Ch03 Intermediate Accounting Ifrs Edition Vol 1 the Accpunting Information System
Transcript of Ch03 Intermediate Accounting Ifrs Edition Vol 1 the Accpunting Information System
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Slide3-2
C H A P T E R 3
THE ACCOUNTING
INFORMATION SYSTEM
Intermediate AccountingIFRS Edition
Kieso, Weygandt, and Warfield
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Slide3-3
1. Understand basic accounting terminology.
2. Explain double-entry rules.
3. Identify steps in the accounting cycle.
4. Record transactions in journals, post to ledger accounts,
and prepare a trial balance.
5. Explain the reasons for preparing adjusting entries.
6. Prepare financial statement from the adjusted trial balance.
7. Prepare closing entries.
Learning Objectives
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Slide3-4
Identifying and recording
Journalizing
Posting
Trial balance
Adjusting entries
Adjusted trial balancePreparing financialstatements
Closing
Post-closing trial balance
Reversing entries
Summary
Accounting
Information System
The Accounting
Cycle
Financial
Statements For
Merchandisers
Basic terminology
Debits and credits
Accounting equation
Financial statementsand ownershipstructure
Income statement
Statement of retainedearnings
Statement of financialposition
Closing entries
The Accounting Information System
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Collects and processes transaction data.
Disseminates the information to interested parties.
Accounting Information System
Accounting Information System (AIS)
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Basic Terminology
LO 1 Understand basic account ing terminolo gy.
Event
Transaction
Account
Real Account
Nominal Account
Ledger
Journal
Posting
Trial Balance
Adjusting Entries
Financial Statements
Closing Entries
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Debits and Credits
LO 2 Explain dou ble-entry rules.
An Account shows the effect of transactions on agiven asset, liability, equity, revenue, or expenseaccount.
Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account andcrediting another.
DEBITS must equal CREDITS.
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Account Name
Debit / Dr. Credit / Cr.
Debits and Credits
An arrangement that shows theeffect of transactions on anaccount.
Debit = ―Left‖
Credit = ―Right‖
Account
LO 2 Explain dou ble-entry rules.
An Account can
be illustrated in a
T-Account form.
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Slide3-10
Account Name
Debit / Dr. Credit / Cr.
Debits and Credits
If Debit entries are greater than Credit entries, theaccount will have a debit balance.
LO 2 Explain dou ble-entry rules.
$10,000 Transaction #2$3,000
$15,000
8,000Transaction #3
Balance
Transaction #1
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Slide3-12
Chapter
3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter
3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
EquityEquity
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Normal
BalanceCredit
Normal
BalanceDebit
Debits and Credits Summary
LO 2 Explain doub le-entry rules.
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Statement of Financial Position Income Statement
= + =-Asset Liability Equity Revenue Expense
Debit
Credit
Debits and Credits Summary
LO 2 Explain dou ble-entry rules.
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Slide3-14
The Accounting Equation
LO 2 Explain dou ble-entry rules.
Relationship among the assets, liabilities and equity of abusiness:
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
Illustration 3-3
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Double-Entry System Illustration
Assets Liabilities Equity= +
1. Owners invest $40,000 in exchange for share capital
+ 40,000 + 40,000
LO 2 Explain dou ble-entry rules.
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Assets Liabilities= +
2. Disburse $600 cash for secretarial wages.
- 600 - 600(expense)
LO 2 Explain dou ble-entry rules.
Double-Entry System Illustration
Equity
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Double-Entry System Illustration
Assets Liabilities= +
3. Purchase office equipment priced at $5,200, giving a10 percent promissory note in exchange.
+ 5,200 + 5,200
LO 2 Explain dou ble-entry rules.
Equity
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Double-Entry System Illustration
Assets Liabilities= +
4. Received $4,000 cash for services rendered.
+ 4,000 + 4,000(revenue)
LO 2 Explain dou ble-entry rules.
Equity
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Double-Entry System Illustration
Assets Liabilities= +
5. Pay off a short-term liability of $7,000.
- 7,000 - 7,000
LO 2 Explain dou ble-entry rules.
Equity
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Slide3-20
Assets Liabilities= +
6. Declared a cash dividend of $5,000.
+ 5,000 - 5,000
LO 2 Explain dou ble-entry rules.
