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Transcript of Chapter 3 Preparing Financial Statements. 123456789101112 1234 Annually 12 Monthly Quarterly...
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Chapter 3
Preparing Financial Statements
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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
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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
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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
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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.
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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
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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
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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
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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.
What adjustment is required?
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.
What adjustment is required?
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
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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.
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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
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Unearned (Deferred) Revenues
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
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Unearned (Deferred) Revenues
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
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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
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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.
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.
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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.
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.
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
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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
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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
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Finally, the totals are
determined.
FastForward - Trial Balance - December 31, 2007P2
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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.”
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Recording Closing EntriesRecording Closing Entries
1. Close revenue accounts.
2. Close expense accounts.
3. Close the income summary account.
4. Close dividends account.
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The Accounting Cycle
Start
Analyzetransactions
Journalize
Post
Prepareunadjustedtrial balance
AdjustPrepareadjusted
trial balance
Preparestatements
Close
Preparepost-closingtrial balance
Reverse(optional)
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