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3-1
Prepared byCoby Harmon
University of California, Santa Barbara
Intermediate Accounting
Intermediate
Accounting
Prepared by
Coby Harmon
University of California, Santa BarbaraWestmont College
INT!"#IAT ACC$UNTIN%
& I & T N T ' # I T I $ N
Prepared by
Coby Harmon
University of California Santa Barbara
Westmont College
(ieso)eygandt)arfieldteam for success
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3-2
PREVIEW OF CHAPTER
Intermediate Accounting
15th Edition
Kieso Weygandt Warfield
3
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3-3
1. Understand basic acconting
terminology.
2. !"plain doble-entry rles.
3. #dentify steps in t$e acconting cycle.
%. &ecord transactions in 'ornals( post to
ledger acconts( and prepare a trial
balance.
). !"plain t$e reasons for preparing
ad'sting entries and identify ma'or types
of ad'sting entries.
*. Prepare financial statements from t$e
ad'sted trial balance.
+. Prepare closing entries.
,. Prepare financial statements for a
merc$andising company.
After studying this chapter, you should be able to:
$e cconting
#nformation System3/!&0#0 B!C#4!S
/!&0#0 B!C#4!S
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3-%
cconting information system
Collects and processes transaction data*
#isseminates t+e financial information to interested parties*
cconting #nformation System
LO 1 Understand basic accounting terminology.
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3-)
Helps management ans)er suc+ uestions as-'o) muc+ and )+at (ind of debt is outstanding.
Were sales +ig+er t+is period t+an last.
W+at assets do )e +ave.W+at )ere our cas+ inflo)s and outflo)s.
#id )e ma(e a profit last period.
Are any of our product lines or divisions operating at a loss.
Can )e safely increase our dividends to stoc(+olders.
Is our rate of return on net assets increasing.
cconting #nformation System
LO 1 Understand basic accounting terminology.
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3-* LO 1 Understand basic accounting terminology.
/ournal
Posting
Trial Balance
Ad0usting ntries
&inancial Statements
Closing ntries
Basic erminology vent
Transaction
Account
!eal Account
Nominal Account
1edger
cconting #nformation System
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3-+
1. Understand basic acconting
terminology.
2. !"plain doble-entry rles.
3. #dentify steps in t$e acconting cycle.
%. &ecord transactions in 'ornals( post to
ledger acconts( and prepare a trial
balance.
). !"plain t$e reasons for preparing
ad'sting entries and identify ma'or types
of ad'sting entries.
*. Prepare financial statements from t$e
ad'sted trial balance.
+. Prepare closing entries.
,. Prepare financial statements for a
merc$andising company.
After studying this chapter, you should be able to:
$e cconting
#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S
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3-, LO 2 Explain doubleentry rules.
An accont s+o)s t+e effect of transactions on a given
asset, liability, euity, revenue, or e2pense account*
5oble-entry accounting system 3t)o4sided effect5*
!ecording done by debiting at least one account and
crediting anot+er*
5!B#S mst e6al C&!5#S*
5ebits and Credits
cconting #nformation System
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3-7
ccont 0ame
5ebit 8 5r. Credit 8 Cr.
5ebits and Credits
An arrangement t+at s+o)s t+eeffect of transactions on an
account*
#ebit 6 71eft8
Credit 6 7!ig+t8
ccontccont
LO 2 Explain doubleentry rules.
n ccont cann ccont can
be illstrated in abe illstrated in a
-ccont form.-ccont form.
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3-19
ccont 0ame
5ebit 8 5r. Credit 8 Cr.
LO 2 Explain doubleentry rules.
:19(999 ransaction ;2:3(999
:1)(999
,(999
Balance
ransaction ;1
ransaction ;3
#f t$e sm of 5ebit entries are greater t$an t$e sm ofCredit entries( t$e accont <ill $ave a debit balance.
5ebits and Credits
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3-11
ccont 0ame
5ebit 8 5r. Credit 8 Cr.
#f t$e sm of Credit entries are greater t$an t$e sm of5ebit entries( t$e accont <ill $ave a credit balance.
LO 2 Explain doubleentry rules.
:19(999 ransaction ;2:3(999
:1(999
,(999 ransaction ;3
Balance
ransaction ;1
5ebits and Credits
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3-12
NormalBalanceCredit
Normal
BalanceCredit
Normal
Balance5ebit
Normal
Balance5ebit
5ebits and Credits Smmary
LO 2 Explain doubleentry rules.