Double-Entry System Illustration
Equity
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Double-Entry System Illustration
Assets Liabilities= +
7. Convert a long-term liability of $80,000 into ordinaryshares.
- 80,000 + 80,000
LO 2 Explain dou ble-entry rules.
Equity
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Double-Entry System Illustration
Assets Liabilities= +
8. Pay cash of $16,000 for a delivery van.
LO 2 Explain dou ble-entry rules.
- 16,000
+ 16,000
Note that the accounting equation equality ismaintained after recording each transaction.
Equity
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Ownership structure dictates the types of accounts thatare part of the equity section.
Proprietorship or
Partnership Corporation
Share capital
Share premium
Dividends
Retained Earnings
Financial Statements and Ownership Structure
LO 2 Explain dou ble-entry rules.
Capital account
Drawing account
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Slide3-25
The Accounting Cycle
LO 3 Ident i fy steps in the acco unt ing cy cle.
Transactions
1. Journalization
6. Financial Statements
7. Closing entries
8. Post-closing trail balance
9. Reversing entries
3. Trial balance
2. Posting
5. Adjusted trial balance
4. AdjustmentsWorkSheet
Illustration 3-6
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Identify and Recording Transactions
What to Record?
An item should be recognized in the financial
statements if it is an element, is measurable,
and is relevant and afaithful representation.
LO 3 Ident i fy steps in the acco unt ing cy cle.
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General Journal – a chronological record of transactions.Journal Entries are recorded in the journal.
1. Journalizing
LO 4 Record transact ions in journals, post toledger accou nts, and pr epare a tr ial balance.
September 1: Shareholders invested $15,000 cash in the
corporation in exchange for ordinary shares.Illustration 3-7
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Posting – the process of transferring amounts from the journalto the ledger accounts.
2. Posting
LO 4 Record transact ions in journals, post toledger accou nts, and pr epare a tr ial balance.
Illustration 3-7
Illustration 3-8
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Posting – Transferring amounts from journal to ledger.
2. Posting
LO 4
Illustration 3-8
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Expanded Example
LO 4 Record transact ions in journals, post toledger accou nts, and pr epare a tr ial balance.
2. Posting
The purpose of transaction analysis is
(1) to identify the type of account involved, and
(2) to determine whether a debit or a credit is required.
Keep in mind that every journal entry affects one or more of the
following items: assets, liabilities, equity, revenues, or expense.
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1. October 1: Shareholders invest $100,000 cash in anadvertising venture to be known as Pioneer Advertising Agency Inc.
Share capital - ordinary 100,000
Cash 100,000Oct. 1
Debit Credit
Cash
100,000 100,000
Debit Credit
Share Capital - Ordinary
2. Posting
LO 4 Record transact ions in journals, post toledger accou nts, and pr epare a tr ial balance.
Illustration 3-9
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2. October 1: Pioneer Advertising purchases office equipmentcosting $50,000 by signing a 3-month, 12%, $50,000 notepayable.
Notes payable 50,000
Office equipment 50,000Oct. 1
Debit Credit
Office Equipment
50,000 50,000
Debit Credit
Notes Payable
2. Posting
LO 4 Record transact ions in journals, post toledger accou nts, and pr epare a tr ial balance.
Illustration 3-10
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3. October 2: Pioneer Advertising receives a $12,000 cashadvance from KC, a client, for advertising services that areexpected to be completed by December 31.
Unearned service revenue 12,000
Cash 12,000Oct. 2
Debit Credit
Cash
100,000 12,000
Debit Credit
Unearned Service Revenue
2. Posting
12,000
LO 4 Record transact ions in journals, post toledger accou nts, and pr epare a tr ial balance.
Illustration 3-11
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Slide3-34
4. October 3: Pioneer Advertising pays $9,000 office rent, incash, for October.
Cash 9,000
Rent expense 9,000Oct. 3
Debit Credit
Cash
100,000 9,000
Debit Credit
Rent Expense
2. Posting
12,000
9,000
LO 4 Record transact ions in journals, post to
ledger accou nts, and pr epare a tr ial balance.
Illustration 3-12
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5. October 4: Pioneer Advertising pays $6,000 for a one-year
insurance policy that will expire next year on September 30.
Cash 6,000
Prepaid insurance 6,000Oct. 4
Debit Credit
Cash
100,000 6,000
Debit Credit
Prepaid Insurance
2. Posting
12,000
9,000
6,000
LO 4 Record transact ions in journals, post to
ledger accou nts, and pr epare a tr ial balance.
