Balance, list all of the revenue and expense accounts and calculate the net income or net loss.
Statement of Stockholders Equity:
start with the accounting period beginning account balances for common stock and retained earnings.
For each respective account, add any changes in common stock, add net income (loss) as calculated on the income statement, and deduct any dividends.
Calculate ending balances for common stock and retained earnings.
Balance Sheet: using the final account balances shown on the Adjusted Trial Balance, list all of the asset, liabilities, and stockholders equity accounts. The retained earnings account ending balance will be taken from the Statement of Stockholders’ Equity.
Statement of Cash Flows: Chapter 11…
Part C: Specifies the reporting process.

50. Income Statement
The income statement demonstrates that Eagle Golf Academy earned a profit of $500 in the month of January. The revenues earned from providing service to customers exceed the costs of providing that service.
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51. Statement of Stockholders’ Equity
The statement of stockholders’ equity summarizes the changes in each stockholders’ equity account as well as in total stockholders’ equity and the accounting value of the company to stockholders (owners). It also reflects the retained earnings of the company.
Retained earnings has three components: revenues, expenses, and dividends. In the adjusted trial balance, the balance of the retained earnings account equals its balance before all revenue, expense, and dividend transactions, which is the balance of retained earnings at the beginning of the accounting period. For Eagle Golf Academy, the beginning balance of retained earnings equals $0 since this is the first month of operations.
Total stockholders’ equity increases from $0 at the beginning of January to $25,300 by the end of January. The increase occurs as a result of a $25,000 investment by the owners (stockholders) when they bought common stock plus an increase of $300 when the company earned a profit of $500 on behalf of its stockholders and after distributing $200 of dividends, retained $300 in the business.
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52. New Format for Balance Sheet ‘Classified’
Assets and Liabilities are classified as either current or long-term term based on liquidity (assets) or order of liquidation (liabilities). How quickly an item can be converted to cash (assets) or liquidated using cash (liabilities)
Cash
Most liquid
Accounts receivable
Very liquid
Inventory
Somewhat liquid
Plant assets
Not liquid
Assets 52

53. Classified Balance Sheet
Categorizes and subtotals assets and liabilities by current and long-term
Current Assets - Converted to cash, sold or consumed in the next year
Long-term Assets -Held for longer than one year, includes plant assets
Current Liabilities - Must be paid within one year
Long-term Liabilities - Due date more than one year from balance sheet date
Partial Balance Sheet
Assets
Liabilities
Current assets
Current liabilities
Long-term investments
Long-term liabilities
Property, plant and equipment
Other assets

54. Classified Balance SheetSheet January 31
EAGLE GOLF ACADEMY
Classified Balance
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$6,200
Accounts payable
$2,300
Accounts receivable
2,700
Unearned revenue
480
Supplies
1,100
Salaries payable
1680
Prepaid rent
5,500
Utilities payable
960
Total current assets
15,500
Interest payable
100
Total current liabilities
$5,520
Long-term assets:
Equipment
24,000
Long-term liabilities:
Less: Accum. depr., equip.
(1,000)
Notes payable
10,000
Total long-term assets
23,000
Total liabilities
$15,520
Stockholders’ Equity
Common stock
25,000
Retained earnings
(2,020)
Total stockholders’ equity
$22,980
Total assets
$38,500
Total liabilities and stockholders’ equity
The balance sheet includes all asset, liability, and permanent stockholders’ equity accounts. We can separate assets into those that provide a benefit over the next year (current assets) and those that provide a benefit for more than one year (long-term assets). Similarly, we can divide liabilities into those due over the next year (current liabilities) and those due in more than one year (long-term liabilities).
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55. Part D The Closing Process
Part D: Throws light on the closing process.

56. LO6 Closing Entries
Closing Journal Entries - prepares the temporary accounts for the next accounting period.
New concept of temporary and permanent accounts:
Temporary accounts - revenue, expenses, dividends. These accounts are reset back to zero at the end of each accounting period. Temporary accounts are zeroed out into the Retained Earnings account.
Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends.
Permanent Accounts – all other accounts are not affected, except for retained as noted above.
The closing process will have the following effects:
1) Transfer of balance of all revenue, expense, and dividend accounts to the balance of retained earnings.
2) Increase in retained earnings account by the amount of revenues and decrease in retained earnings by the amount of expenses and dividends.
3) The balance of each revenue, expense, and dividend account will be reduced to zero.
4) Closing entries do not affect the balances of permanent accounts other than retained earnings.

