42510011 0010 1010 1101 0001 0100 1011

AC113 Seminar

Unit 4 – Chapter 3

4251

0011 0010 1010 1101 0001 0100 1011

Basic Accrual Accounting Concepts

• Transactions…– are recorded as they occur. – are recorded even if cash is not paid or

received.– affect the accounting equation (A=L+OE).

4251

0011 0010 1010 1101 0001 0100 1011

Accrual Basis

• Revenue is recognized (recorded) when earned.

• Liabilities are recognized when the obligation is incurred.

4251

0011 0010 1010 1101 0001 0100 1011

Matching Principle

• When revenues are earned and recorded, all expenses incurred in generating the revenues must also be recorded.

• Matching subtracts expenses incurred from revenues earned to arrive at Net Income or Net Loss.

4251

0011 0010 1010 1101 0001 0100 1011

The Adjustment Process

• Necessary to match revenues and expenses – application of the matching concept.

• Completes the information necessary for financial statement preparation.

4251

0011 0010 1010 1101 0001 0100 1011

Deferrals

• Created by recording a transaction in a way that delays the recognition of an expense or a revenue.

• Examples:– Prepaid/deferred expenses– Unearned/deferred revenues

4251

0011 0010 1010 1101 0001 0100 1011

Accruals

• Created when a revenue or expense has been earned or incurred, but has not been recorded at the end of an accounting period.

• Examples:– Accrued expenses/liabilities– Accrued revenues/assets

4251

0011 0010 1010 1101 0001 0100 1011

Deferrals and Accruals

4251

0011 0010 1010 1101 0001 0100 1011

Accrual Basis Accounting

• Enhances interpretation of financial statements by following a standard set of rules (GAAP) for recording and reporting.

• Is a better predictor of long-term profitability.

• Required for publicly held corporations.

4251

0011 0010 1010 1101 0001 0100 1011

Cash Basis Accounting

• Transactions are recorded when cash is paid or received.

• Used by individuals and small businesses.

4251

0011 0010 1010 1101 0001 0100 1011

Accrual Accounting Uses the Accounting Cycle

• Basic steps of the accounting cycle:– Identifying, analyzing, and recording the effects

of transactions on the accounting equation.– Identifying, analyzing, and recording

adjustment data.– Preparing financial statements.

4251

0011 0010 1010 1101 0001 0100 1011

Adjustments: Exercise 3-8, pg. 112

• Given: The balance in the supplies account, before adjustment at the end of the year, is $1,850. What is the amount of the adjustment if the amount of supplies on hand at the end of the year is $675?

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-8, pg. 112 (cont.)

• When we purchase supplies, our supplies account increases. The problem tells us that the balance in the account is $1,850. However, a physical inventory of supplies reveals that only $675 worth of supplies are still on hand.

• What does this mean?

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-8, pg. 112 (cont.)

• The $675 of supplies still on hand are the supplies that have not been used.

• The difference between the $1,850 balance and the $675 still on hand is $1,175.

• What do you think might have happened to the $1,175 worth of supplies???

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-8, pg. 112 (cont.)

• They were used in the business!

• So, our adjustment will be to move $1,175 out of supplies (asset) and into supplies expense.

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-8, pg. 112 (cont.)

• Part B, Given: The supplies account has a balance of $380, and the supplies expense account has a balance of $1,560 at December 31, 2009. If 2009 was the first year of operations, what was the amount of supplies purchased during the year?

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-8, pg. 112 (cont.)

Basic Formula

Beginning Inventory

+ Purchases

Supplies available for use

- Ending inventory

Supplies used during the year

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-8, pg. 112 (cont.)

Fill in the blanks

$0 (because this is the first year of operations)

+ ??????? (this is the number we are looking for)

Supplies available for use

- $380

$1,560

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-8, pg. 112 (cont.)

$1,560 + $380 = $1,940 – supplies available for use.

Because we started with a beginning inventory of $0, the $1,940 must have been purchased during the current accounting period.

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115

Here we are asked to prepare a classified balance sheet.

Let’s revisit a balance sheet.

What type of items do we include on a balance sheet?

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

Assets = Liabilities + Stockholders’ Equity

Now, what might a classified balance sheet mean?

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

A classified balance sheet basically means that we will categorize (classify) our accounts into various categories.

What are some of the classifications that we might use on a classified balance sheet?

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

Asset Categories:

Current Assets – assets expected to be converted to cash, sold, or used up in one year or less.

Fixed Assets – long-term physical assets to be used in the business to generate revenue.

Intangible Assets – long-term assets lacking physical substance such as copyrights, patents, trademarks, and brand names.

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

Liabilities:

Current Liabilities – liabilities that will be paid within one year.

Long-Term Liabilities – liabilities that will be paid in longer than one year.

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

Which accounts should we include in the current assets section of our balance sheet?

***Hint: Assets that will turn to cash, be sold, or used up within one year.

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

REDOX CO. Balance Sheet

November 30, 2008

Assets Current assets: Cash .................................................................... $14,400 Accounts receivable .......................................... 17,500 Supplies .............................................................. 1,500 Prepaid insurance .............................................. 5,800 Prepaid rent ........................................................ 3,600 Total current assets $42,800

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

Which accounts should be part of our fixed assets?

How about intangible assets? Do you see any intangible assets in the list?

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

REDOX CO. Balance Sheet

November 30, 2008

Assets Current assets: Cash .................................................................... $14,400 Accounts receivable .......................................... 17,500 Supplies .............................................................. 1,500 Prepaid insurance .............................................. 5,800 Prepaid rent ........................................................ 3,600 Total current assets ...................................... $42,800 Property, plant, and equipment: Equipment ........................................................... $65,000 Less accumulated depreciation ................... 16,800 48,200 Total assets .............................................................. $91,000

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

Which accounts should be part of current liabilities?

How about long-term liabilties?

How about stockholders’ equity?

4251

0011 0010 1010 1101 0001 0100 1011

Exercise 3-29, pg. 115 (cont.)

Liabilities Current liabilities: Accounts payable ............................................... $ 7,600 Salaries payable ................................................. 1,400 Unearned fees ..................................................... 1,000 Total liabilities .......................................................... $10,000

Stockholders’ Equity Capital stock ............................................................ $25,000 Retained earnings .................................................... 56,000 Total stockholders’ equity ................................. 81,000 Total liabilities and stockholders’ equity $91,000

4251

0011 0010 1010 1101 0001 0100 1011

Questions

Does anyone have additional questions?