Financial AccountingFinancial Accounting

Spring 2013Spring 2013

Sias International University Sias International University

Where are we now?Where are we now?

►Chapter 1 and 2 – The general view of the Chapter 1 and 2 – The general view of the financial statement,( like taking a non-financial statement,( like taking a non-stop train to bei jing.) we also talked stop train to bei jing.) we also talked about about

► Journal entries, the debit and the creditJournal entries, the debit and the credit► J.E.J.E.=Debit(Dr) Cash $XXX=Debit(Dr) Cash $XXX► Credit(Cr) Sales Income $XXX Credit(Cr) Sales Income $XXX

►To record cash received from sales To record cash received from sales

►Don’t be confused with the abbreviation:Don’t be confused with the abbreviation:►SE, RE, A/P, A/R, JESE, RE, A/P, A/R, JE►AJE = Adjusting journal entryAJE = Adjusting journal entry►FS = Financial statementsFS = Financial statements►From here we are going to see From here we are going to see

adjustments to the FS, like a train stopping adjustments to the FS, like a train stopping in a station.in a station.

►The sequence is JE, Trial Balance, The sequence is JE, Trial Balance, AJE, AJE, adjusted trial balanceadjusted trial balance, the 4 four FS, and , the 4 four FS, and Closing the booksClosing the books

Chapter 3Chapter 3►Chapter 3 is connected with chapters 1, Chapter 3 is connected with chapters 1,

22►Accrual Accounting- accounting that Accrual Accounting- accounting that

records the impact of a business event records the impact of a business event as it occurs, regardless of whether the as it occurs, regardless of whether the transaction affected cashtransaction affected cash

►Cash basis Accounting – accounting that Cash basis Accounting – accounting that record only transactions in which cash is record only transactions in which cash is paid or received paid or received

►The GAAP require that business used The GAAP require that business used accrual accountingaccrual accounting

3 Principles involved 3 Principles involved ►# 1 Time period concept – The basic # 1 Time period concept – The basic

accounting period is 1 year. accounting period is 1 year. ►““Fiscal Year” – an accounting cycle that ends Fiscal Year” – an accounting cycle that ends ►Other than Dec. 31Other than Dec. 31►““For the For the Fiscal year Fiscal year ended, Jan. 31,2009”ended, Jan. 31,2009”► ►#2 Revenue Principle – Record only revenue #2 Revenue Principle – Record only revenue

after it has been earned. Meaning after it after it has been earned. Meaning after it has delivered goods or serviceshas delivered goods or services

►See See exhibit 3-1exhibit 3-1, , page 129page 129

►# 3 –Matching Principle – Expenses are # 3 –Matching Principle – Expenses are the cost of assets used and liabilities the cost of assets used and liabilities created in other to earn income. created in other to earn income. Expenses have no future benefit to the Expenses have no future benefit to the Corporation,Corporation,PagePage 129,Exhibit 3-2129,Exhibit 3-2

►““Maximize Profit, Minimize Cost”Maximize Profit, Minimize Cost”

►Look carefully on the Trial Balance, Look carefully on the Trial Balance, Page 131 and 78 (adjusted and Page 131 and 78 (adjusted and unadjusted)unadjusted)

5 Categories of Adjusting 5 Categories of Adjusting entriesentries

►#1 #1 Page 132-133Page 132-133►Prepaid Prepaid expensesexpenses ( Assets)( Assets)►””Expenses paid in advance“ Expenses paid in advance“

► JEJE: June 1 Prepaid rent 3,000.00: June 1 Prepaid rent 3,000.00► Cash (3 months) 3,000.00 Cash (3 months) 3,000.00 ► June 30 June 30 Rent Expense (1 Month) Rent Expense (1 Month)

1,000.001,000.00► Prepaid rent 1,000.00 Prepaid rent 1,000.00

►# 2 # 2 Page 141-142Page 141-142►Unearned Unearned Revenues Revenues (Liabilities)(Liabilities) ►””received money in advance” 15 days received money in advance” 15 days

only only

► June 15 Cash 400.00June 15 Cash 400.00► Unearned revenue 400.00 Unearned revenue 400.00 ► June 30 June 30 Unearned revenue 200.00Unearned revenue 200.00► Revenue 200.00 Revenue 200.00

►# 3 # 3 Page 138-139Page 138-139►Accrued Accrued Expenses Expenses (ex: salary is (ex: salary is

1,800.00)1,800.00)►””Late in paying expenses”Late in paying expenses”

► June 15 Salary Expense 900.00June 15 Salary Expense 900.00► Cash 900.00 Cash 900.00 ► June 30(Holiday) June 30(Holiday) Salary Expense 900.00Salary Expense 900.00► Salary Payable 900.00 Salary Payable 900.00

