AC303-CH2Slides

8/11/2019 AC303-CH2Slides

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McGraw-Hill /Irwin 2009 The McGraw-Hill Companies, Inc.

REVIEW OF THEACCOUNTING PROCESS

Chapter 2


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Slide 2

2-2

Accounting Equation for a Corporation

A = L + SE+ Retained Earnings+ Paid-in Capital

- Expenses- Losses

+ Revenues+ Gains

- Dividends


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Slide 3

2-3

Account Relationships

Debits and credits affect the Balance SheetModel as follows:

A = L + PIC + REAssets

Dr.

+

Cr.

-

Liabilities

Dr.

-

Cr.

+

Paid-inCapitalDr.-

Cr.+

RetainedEarnings

Dr.

-

Cr.

+

Revenuesand GainsDr.-

Cr.+

Expensesand Losses

Dr.+ Cr.-

Permanent AccountsTemporary Accounts


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Slide 4

2-4

Sourcedocuments

Record inJournal

FinancialStatements

TransactionAnalysis

Post toLedger

UnadjustedTrial Balance

Record & PostAdjusting

Entries

AdjustedTrial Balance

Close TemporaryAccounts

Post-ClosingTrial Balance

TheAccountingProcessing

Cycle

During the Accounting Period

At the End of the Accounting Period

At the Endof the Year


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Slide 5

2-5

Accounting Processing Cycle

On January 1, $40,000 was borrowed from abank and a note payable was signed.

Prepare the journal entry.

Two accounts are affected:

Cash (an asset) increases by $40,000. Notes Payable (a liability) increases by $40,000.

GENERAL JOURNAL Page 1

Date Description

Post.

Ref. Debit Credit

Jan 1 Cash 40,000

Notes Payable 40,000


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Slide 6

2-6

General Ledger

The T accountis a shorthand format of an accountused by accountants to analyze transactions.

It is not part of the bookkeeping system.

GENERAL LEDGER

Account: Acct. No. ##

Balance

Date Item

Post.

Ref. Debit Credit DR (CR)


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Slide 7

2-7

Posting Journal Entries


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Account Title Debits Credits

Cash 68,500$

Accounts receivable 2,000

Supplies 2,000Prepaid rent 24,000

Inventory 38,000

Furniture and fixtures 12,000

Accounts payable 35,000$

Notes payable 40,000

Unearned rent revenue 1,000Common stock 60,000

Retained earnings 1,000

Sales revenue 38,500

Cost of goods sold 22,000

Salaries expense 5,000

Total 174,500$ 174,500$

Dress Right Clothing Corporation

Unadjusted Trial Balance

July 31, 2009

After recording all entries for the period, Dress RightsUnadjusted Trial Balance would be as follows:

Debits = Credits

A TrialBalanceis alisting of all

accountsand their

balances ata point in

time.


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Slide 9

2-9

Transactions wherecash is paid or received

beforea relatedexpense or revenue is

recognized.

Transactions wherecash is paid or receivedaftera related expense

or revenue isrecognized.

Adjusting Entries

Prepayments Accruals Estimates

Accountants must oftenmake estimatesin order

to comply with theaccrual accounting

model.

At the end of the period, adjusting entries arerequired to satisfy the realization principle and

the matching principle.


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Slide 10

2-10

Asset Expense

UnadjustedBalance

CreditAdjustment

DebitAdjustment

Prepaid Expenses

Today, I will pay

for my first

6 months rent. Prepaid Expenses

Items paid for in advanceof receiving their benefits


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Slide 11

2-11

Depreciation is the process of computingexpense by allocating the cost of plant andequipment over their expected useful lives.

Straight-LineDepreciationExpense

=Asset Cost - Salvage Value

Useful Life

Depreciation


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Slide 12

2-12

Liability Revenue

UnadjustedBalance

CreditAdjustment

DebitAdjustment

Unearned Revenues

Go Streaks

Buy your season tickets for

all home basketball games NOW! Unearned Revenue

Cash received inadvance of performing

services


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Slide 13

2-13

Alternative Approach to Record Prepayments

Unearned RevenueRecord initial cash receipts

as follows:

Cash $$$

Revenue $$$

Adjusting Entry

Record the amount for the

unearned liability as

follows:

Revenue $$$

Unearned revenue $$$

Prepaid ExpensesRecord initial cash

payments as follows:

Expense $$$

Cash $$$

Adjusting Entry

Record the amount for the

prepaid expense as

follows:

Prepaid expense $$$

Expense $$$


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Slide 14

2-14

Expense Liability

CreditAdjustment

DebitAdjustment

Accrued Liabilities

I wont pay you

until the job is done!

Accrued Liabilities

Liabilities recorded when anexpense has been incurred

prior to cash payment.


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Slide 15

2-15

Asset Revenue

CreditAdjustment

DebitAdjustment

Accrued Receivables

Yes, you can pay mein May for your April

15 tax return. Accrued ReceivablesRevenue earned in a

period prior to the cashreceipt.


