1. Dr Cr Chapter 2 The Accounting Process

2. Chapter 2--Learning Objectives 1.Analyze transactions based upon the accounting equation

3. Accounting Equation Assets = Liabilities + Equity or Assets - Liabilities = Equity

4. Accounting Equation Assets = Liabilities + Equity Assets Have value Will generate future cash flows

5. Accounting Equation Assets = Liabilities + Equity Assets Factory building Equipment Accounts receivable

6. Accounting Equation Assets = Liabilities + Equity Liabilities Obligations Incurred to Acquire Assets

7. Accounting Equation Assets = Liabilities + Equity Liabilities Accounts Payable Salaries Payable Bonds Payable

8. Accounting Equation Assets = Liabilities + Equity Equity Owner Claim to Assets Assets - Liabilities

9. The Accounting Equation Assets = Liabilities + Equity Investments by Owners Distributions to Owners Revenues - Expenses Gains - Losses

10. Transactions & Events Affect Balance Sheet only Affect Balance Sheet & Earnings

11. Transactions affecting the balance sheet Investments by owners Distributions to owners Use assets to acquire other assets Use assets to extinguish debt Acquire assets by incurring debt

12. Accounting Equation Assets = Liabilities + Equity Example Purchased a Car for $22,000 Paid $5,000 down Signed a note for the balance

13. Effect on Accounting Equation Assets = Liabilities + Equity Car $22,000 Note $17,000 Cash ( 5,000) Assets $17,000 = Liab $17,000

14. Transactions affecting Earnings Earnings = Change in net assets, excluding investments by and distributions to owners Equity = Net assets Earnings increase equity Earnings = Revenues - Expenses + Gains - Losses Earnings increase equity through revenues, expenses, gains & losses

15. Chapter 2--Learning Objectives 2.Interpret the four traditional financial statements

16. Financial Statements 1.Income statement 2.Statement of changes in shareholders’ equity 3.Balance sheet 4.Statement of cash flows

17. Income Statement Elements _Revenues _Expenses _Gains _Losses For the accounting period }

18. Statement of changes in shareholders’ equity _Investments by owners _Distributions to owners _Net income or loss For the accounting period }

19. Balance Sheet Elements _Assets _Liabilities _Equity At the end of the accounting period }

20. Statement of cash flows _Investing activities _Financing activities _Operating activities For the accounting period }

21. Relationship of Financial Statements

22. Income Statement Statement of Owner’s Equity Balance Sheet Revenue + Gains - Expenses -Losses Net Income

23. Income Statement Balance Sheet Revenue + Gains - Expenses -Losses Net Income R/E Beginning Balance + Net Income - Dividends R/E Ending Balance } Statement of Owner’s Equity

24. Income Statement Balance Sheet Revenue + Gains - Expenses -Losses Net Income R/E BB + Net Income - Dividends R/E EB Statement of Owner’s Equity

25. Income Statement Balance Sheet Revenue + Gains - Expenses -Losses Net Income R/E BB + Net Income - Dividends R/E EB Statement of Owner’s Equity Assets Liabilities Equity

26. Income Statement Revenue + Gains - Expenses -Losses Net Income R/E BB + Net Income - Dividends R/E EB Statement of Owner’s Equity Balance Sheet Assets Liabilities Equity

27. Income Statement Revenue + Gains - Expenses -Losses Net Income R/E BB + Net Income - Dividends R/E EB Statement of Owner’s Equity Balance Sheet Assets Liabilities Equity

28. Income Statement Revenue + Gains - Expenses -Losses Net Income R/E BB + Net Income - Dividends R/E EB Statement of Owner’s Equity Balance Sheet Assets Liabilities Equity

29. Income Statement Revenue + Gains - Expenses -Losses Net Income R/E BB + Net Income - Dividends R/E EB Statement of Owner’s Equity Balance Sheet Assets Liabilities Equity

30. Income Statement Revenue + Gains - Expenses -Losses Net Income R/E BB + Net Income - Dividends R/E EB Statement of Owner’s Equity Balance Sheet Assets Liabilities Equity

31. Chapter 2--Learning Objectives 3.Understand the accounting model including the purpose of journals and ledgers

32. Journals Journals - Books of Original Entry –Record transactions or events i.e, Journal entries –In chronological order –Complete record of effects of transaction on accounts –Accounts and amounts debited /credited