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3-13
Balance S$eet
6 9 4sset /iability !6ity &evene !"pense
5ebit
Credit
5ebits and Credits Smmary
LO 2 Explain doubleentry rules.
#ncome Statement
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3-1%
$e cconting !6ation
LO 2 Explain doubleentry rules.
!elations+ip among t+e assets, liabilities and stoc(+olders:euity accounts of a business-
T+e euation must be in balance after every transaction* &or
every 5ebit t+ere must be a Credit*
#llstration 3-3
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3-1)
5oble-!ntry System #llstration
Assets Assets 1iabilities1iabilities Stoc(+olders:
uity
Stoc(+olders:
uity= >
;* $)ners invest <=>,>>> in e2c+ange for commonstoc(*
> %9(999 > %9(999
LO 2 Explain doubleentry rules.
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3-1*
Assets Assets 1iabilities1iabilities
= >
?* #isburse <@>> cas+ for secretarial )ages*
- *99 - *99?e"pense@
LO 2 Explain doubleentry rules.
Stoc(+olders:
uity
Stoc(+olders:
uity
5oble-!ntry System #llstration
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3-1+
Assets Assets 1iabilities1iabilities
= >
* Purc+ase office euipment priced at <,?>>, giving a;> percent promissory note in e2c+ange*
> )(299 > )(299
LO 2 Explain doubleentry rules.
Stoc(+olders:
uity
Stoc(+olders:
uity
5oble-!ntry System #llstration
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3-1,
Assets Assets 1iabilities1iabilities
= >
=* !eceived <=,>>> cas+ for services performed*
> %(999 > %(999?revene@
LO 2 Explain doubleentry rules.
Stoc(+olders:
uity
Stoc(+olders:
uity
5oble-!ntry System #llstration
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3-17
Assets Assets 1iabilities1iabilities
= >
* Pay off a s+ort4term liability of <,>>>*
- +(999 - +(999
LO 2 Explain doubleentry rules.
Stoc(+olders:
uity
Stoc(+olders:
uity
5oble-!ntry System #llstration
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3-29
Assets Assets 1iabilities1iabilities
= >
@* #eclared a cas+ dividend of <,>>>*
> )(999 - )(999
LO 2 Explain doubleentry rules.
Stoc(+olders:
uity
Stoc(+olders:
uity
5oble-!ntry System #llstration
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3-21
Assets Assets 1iabilities1iabilities
= >
* Convert a long4term liability of <D>,>>> into commonstoc(*
- ,9(999 > ,9(999
LO 2 Explain doubleentry rules.
Stoc(+olders:
uity
Stoc(+olders:
uity
5oble-!ntry System #llstration
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3-22
Assets Assets 1iabilities1iabilities
= >
D* Pay cas+ of <;@,>>> for a delivery van*
LO 2 Explain doubleentry rules.
- 1*(999
> 1*(999
Note t+at t+e accounting euation euality ismaintained after recording eac+ transaction*
Note t+at t+e accounting euation euality ismaintained after recording eac+ transaction*
Stoc(+olders:
uity
Stoc(+olders:
uity
5oble-!ntry System #llstration
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3-23
$)ners+ip structure dictates t+e types of accounts t+at arepart of or affect t+e euity section*
Proprietors$ip orPartners$ip
Proprietors$ip or
Partners$ip CorporationCorporation
<nerAs Capital
<nerAs 5ra<ing
Common Stoc
Paid-in Capital in
!"cess of Par 5ividends
&etained !arnings
inancial Statements and <ners$ip Strctre
LO 2 Explain doubleentry rules.
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3-2% LO 2 Explain doubleentry rules.
Stoc(+olders: uityStoc(+olders: uityBalance S$eet
Statement of &etained !arnings
Net income or Net loss
?revenes less e"penses@
#ncome Statement
Net income or Net loss
?revenes less e"penses@
#ncome Statement#ividends#ividends
!etained arnings
?net income retained in bsiness@
!etained arnings
?net income retained in bsiness@
Common Stoc(
?investments by stoc$olders@
Common Stoc(
?investments by stoc$olders@
#llstration 3-%
inancial Statements and <ners$ip Strctre
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3-2)
1. Understand basic acconting
terminology.
2. !"plain doble-entry rles.
3. #dentify steps in t$e acconting cycle.
%. &ecord transactions in 'ornals( post to
ledger acconts( and prepare a trial
balance.
). !"plain t$e reasons for preparing
ad'sting entries and identify ma'or types
of ad'sting entries.
