ACC 301 ch03

nullReview of a Company’s Accounting SystemReview of a Company’s Accounting SystemChapter3COPYRIGHT © 2010 South-Western/Cengage Learning Intermediate Accounting 11th edition Nikolai Bazley JonesAn electronic presentation By Norman Sunderman and Kenneth Buchanan Angelo State UniversityObjectives*Understand the components of an accounting system. Know the major steps in the accounting cycle. Prepare journal entries in the general journal. Post to the general ledger and prepare a trial balance. Prepare adjusting entries. Prepare financial statements.ObjectivesObjectives*ObjectivesPrepare closing entries. Complete a worksheet (spreadsheet). Prepare reversing entries Use subsidiary ledgers. Understand special journals. Convert cash-basis financial statements to accrual-basis (Appendix).Accounting Equation*Accounting EquationAssets= +LiabilitiesStockholder’s EquityAccounting Equation*AssetsAccounting EquationAssets are the corporation’s economic resources and have future value.Accounting Equation*= LiabilitiesDebtsAccounting EquationLiabilities are obligations or debts. A liability is a present obligation for a future sacrifice as a result of a past transaction.Accounting Equation*+ Stockholders’ EquityNet WorthAccounting EquationStockholders’ equity is the residual interest in assets or net worth, which is assets minus liabilities.Interrelated Accounting Equations*Assets = Liabilities + Stockholders’ EquityInterrelated Accounting EquationsRevenues*RevenuesRevenues are charges to customers for goods or services provided.Expenses*ExpensesExpenses are assets that have expired, been consumed, or become cost of goods sold and have no future value.Accounts*TitleAccount titleAccountsAccounts*TitleDebit“Debit” refers to the left side.AccountsAccounts*TitleDebitCreditCredit refers to the right side.AccountsAccounts*In the double-entry system, for each transaction that a company records, the total dollar amount of the debits entered in all the related accounts must equal the total dollar amount of the credits.AccountsAccounts*Permanent (Real) Accounts Assets = Liabilities + Stockholders’ EquityAsset Accounts (debit) (credit) Increase DecreaseLiability Accounts (debit) (credit) Decrease IncreaseCapital Stock Accounts (debit) (credit) Decrease Increase Retained Earnings (debit) (credit) Decrease IncreaseAccountsThe debits must equal the creditsAccounts*Temporary (Nominal) AccountsRevenue Accounts (debit) (credit) Decrease Increase Expense Accounts (debit) (credit) Increase Decrease Retained Earnings (debit) (credit) Decrease Increase Dividend Accounts (debit) (credit) Increase DecreaseAccountsFinancial Statements*Income Statement—Summarizes the results of a company’s income-producing activities for the accounting period. Balance Sheet—Summarizes the amounts of a company’s assets, liabilities, and stockholders’ equity at the end of the accounting period. Statement of Cash Flows—Summarizes a company’s cash receipts and cash payments during the accounting period.Financial StatementsThe Accounting Cycle*Record the daily transactions in a journal Post the journal entries to the accounts in the ledger Prepare and post adjusting entries Prepare the financial statements Prepare and post closing entries for revenue, expense, and dividend accountsThe Accounting Cyclenull*Comprehensive Illustration for Dapple CorporationStep 1: Journalizing: Recording in the General Journalnull*GENERAL JOURNALOn January 1, 2010, various stockholders invest in Dapple by purchasing 2,000 shares of no-par stock at $10 per share. Date Account Titles and Explanations Debit Creditnull*GENERAL JOURNAL Date Account Titles and Explanations Debit CreditOn January 16, Dapple purchases two acres of land as a building site, paying $1,500 an acre. 16 Land 3,000 Cash 3,000 Purchased 2 acres of land at $1,500 per acre. null*Comprehensive Illustration for Dapple CorporationStep 2: Posting to the Ledgernull*GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 16 Land 3,000 Cash 3,000 Purchased 2 acres of land at $1,500 per acre. null*GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 16 Land 3,000 Cash 3,000 Purchased 2 acres of land at $1,500 per acre. null*After posting, the general ledger accounts contain the same information as in the general journal, just in a different format.Ledger T Account*Cash1/1 20,000 1/16 3,000 4/2 8,000 3/30 10,840 12/1 450 3/30 360 12/2 2,000 4/8 7,300 7/15 3,300 10/1 1,800 12/28 428 12/29 500 Ledger T AccountThe balance of each permanent account is calculated.Determine the account balance.null*After the journal entries are posted for the accounting period, a trial balance is often prepared.null*The trial balance is used to verify that the total of the debit balances is equal to the total of the credit balances.DebitsCreditsnull*Comprehensive Illustration for Dapple CorporationStep 3: Preparation of Adjusting EntriesAdjusting Entries*Adjusting EntriesThe purpose of adjusting entries is to record revenues and expenses in the correct period Dated the last day of the accounting periodnull*On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.Prepaid Expensenull*GENERAL JOURNAL Date Account Titles and Explanations Debit CreditMar. 30 Prepaid Insurance 360 Cash 360 Purchased a 1-year comprehensive insurance policy.On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.null*GENERAL JOURNAL Date Account Titles and Explanations Debit CreditAdjusting EntriesDec. 31 Insurance Expense 270 Prepaid Insurance 270 To record expiration of 9 months of insurance coverage purchased on March 30. By December 31, nine months of the policy had expired.Adjusting Entries*3/30 360Prepaid Insurance12/31 Adj. 27012/31 Adj. 270Insurance Expense By December 31, nine months of the policy had expired.Adjusting Entriesnull*On December 1, Dapple Corporation received $450 for three months’ rent in advance. Deferred Revenuenull*GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Dec. 1 Cash 450 Unearned Rent 450 Received 3 months’ rent in advance at $150 per month. Company owes use of portion of building to Fritz Company for the 3-month period. On December 1, Dapple Corporation received $450 for three months’ rent in advance. null*GENERAL JOURNAL Date Account Titles and Explanations Debit CreditAdjusting EntriesDec. 