33. Sample Transaction Paid $1,000 on Account to XYZ Supplies Journal Entry Accounts Payable1,000 Cash1,000

34. Ledgers Ledgers - Contain Accounts –General Ledger Contains accounts for financial statement elements

35. Posting From Journal to General Ledger Account

36. Journal Entry Accounts Payable1,000 Cash1,000 Accounts Payable Debit Credit 1,000 10,000 9,000

37. Types of Journal General Journals Special Journals

38. Cash Receipts Journal Cash Disbursements Journal Purchases Journal Sales Journal

39. Cash Receipts Journal Record All receipts of Cash –ie, deposits to the bank Examples: –Cash sales –Received Cash on account –Sold company truck for cash

40. Cash Disbursements Journal Record All payments of Cash –ie, checks written Examples: –Paid supplier on account –Purchased truck for cash –Made mortgage payment

41. Sales Journal Record All Sales on Account –When sale is made and no cash is received

42. Purchases Journal Record All Purchases of merchandise on Account –When purchases are made and no cash is paid –Purchases of items other than merchandise are recorded in the general journal

43. General Journal For All other Journal Entries Examples: –Adjusting –Closing –Sales & purchase returns

44. Chapter 2--Learning Objectives 4.Perform the steps in the accounting process

45. Inputs Source Docs Transactions Events Outputs Financial Statements Record Accumulate in Accounts Accounting Cycle

46. During the Accounting Period 1Identify transactions & events to record 2Journalize transactions & events 3Post from journals to ledgers

47. At the end of the accounting period 4Prepare Unadjusted Trial Balance 5Journalize & Post adjusting entries 6Prepare Adjusted Trial Balance 7Prepare Financial Statements 8Journalize & Post closing entries 9Prepare Post Closing Trial Balance

48. At beginning of next accounting period 10 Journalize & Post reversing entries

49. Adjusting Entries - Types uDeferrals uAccruals uEstimated Items uInventory

50. Deferrals uPrepaid Expenses uUnearned revenues

51. Typical Deferred Expenses uSupplies uPrepaid Rent Bookkeeping Approaches u Record transaction as expense u Record transaction as asset

52. Accounting Approach uOriginal debit to expense –Adjusting Entry Debit Prepaid Credit Expense

53. Example: u12/1/x1: Paid 3 month rent in advance, $3,000 uJournal Entry Rent Expense 3,000 Cash3,000

54. Year End - 12/31 u$1,000 has expired = Expense u$2,000 is unexpired = Asset

55. Have on BooksWant on Books Rent Expense 3,000 Rent Expense 1,000 Prepaid Rent 2,000

56. Adjustment Rent Expense 3,000 Prepaid Rent 2,000 Adjusting Entry Prepaid Rent2,000 Rent Expense2,000 1,000

57. Accounting Approach uOriginal debit to Asset –Adjusting Entry Debit Expense Credit Prepaid

58. Example: u12/1/x1: Paid 3 month rent in advance, $3,000 uJournal Entry Prepaid Rent 3,000 Cash3,000

59. Year End - 12/31 u$1,000 has expired = Expense u$2,000 is unexpired = Asset

60. Have on BooksWant on Books Prepaid Rent 3,000 Rent Expense 1,000 Prepaid Rent 2,000

61. Adjustment Prepaid Rent 3,000 Rent Expense 1,000 Adjusting Entry Rent Expense1,000 Prepaid Rent1,000 2,000

62. Unearned Revenues uObligations to perform services for which money has already been received

63. Typical Unearned Revenues uRent Received in Advance uSubscriptions Received in Advance Bookkeeping Approaches u Record transaction as revenue u Record transaction as liability

64. Accounting Approach uOriginal credit to Revenue –Adjusting Entry Debit Revenue Credit Unearned Revenue

65. Example: u12/1/x1: Received 3 month rent in advance, $3,000 uJournal Entry Cash 3,000 Rental Revenue 3,000

66. Year End - 12/31 u$1,000 is earned = Revenue u$2,000 is unearned = Liability

67. Have on BooksWant on Books Rental Revenue 3,000 Rental Revenue 1,000 Rent Received in Advance 2,000

68. Adjustment Rental Revenue 3,000 Rent Received in Advance 2,000 Adjusting Entry Rental Revenue2,000 Rent Rec’d in Adv2,000 1,000

