1. Prepare Income Statement and Balance Sheet According to Accrual Basis
Principles of Cost Analysis and Management

2. Did Lacy Really Make $70? Revenues – Expenses =
Cash
Other Assets
Liabilities
(+)
200 15 5 50
130
(-) 20 10 5 65 40
(+) 20 65 40
140
(-) 5
(-) 40
(+) 40
Financial Position
Revenues
Expenses
(-)
(+)
200
(-)
(+) 15 20 50 85
(+) 10 5 15
(-)
Revenues – Expenses =
Change in Financial Position

3. Terminal Learning Objective
Action: Prepare Income Statement and Balance Sheet according to Accrual Basis
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for international learners):
Explain purpose of adjusting transactions
Describe types of adjusting transactions
Record adjusting transactions in tabular format
Identify and enter relevant report data (using macros provided in Excel template) to prepare Income Statement and Balance Sheet according to Accrual Basis

4. Review: The Accounting Cycle
Record Transactions
Post-Closing Trial Balance
Post to Ledger
Close Accounts
Prepare Trial Balance
Prepare
Statements
Adjust Accounts
Adjusted
Trial Balance

5. Why Adjust Accounts?
Purpose: Allows financial statements to accurately represent financial position of the entity.
Statement of Activities: Correctly report revenues and expenses for the period.
Statement of Financial Position: Correctly state ending balances for assets, liabilities, and financial position

6. Purpose for Adjustments
Assign activity to proper time period
Revenue recognition principle: Revenue is reported on the Statement of Activities in the period in which it is Earned.
Revenue is earned when service is provided or product is sold.
Plan
Take
Orders
Complete Service or Ship Product
Collect
Cash
Revenue & Non-Cash Asset

7. Purpose for Adjustments
Assign activity to proper time period
Matching principle: Expenses are reported on the Statement of Activities in the period Resource Are Consumed
Plan
Order
Consume
Receive
Pay
Asset & Liability  Remove Liability  Expense

8. LSA #1 Check on Learning
Q1. What is the accounting principle that defines when expenses should be reported? Q2. In what period should revenues be reported?
A1.
Q1. What is the accounting principle that defines when expenses should be reported?
A1. Matching principle
Q2. In what period should revenues be reported?
A2. In the period earned – when product is shipped or services are completed.
A2.

9. 2 Basic Types of Adjustments
Prepayments: Cash is paid before the resource is consumed.
When cash is paid in advance, an asset is created
At the end of the period, some of the asset may have been consumed  expense.
Consume
Pay
Record Asset  Reduce Asset, Record Expense

10. 2 Basic Types of Adjustments
Accruals: Resources have been consumed but no cash has been paid.
Results in a liability
Consume
Pay
Expense & Liability  Remove Liability

11. Inventory and Cost of Goods Sold
Goods and materials that are manufactured or purchased for resale.
Hold as assets on the Statement of Financial Position until sold.
Record as expense “Cost of Goods Sold” on the Statement of Activities when sold.

12. Equipment and Depreciation
Depreciation is the accounting process of assigning a portion of equipment’s cost to the periods in which it is used.
A portion of the benefit of owning the equipment has been received in the current period  expense.
The future benefit is reduced.

13. Rules for Adjustments
Each adjustment will affect One Account from the Statement of Activities and One Account from the Statement of Financial Position.
Adjustments will NEVER affect the cash account.

14. LSA #2 Check on Learning
Q1. Which type of adjustment is called for when resources are consumed before cash is paid? Q2. Which account will never be affected by adjusting transactions?
A1.
Q1. Which type of adjustment is called for when resources are consumed before cash is paid?
A1. Accrual
Q2. Which account will never be affected by adjusting transactions?
A2. Cash
A2.

15. Lacy’s Ledger Other Assets consist of: Supplies $105 Utensils 20
Expenses
(+) 20 65 40
140
(-) 5 10 15
Other Assets consist of:
Supplies $105
Utensils
IOUs

16. Lacy’s Ledger (Cont.)
Other Assets
Expenses
(+) 20 65 40 80
(-) 5 60 10 75
Lacy determines that $60 of supplies have been used

17. Lacy’s Ledger (Cont.)
Other Assets
Expenses
(-) 5 60
(+) 10 75
(+) 20 65 40 80
Other Assets decrease and Expenses increase. Remaining assets are:
Supplies $45
Utensils
IOUs

18. Recording Adjustments
Record the use of supplies in the accounting equation:
Transaction Description
Cash +
Other Assets =
Liab
Financial Position
Rev –
Exp
Balance Forward
130
140
200 85 - 15
Supplies used
-60
+60
New Balance 80 75
Transaction Description
Cash +
Other Assets =
Liab
Financial Position
Rev –
Exp
Balance Forward
130
140
200 85 - 15

19. Lacy’s Ledger (Cont.)
Other Assets
Expenses
(+) 10 5 60 1 76
(-)
(+) 20 65 40 79
(-) 5 60 1
Lacy paid $20 for Utensils and plans to use them for 20 months. One month’s benefit has already been received

