ACg 2021Chapter3

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    Adjusting Accounts & PreparingFinancial Statements

    Chapter 3

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    Accounting period

    Time principle period

    Specific time periods for accounting

    activities Fiscal year

    Consisting of any 12 months period other thanending on December 31

    Natural year Ends December 31

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    Accounting basis

    Accrual basis

    Uses the adjusting process to recognize

    revenues when earned and to matchexpenses with revenues

    Cash Basis

    Recognized revenues when cash isreceived and records expenses when cashis paid

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    Revenue Recognition

    Matching principle Aims to record

    expenses in thesame accountingperiod as therevenues that areearned as a result of

    these expenses

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    Adjustments

    Adjusting entries To correct for transactions and events that

    extend over more than one period Deferred wait till cash is paid

    Accrual

    Rule

    Debit the expense Credit the asset or liabilities

    For the amount used up

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    Prepaid insurance

    Suppose that we purchase $2,400 forinsurance for one year on May 1.

    Record the adjustments on December31.

    $2,400/12 = $200 x 8months = $1,600

    Insurance expense 1600 Prepaid insurance 1600

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    Supplies

    Suppose that supplies account has abalance of $4,000 and inventory shows

    $1,000. Record the supplies used up. Balance 4,000

    Inventory1,000

    Used up 3,000

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    Supplies

    Supplies expense 3,000

    Supplies 3,000

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    Depreciation

    Plant assets/Fixed Assets

    Assets which are tanigble and long lived

    Building and machinery

    Depreciation

    The reduction in value of an asset due to

    its use

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    Depreciation

    Depreciation expense

    Annual reduction in value of asset

    Accumulated depreciation Contra asset

    Increases with a credit

    Total reduction in value of an asset

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    Unearned revenues

    Refers to cash received in advance ofservices provided

    Suppose that unearned revneue has abalance of $7,000 but records showsonly $3,000 is unearned

    Balance $7,000 Should be 3,000 Earned 4,000

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    Unearned Revenues

    Unearned revenues A liability

    If we do not complete the work then we areliable to refund the monies.

    Once the work is completed then theliability does not exist

    Unearned revenues 4,000 Fees earned 4000

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    Accrued expenses

    Refers to costs that are incurred in aperiod that are unpaid and unrecorded

    Accrued salaries Salaries owed at the end of the period to

    be made next period

    Suppose year ends on Wed, do we pay onWed or wait until Friday

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    Salaries

    Suppose salaries at year end is $400

    Salaries expense 400

    Salaries payable 400

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    Accrued revenues

    Refers to revenues earned in a periodthat are both unrecorded and not yet

    received in cash Unrecorded accounts receivable

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    Trial Balance

    Unadjusted trial balance

    is a list of account balances before

    adjustments Used to make adjusting entries

    Adjusted trial balance

    Used to prepare financial statements

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    Financial Statements

    Four basic financial statements

    Income statement

    Statement of Retained Earnings

    Balance Sheet

    Statement of Cash flows

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    Income Statement

    Results of operations for a businessShows revenues minus expenses

    Rob Co

    Income StatementFor period ending

    12/31/04Revenues

    Sales $75,000

    Expense

    Salaries exp $25,000

    Rent exp $10,000

    Total exp 35,000

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    Statement of Retained Earnings

    Changes in net worth and equity

    Rob Co

    Statement of Retained Earnings

    For period ending 12/31/04

    Beginning Retained Earnings $60,000

    +Net income 40,000100,000

    -Dividends 20,000

    Ending Retained Earnings $80,000

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    Balance sheetRob Co

    Balance Sheet

    December 3, 2004Assets

    Cash $45,000

    Truck 75,000

    Total Assets $120,000

    Liabilities

    Accts pay $10,000

    Total liab. $10,000

    Stockholders Equity

    Common Stock $30,000

    Retained Earnings $80,000

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    Statement of Cash Flows

    Inflows and outflow of cash from

    Operations

    Investments Financing

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    Accounting Cycle

    Record entries in the journal Post to ledger

    Prepare unadjusted Trial Balance Record and post adjusting entries Prepare adjusted trial balance

    Prepare financial statementsRecord and post closing entries

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    Closing Entries

    Temporary accounts

    Accumulate data related to one accounting

    period Revenue

    Expense

    Dividends

    Income summary

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    Close revenues

    Revenues DR

    Income summary Cr

    Debit whatever revenue accounts youhave on the trial balance for theirending balance and the total is credited

    to income summary

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    Close Expenses

    Income summary DR

    Expenses CR

    Credit each expense accountseparately for the amount of thebalance in the account and debitincome summary for the total

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    Close Income Summary

    Income Summary DR

    Retained earnings CR

    Income Summary

    Debit Credit

    Total expenses Total revenues

    Net income

    For the balance in the income summary account

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    Close Dividends

    Dividends reduce the equity of thebusiness and the amount retained in

    the business Retained earnings DR

    Dividends CR

    For the amount of the balance in thedividend account

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    Transactions

    Fees earned $50,000

    Rent expense 10,000

    Supplies expense 5,000

    Dividends 2,000

    Retained earnings $30,000 Record the closing entries

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    Close revenues

    Fees earned 50,000

    Income summary 50,000

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    Close Expenses

    Income Summary $15,000

    Rent expense $10,000

    Supplies expense 5,000

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    Close Income Summary

    Income Summary $35,000

    Retained earnings $35,000

    Income Summary

    DR CR

    $15,000 $50,000

    $35,000 net income

    RevenuesExpenses

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    Close Dividends

    Retained earnings $2,000

    Dividends $2,000

    Retained Earnings

    DR

    $2,000Dividends

    CR

    $30,000 Balance

    $35,000 net income

    $63,000 ending balance

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    Classification of Accounts

    Current assets Expected to be

    collected in less thanone year

    Cash

    Accounts receivable

    Supplies Inventory

    Plant Asset Long lived tangible

    assets

    Factory building

    Machinery andequipment