Intermediate Accounting, Ninth Edition
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Transcript of Intermediate Accounting, Ninth Edition
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Intermediate Accounting, Ninth EditionIntermediate Accounting, Ninth Edition
Kieso and WeygandtKieso and Weygandt
Prepared byPrepared by
Catherine Katagiri, CPACatherine Katagiri, CPA
The College of Saint RoseThe College of Saint Rose
Albany, New YorkAlbany, New York
John Wiley & Sons, IncJohn Wiley & Sons, Inc..
K & W
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Chapter 3:Chapter 3:The Accounting Information SystemThe Accounting Information System
After studying this chapter you should be able to:After studying this chapter you should be able to:• Understand basic accounting terminology.
• Explain double-entry rules.
• Identify steps in the accounting cycle.
• Record transactions in journals, post to ledger accounts, and prepare a
trial balance.
• Explain the reasons for preparing adjusting entries.
• Explain how inventory accounts are adjusted at year-end.
• Prepare closing entries.
• Identify adjusting entries that may be reversed.
• Prepare a 10-column worksheet.
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Basic TerminologyBasic Terminology
• The following is a brief summary of selected terms.
Please review page 69, our text as well.
– Event: A happening of consequence. May be external or
internal. Generally triggers a change in assets, liabilities or
equity.
– Transaction: An external event involving a transfer or
exchange between two or more entities.
– Account: A systematic recording of transactions or events
that affect assets, liabilities, equity, revenue and expense
areas. An account represents an area of similar economic
interest.
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Basic TerminologyBasic Terminology
– Real Accounts: Balance
sheet accounts--Asset,
liability and equity accounts
(except dividends). Exist
from one period to the next
(not closed).
–Nominal Accounts: Income
statement accounts--Revenue and
expense as well as the dividends
account. They do not exist from one
period to the next (they are closed).
Exist in name only!
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Basic TerminologyBasic Terminology
– Ledger: The book (manual or computer) of “T” accounts.
» General ledger (GL) is the book of control or general
accounts.
» Subsidiary ledger contains the detail of a specific
control or general account (e.g., Accounts Receivable).
– Journal: The book of original entry. Transactions are
recorded in journal entry form in their entirety. Posted to the
GL.
– Posting: The carrying of the essential facts from the journal
to the general ledger.
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Basic TerminologyBasic Terminology
– Trial Balance: A list of all open accounts in the GL and their
balances. Done to prove the equality of debits and credits.
» Unadjusted--taken after routine entries are posted.
» Adjusted--taken after adjusting entries are posted.
» Post-closing--taken after closing entries are posted.
– Adjusting Entries: Done to bring the books up to date in
anticipation of the preparation of the financial statements.
– Financial Statements: The primary reporting vehicles for
accounting information. They are the result of the collection,
tabulation and summation of accounting data. The following
four statements comprise a complete set of financial
statements (“taken as a whole”):
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Basic TerminologyBasic Terminology
» Balance sheet--Financial condition (position) of an
enterprise at the end of the period.
» Income statement--Shows the results of operations for the
period.
» Statement of cash flows--Reports cash activity for the
period by operating, investing and financing flows.
» Statement of retained earnings--Reconciles the beginning
and ending balances in the owner equity account.
– Closing entries: Done to zero the nominal accounts, formally
calculate income or loss and update retained earnings.
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Basic TerminologyBasic Terminology
– Debits and credits:
» Debit means entering an amount on the left-hand side of
an account. It does not mean increase or decrease.
» Credit means entering an amount on the right-hand side of
an account. It does not mean increase or decrease.
Account Name
Debit Credit
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Basic TerminologyBasic Terminology
– Double Entry System of Accounting. A logical method
for recording transactions. It recognizes that there
are at least two events or changes for each
transaction. Debit (or sum of the debits) will
always equal the credit (or the sum of the credits).
• Balance Sheet Equation: Balance Sheet Equation:
Assets = Liabilities + Owner EquityAssets = Liabilities + Owner Equity
Assets will always equal the sources of those
assets. That is, assets belong to either the
creditors or the owners.
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Accounting CycleAccounting Cycle
• Accounting Cycle:
– Identify, analyze and record relevant business
transactions.
» Please see Chapter Two--Elements of financial
statements.
» Both internal and external events.
– Journalizing
» Record of transactions in the journal in formal
journal entry form. Transactions are recorded
all in one place in chronological order.
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Accounting CycleAccounting Cycle
» Formal journal entry form: (If more than one debit and/or
more than one credit it is called a compound entry.)
Date Account name XX
Account name XX
Account name
XX
Explanation
– Posting: Routine function of carrying the entries from
the journal to the ledger.