*. Prepare financial statements from t$e
ad'sted trial balance.
+. Prepare closing entries.
,. Prepare financial statements for a
merc$andising company.
After studying this chapter, you should be able to:
$e cconting
#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S
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3-2*
$e cconting Cycle
LO ! "dentify steps in the accounting cycle.
TransactionsTransactions
/ournaliEation/ournaliEation
Statement preparationStatement preparation
ClosingClosing
Post4closing trail balancePost4closing trail balance
!eversing entries!eversing entries
Trial balanceTrial balance
PostingPosting
Ad0usted trial balance Ad0usted trial balance
Ad0ustments Ad0ustmentsWor(S+eetWor(S+eet
#llstration 3-*
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3-2+
#dentify and &ecording ransactions
W$at to &ecordD
T+e &ASB used t+e p+rase 7transactions and ot+er
events and circumstances t+at affect a business
enterprise*8
LO ! "dentify steps in the accounting cycle.
ypes of !ventsE
!"ternal F bet)een an entity and its environment*
#nternal F event occurring entirely )it+in an entity*
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3-2,
1. Understand basic acconting
terminology.
2. !"plain doble-entry rles.
3. #dentify steps in t$e acconting cycle.
%. &ecord transactions in 'ornals( post to
ledger acconts( and prepare a trial
balance.
). !"plain t$e reasons for preparing
ad'sting entries and identify ma'or types
of ad'sting entries.
*. Prepare financial statements from t$e
ad'sted trial balance.
+. Prepare closing entries.
,. Prepare financial statements for a
merc$andising company.
After studying this chapter, you should be able to:
$e cconting
#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S
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3-27
eneral ornal F a c+ronological record of transactions*ornal !ntries are recorded in t+e 0ournal*
ornaliFing
LO #
September 1E Stoc(+olders invested <;,>>> cas+ in t+e corporation
in e2c+ange for s+ares of stoc(* Purc+ased computer euipment for
<,>>> cas+*#llstration 3-+
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3-39
Posting F Transferring amounts from 0ournal to ledger*
Posting
LO #
#llstration 3-,
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3-31
n !"panded !"ample
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
Posting
T+e purpose of transaction analysis is
3;5 to identify t+e type of account involved, and
3?5 to determine )+et+er a debit or a credit is reuired*
Geep in mind t+at every 0ournal entry affects one or more of t+e
follo)ing items- assets, liabilities, stoc(+olders: euity,
revenues, or e2penses*
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3-32
;* $ctober ;- Stoc(+olders invest <;>>,>>> cas+ in anadvertising venture to be (no)n as Pioneer Advertising
Agency Inc*
Common Stoc( ;>>,>>>
Cas+ ;>>,>>>$ct* ;
#ebit Credit
Cas+
199(999 199(999
#ebit Credit
Common Stoc(
Posting
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
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3-33
?* $ctober ;- Pioneer Advertising purc+ases office euipmentcosting <>,>>> by signing a 4mont+, ;?H, <>,>>> note
payable*
Notes Payable >,>>>
uipment >,>>>$ct* ;
#ebit Credit
uipment
)9(999 )9(999
#ebit Credit
Notes Payable
Posting
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
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3-3%
* $ctober ?- Pioneer Advertising receives a <;?,>>> cas+advance from GC, a client, for advertising services t+at are
e2pected to be completed by #ecember ;*
Unearned Service !evenue ;?,>>>
Cas+ ;?,>>>$ct* ?
#ebit Credit
Cas+
;>>,>>> 12(999
#ebit Credit
Unearned Service !evenue
Posting
12(999
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
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3-3)
=* $ctober - Pioneer Advertising pays <,>>> office rent, incas+, for $ctober*
Cas+ ,>>>
!ent 2pense ,>>>$ct*
#ebit Credit
Cas+
;>>,>>> 7(999
#ebit Credit
!ent 2pense
Posting
;?,>>>
7(999
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
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3-3*
* $ctober =- Pioneer Advertising pays <@,>>> for a one4yearinsurance policy t+at )ill e2pire ne2t year on September >*
Cas+ @,>>>
Prepaid Insurance @,>>>$ct* =
#ebit Credit
Cas+
;>>,>>> *(999
#ebit Credit
Prepaid Insurance
Posting
;?,>>>
,>>>
*(999
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
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3-3+
@* $ctober - Pioneer Advertising purc+ases, for <?,>>> onaccount, an estimated 4mont+ supply of advertising materials
from Aero Supply*
Accounts Payable ?,>>>
Supplies ?,>>>$ct*
#ebit Credit
Supplies
2)(999 2)(999
#ebit Credit
Accounts Payable
Posting
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
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3-3,
* $ctober - Pioneer Advertising signs a contract )it+ a localne)spaper for advertising inserts 3flyers5 to be distributed
starting t+e last Sunday in November* Pioneer )ill start )or(
on t+e content of t+e flyers in November* Payment of <,>>> is
due follo)ing delivery of t+e Sunday papers containing t+e
flyers*
Posting
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
bsiness transaction $as not occrred. $ere is only an
agreement bet<een Pioneer dvertising and t$e ne<spaper for
t$e services to be performed in 0ovember. $erefore( no 'ornalentry is necessary in ctober.
