1. 1 Review of the Accounting Process A ppendix C

2. 2 1.Understand the components of an accounting cycle. 2. Know the major steps in the accounting cycle. 3. Prepare journal entries in the general journal. 4.Post to the general ledger and prepare a trial balance. 5.Prepare adjusting entries. Objectives ContinuedContinued

3. 3 6.Prepare financial statements. 7.Prepare closing entries. 8. Complete a worksheet. 9.Understand subsidiary ledgers. 10.Use special journals. 11.Convert cash-basis financial statements to accrual-basis. Objectives

4. 4 Accounting Equation Assets

5. 5 = Liabilities Debt Summary

6. 6 Accounting Equation + Stockholders’ Equity Net Worth

7. 7 Interrelated Accounting Equations Assets = Liabilities + Stockholders’ Equity Stockholders’ Equity = Contributed Capital + Retained Earnings Retained Earnings = Beginning Retained Earnings + Net Income – Dividends Net Income = Revenues – Expenses

8. 8 Accounts Title Account title.

9. 9 Accounts Title

10. 10 Title Accounts Debit “Debit” refers to the left side.

11. 11 Accounts Title DebitCredit Credit refers to the right side.

12. 12 Accounts In the double-entry system, for each transaction that a company records, the total dollar amount of the debits must equal the total dollar amount of the credits.

13. 13 Accounts Permanent Accounts Assets = Liabilities + Stockholders’ Equity Asset Accounts (debit) (credit) Increase Decrease Liability Accounts (debit) (credit) Decrease Increase Capital Stock Accounts (debit) (credit) Decrease Increase Retained Earnings. (debit) (credit) Decrease Increase

14. 14 Accounts Temporary Accounts Revenue Accounts (debit) (credit) Decrease Increase Expense Accounts (debit) (credit) Increase Decrease Retained Earnings. (debit) (credit) Decrease Increase Dividend Accounts (debit) (credit) Increase Decrease

15. 15 Financial Statements The Income Statement—This statement summarizes the results of a company’s income- producing activities for an accounting period. The Balance Sheet—The balance sheet summarizes the amounts of a company’s assets, liabilities, and stockholders’ equity on a particular date. The Statement of Cash Flows—The SCF summarizes a company’s cash receipts and cash payments during the accounting period. The Income Statement—This statement summarizes the results of a company’s income- producing activities for an accounting period. The Balance Sheet—The balance sheet summarizes the amounts of a company’s assets, liabilities, and stockholders’ equity on a particular date. The Statement of Cash Flows—The SCF summarizes a company’s cash receipts and cash payments during the accounting period.

16. 16 The Accounting Cycle Step 1: Record daily transactions in a journal. Step 2:Post the journal entries to the accounts in the ledger. Step 3:Prepare and post adjusting entries. Step 4:Prepare the financial statements. Step 5:Prepare and post closing entries for revenue, expense, and dividend accounts.

17. 17 Comprehensive Illustration for Dapple Corporation Step 1: Recording in the General Journal

18. 18 GENERAL JOURNAL On January 1, 2004 various stockholders invest in Dapple by purchasing 2,000 shares of no-par stock at $10 per share. Date Account Titles and Explanations Debit Credit 2004 Jan. 1Cash20,000 Capital Stock20,000 Issued 2,000 shares of no-par stock at $10 per share

19. 19 GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 2001 Jan. 1Cash20,000 Capital Stock20,000 Issued 2,000 shares of no-par stock at $10 per share On January 16, Dapple purchases two acres of land as a building site, paying $1,500 an acre. 16Land3,000 Cash3,000 Purchased 2 acres of land at $1,500 per acre.

20. 20 Use the data in Exhibit C-3 to make general journal entries, then compare your work with Exhibit C-4.