Illustration 3-13
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6. October 5: Pioneer Advertising purchases, for $25,000 onaccount, an estimated 3-month supply of advertisingmaterials from Aero Supply.
Accounts payable 25,000
Advertising supplies 25,000Oct. 5
Debit Credit
Advertising Supplies
25,000 25,000
Debit Credit
Accounts Payable
2. Posting
LO 4 Record transact ions in journals, post to
ledger accou nts, and pr epare a tr ial balance.
Illustration 3-14
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Slide3-37
7. October 9: Pioneer Advertising signs a contract with a localnewspaper for advertising inserts (flyers) to be distributedstarting the last Sunday in November. Pioneer will startwork on the content of the flyers in November. Payment of$7,000 is due following delivery of the Sunday papers
containing the flyers.
2. Posting
LO 4 Record transact ions in journals, post to
ledger accou nts, and pr epare a tr ial balance.
Illustration 3-15
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8. October 20: Pioneer Advertising’s board of directorsdeclares and pays a $5,000 cash dividend to shareholders.
Cash 5,000
Dividends 5,000Oct. 20
Debit Credit
Cash
100,000 5,000
Debit Credit
Dividends
2. Posting
12,000
9,000
6,000
5,000
LO 4 Record transact ions in journals, post to
ledger accou nts, and pr epare a tr ial balance.
Illustration 3-16
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Slide3-39
9. October 26: Employees are paid every four weeks. Thetotal payroll is $2,000 per day. The pay period ended onFriday, October 26, with salaries of $40,000 being paid.
Cash 40,000
Salaries expense 40,000Oct. 26
Debit Credit
Cash
100,000 40,000
Debit Credit
Salaries Expense
2. Posting
12,0009,0006,000
5,000
40,000
LO 4 Record transact ions in journals, post to
ledger accou nts, and pr epare a tr ial balance.
Illustration 3-17
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Slide3-40
10. October 31: Pioneer Advertising receives $28,000 in cash
and bills Copa Company $72,000 for advertising servicesof $100,000 provided in October.
Accounts receivable 72,000
Cash 28,000Oct. 31
Debit Credit
Cash
100,000 72,000
Debit Credit
Accounts Receivable
2. Posting
12,0009,0006,000
5,000
40,000
Service revenue 100,000
100,000
Debit Credit
Service Revenue
28,000
80,000
Illustration 3-18
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Slide3-41
Trial Balance – A list of each
account and its
balance; used
to proveequality of debit
and credit
balances.
3. Trial Balance
LO 4 Record transact ions in journals, post to
ledger accou nts, and pr epare a tr ial balance.
Illustration 3-19
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Slide3-42
4. Adjusting Entries
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
Makes it possible to:
Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement
date.
Report on the income statement the proper revenues and
expenses for the period.
Revenues are recorded in the period in which they are
earned.
Expenses are recognized in the period in which they are
incurred.
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Types of Adjusting Entries
1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before they are used or consumed.
Deferrals
3. Accrued Revenues.
Revenues earned but not
yet received in cash orrecorded.
4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or recorded.
2. Unearned Revenues.
Revenues received in cash
and recorded as liabilitiesbefore they are earned.
Accruals
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
Illustration 3-20
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Slide3-44
Deferrals areeither
prepaid
expenses
or
unearned
revenues.
Adjusting Entries for Deferrals
Illustration 3-21
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Slide3-45
Payment of cash that is recorded as an asset becauseservice or benefit will be received in the future.
Adjusting Entries for “Prepaid Expenses”
insurance
supplies
advertising
Cash Payment Expense RecordedBEFORE
rent
purchasing buildings andequipment
Prepayments often occur in regard to:
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Suppl ies. Pioneer purchased advertising supplies costing
$25,000 on October 5. Prepare the journal entry to record the
purchase of the supplies.
Cash 25,000
Advertising supplies 25,000Oct. 5
Debit Credit
Advertising Supplies
25,000 25,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Expenses”
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Suppl ies. An inventory count at the close of business on
October 31 reveals that $10,000 of the advertising supplies are
still on hand.