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3-37
D* $ctober ?>- Pioneer Advertising:s board of directors declaresand pays a <,>>> cas+ dividend to stoc(+olders*
Cas+ ,>>>
#ividends ,>>>$ct* ?>
#ebit Credit
Cas+
;>>,>>> )(999
#ebit Credit
#ividends
Posting
;?,>>>
,>>>
@,>>>
)(999
LO # $ecord transactions in %ournals, post to ledgeraccounts, and prepare a trial balance.
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3-%9 LO #
* $ctober ?@- mployees are paid every four )ee(s* T+e totalpayroll is <?,>>> per day* T+e pay period ended on &riday,
$ctober ?@, )it+ salaries and )ages of <=>,>>> being paid*
Cas+ =>,>>>
Salaries and Wages 2pense =>,>>>$ct* ?@
#ebit Credit
Cas+
;>>,>>> %9(999
#ebit Credit
Salaries and Wages 2pense
Posting
;?,>>>
,>>>
@,>>>
,>>>
%9(999
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3-%1
;>* $ctober ;- Pioneer Advertising receives <?D,>>> in cas+ and
bills Copa Company <?,>>> for advertising services of<;>>,>>> performed in $ctober*
Accounts !eceivable ?,>>>
Cas+ ?D,>>>$ct* ;
#ebit Credit
Cas+
;>>,>>> +2(999
#ebit Credit
Accounts !eceivable
;?,>>>,>>>@,>>>
,>>>
=>,>>>
Service !evenue ;>>,>>>
199(999
#ebit Credit
Service !evenue
2,(999
,9(999
Posting
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3-%2
rial Balance F A list of eac+
account and its
balanceJ used to
prove euality ofdebit and credit
balances*
rial Balance
LO #
#llstration 3-17
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3-%3
1. Understand basic acconting
terminology.
2. !"plain doble-entry rles.
3. #dentify steps in t$e acconting cycle.
%. &ecord transactions in 'ornals( post to
ledger acconts( and prepare a trial
balance.
). !"plain t$e reasons for preparing
ad'sting entries and identify ma'or types
of ad'sting entries.
*. Prepare financial statements from t$e
ad'sted trial balance.
+. Prepare closing entries.
,. Prepare financial statements for a
merc$andising company.
After studying this chapter, you should be able to:
$e cconting
#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S
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3-%%
d'sting !ntries
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
"a(es it possible to- !eport on t+e balance s+eet t+e appropriate assets,
liabilities, and o)ner:s euity at t+e statement date*
!eport on t+e income statement t+e proper revenues
and e2penses for t+e period*
K &evenes are recorded in t+e period in )+ic+ services
are performed*
K !"penses are recogniEed in t+e period in )+ic+ t+ey areincurred*
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3-%)
ypes of d'sting !ntries
;* Prepaid !"penses. 2penses paid in cas+
before t+ey are used orconsumed*
5eferrals
* ccred &evenes.
!evenues for services
performed but not yetreceived in cas+ or
recorded*
=* ccred !"penses.
2penses incurred but not
yet paid in cas+ or recorded*
?* Unearned &evenes.