21. 21 Comprehensive Illustration for Dapple Corporation Step 2: Posting to the Ledger

22. 22 GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 2004 Jan. 1Cash20,000 Capital Stock20,000 Issued 2,000 shares of no-par stock at $10 per share 16Land3,000 Cash3,000 Purchased 2 acres of land at $1,500 per acre. Cash 01/01 20,000 Capital Stock 01/01 20,000

23. 23 GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 2004 Jan. 1Cash20,000 Capital Stock20,000 Issued 2,000 shares of no-par stock at $10 per share 16Land3,000 Cash3,000 Purchased 2 acres of land at $1,500 per acre. Cash 01/01 20,000 01/16 3,000 Land 01/16 3,000

24. 24 After posting, the general ledger accounts contain the same information as in the general journal, just in a different format.

25. 25 Cash 01/0120,00001/163,000 04/038,00003/3010,840 04/2016003/30360 12/0145004/087,300 12/021,96004/15250 07/153,300 10/011,800 12/28428 12/29500 Determine the account balance. Balance2,792 The balance of each permanent account is calculated (see Exhibit C-5).

26. 26 After the journal entries are posted for the accounting period, a trial balance is often prepared.

27. 27 The trial balance is used to verify that the total of the debit balances is equal to the total of the credit balances. Debits Credits

28. 28 Comprehensive Illustration for Dapple Corporation Step 3: Preparation of Adjusting Entries

29. 29 On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.

30. 30 GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 2004 Jan. 1Cash20,000 Capital Stock20,000 Issued 2,000 shares of no-par stock at $10 per share 30Prepaid Insurance360 Cash360 Purchased a 1-year comprehen- sive insurance policy. On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.

31. 31 GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Adjusting Entries By December 31, nine months of the policy had expired. By December 31, nine months of the policy had expired. Dec. 31Insurance Expense270 Prepaid Insurance270 To record expiration of 9 months of insurance coverage purchased. 2004

32. 32 03/30 360 Prepaid Insurance 12/31 Adj. 270 Insurance Expense By December 31, nine months of the policy had expired. By December 31, nine months of the policy had expired. Balance 90

33. 33 On December 1, Dapple Corporation received $450 for 3 months’ rent in advance. For Rent

34. 34 GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 2001 Jan. 1Cash20,000 Capital Stock20,000 Issued 2,000 shares of no-par stock at $10 per share Dec. 1Cash450 Unearned Rent450 Received 3-months’ rent in ad- vance at $150 per month. The company owes use of portion of building to Fritz Company for the 3-month period. On December 1, Dapple Corporation received $450 for 3 months’ rent in advance.

35. 35 GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Adjusting Entries Dec. 31Insurance Expense270 Prepaid Insurance270 To record expiration of 9 months of insurance coverage purchased. 31Unearned Rent150 Rent Revenue150 To record earning of 1 month of rent revenue from receipt collected in advance on December 1. By December 31, one month’s rent ($450 ÷ 3 = $150) has been earned. By December 31, one month’s rent ($450 ÷ 3 = $150) has been earned.

36. 36 12/31 Adj. 150 Unearned Rent 12/01450 12/31 Adj.150 Rent Revenue This entry is posted to the ledger. This entry is posted to the ledger. Balance 300

37. 37 On December 31, Dapple Corporation has accrued salaries of $900. Entries must be journalized before they are posted. Examine the accrued salaries journal entry in Exhibit C-6.

38. 38 10/021,800 Salaries Expense 12/31 Adj.900 Salaries Payable Next, the adjusting entry is posted. Next, the adjusting entry is posted. 12/31 Adj.900

39. 39 On September 1, Dapple Corporation accepted a $1,320, 15% note as payment when it sold an acre of land.

40. 40 GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Adjusting Entries Sept. 1Notes Receivable1,320 Loss on Sale of Land180 Land1,500 Sold 1 acre of land at less than it cost, incurring a loss. Buyer issued a note due in 6 months and bearing 15% annual interest. On September 1, Dapple Corporation accepted a $1,320, 15% note as payment when it sold an acre of land.

41. 41 Interest Receivable 12/31 Adj. 66 Interest Revenue 12/31 Adj.66 Refer to Exhibit C-6 for the journalized adjusting entry. By December 31, the company has earned 4 months of interest totaling $66 ($1,320 x 0.15 x 4/12).