69. Accounting Approach uOriginal credit to Liability –Adjusting Entry Debit Liability Credit Revenue

70. Example: u12/1/x1: Received 3 month rent in advance, $3,000 uJournal Entry Cash3,000 Rent Received in Advance3,000

71. Year End - 12/31 u$1,000 in earned = Revenue u$2,000 is unearned = Liability

72. Have on BooksWant on Books Rent Rec’d in Advance 3,000 Rental Revenue 1,000 Rent Rec’d in Advance 2,000

73. Adjustment Rent Rec’d in Advance 3,000 Rental Revenue 1,000 Adjusting Entry Rent Rec in Adv1,000 Rental Revenue1,000 2,000

74. Accruals uAccrued Expenses –Payables uAccrued Revenues –Receivables

75. Typical Accrued Expenses uSalaries Payable uInterest payable uTaxes Payable

76. Most Common Accrued Revenue uInterest Receivable

77. Typical Estimated Items uDepreciation uBad Debt Expense uPension Expense

78. Inventory Adjustment uClose Beginning Inventory uClose Purchases uInsert Ending Inventory uDifference = Cost of Goods Sold

79. Cost of Goods Sold Beginning Inventory + Purchases Goods available for Sale - Ending Inventory Cost of Goods Sold

80. Example uBeginning Inventory10,000 uPurchases95,000 uEnding Inventory 7,000

81. Cost of Goods Sold Beg Inv 10,000 + Purchases 95,000 Available105,000 - End Inv 7,000 CGS 98,000

82. Have on BooksWant on Books Inventory 10,000 Inventory 7,000 Cost of Goods Sold 98,000 Purchases 95,000

83. Inventory 10,000 Purchases 95,000 CGS

84. Inventory10,000Purchases 95,000 CGS

85. Inventory10,000Purchases 95,000 CGS

86. Inventory10,000Purchases95,000CGS

87. Inventory 10,000 Purchases 95,000 CGS

88. Inventory 10,000 Purchases 95,000 CGS 7,000 7,000

89. Inventory 10,000 Purchases 95,000 CGS 7,000 98,000

90. Inventory 10,000 Purchases 95,000 CGS Inventory10,000 Account DebitCredit

91. InventoryPurchases95,000CGS Inventory10,000 Purchases95,000 Account DebitCredit

92. InventoryPurchasesCGS Inventory10,000 Purchases95,000 7,000 Inventory 7,000 Cost of Goods Sold 98,000 Account DebitCredit

93. InventoryPurchasesCGS Inventory10,000 Purchases95,000 10,000 Inventory 7,000 Cost of Goods Sold 98,000 10,000 7,000 95,000 7,000 95,000 98,000 Account DebitCredit

94. Balance Sheet Assets Liabilities Equity Closing the Books The only thing left Permanent Accounts

95. Income Statement R/E EB Statement of Owner’s Equity R/E BB + Net Income - Dividends Revenue + Gains - Expenses -Losses Net Income TemporaryTemporary

96. Income Statement R/E EB Statement of Owner’s Equity R/E BB + Net Income - Dividends Revenue + Gains - Expenses -Losses Net Income Close to R/E

97. Closing uClose all income statement accounts to the Income Summary uClose Income Summary to R/E uClose Dividends to R/E

98. Adjusted Trial Balance Debits Current Assets 40,000 Investments 15,000 Plant Assets 90,000 Dividends 2,000 CGS 45,000 Adm Expenses 11,000 Selling Expense14,000 Interest Expense 4,000 Total221,000 Credits Current Liabs 15,000 Long Term Liabs 65,000 Common Stock 27,000 Retained Earnings 6,000 Net Sales 100,000 Interest Revenue 8,000 Total 221,000

99. Close Income Statement Accounts DebitCredit Net Sales Net Sales 100,000 100,000 Interest Revenue 8,000 8,000 CGS 45,000 Admin Expenses 11,000 11,000 Selling Expense 14,000 14,000 Interest Expense Interest Expense 4,000 4,000 Income Summary 34,000 34,000

100. Close Income Summary Account DebitCredit Income Summary Income Summary 34,000 34,000 Retained Earnings 34,000 34,000

101. Close Dividends DebitCredit Retained Earnings Retained Earnings 2,000 2,000 Dividends

102. Income Summary 34,000 38,000 Retained Earnings 6,000 34,000 0 Dividends 2,000 38,000

103. Reversing Entries  Reverse certain adjusting entries  Dated: Beginning of next accounting period  Facilitate the bookkeeping process

104. What entries to reverse?  All Accruals  Those deferrals that increased balance sheet accounts –i.e., returns amounts to expense & revenue accounts