Cas+ received before
services are performed*
ccrals
#llstration 3-29
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
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3-%*
5eferrals areeit+er
prepaid
e"penses
or nearned
revenes*
d'sting !ntries for 5eferrals
#llstration 3-21
LO &
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3-%+
'repaid Expenses. Assets paid for and recorded before acompany uses t+em*
d'sting !ntries for Prepaid !"penses
insurance
supplies advertising
Cas+ PaymentCas+ Payment 2pense !ecorded2pense !ecordedB!&!
rent
buildings and euipment
Prepayments often occur in regard to-
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
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3-%,
(upplies. Pioneer Advertising purc+ased advertising suppliescosting <?,>>> on $ctober * Prepare t+e 0ournal entry to
record t+e purc+ase of t+e supplies*
Cas+ ?,>>>
Supplies ?,>>>$ct*
#ebit Credit
Supplies
2)(999 2)(999
#ebit Credit
Cas+
d'sting !ntries for Prepaid !"penses
LO &
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3-%7
(upplies. An inventory count at t+e close of business on$ctober ; reveals t+at <;>,>>> of t+e advertising supplies are
still on +and*
Supplies ;,>>>
Supplies 2pense ;,>>>$ct* ;
#ebit Credit
Supplies
?,>>>?,>>> 1)(999
#ebit Credit
Supplies 2pense
1)(999
19(999
LO &
d'sting !ntries for Prepaid !"penses
P#0!!& 54!&#S#0 !0CG #0C
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3-)9
d'sting !ntries forPrepaid !"penses
Statement
PresentationE
Supplies identifies t+at
portion of t+e asset:s
cost t+at )ill provide
future economic benefit*
#llstration 3-3)
#llstration 3-3)
P#0!!& 54!&#S#0 !0CG #0C.Balance S$eet
ctober 31( 291%
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3-)1
StatementPresentationE
Supplies e2pense
identifies t+at portion of
t+e asset:s cost t+at
e2pired in $ctober*
#llstration 3-3)
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
P#0!!& 54!&#S#0 !0CG #0C.
#ncome Statement
or t$e ont$ !nded ctober 31( 291%
d'sting !ntries for Prepaid !"penses
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3-)2
"nsurance. $n $ct* =t+
, Pioneer Advertising paid <@,>>> for aone4year fire insurance policy, coverage beginning $ctober ;*
Prepare t+e entry to record t+e purc+ase of t+e insurance*
Cas+ @,>>>
Prepaid Insurance @,>>>$ct* =
#ebit Credit
Prepaid Insurance
*(999 *(999
#ebit Credit
Cas+
LO &
d'sting !ntries for Prepaid !"penses
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3-)3
"nsurance. An analysis of t+e policy reveals t+at <>>3<@,>>> L ;?5 of insurance e2pires eac+ mont+* Prepare t+e
entry to record t+e insurance cost e2pired in $ctober*
Prepaid Insurance >>
Insurance 2pense >>$ct* ;
#ebit Credit
Prepaid Insurance
@,>>>@,>>> )99
#ebit Credit
Insurance 2pense
)99
)()99
LO &
d'sting !ntries for Prepaid !"penses
P#0!!& 54!&#S#0 !0CG #0C
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3-)%
d'sting !ntries forPrepaid !"penses
Statement
PresentationE
Prepaid insurance
identifies t+at portion of
t+e asset:s cost t+at )ill
provide future economic
benefit*
#llstration 3-3)
#llstration 3-3)
P#0!!& 54!&#S#0 !0CG #0C.Balance S$eet
ctober 31( 291%
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3-))
StatementPresentationE
Insurance e2pense
identifies t+at portion of
t+e asset:s cost t+at
e2pired in $ctober*
#llstration 3-3)
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
P#0!!& 54!&#S#0 !0CG #0C.
#ncome Statement
or t$e ont$ !nded ctober 31( 291%
d'sting !ntries for Prepaid !"penses
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3-)*
)epreciation. Pioneer Advertising estimates depreciation on itsoffice euipment to be <=>> per mont+* Prepare t+e entry to
record depreciation for t+e mont+ of $ctober*
Accumulated #epreciation =>>
#epreciation 2pense =>>$ct* ;
#ebit Credit
#epreciation 2pense
%99 %99#ebit Credit
Accumulated #epreciation
LO &
d'sting !ntries for Prepaid !"penses
P#0!!& 54!&#S#0 !0CG #0C.
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3-)+
d'sting !ntries forPrepaid !"penses
Statement
PresentationE
Accumulated
#epreciation is a contra
asset account*
#llstration 3-3)
#llstration 3-3)
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ctober 31( 291%
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3-),
StatementPresentationE
#epreciation e2pense
identifies t+at portion of
t+e asset:s cost t+at
e2pired in $ctober*
#llstration 3-3)
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
P#0!!& 54!&#S#0 !0CG #0C.