57. Closing Entries (Zero out temporary accounts)
Steps:
Closing entries transfer the revenue, expense, and dividends balances to Retained Earnings. Here are the steps to close the books of a company:
Revenue
Debit each revenue account for the amount of its credit balance.
Credit Retained Earnings for the sum of the revenues.
Now the sum of the revenues is in Retained Earnings.
Expenses
Debit Retained Earnings for the sum of the expenses.
Credit each expense account for the amount of its debit balance.
The sum of the expenses is now in Retained Earnings.
3) Dividends
Debit Retained earnings for the sum of the dividends.
Credit dividend account for the amount of its debit balance.
The sum of the Dividends is now in Retained Earnings.
Remember that dividends are not expenses. Dividends never affect net income.
Close Revenues
Debit each revenue account
Credit Retained earnings
Close Expenses
Debit Retained earnings
Credit each expense account
Close Dividends
Credit Dividends

58. Journal Entries JOURNAL Date Accounts and explanation Debit Credit
Sales revenue
6,420
Retained earnings
8,240
Supplies Expense
1,200
Rent expense
500
Depreciation expense
1,000
Salaries expense
4,480
Utilities expense
960
Interest expense
100
JOURNAL
Date
Accounts and explanation
Debit
Credit
Retained earnings
200
Dividends
Problem 3-75A requires the preparation of closing entries. The first closing entry is to zero out revenue accounts. This company only has one revenue account – Sales revenue. It should be debited for its balance. Retained earnings is credited. The second entry is to close all expense accounts. Each expense account is credited for its balance. Retained earnings is debited for the total.

59. Post to Retained Earnings General Ledger Account
The ending balance of retained earnings now includes all transactions affecting the components of the account. The ending balance of $300 represents all revenues and expenses over the life of the company (just the first month of operations in this example) less dividends.
The ending balance of retained earnings in January will be its beginning balance in February. Then we’ll close February’s revenues, expenses, and dividends to retained earnings, and this cycle will continue each period
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60. DURING THE MONTH TRANSACTIONS
END OF MONTH TRANSACTIONS

61. Statement of Retained Earnings Balance Sheet Statement of Cash Flows
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Accounting Equation: Assets = Liabilities + Owners Equity
GAAP (Rules) formulated by FASB
Principles
Revenue Recognition
Matching Principle
Entity – any organization stand apart as a separate economic unit.
HC – assets should be recorded at cost.
Cannot count revenue twice for two entities – even if it is a subsidiary that sells to the parent company.
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Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 61

63. Check-in – Crimson Tide Music Company
Check-in’s on 4 & 5
Check-in – Crimson Tide Music Company
#4 How much is left in the prepaid rent account at the end of December?
a.) $0.00; b.) $500; c.) $2,000; d.) $1,500
#5 How much is left in the supplies account at the end of January?
a.) $900; b.) $600; c.) $1,500; d.) $0.00

74. Participation Questions Chap. 3
Which publicly traded Company is used as example #1 in class for the revenue recognition principle?
Apple Computers, JC Penney, Sears, or Walmart
The second example discussing a cruise for the revenue recognition principle discusses Calvin actually taking a cruise in which month?
April 2015, November 2014, March 2015, or May 2015
Which depreciation method did we discuss for the $24,000 in Equipment purchased by Eagle Golf Academy, where the depreciation expense equals $1,000 per month if the useful life of the equipment is 24 months?
Straight-line, Double declining balance, or Activity based depreciation
After all of the adjusting entries were completed for Eagle Golf Academy and the Income Statement was prepared, was the income for Golf Eagle positive or negative? (Please wait until we have completed the chapter to answer this question.)
Positive or Negative
The example of Eagle Golf Academy showed that companies can pay dividends even when there is a net loss for the month – T/F