20. Lacy’s Ledger (Cont.) Remaining assets are: Supplies $45 Utensils 19
Other Assets
Expenses
(+) 20 65 40 79
(-) 5 60 1 10 76
Remaining assets are:
Supplies $45
Utensils 19
IOUs 15

21. Recording Adjustments
Record depreciation in the accounting equation:
Transaction Description
Cash +
Other Assets =
Liab
Financial Position
Rev –
Exp
Balance Forward
130 80
200 85 - 75
Depreciation -1 +1
New Balance 79 76
Transaction Description
Cash +
Other Assets =
Liab
Financial Position
Rev –
Exp
Balance Forward
130 80
200 85 - 75

22. Lacy agrees to reimburse Madge $3 for using the family refrigerator
Lacy’s Ledger (Cont.)
Liabilities
Expenses
(+) 10 5 60 1 3 79
(-)
(-) 40
(+) 40 3
Lacy agrees to reimburse Madge $3 for using the family refrigerator

23. Lacy’s Ledger (Cont.)
Liabilities
Expenses
(+) 10 5 60 1 3 79
(-)
(-) 40
(+) 40 3
Both Expenses and Liabilities Increase. Accrued Expense: benefit received but no cash paid.

24. Recording Adjustments
Record refrigerator use in the accounting equation:
Transaction Description
Cash +
Other Assets =
Liab
Financial Position
Rev –
Exp
Balance Forward
130 79
200 85 - 76
Refrigerator use +3
New Balance 3
Transaction Description
Cash +
Other Assets =
Liab
Financial Position
Rev –
Exp
Balance Forward
130 79
200 85 - 76

25. Lacy‘s Adjusted Trial Balance
Account Title
dr.
cr.
 Cash
$130 
 Other Assets
79 
 Liabilities
$ 3
 Financial Position
200
 Revenues
 85
 Expenses
 79
Totals
 $288
$288 

26. Lacy’s Statement of Activities
Revenues: $85 Expenses: 79 Excess of revenues over expenses: $6 Other Financing Source – Equity Transfer from General Fund 200 Change in Financial Position $206 Add: Beginning Financial Position -0- Ending Financial Position $206

27. Lacy’s Statement of Financial Position
Assets:
Liabilities & Financial Position:
Liabilities: $3
Financial Position:
Total: $209
Cash $130 Other Assets 79 Total: $209

28. LSA #3 Check on Learning
Q1. Which adjusting transaction resulted in a liability? Q2. Which adjusting transaction(s) reduced assets?
A1.
Q1. Which adjusting transaction resulted in a liability?
A1. Refrigerator Use
Q2. Which adjusting transaction(s) reduced assets?
A2. Depreciation, supplies
A2.

29. LSA #1-3 Summary
During this lesson, we covered the different types of transactions and their purpose for adjusting. We also covered the two basic adjustment types as well as that of the rules governing those adjustments. Finally, we recorded given numbers to a ledger to view the “statement of financial position.” What are your questions?

30. 3.3 The Accounting Cycle (Excel Spreadsheet)

31. Accounting Cycle Spreadsheet
Post adjusting transactions to
T-Accounts.
New balances calculate automatically

32. Accounting Cycle Spreadsheet (Cont.)
Remember:
Debits = Credits

33. The Statement of Activity is generated automatically
Accounting Cycle Spreadsheet (Cont.)
The Statement of Activity is generated automatically

34. Accounting Cycle Spreadsheet (Cont.)
Enter details to complete the Statement of Financial Position
Ending financial position is calculated automatically.

35. LSA #4 Check on Learning
The Check on learning will be conducted after the Practical Exercise (PE).

36. LSA #4 Summary
During this lesson, we discussed and conducted hands-on training on the importance of tracking commitments, obligations, accrued expenditures/expenses and disbursements.
What are your questions?

37. Practical Exercise
Prepare Income Statement and Balance Sheet According to Accrual Basis is a lesson designed for the learners to apply the steps in managerial cost accounting. Financial Managers must understand and apply the process of accumulating, measuring, analyzing, interpreting, and reporting cost information useful to both internal and external groups concerned with the way in which the organization uses, accounts for, safeguards, and controls it resources to meet its objective. During this lesson, we covered the following Learning Step Activities:
1. Explain purpose of adjusting transactions
2. Describe types of adjusting transactions
3. Record adjusting transactions in tabular format
4. Identify and enter relevant report data (using macros provided in Excel template) to prepare income statement and balance sheet according to accrual basis
What are your questions?

38. TLO Summary
Action: Prepare Income Statement and Balance Sheet according to Accrual Basis
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for international learners):
Explain purpose of adjusting transactions
Describe types of adjusting transactions
Record adjusting transactions in tabular format
Identify and enter relevant report data (using macros provided in Excel template) to prepare Income Statement and Balance Sheet according to Accrual Basis