– Trial balance: Listing of accounts and their balances
in general ledger order (A,L, OE, R, E). Done to prove
the equality of the debits and credits.
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– Adjusting Journal Entries (AJE): Done to bring the books up to date
so financial statements can be prepared.
Accounting CycleAccounting Cycle
Types of AJEs:
Deferrals
Accruals
Cost Allocation
– Please review the common characteristics of AJEs
» Dated last day of period.
» Always change at least one balance sheet account
and one income statement account.
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Adjusting EntriesAdjusting Entries
• Let’s review examples of selected AJEs:Let’s review examples of selected AJEs:
– Deferral of an expense (prepaids)
– Deferral of a revenue (unearned revenues)
– Accrual of an expense
– Accrual of a revenue
– Cost allocation
» Depreciation
» Bad Debts
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Adjusting EntriesAdjusting Entries
– Deferral Type of AJE is characterized by a previous transaction
which must be adjusted because it is now the end of the period
(time period assumption). The transaction is not yet complete at
the end of the period.
– Example: Deferral of an expense.Deferral of an expense.
Information: You are a tenant renting office space for $2,000 per
month. On November 1, 19X1, you prepay six months of rent or
$12,000 to your landlord. The original entry may have been:
11/1 Rent expense 12,000
Cash 12,000
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Adjusting EntriesAdjusting Entries
– Suppose it is now December 31, 19X1, two months later. The previous
entry must be adjusted. The adjusting entry would be:
To adjust:
12/31 Prepaid Rent 8,000
Rent Expense 8,000
Note: You had to refer back to the original entry to prepare the correct adjusting entry.
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Adjusting EntriesAdjusting Entries
– This properly reflects, at the end of the period,
four months of asset remaining and two
months of expense matched to the period.
– But what if the original entry had been:But what if the original entry had been:
11/1 Prepaid Rent 12,000
Cash 12,000
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Adjusting EntriesAdjusting Entries
– Then the appropriate adjusting entry would be:
To adjust:
12/31 Rent Expense 4,000
Prepaid Rent 4,000
Note: You had to refer back to
the original entry to prepare the
correct adjusting entry.
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Adjusting EntriesAdjusting Entries
– Example: Deferral of an revenue.Deferral of an revenue.
Information: You are a publisher selling magazines. You collect
on 9/1/X1, a total of $18,000 for the next six months of
publications (earned evenly). The original entry may have been:
12/31 Cash 18,000
Earned Revenue 18,000
– It is now 12/31/X1 and the above entry is no
longer wholly correct. It must be adjusted to
reflect you have services still to perform.
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Adjusting EntriesAdjusting Entries
To adjust:
12/31 Earned Revenues 6,000
Unearned (Deferred) Revenues 6,000
But what if the original entry had been:But what if the original entry had been:
To adjust:
12/31 Cash 18,000
Unearned (Deferred) Revenues
18,000
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Adjusting EntriesAdjusting Entries
– It is now 12/31/X1 and the above entry is no longer wholly
correct. It must be adjusted to reflect you have services
still to perform. The adjusting entry at 12/31/X1 would be:
To adjust:
12/31 Unearned Revenues 12,000
Earned Revenues 12,000
– The adjusting entry was prepared with the original entry in
mind. You arrive at $12,000 of earned revenue and $6,000
of a liability, deferred revenues, at the end of the period.
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Adjusting EntriesAdjusting Entries
Accrual typeAccrual type of adjusting journal entries:
– Done to record an as yet unrecorded transaction. To accrue or
record for the first time.
– No prior transaction to refer back to or update.
– Example: Accrual of a revenue:Accrual of a revenue:
Information: You have performed accounting services for a
client on December 30, 19X1. The services are valued at $300
but you have not recorded this yet nor sent a bill. To adjust:
12/31 Accounts Receivable 300
Service Revenue (Earned) 300
Note: There will always be a pairing between a receivable Note: There will always be a pairing between a receivable (balance sheet) and a revenue (income statement) (balance sheet) and a revenue (income statement)
account.account.
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Adjusting EntriesAdjusting Entries
– Example: Accrual of an expenseAccrual of an expense
Information: You had some emergency repair work done on 12/31/X1.
The plumber states the bill will be approximately $3,400. To adjust:
12/31
Repair Expense 3,400
Accounts Payable 3,400
Note: There will always be a pairing between Note: There will always be a pairing between an expense (income an expense (income statement) and a payable statement) and a payable (balance sheet) account.(balance sheet) account.
The final accrual done will be the tax accrual.The final accrual done will be the tax accrual.