42. 42 Examine the remaining adjusting entries in Exhibit C-6. Then, refer to Exhibit C-5 to see their impact on the ledger.

43. 43 Comprehensive Illustration for Dapple Corporation Step 4: Preparation of Financial Statements

44. 44 Steps 4 Procedures 1.If necessary, recompute the balance of each account in the ledger. 2.Prepare an adjusted trial balance to test that debits equal credits. 3.Prepare an income statement. 4.Prepare a statement of retained earnings. 5.Prepare a balance sheet.

45. 45 The completed financial statements for Dapple Corporation are found in Exhibits C-8 through C- 10.

46. 46 Comprehensive Illustration for Dapple Corporation Step 5: Preparation of Closing Entries

47. 47 Closing entries (1) reduce the balance in each temporary account to zero, and... …(2) update the retained earnings and inventory accounts.

48. 48 Typical Order of Closing Entries (1)Close temporary accounts with credit balances to Income Summary and record the ending inventory. (2)Close temporary accounts with debit balances to Income Summary and close the beginning inventory. (3)Close Income Summary to Retained Earnings. (4)Close Dividends Distributed to Retained Earnings.

49. 49 Dapple Corporation’s closing entries are illustrated in Exhibit C-11. Note how the entries follow the four steps listed in Slide 48. Refer again to Exhibit C- 5 to see how the closing entries “closed” the temporary accounts.

50. 50 General Guidelines for Reversing Entries 1.Adjusting entries that establish accrued revenues or expenses to be collected or paid in the next accounting period. 2.Adjusting entries related to prepayments of costs initially recorded as expenses or receipts- in-advance initially recorded as revenues. 1.Adjusting entries that establish accrued revenues or expenses to be collected or paid in the next accounting period. 2.Adjusting entries related to prepayments of costs initially recorded as expenses or receipts- in-advance initially recorded as revenues. Reversing entries should be made for any adjusting entry that establishes a new balance sheet account, as follows:

51. 51 General Guidelines for Reversing Entries 1.Adjusting entries related to prepayments of costs initially recorded as assets or receipts- in-advance initially recorded as liabilities. 2.Adjusting entries related to estimated items such as depreciation or bad debts. Reversing entries should not be made for: REVERSING ENTRY

52. 52 The Worksheet A worksheet is prepared to facilitate preparing adjusting entries, closing entries, and the financial statements.

53. 53 Subsidiary Ledgers Why use a subsidiary ledger? 1.To reduce the size of the general ledger. 2.To minimize errors. 3.To divide the accounting task. 4.To keep up-to-date records of its dealings with charge customers and suppliers.

54. 54 Subsidiary Ledgers General Ledger Subsidiary Ledger Frank Company Balance3,000 Knox Company Balance4,000 Accounts Receivable Balance7,000

55. 55 Special Journals Sales Journal. Used to record all (and only) sales of merchandise on account. Purchases Journal. Used to record all (and only) purchases of merchandise on account. Cash Receipts Journal. Used to record all cash receipts. Cash Payments Journal. Used to record all cash payments. General Journal. Used to record adjusting, closing, and reversing entries and other transactions not recorded in the special journals.

56. 56 Cash-Basis Accounting Under cash-basis accounting, a company records revenues when cash is collected and records expenses when cash is paid.

57. 57 Cash-Basis Accounting Cash-basis accounting is used by small retail stores and professionals such as dentists, doctors, and architects.

58. 58 Cash-Basis Accounting Cash Basis Collections from customers + Ending accounts receivable – Beginning accounts receivable Sales revenue AdjustmentsAccrual Basis Payments to suppliers Cost of goods sold + Beginning inventory – Ending inventory + Ending accounts payable – Beginning accounts payable Payments for other operating costs Operating expenses (except depreciation) + Beginning prepaid expenses – Ending prepaid expenses + Ending accrued expenses – Beginning accrued expenses

59. 59 The End A ppendix C

60. 60