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Slide 16

2-16

Estimates

Uncollectibleaccounts anddepreciation of fixed

assets are estimated.

An estimated item isa function of futureevents anddevelopments.

$


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Slide 17

2-17

Estimates

Page 30

Date Description

Post.

Ref. Debit Credit

July 31 Bad Debt Expense 500

Allowance for Uncollectible

Accounts 500

GENERAL JOURNAL


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Slide 19

2-19


Income Statement

For Month Ended July 31, 2009

Sales revenue 38,500$

Cost of goods sold 22,000

Gross profit 16,500

Other expenses:

Salaries 10,500$

Supplies 800

Rent 2,000

Depreciation 200Bad debt 500

Total operating expenses 14,000

Operating income 2,500

Other income (expense):

Rent revenue 250Interest expense (333) (83)

Net income 2,417$

The income statement summarizes the results

of operating activities of the company.


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Slide 20

2-20

Current assets: Cash 68,500$

Accounts receivable 2,000$

Less: Allowance for uncollectible accounts 500 1,500

Supplies 1,200

Inventory 38,000Prepaid rent 22,000

Total current assets 131,200

Property and equipment:


Less: Accumulated depreciation 200 11,800

Total assets 143,000$


Balance Sheet

At July 31, 2009

Assets

The balance sheet presents the financial

position of the company on a particular date.

Slid 21


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Slide 21

2-21

Current liabilities: Accounts payable 35,000$

Salaries payable 5,500

Unearned rent revenue 750

Interest payable 333

Note payable 10,000

Total current liabilities 51,583

Long-term liabilities:

Note payable 30,000

Shareholders' equity:

Common stock 60,000$

Retained earnings 1,417Total shareholders' equity 61,417

Total liabilities and shareholders' equity 143,000$


Balance Sheet

At July 31, 2009

Liabilities and Shareholders' Equity

Notice that assets of $143,000 equal total

liabilities plus shareholders equity of $143,000.

Slid 22


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Slide 22

2-22

The statement of cash flows discloses the

changes in cash during a period.

Cash flows from operating activities:

Cash inflows:

From customers 36,500$From rent 1,000

Cash outflows:

For rent (24,000)

For supplies (2,000)

To suppliers for merchandise (25,000)

To employees (5,000)

Net cash used by operating activities (18,500)$

Cash flows from investing activities:

Purchase of furniture and fixtures (12,000)

Cash flows from financing activities:

Issue of capital stock 60,000$

Increase in notes payable 40,000

Payment of cash dividend (1,000)Net cash provided by financing activities 99,000

Net increase in cash 68,500$


Statement of Cash Flows

For the Month of July 2009


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Slide 24


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Slide 24

2-24

TemporaryAccounts

Revenues

IncomeSummary

Expen

ses

Div

idends

PermanentAccounts

Assets

Liabilities

Shareholders

Eq

uity

The closing process applies

only to temporary accounts.

Temporary and Permanent Accounts

RetainedEarnings

Slide 25


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Slide 25

2-25

CLOSING ENTRIES

Two Objectives of Closing Entries:

1.Set the Temporary Accounts (Income Statement

accounts and Dividends) to zero.

2.Update the Retained Earnings account (includecurrent period earnings and dividends).

DRESS RIGHT CLOTHING CORPORATION


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2-26

Adjusted Trial Balance

July 31, 2009


Cash 68,500$


Allowance for uncollectible accounts 500$

Supplies 1,200

Prepaid rent 22,000

Inventory 38,000


Accumulated depr.-furniture & fixtures 200

Accounts payable 35,000

Note payable 40,000

Unearned rent revenue 750Salaries payable 5,500


Common stock 60,000



Rent revenue 250

Cost of goods sold 22,000Salaries expense 10,500

Supplies expense 800

Rent expense 2,000

Depreciation expense 200

Interest expense 333

Bad debt expense 500

Totals 181,033$ 181,033$

This is the AdjustedTrial Balance for

Dress Right after alladjusting entries have

been recorded andposted.

Dress Right will usethese balances to

prepare the financialstatements.


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2-27

Dress Right Closing Entries


Rent revenue 250Income Summary 38,750

Income Summary 36,333Cost of goods sold 22,000Salaries expense 10,500

Supplies expense 800Rent expense 2,000Depreciation expense 200Interest expense 333Bad debt expense 500

Income Summary 2,417Retained Earnings 2,417

Slide 28


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Slide 28

Post-Closing Trial Balance

Lists permanentaccounts and their

balances.

Total debits equaltotal credits.

DRESS RIGHT CLOTHING CORPORATION

Post-Closing Trial Balance

July 31, 2009


Cash 68,500$


Allowance for uncollectible accounts 500$

Supplies 1,200Prepaid rent 22,000

Inventory 38,000


Accumulated depr.-furniture & fixtures 200

Accounts payable 35,000

Note payable 40,000

Unearned rent revenue 750Salaries payable 5,500


Common stock 60,000


Totals 143,700$ 143,700$

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