1. Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Accounting Cycle: End of the Period Chapter 3

2. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-2 Learning Objectives Understand when revenues and expenses are recorded Distinguish between accrual-basis and cash-basis accounting Demonstrate the purposes and recording of adjusting entries Post adjusting entries and prepare an adjusted trial balance

3. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-3 Learning Objectives Prepare financial statements using the adjusted trial balance Demonstrate the purposes and recording of closing entries Post closing entries and prepare a post-closing trial balance

4. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part A Accrual-Basis Accounting 3-4

5. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 1 Understand when revenues and expenses are recorded 3-5

6. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-6 Revenue and Expense Reporting Revenue recognition Recognize revenue when it is earned Expense recognition Expenses are reported with the revenues they help to generate Revenue recognition principle Matching principle

7. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-7 Illustration 3.1—Expense Recognition

8. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 2 Distinguish between accrual-basis and cash-basis accounting 3-8

9. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-9 Accrual-Basis Compared with Cash-Basis Accounting Point of Difference Accrual BasisCash Basis Revenue Recognition When revenue is earned When cash is received Recording Expenses With related revenuesWhen cash is paid GAAPPart of GAAPNot a part of GAAP

10. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-10 Illustration 3.2—Accrual-Basis Revenue versus Cash-Basis Revenue

11. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-11 Illustration 3.3—Accrual-Basis Expense versus Cash-Basis Expense

12. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part B The Measurement Process 3-12

13. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Demonstrate the purposes and recording of adjusting entries 3-13

14. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-14 Illustration 3.4—The Accounting Cycle

15. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-15 Adjusting Entries Prepayments Prepaid expenses Unearned revenues Accruals Accrued expenses Accrued revenues

16. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-16 Purpose of Adjusting Entries To account for transactions that have not been recorded by the end of the period To record revenues in the period earned To record expenses in the period they are incurred to generate those revenues To correctly state assets and liabilities

17. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-17 Prepaid Expenses Cost of assets acquired in one period that will be expensed in a future period

18. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-18 Example: Prepaid Expenses

19. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-19 Unearned Revenues Cash received in advance from a customer for products or services to be provided in the future

20. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-20 Example: Unearned Revenues

21. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-21 Accrued Expenses Company has incurred a cost but hasn’t yet paid cash or recorded an obligation

22. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-22 Example: Accrued Expenses

23. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-23 Accrued Revenues Revenue earned but hasn’t yet received cash or recorded an amount receivable

24. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-24 Example: Accrued Revenues

25. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 4 Post adjusting entries and prepare an adjusted trial balance 3-25

26. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-26 Adjusted Trial Balance Lists all account balances after updating them for adjusting entries Prepared after posting the adjusting entries to the general ledger

27. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-27 Illustration 3.10—Adjusted Trial Balance

28. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part C The Reporting Process: Financial Statements 3-28

29. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 5 Prepare financial statements using the adjusted trial balance 3-29

30. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-30 Illustration 3.11—Relationship between Adjusted Trial Balance and Financial Statements

31. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-31 Illustration 3.12—Income Statement

32. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-32 Illustration 3.13—Statement of Stockholders’ Equity

33. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-33 Illustration 3.14—Classified Balance Sheet

34. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-34 Statement of Cash Flows The final financial statement Measures activities involving cash receipts and cash payments Reflecting a company’s operating, investing, and financing activities.

35. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part D The Closing Process 3-35

36. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 6 Demonstrate the purposes and recording of closing entries 3-36

37. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-37 Closing Entries To transfer the balances of temporary accounts to the Retained Earnings To reduce the balances of these temporary accounts to zero

38. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-38 Illustration 3.15—Closing Entries

39. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 7 Post closing entries and prepare a post-closing trial balance 3-39

40. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-40 Post-Closing Trial Balance Lists all accounts balances after updating for closing entries. Prepared accounts for the next period

41. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-41 Illustration 3.18—Post-Closing Trial Balance

42. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. End of Chapter 3 3-42