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Adjusting EntriesAdjusting Entries
Cost allocation typeCost allocation type of adjusting journal entry:
– To follow matching and divide up cost to current and future
periods benefited.
– Depreciation, bad debt expense.
Example: You consume the usefulness of your building at the
rate of $12,000 per year. To recognize that the cost has now
been consumed (now an expense) you depreciate:
12/31
Depreciation Expense (I/S) 12,000
Accumulated Depreciation (B/S) 12,000
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Accounting CycleAccounting Cycle
• After all the adjusting entries have been recorded and After all the adjusting entries have been recorded and
posted an adjusted trial balance is taken. posted an adjusted trial balance is taken.
– This will not detect omissions or errors where
debits = credits. It only determines, after
adjusting, that total debits = credits.
– Financial statements may then be prepared from
the adjusted balances.
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Accounting CycleAccounting Cycle
• Inventory Methods:Inventory Methods:
– Periodic:Periodic:
» Use of the purchases and contra accounts, Freight-in.
» Adjust inventory at end of period within the context of
closing.
» Cost of Goods Sold (CGS) is a calculated figure
» Closing involves purchases, sales, contras, Freight-in.
– Perpetual:Perpetual:
» Inventory is kept up-to-date--Debited when bought,
credited when sold-Returns & Allowances, discounts flow
through the inventory account.
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Closing EntriesClosing Entries
» Cost of Goods Sold is a known figure.
» No purchase contras to close.
• Closing--Please review the mechanics of closing, Closing--Please review the mechanics of closing, pages 88-90, our text.pages 88-90, our text.
– Closing done to ready the nominal (I/S, dividends) accounts for the next period.
– Under a periodic system the inventory account is adjusted during closing.
– Closing done to formally calculate net income or loss.
– Closing done to update RE
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Closing EntriesClosing Entries
• Closing to capital:Closing to capital:
– In a corporation capital is divided into amounts for shares (stock) and amounts earned by the corporation (Retained Earnings-RE). Income is closed to RE.
• After closing completed:After closing completed:
– Only real (balance sheet accounts) remain.
– A post-closing trial balance is prepared to check
the equality of debits and credits and is a starting
point for the next period.
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• Please review the preparation of the worksheet Please review the preparation of the worksheet
(pages 93-96, our text). (pages 93-96, our text).
– Done to coordinate and substantiate work done.
– Financial statements and tax returns prepared
directly from the worksheet.
– When satisfied your work is complete the records
are then updated permanently and closing occurs.
– Note the treatment of the inventory. There is more
than one method to adjust inventory-it gets to the
same place eventually!
Worksheet PreparationWorksheet Preparation
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Reversing EntriesReversing Entries
• Reversing entries-done to ease subsequent Reversing entries-done to ease subsequent
recording.recording.
– Optional
– Accruals are usually reversed.
– Deferrals may be reversed.
– Cost Allocation type AJE would not logically be a candidate
for reversal .
– For example: You accrue your $8,900 payroll on Wednesday,
12/31/X1, the end of the period. The full weekly payroll is
normally $15,000. To accrue:12/31/X1 Wage Expense (I/S) 8,900
Wages Payable (B/S) . 8,900
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Reversing EntriesReversing Entries
– As the adjusting entries tend to be difficult, the AJE was
prepared by you, the accountant, instead of the usual clerical
personnel. They are unaware the accrual was done and so on
Friday, January 2, 19X2, they record the entire week’s payroll
($15,000) like they usually do:
1/2/X2
Wage Expense (I/S) 15,000
Cash (B/S) 15,000
– This would be incorrect because the first three days of
the pay period were already expensed and matched to
the year X1. There is also a liability outstanding that
must be removed when the payroll is paid. The correct
entry would be:
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Reversing EntriesReversing Entries
1/2/X2
Wage Expense (I/S) 6,100
Wage Payable (B/S) 8,900
Cash (B/S) 15,000
– To avoid these types of errors or to be able to “ignore”
AJEs a reversing entry may be done. Suppose after the
original AJE was done and CLOSING occurred, the
following reversing entry was done on 1/1/X2:
1/1/X2
Wage Payable (B/S) 8,900
Wage Expense (I/S) 8,900
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Reversing EntriesReversing Entries
– This reversing entry would get rid of the payable and record
a CREDIT balance in the wage expense account. When the
routine payroll entry was done:
1/2/X2
Wage Expense (I/S) 15,000
Cash (B/S) 15,000
– The accounts would now be correct: The payable would
be gone, the expense for 19X2 would be $6,100.
– Reversing entries should simplify the subsequent
recording of routine transactions.