Chapter 3 Preparing Financial Statements. 123456789101112 1234 Annually 12 Monthly Quarterly Semiannually The Accounting Period Jan FebMar Apr MayJunJulAugSepOctNovDec

Chapter 3

Preparing Financial Statements

1 2 3 4 5 6 7 8 9 10 11 12

1 2 3 4

Annually

1 2

Monthly

Quarterly

Semiannually

The Accounting Period

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

C 1

Accounting

Accrual Basis vs. Cash Basis

Accrual Basis

Revenues are recognized when

earned and expenses are recognized when

incurred.

Cash Basis

Revenues are recognized when

cash is received and expenses recorded when cash is paid.

Not GAAPNot GAAPNot GAAPNot GAAP

C 1

We have delivered theproduct to our customer,

so I think we should recordthe revenue earned.

We have delivered theproduct to our customer,

so I think we should recordthe revenue earned.

Recognizing Revenues

• Revenue Recognition

C 1

Recognizing Expenses

• Revenue Recognition

• Matching

Summaryof Expenses

Rent

Gasoline

Advertising

Salaries

Utilities

and . . . .

$1,000

500

2,000

3,000

450

. . . .

Now that we haverecognized the revenue,let’s see what expenses

we incurred togenerate that revenue.

Now that we haverecognized the revenue,let’s see what expenses

we incurred togenerate that revenue.

C 1

AdjustmentsAdjustments

An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.

Adjusting Accounts

Paid (or received) cash before expense (or revenue) recognizedPaid (or received) cash before

expense (or revenue) recognizedPaid (or received) cash after

expense (or revenue) recognizedPaid (or received) cash after

expense (or revenue) recognized

Prepaid (Deferred) expenses*

Prepaid (Deferred) expenses*

Unearned (Deferred) revenues

Unearned (Deferred) revenues

AccruedexpenseAccruedexpense

AccruedrevenuesAccruedrevenues

Framework for Adjustments

*including depreciation

C 3

Here is the checkfor my first

6 months’ rent.

Here is the checkfor my first

6 months’ rent.

Prepaid (Deferred) Expenses

Resources paid for prior to

receiving the actual benefits.

Resources paid for prior to

receiving the actual benefits.

Asset Expense

UnadjustedBalance

CreditAdjustment

DebitAdjustment

P1

Prepaid Insurance

On December 1, 2007, Scott Company paid $12,000 to cover rent for December 2007 through May 2008. Scott recorded the expenditure as Prepaid Insurance

on December 1.

What adjustment is required?

On December 1, 2007, Scott Company paid $12,000 to cover rent for December 2007 through May 2008. Scott recorded the expenditure as Prepaid Insurance

on December 1.

What adjustment is required?Dec. 31 Insurance Expense 2,000

Prepaid Insurance 2,000 To record first month's expired insurance

Dec. 1 12,000 Dec. 31 2,000Bal. 10,000

Prepaid Insurance 637

Dec. 31 2,000Insurance Expense 128

P1

Supplies

During 2007, Scott Company purchased $15,500 of supplies. Scott recorded the expenditures as

Supplies. On December 31, a count of the supplies indicated $2,655 on hand.


During 2007, Scott Company purchased $15,500 of supplies. Scott recorded the expenditures as

Supplies. On December 31, a count of the supplies indicated $2,655 on hand.


Dec. 31 Supplies Expense 12,845 Supplies 12,845

To record supplies used during 2007

Bought 15,500 Dec. 31 12,845Bal. 2,655

Supplies 126Dec. 31 12,845

Supplies Expense 652

P1

Straight-LineDepreciationExpense

= Asset Cost - Salvage Value

Useful Life

Depreciation

Depreciation is the process of computing expense from allocating the cost of plant and equipment

over their expected useful lives.

P1

Buy your season tickets forall home basketball games NOW!

““Go Big Blue”Go Big Blue”

Unearned (Deferred) Revenues

Cash received in advance of providing

products or services.

Cash received in advance of providing

products or services.

