Spiceland | Thomas | Herrmann
Financial Accounting
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The Accounting
Cycle:End of the
PeriodChapter 3
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Learning Objectives
• Understand when revenues and expenses are recorded
• Distinguish between accrual-basis and cash-basis accounting
• Demonstrate the purposes and recording of adjusting entries
• Post adjusting entries and prepare an adjusted trial balance
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Learning Objectives
• Prepare financial statements using the adjusted trial balance
• Demonstrate the purposes and recording of closing entries
• Post closing entries and prepare a post-closing trial balance
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part A
Accrual-Basis Accounting
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Learning Objective 1
Understand when revenues and expenses are recorded
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Revenue and Expense Reporting
• Revenue recognition• Recognize revenue when it is earned
• Expense recognition• Expenses are reported with the revenues they help
to generate
• Revenue recognition principle• Matching principle
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Illustration 3.1—Expense Recognition
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Learning Objective 2
Distinguish between accrual-basis and cash-basis accounting
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Accrual-Basis Compared with Cash-Basis Accounting
Point of Difference
Accrual Basis Cash Basis
Revenue Recognition
When revenue is earned
When cash is received
Recording Expenses
With related revenues When cash is paid
GAAP Part of GAAP Not a part of GAAP
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Illustration 3.2—Accrual-Basis Revenue versus Cash-Basis Revenue
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Illustration 3.3—Accrual-Basis Expense versus Cash-Basis Expense
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Part B
The Measurement Process
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Learning Objective 3
Demonstrate the purposes and recording of adjusting entries
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Illustration 3.4—The Accounting Cycle
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Adjusting Entries
Prepayments
Prepaid expenses
Unearned revenues
Accruals
Accrued expenses
Accrued revenues
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Purpose of Adjusting Entries
• To account for transactions that have not been recorded by the end of the period
• To record revenues in the period earned• To record expenses in the period they are
incurred to generate those revenues• To correctly state assets and liabilities
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Prepaid Expenses
• Cost of assets acquired in one period that will be expensed in a future period
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Example: Prepaid Expenses
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Unearned Revenues
• Cash received in advance from a customer for products or services to be provided in the future
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Example: Unearned Revenues
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Accrued Expenses
• Company has incurred a cost but hasn’t yet paid cash or recorded an obligation
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Example: Accrued Expenses
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Accrued Revenues
• Revenue earned but hasn’t yet received cash or recorded an amount receivable
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Example: Accrued Revenues
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Learning Objective 4
Post adjusting entries and prepare an adjusted trial balance
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Adjusted Trial Balance
• Lists all account balances after updating them for adjusting entries
• Prepared after posting the adjusting entries to the general ledger
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Illustration 3.10—Adjusted Trial Balance
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Part C
The Reporting Process:
Financial Statements
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Learning Objective 5
Prepare financial statements using the adjusted trial balance
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Illustration 3.11—Relationship between Adjusted Trial Balance and Financial Statements
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Illustration 3.12—Income Statement
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Illustration 3.13—Statement of Stockholders’ Equity
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Illustration 3.14—Classified Balance Sheet
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Statement of Cash Flows
• The final financial statement• Measures activities involving cash receipts and
cash payments• Reflecting a company’s operating, investing, and
financing activities.
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Part D
The Closing Process
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Learning Objective 6
Demonstrate the purposes and recording of
closing entries
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Closing Entries
• To transfer the balances of temporary accounts to the Retained Earnings
• To reduce the balances of these temporary accounts to zero
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Illustration 3.15—Closing Entries
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Learning Objective 7
Post closing entries and prepare a post-closing trial balance
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Post-Closing Trial Balance
• Lists all accounts balances after updating for closing entries.
• Prepared accounts for the next period
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Illustration 3.18—Post-Closing TrialBalance
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End of Chapter 3
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