Advertising supplies 15,000
Advertising supplies expense 15,000Oct. 31
Debit Credit
Advertising Supplies
25,000 15,000
Debit Credit
Advertising SuppliesExpense
15,000
Adjusting Entries for “Prepaid Expenses”
10,000
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Slide3-48
StatementPresentation:
Advertising
supplies identifiesthat portion of the
asset’s cost that
will provide future
economic benefit.
Adjusting Entries for “Prepaid Expenses”
Illustration 3-35
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire
insurance policy, beginning October 1. Show the entry to
record the purchase of the insurance.
Cash 6,000
Prepaid insurance 6,000Oct. 4
Debit Credit
Prepaid Insurance
6,000 6,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Expenses”
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Insurance. An analysis of the policy reveals that $500 ($6,000 /
12) of insurance expires each month. Thus, Pioneer makes the
following adjusting entry.
Prepaid insurance 500
Insurance expense 500Oct. 31
Debit Credit
Prepaid Insurance
6,000 500
Debit Credit
Insurance Expense
Adjusting Entries for “Prepaid Expenses”
500
5,500
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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StatementPresentation:
Insurance
expense identifiesthat portion of the
asset’s cost that
expired in
October.
Adjusting Entries for “Prepaid Expenses”
Illustration 3-34
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Slide3-54
Depreciat ion. Pioneer Advertising estimates depreciation on its
office equipment to be $400 per month. Accordingly, Pioneer
recognizes depreciation for October by the following adjusting
entry.
Accumulated depreciation 400Depreciation expense 400Oct. 31
Debit Credit
Depreciation Expense
400 400
Debit Credit
Accumulated Depreciation
Adjusting Entries for “Prepaid Expenses”
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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StatementPresentation:
Accumulated
Depreciation—is acontra asset
account.
Adjusting Entries for “Prepaid Expenses”
Illustration 3-35
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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StatementPresentation:
Depreciation
expense identifiesthat portion of the
asset’s cost that
expired in
October.
Adjusting Entries for “Prepaid Expenses”
Illustration 3-34
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Slide3-57
Receipt of cash that is recorded as a liability because therevenue has not been earned.
Adjusting Entries for “Unearned Revenues”
rent
airline tickets
school tuition
Cash Receipt Revenue RecordedBEFORE
magazine subscriptions
customer deposits
Unearned revenues often occur in regard to:
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Slide3-58
Unearned Revenue.
Pioneer Advertising received $12,000 on
October 2 from KC for advertising services expected to becompleted by December 31. Show the journal entry to recordthe receipt on Oct. 2nd.
Unearned service revenue 12,000
Cash 12,000Oct. 2
Debit Credit
Cash
12,000 12,000
Debit Credit
Unearned Service Revenue
Adjusting Entries for “Unearned Revenues”
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Slide3-59
Debit Credit
Service Revenue
100,000 12,000
Debit Credit
Unearned Service Revenue
4,000
8,000
Adjusting Entries for “Unearned Revenues”
Unearned Revenues. Analysis reveals that Pioneer earned$4,000 of the advertising services in October. Thus, Pioneermakes the following adjusting entry.
Service revenue 4,000
Unearned service revenue 4,000Oct. 31
4,000
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Slide3-60
StatementPresentation:
Unearned service
revenue identifiesthat portion of the
liability that has
not been earned.
Illustration 3-35
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
Adjusting Entries for “Unearned Revenues”
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Slide3-61
StatementPresentation:
Service revenue
represents thatportion of the
liability that was
earned in October.
Illustration 3-34
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
Adjusting Entries for “Unearned Revenues”
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Slide3-63
Revenues earned but not yet received in cash orrecorded.
Adjusting Entries for “Accrued Revenues”
rent
interest
services performed
BEFORE
Accrued revenues often occur in regard to:
Cash ReceiptRevenue Recorded
Adjusting entry results in:
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Slide3-64
Accrued Revenues. In October Pioneer earned $2,000 for
advertising services that it did not bill to clients before October
31. Thus, Pioneer makes the following adjusting entry.
Service revenue 2,000
Accounts receivable 2,000Oct. 31
Debit Credit
Accounts Receivable
72,000
Adjusting Entries for “Accrued Revenues”
Debit Credit
Service Revenue
100,000
4,000
2,000
106,000
2,000
74,000
Adjusting Entries for “Accrued Revenues”
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Slide3-65 LO 5
Illustration 3-34
Adjusting Entries for “Accrued Revenues”
Statement
Presentation
Illustration 3-35
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Slide
3-66
Expenses incurred but not yet paid in cash or recorded.