Liability RevenueUnadjusted

BalanceCredit

AdjustmentDebit

Adjustment

P1


On October 1, 2007, Ox University sold 1,000 season tickets to its 20 home basketball games for $100 each. Ox University makes the following entry:

Oct. 1 Cash 100,000 Unearned Revenue 100,000

Basketball revenue received in advance

Oct. 1 100,000Unearned Revenue

P1


On December 31, Ox University has played 10 of its regular home games, winning 2 and losing 8.

Dec. 31 Unearned Revenue 50,000 Basketball Revenue 50,000

To recognize 10-game basketball revenue

Oct. 1 100,000 Dec. 31 50,000Bal. 50,000

Unearned RevenueDec. 31 50,000

Basketball Revenue

P1

We’re about one-halfdone with this job and

want to be paid forour work!

We’re about one-halfdone with this job and

want to be paid forour work!

Costs incurred in a period that are

both unpaid and unrecorded.

Costs incurred in a period that are

both unpaid and unrecorded.

Accrued Expenses

Expense LiabilityCredit

AdjustmentDebit

Adjustment

P1

12/1/07 12/31/07Year end

Last paydate

12/26/07

Next paydate

1/2/08

Record adjustingjournal entry.

Record adjustingjournal entry.

Accrued Expenses

Barton, Inc. pays its employees every Friday. Year-end, 12/31/07, falls on a Wednesday. As of 12/31/07, the employees have earned salaries of $47,250 for Monday

through Wednesday of the week ended 1/02/08.



P1

Accrued Expenses





Dec. 31 Salaries Expense 47,250 Salaries Payable 47,250

To accrue 3-days' salary

Other salaries657,500

Dec. 31 47,250Bal. 704,750

Salaries Expense

Dec. 31 47,250Salaries Payable

P1

Yes, I’ve completed yourtax return, but have not had

time to bill you yet.

Yes, I’ve completed yourtax return, but have not had

time to bill you yet.

Accrued Revenues

Revenues earned in a period that

are both unrecorded and not yet received.

Revenues earned in a period that

are both unrecorded and not yet received.

Asset Revenue

CreditAdjustment

DebitAdjustment

P1

Accrued Revenues

Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make

the adjusting entry necessary on December 31, 2007, the end of the company’s fiscal year.

Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make

the adjusting entry necessary on December 31, 2007, the end of the company’s fiscal year.

Dec. 31 Accounts Receivable 31,200 Service Revenue 31,200

To accrue revenue earned

Other receivables1,325,268

Dec. 31 31,200Bal. 1,356,468

Accounts ReceivableOther revenues

6,589,500 Dec. 31 31,200Bal . 6,620,700

Service Revenue

P1

Finally, the totals are

determined.

FastForward - Trial Balance - December 31, 2007P2

Temporary and Permanent Accounts

Temporary (nominal) accounts accumulate data related to one accounting period. They include all income statement

accounts, the dividends account, and the Income Summary account. These accounts are “closed” at the end of the period

to get ready for the next accounting period.

Temporary (nominal) accounts accumulate data related to one accounting period. They include all income statement

accounts, the dividends account, and the Income Summary account. These accounts are “closed” at the end of the period

to get ready for the next accounting period.

Permanent (real) accounts report activities related to one or more future accounting periods. They carry ending balances

to the next accounting period and are not “closed.”

Permanent (real) accounts report activities related to one or more future accounting periods. They carry ending balances

to the next accounting period and are not “closed.”

C 4

Recording Closing EntriesRecording Closing Entries

1. Close revenue accounts.

2. Close expense accounts.

3. Close the income summary account.

4. Close dividends account.

P4

The Accounting Cycle

Start

Analyzetransactions

Journalize

Post

Prepareunadjustedtrial balance

AdjustPrepareadjusted

trial balance

Preparestatements

Close

Preparepost-closingtrial balance

Reverse(optional)

C5

Documents

Chapter 3 Preparing Financial Statements. 123456789101112 1234 Annually 12 Monthly Quarterly Semiannually The Accounting Period Jan FebMar Apr MayJunJulAugSepOctNovDec