►# 4 # 4 Page 140Page 140►Accrued Accrued Revenues Revenues (Ex: 600.00 for 1 (Ex: 600.00 for 1

month)month)►To be received on To be received on July 15July 15►””Late in receiving income”Late in receiving income”

► June 30 June 30 A/R (600.00 x ½) 300.00A/R (600.00 x ½) 300.00► Service revenue 300.00 Service revenue 300.00 ► To accrue service revenueTo accrue service revenue

►# 5 # 5 Page 135-137Page 135-137►Depreciation Depreciation ExpenseExpense – The process of – The process of

allocating cost of PPE except allocating cost of PPE except landland over over its useful life to expenseits useful life to expense

Why?Why?

Because PPE loses its value over the Because PPE loses its value over the years thru wear and tear, and being years thru wear and tear, and being obsolete)obsolete)

►Page 135 Page 135 ► June 3 Equipment 24,000.00June 3 Equipment 24,000.00► A/P 24,000.00 A/P 24,000.00 ► Purchased office furniture Purchased office furniture on accounton account

► June 30 June 30 Depreciation ExpenseDepreciation Expense 400.00 400.00► Accumulated depreciation Accumulated depreciation

400.00400.00► To record depreciation on equipmentTo record depreciation on equipment

The Straight-line The Straight-line Method,Method,PagePage 136136

►Cost of assetCost of asset / / expected useful lifeexpected useful life►Depreciation =$24,000.00 / 5 years Depreciation =$24,000.00 / 5 years ►=$4,800.00 per year=$4,800.00 per year►=$400.00 per month ($4,800.00 / 12)=$400.00 per month ($4,800.00 / 12)

►This amount goes to an account called This amount goes to an account called Accumulated depreciation (Acc. Dep)Accumulated depreciation (Acc. Dep)

Accumulated DepreciationAccumulated Depreciation

►Page 136Page 136► It is a It is a Contra asset Contra asset account account ►Listed under Assets but with a Credit Listed under Assets but with a Credit

balance, usually with an open and close balance, usually with an open and close parenthesisparenthesis

►See Balance sheet See Balance sheet Page 138Page 138

►Book Value – the net on the amount of the Book Value – the net on the amount of the PPE PPE minusminus the accumulated depreciation the accumulated depreciation

In Summary, In Summary, Page 143Page 143

► On June 30 On June 30 DebitDebit CreditCredit►Prepaid Expense Expense Prepaid Expense Expense AssetAsset►Depreciation Expense Depreciation Expense Contra A.Contra A.►Accrued ExpensesAccrued Expenses ExpenseExpense Liability Liability►Accrued RevenueAccrued Revenue Asset Asset RevenueRevenue ► Unearned Revenue Unearned Revenue LiabilityLiability Revenue Revenue► Question: Why is unearned Rev. a liability?Question: Why is unearned Rev. a liability?

Let’s look at the AJE’s for Let’s look at the AJE’s for June 30thJune 30th

►See Unadjusted Trial balance on See Unadjusted Trial balance on Page 131Page 131►See AJE’s on See AJE’s on Page 143Page 143

►Question: What kind of expense is letter GQuestion: What kind of expense is letter G

►See Adjusted trial balance on See Adjusted trial balance on Page 145, Page 145, Exhibit 3-9Exhibit 3-9

Closing the BooksClosing the Books

►Means to prepare the Income, Revenue Means to prepare the Income, Revenue and dividends accounts for the next and dividends accounts for the next period’s transaction, so Closing Entries period’s transaction, so Closing Entries are:are:

►1) 1) DebitDebit each each revenuerevenue account balance, account balance, Credit RECredit RE

►2) 2) Credit expense Credit expense account balance , and account balance , and Debit REDebit RE

►3) 3) Credit dividends Credit dividends account and account and debit REdebit RE

Page 154Page 154

►Assets and Liabilities based on Assets and Liabilities based on LiquidityLiquidity

Page 155-156Page 155-156

►Formats for the FSFormats for the FS

Using Accounting RatiosUsing Accounting Ratios

Pages 157-158Pages 157-158

Current RatioCurrent Ratio=Current Assets/Current =Current Assets/Current LiabilityLiability

““The ability to pay The ability to pay currentcurrent L by current A” L by current A”

The The higherhigher the the betterbetter (Normal ratio =(Normal ratio =1.501.50))

Debt Ratio Debt Ratio = Total Liabilities/Total Assets= Total Liabilities/Total Assets

“ “ The ability to pay The ability to pay TotalTotal L by Total A “ L by Total A “

The The lowerlower ,the ,the betterbetter (Normal ratio=(Normal ratio=60,70%60,70%))