Adjusting Entries for “Accrued Expenses”
rentinterest
BEFORE
Accrued expenses often occur in regard to:
Cash PaymentExpense Recorded
salariestaxes
Adjusting entry results in:
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Interest payable 500
Interest expense 500Oct. 31
Debit Credit
Interest Expense
500 500
Debit Credit
Interest Payable
Adjusting Entries for “Accrued Expenses”
Accrued Interest. Pioneer signed a three-month, 12%, note
payable in the amount of $50,000 on October 1. Prepare the
adjusting entry on Oct. 31 to record the accrual of interest.
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
Adjusting Entries for “Accrued Expenses”
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3-69 LO 5
Illustration 3-34
Adjusting Entries for Accrued Expenses
Statement
Presentation
Illustration 3-35
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Adjusting Entries for “Accrued Expenses”
Ac crued Salar ies. At October 31, the salaries for these days
represent an accrued expense and a related liability to Pioneer.
The employees receive total salaries of $10,000 for a five-day
work week, or $2,000 per day.
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
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Salaries payable 6,000
Salaries expense 6,000Oct. 31
Debit Credit
Salaries Expense
40,000 6,000
Debit Credit
Salaries Payable
Adjusting Entries for “Accrued Expenses”
Accrued Salar ies. Employees receive total salaries of $10,000
for a five-day work week, or $2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.
6,000
46,000
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Adj ti E t i f “A d E ”
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Salaries expense 34,000
Salaries payable 6,000Nov. 23
Debit Credit
Salaries Expense
34,000 6,000
Debit Credit
Salaries Payable
Adjusting Entries for “Accrued Expenses”
Accrued Salar ies. On November 23, Pioneer will again pay total
salaries of $40,000. Prepare the entry to record the payment of
salaries on November 23.
Cash 40,000
6,000
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
Adj ti E t i f “A d E ”
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Adjusting Entries for “Accrued Expenses”
Bad Debts. Assume Pioneer reasonably estimates a bad debt
expense for the month of $1,600. It makes the adjusting entry for
bad debts as follows.
Illustration 3-32
LO 5 Expla in the reason s for prepar ing adjust ing entr ies.
5 Adjusted Trial Balance
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Shows the balanceof all accounts,
after adjusting
entries, at the end
of the accounting
period.
5. Adjusted Trial Balance
LO 5
Illustration 3-33
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6 Preparing Financial Statements
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6. Preparing Financial Statements
LO 6
Illustration 3-35
7 Cl i E t i
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7. Closing Entries
LO 7 Prepare clo sing entr ies.
To reduce the balance of the income statement(revenue and expense) accounts to zero.
To transfer net income or net loss to equity.
Statement of financial position (asset, liability, and
equity) accounts are not closed.
Dividends are closed directly to the RetainedEarnings account.
7 Cl i E t i
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7. Closing Entries
LO 7
Illustration 3-36
7 Closing
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7. Closing
Entries Illustration 3-37
LO 7
8 Post Closing Trial Balance
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8. Post-Closing Trial Balance
LO 7 Prepare clo sing entr ies.
Illustration 3-38
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Accounting Cycle Summarized
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Accounting Cycle Summarized
LO 7 Prepare clo sing entr ies.
1. Enter the transactions of the period in appropriate journals.2. Post from the journals to the ledger (or ledgers).
3. Take an unadjusted trial balance (trial balance).
4. Prepare adjusting journal entries and post to the ledger(s).
5. Take a trial balance after adjusting (adjusted trial balance).
6. Prepare the financial statements from the second trial balance.
7. Prepare closing journal entries and post to the ledger(s).
8. Take a trial balance after closing (post-closing trial balance).
9. Prepare reversing entries (optional) and post to the ledger(s).
Financial Statements for a Merchandising Company
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Financial Statements for a Merchandising Company
LO 7
Illustration 3-39
Financial Statements of a Merchandising Company
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Financial Statements of a Merchandising Company
Illustration 3-40
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Internal controls are a system of checks and balances designed to
prevent and detect fraud and errors. Both of these actions arerequired under SOX.
Companies find that internal control review is a costly process. Onestudy estimates the cost for U.S. companies at over $35 billion,with audit fees doubling in the first year of compliance.