105. Accrual Example  Salaries are $1,000/day. The year ended on Tuesday. Salaries are paid each Monday for the previous week.  Year end adjustment (for 2 days) Salary Expense2,000 Salaries Payable2,000

106. Accounting Approaches  Make reversing entry  Don’t make reversing entry

107. Payment of the Salaries: Assume no reversing entry is made  When the salaries are paid the following Monday Salaries Payable2,000 Salary Expense3,000 Cash 5,000

108. Salary ExpenseSalaries Payable 2,000 At year end Adjusting Entry

109. Salary ExpenseSalaries Payable 2,000 Closing Entry

110. Salary ExpenseSalaries Payable 2,000 Beginning of next accounting period

111. Salary ExpenseSalaries Payable 2,0003,0002,000 Pay Salaries

112. Salary ExpenseSalaries Payable 3,000 Account balances after payment

113. Assume instead: The following reversing entry was made Salaries Payable2,000 Salary Expense2,000

114. Payment of the Salaries When the salaries are paid the following Monday Salary Expense5,000 Cash 5,000

115. Salary ExpenseSalaries Payable 2,000 At year end Adjusting Entry

116. Salary ExpenseSalaries Payable 2,000 Closing Entry

117. Salary ExpenseSalaries Payable 2,000 Beginning of next accounting period Reversing Entry

118. Salary ExpenseSalaries Payable 2,000 3,000 5,000 Pay Salaries End result is the same

119. Deferrals Adjusting Entry Increases Asset or Liability Reverse Adjusting Entry Decreases Asset or Liability Don’t Reverse

120. Deferrals: Example - Deferred Expenses Original = Debit to Expense Adjusting Entry Debit Prepaid Credit Expense –Reverse Original = Debit to Asset Adjusting Entry Debit Expense Credit Prepaid –Don’t Reverse

121. Example:  12/1/x1: Paid 3 month rent in advance, $3,000  Original entry to expense  Journal Entry Rent Expense 3,000 Cash3,000

122. Adjustment Adjusting Entry Prepaid Rent2,000 Rent Expense2,000 Rent Expense 3,000 Prepaid Rent 2,000 1,000

123. Year End Balances Closing Entry Rent Expense 1,000 Prepaid Rent 2,000 1,000

124. Beginning of Next Year Reversing Entry Rent ExpensePrepaid Rent 2,000

125. Example:  12/1/x1: Paid 3 month rent in advance, $3,000  Original entry to asset  Journal Entry Prepaid 3,000 Cash3,000

126. Adjustment Adjusting Entry Rent Expense1,000 Prepaid Rent1,000 Prepaid 3,000 Rent Expense 1,000 2,000

127. Year End Balances Closing Entry Rent Expense 1,000 Prepaid Rent 2,000 1,000

128. Beginning of Next Year Don’t Reverse Rent ExpensePrepaid Rent 2,000

129. Exercise Given: Adjusting Entries Determine whether each AJE relates to –Accrual (A) – Deferral (D) If a deferral, Did the entry Increase a Balance Sheet Account? Reverse AJE?

130. SALARY EXPENSE SALARIES PAYABLE Accrual (A)or Deferral (D) Reverse?YesorNo

131. SUPPLIES EXPENSE SUPPLIES Accrual (A)or Deferral (D) Increase Balance Sheet Account? YesorNo Reverse?YesorNo

132. SUPPLIES SUPPLIES EXPENSE Accrual (A)or Deferral (D) Increase Balance Sheet Account? YesorNo Reverse?YesorNo

133. INTEREST EXPENSE INTEREST PAYABLE Accrual (A)or Deferral (D) Reverse?YesorNo

134. RENT RECEIVED IN ADVANCE RENTAL REVENUE Accrual (A)or Deferral (D) Increase Balance Sheet Account? YesorNo Reverse?YesorNo

135. RENTAL REVENUE RENT RECEIVED IN ADVANCE Accrual (A)or Deferral (D) Increase Balance Sheet Account? YesorNo Reverse?YesorNo

136. Other Adjusting Entries  Estimated Items  Cost of Goods Sold  Should they be reversed? NEVER

137. DEPRECIATION EXPENSE ACCUMULATED DEPRECIATION Reverse?YesorNo Estimated Item Never Reverse

138. INVENTORY COST OF GOODS SOLD PURCHASES Reverse?YesorNo Cost of Goods Sold Never Reverse