Upload
raymond-roberts
View
47
Download
6
Tags:
Embed Size (px)
DESCRIPTION
Accounting Schoolwork
Citation preview
Recognition: formally
recording an item in
the financial statements
of an entity
Recognition and Measurement
I know I
need to
record
this...
Measurement:
quantification of the
economic effects of
the item on the entity
...but at
current value
or historical
cost?
Cash vs. Accrual Basis
Cash basis: revenues and expenses are
recorded only when cash is received or paid
Accrual basis: revenues are recognized when
earned; expenses are recognized when incurred
Cash basis
statement
Accrual basis
statement
Statement of
Cash Flows
Cash flows from
operating activities:
$(4,000)
Income
Statement
Net income:
$ 7,000
What accounts for
the difference?
Revenue Recognition Principle
Exceptions:
Long-term contracts
Franchises
Commodities
Installment sales
Rent and interest
Revenue is recognized when realized and
earnedusually at point of sale
Expense Recognition
Income Statement
PP&E
Intangibles
as used
Balance Sheet
when sold
over period they
provide benefits
ASSETS: EXPENSES:
Cost of goods sold
Supplies expense
Insurance expense
Rent expense
Depreciation expense
Amortization expense
Other expenses
(as incurred)
Inventory
Supplies
Prepaid assets
Matching Principle
Directly
e.g., Inventory e.g., Buildings e.g., Utilities
Match expenses with associated revenues
Indirectly over
period they
provide benefits
Simultaneously
upon their
acquisition
Types of Adjusting Entries
RECOGNIZE
REVENUE OR
EXPENSES
BEFORE OR
AFTER CASH IS
EXCHANGED
Deferred
expense
Accrued
liability
Accrued
asset
Deferred
revenue
Deferred ExpenseCash paid before expense is incurred
Examples: Prepaid rent
Prepaid insurance
Office supplies
Property and equipment
Costs are initially recorded as assets and allocated to
expenses in future periods
Prepay rent on office space for one year on September 1
Initial journal entry:
9/1 Prepaid Rent 2,400
Cash 2,400
Monthly adjusting journal entry:
9/30 Rent Expense 200
Prepaid Rent 200
($2,400 annual 1/12 = $200 per month for 12 months)
Deferred Expense Example #1
Deferred Expense Example #2
Initial journal entry:
1/1 Store fixtures 5,000
Cash 5,000
Monthly adjusting journal entry:
1/31 Depreciation Expense 75 Accumulated Depreciation 75
($5,000 $500) 1/60 = $75 per month for 60 months)
Purchase new store fixtures on January 1 for $5,000.
Estimated useful life is 5 years (60 months); estimated
salvage value is $500
Deferred Revenue Cash received before revenue is earned
Examples:
Insurance collected in advance
Subscriptions collected in advance
Gift certificates
Receipts are initially recorded as liabilities (unearned
or refundable receipts) and recorded as revenues in
future periods when earned
Deferred Revenue Example
Received $2,400 for an insurance policy in advance on
September 1
Initial journal entry:
9/1 Cash 2,400
Insurance Collected in Advance 2,400
Monthly adjusting journal entry:
9/30 Insurance Collected in Advance 200
Rent Revenue 200
($2,400 annual 1/12 = $200 per month for 12 months)
Accrued Liability Expense incurred before cash is paid
Examples:
Payroll
Taxes
Interest
Record expense (and corresponding liability) in period incurred; pay for it in a future period
No cash flow on recording, only when paid
Accrued Liability Example #1
At end of month, between pay periods:
Wages Expense 40,000
Wages Payable 40,000
Next payday:
Wages Payable 40,000
Wages Expense 240,000
Cash 280,000
Pay biweekly wages of $280,000
Accrued Liability Example #2
Initial journal entry:
3/1 Cash 20,000Note Payable 20,000
Monthly adjusting journal entry:
3/31 Interest Expense 150
Interest Payable 150
($20,000 principal 9% 3/12 = $450 for 3months or $450/3 = $150 per month)
On March 1, assume a 9%, 90-day, $20,000
loan is taken out with a bank
Accrued Asset Revenue earned before cash is received
Examples:
Rent
Interest
Record revenue (and corresponding receivable) in
period earned; receive payment in a future period
Accrued Asset Example
First day of the month:
Rent Receivable 2,500
Rent Revenue 2,500
Upon receipt of cash:
Cash 2,500
Rent Receivable 2,500
Rent payment of $2,500 due within first 10
days of month
Steps in the Accounting Cycle
1. Collect and
analyze info2. Journalize
transactions
3. Post
transactions to
general ledger
4. Prepare
work sheet
5. Prepare
financial
statements
6. Record and
post adjusting
entries
7. Close the
accounts
RevenuesNormal
balance
Nominal Accounts
Expenses
Normal
balance
DividendsNormal
balance
$ XX $ XX
$ XX
Zero out
nominal accounts
to start accumulation
of next periods
results
Close to
Income
Summary
$ XX
Close to
Income
Summary
$ XX
Close to
Retained
Earnings
$ XX
Closing Entries
(Net loss) or net income
closed to Retained Earnings
Income Summary$XX
from revenue
accounts
$XX
from expense
accounts
Accounting Tools:
Work Sheets
Unadjusted Trial Balance ColumnsBegin by filling in the trial balance accounts
and amounts
The Adjusting Entries Columns
Make adjustments;
formal journal entries
are prepared later
Adjusted Trial Balance Columns
The Income Statement Columns
Extend revenue and
expense account balances
to the income statement
The Balance Sheet Columns
Extend asset, liability,
and equity accounts to
the balance sheet