31 Insurance Expense 270 Prepaid Insurance 270 To record expiration of 9 months of insurance coverage purchased on March 30. 31 Unearned Rent 150 Rent Revenue 150 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.Adjusting Entries*12/31 Adj. 150Unearned Rent 12/1 45012/31 Adj. 150Rent Revenue This entry is posted to the ledger.Adjusting Entriesnull*On December 31, Dapple Corporation has accrued salaries of $900.Entries must be journalized before they are posted. Adjusting Entries*10/1 1,800Salaries Expense12/31 Adj. 900Salaries Payable Next, the adjusting entry is posted. 12/31 Adj. 900Adjusting Entriesnull*On September 1, Dapple Corporation accepted a $1,320, 15% note as payment when it sold an acre of land.Accrual of Interest Revenuenull*GENERAL JOURNAL Date Account Titles and Explanations Debit CreditAdjusting Entries Sept. 1 Notes Receivable 1,320 Loss on Sale of Land 180 Land 1,500 Sold 1 acre of land at less than its 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.Adjusting Entries*Interest Receivable12/31 Adj. 66Interest Revenue 12/31 Adj. 66By December 31, the company has earned 4 months of interest totaling $66 ($1,320 × 0.15 × 4/12). Adjusting EntriesRemaining Adjusting Entries*Remaining Adjusting Entriesnull*GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Dec. 1 Cash 450 Rent Revenue 450 31 Rent Revenue 300 Unearned Rent 300 Adjusting entry using alternative method of recording deferred revenue.Some companies may record the receipt of revenue in advance as revenues instead of unearned revenues.At Dec. 31, some of the revenue has still not been earned and an adjusting entry must be made.null*GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Mar. 30 Insurance Expense 360 Cash 360 Purchased a 1-year comprehensive insurance policy. Dec. 31 Prepaid Insurance 90 Insurance Expense 90Prepaid expenses may be recorded as expenses and the unused portion adjusted at year end.null*Comprehensive Illustration for Dapple CorporationStep 4: Preparation of the Financial StatementsPreparation of the Financial Statements*If necessary, recompute the balance of each account in the ledger. Prepare an adjusted trial balance to verify that debits equal credits. Prepare an income statement. Prepare a statement of retained earnings. Prepare a balance sheet.Preparation of the Financial StatementsIncome Statement*Income StatementRetained Earnings Statement*Retained Earnings StatementBalance Sheet*Balance Sheetnull*Comprehensive Illustration for Dapple CorporationStep 5: Preparation of Closing Entriesnull*Closing entries (1) reduce the balance in each temporary account to zero, and...…(2) update the retained earnings and inventory accounts.Typical Order of Closing Entries*Close temporary accounts with credit balances to Income Summary and record the ending inventory. Close temporary accounts with debit balances to Income Summary and close the beginning inventory. Close Income Summary to Retained Earnings. Close Dividends Distributed to Retained Earnings. Typical Order of Closing Entriesnull*The following slide shows how the closing entries “closed” the temporary accounts.Closing EntriesClosing Entries*Closing EntriesSales Returns*Sales ReturnsSales Returns and Allowances 500 Accounts Receivable 500 OR debit Sales directly Sales 500 Accounts Receivable 500Periodic Inventory System*Periodic Inventory SystemWorksheet*A worksheet is prepared to facilitate preparing adjusting entries, closing entries, and the financial statements.WorksheetGeneral Guidelines for Reversing Entries*Adjusting entries that create accrued revenues or expenses to be collected or paid in the next accounting period Adjusting entries related to prepayments of costs initially recorded as expenses or receipts-in-advance initially recorded as revenuesReversing entries should be made for any adjusting entry that creates a new balance sheet account as follows:General Guidelines for Reversing EntriesGeneral Guidelines for Reversing Entries*Adjusting entries related to prepayments of costs initially recorded as assets or receipts-in-advance initially recorded as liabilities Adjusting entries related to estimated items such as depreciation or bad debtsReversing entries should not be made for:REVERSING ENTRYGeneral Guidelines for Reversing EntriesReversing Accrued Revenues*Reversing Accrued RevenuesReversing Accrued Expenses*Reversing Accrued ExpensesSubsidiary Ledgers*Why use a subsidiary ledger?To reduce the size of the general ledger To minimize errors To divide the accounting task To keep up-to-date records of its credit customers and suppliersSubsidiary LedgersSubsidiary Ledgers*Subsidiary LedgersSpecial Journals*Sales Journal. Used to record all (and only) sales of merchandise on credit. Purchases Journal. Used to record all (and only) purchases of merchandise on credit. 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.Special JournalsAppendix: Cash-Basis Accounting*Cash-basis accounting is used by small retail stores and professionals such as dentists, doctors, and architects.Appendix: Cash-Basis AccountingAppendix: Cash-Basis Accounting*Under cash-basis accounting, a company records revenues when cash is collected and records expenses when cash is paid.Appendix: Cash-Basis AccountingAppendix: Cash-Basis Accounting*Cash BasisCollections from customers= Sales revenuePayments to suppliers= Cost of goods soldPayments for other operating costs= Operating expenses (except depreciation)Appendix: Cash-Basis Accountingnull* Chapter3Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.