The enhanced internal control standards apply only to large publiccompanies listed on U.S. exchanges. There is continuing debate overwhether foreign issuers should have to comply.
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Most companies use accrual-basis accounting recognize revenue when it is earned and
expenses in the period incurred,
without regard to the time of receipt or payment of cash.
Under the strict cash basis, companies
record revenue only when they receive cash, and
record expenses only when they disperse cash.
Cash basis financial statements are not in conformity with IFRS.
LO 8 Dif ferent iate the cash basis of account ing
from the accrual basis of account ing .
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Illustration: Quality Contractor signs an agreement to construct agarage for $22,000. In January, Quality begins construction, incurs
costs of $18,000 on credit, and by the end of January delivers a
finished garage to the buyer. In February, Quality collects $22,000
cash from the customer. In March, Quality pays the $18,000 due the
creditors.Illustration 3A-1
LO 8 Dif ferent iate the cash basis of account ing
from the accrual basis of account ing .
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Illustration: Quality Contractor signs an agreement to construct agarage for $22,000. In January, Quality begins construction, incurs
costs of $18,000 on credit, and by the end of January delivers a
finished garage to the buyer. In February, Quality collects $22,000
cash from the customer. In March, Quality pays the $18,000 due the
creditors.Illustration 3A-2
LO 8 Dif ferent iate the cash basis of account ing
from the accrual basis of account ing .
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Conversion From Cash Basis To Accrual Basis
Illustration: Dr. Diane Windsor, like many small business owners,
keeps her accounting records on a cash basis. In the year 2010, Dr.
Windsor received $300,000 from her patients and paid $170,000 for
operating expenses, resulting in an excess of cash receipts over
disbursements of $130,000 ($300,000 - $170,000). At January 1 andDecember 31, 2010, she has accounts receivable, unearned service
revenue, accrued liabilities, and prepaid expenses as shown in
Illustration 3A-5.Illustration 3A-5
LO 8 Dif ferent iate the cash basis of account ing
from the accrual basis of account ing .
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Conversion From Cash Basis To Accrual Basis
Illustration: Calculate service revenue on an accrual basis.
Illustration 3A-5
Illustration 3A-8
LO 8 Dif ferent iate the cash basis of account ing
from the accrual basis of account ing .
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Conversion From Cash Basis To Accrual Basis
Illustration: Calculate operating expenses on an accrual basis.
Illustration 3A-5
Illustration 3A-11
LO 8 Dif ferent iate the cash basis of account ing
from the accrual basis of account ing .
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Conversion From Cash Basis To Accrual BasisIllustration 3A-12
LO 8 Dif ferent iate the cash basis of account ing
from the accrual basis of account ing .
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Theoretical Weaknesses of the Cash Basis
Today’s economy is considerably more lubricated by credit than
by cash.
The accrual basis, not the cash basis, recognizes all aspects of
the credit phenomenon.
Investors, creditors, and other decision makers seek timely
information about an enterprise’s future cash flows.
LO 8 Dif ferent iate the cash basis of account ing
from the accrual basis of account ing .
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Slide
3-97 LO 9 Ident i fy ing adjust ing entr ies that may be reversed.
Illustration of Reversing Entries—Accruals
Illustration 3B-1
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Slide
3-98 LO 9 Ident i fy ing adjust ing entr ies that may be reversed.
Illustration of Reversing Entries—Deferrals
Illustration 3B-2
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Slide
3-99 LO 9 Ident i fy ing adjust ing entr ies that may be reversed.
Summary of Reversing Entries
1. All accruals should be reversed.
2. All deferrals for which a company debited or credited the
original cash transaction to an expense or revenue
account should be reversed.
3. Adjusting entries for depreciation and bad debts are not
reversed.
Recognize that reversing entries do not have to be used.Therefore, some accountants avoid them entirely.
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3-102 LO 10 Prepare a 10-col um n work sh eet.
Adjusted
Trial
Balance
Illustration 3C-1
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The Worksheet:
Provides information needed for preparation of the
financial statements.
Sorts data into appropriate columns, which facilitates
the preparation of the statements.
LO 10 Prepare a 10-col um n work sh eet.
Preparing Financial Statements from a Worksheet
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Illustration 3-39
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Illustration 3-40
LO 10 Prepare a 10-col um n work sh eet.
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Illustration 3-41
LO 10
Copyright
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Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted
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