#ncome Statement
or t$e ont$ !nded ctober 31( 291%
d'sting !ntries for Prepaid !"penses
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3-)7
!eceipt of cas+ before t+e services are performed isrecorded as a liability called nearned revenes*
rent
airline tic(ets tuition
Cas+ !eceiptCas+ !eceipt !evenue !ecorded!evenue !ecordedB!&!
magaEine subscriptions
customer deposits
Unearned revenues often occur in regard to-
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
d'sting !ntries for Unearned &evenes
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3-*9 LO &
Unearned $e*enue. Pioneer Advertising received <;?,>>> on$ctober ?nd from GC for advertising services e2pected to be
completed by #ecember ;* Prepare t+e 0ournal entry to
record t+e receipt on $ctober ?nd*
Unearned Service !evenue ;?,>>>Cas+ ;?,>>>$ct* ?
#ebit Credit
Cas+
12(999 12(999
#ebit Credit
Unearned Service !evenue
d'sting !ntries for Unearned &evenes
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3-*1 LO &
#ebit Credit
Service !evenue
;>>,>>>;>>,>>> ;?,>>>;?,>>>
#ebit Credit
Unearned Service !evenue
%(999
,(999
Unearned $e*enues. Analysis reveals t+at Pioneer Advertisingearned <=,>>> of t+e advertising services in $ctober* Prepare
t+e entry to record t+e revenue for services performed*
Service !evenue =,>>>
Unearned Service !evenue =,>>>$ct* ;
%(999
19%(999
d'sting !ntries for Unearned &evenes
P#0!!& 54!&#S#0 !0CG #0C.
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3-*2
Statement
PresentationE
Unearned servicerevenue identifies t+at
portion of t+e liability for
)+ic+ services +ave not
been performed*
#llstration 3-3)
#llstration 3-3)
Balance S$eetctober 31( 291%
d'sting !ntriesfor Unearned
&evenes
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3-*3
StatementPresentationE
Service !evenue
includes t+e portion of
unearned service
revenue for )+ic+
services )ere
performed in $ctober*
#llstration 3-3)
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
d'sting !ntries for Unearned &evenes
P#0!!& 54!&#S#0 !0CG #0C.
#ncome Statement
or t$e ont$ !nded ctober 31( 291%
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3-*%
d'sting !ntries for ccrals
#llstration 3-2+
ccrals areeit+er
accred
revenes or
accrede"penses*
LO &
f
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3-*)
!evenues recorded for services performed but cas+ +as yetto be received at t+e statement date are accred revenes*
d'sting !ntries for ccred &evenes
rent
interest
services performed
B!&!
Accrued revenues often occur in regard to-
Cas+ !eceiptCas+ !eceipt!evenue !ecorded!evenue !ecorded
Ad0usting entry results in-
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
d' ti ! t i f d &
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3-** LO &
Accrued $e*enues. In $ctober Pioneer Advertising performedservices )ort+ <?,>>> t+at )ere not billed clients before $ct* ;*
Prepare t+e entry to revenues for services performed*
Service !evenue ?,>>>
Accounts !eceivable ?,>>>$ct* ;
#ebit Credit
Accounts !eceivable
?,>>>?,>>>
#ebit Credit
Service !evenue
;>>,>>>;>>,>>>
=,>>>=,>>>
2(999
19*(999
2(999
+%(999
d'sting !ntries for ccred &evenes
P#0!!& 54!&#S#0 !0CG #0C.
d' ti ! t i
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3-*+ LO &
#llstration 3-3)
#llstration 3-3)
Balance S$eetctober 31( 291%
d'sting !ntriesfor ccred
&evenes
P#0!!& 54!&#S#0 !0CG #0C.
#ncome Statement
or t$e ont$ !nded ctober 31( 291%
d' ti ! t i f d !
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3-*,
2penses incurred but not yet paid in cas+ or recorded*
rent
interest
B!&!
Accrued e2penses often occur in regard to-
Cas+ PaymentCas+ Payment2pense !ecorded2pense !ecorded
ta2es
salaries
Ad0usting entry results in-
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
d'sting !ntries for ccred !"penses
d' ti ! t i f d !
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3-*7
Accrued "nterest. Pioneer Advertising signed a t+ree4mont+note payable in t+e amount of <>,>>> on $ctober ;* T+e note
reuires interest at an annual rate of ;? percent* T+ree factors
determine t+e amount of t+e interest accumulation-
; ? #llstration 3-27
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
d'sting !ntries for ccred !"penses
d' ti ! t i f d !
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3-+9
Interest Payable >>
Interest 2pense >>$ct* ;
#ebit Credit
Interest 2pense
)99 )99
#ebit Credit
Interest Payable
Accrued "nterest. Pioneer signed a t+ree4mont+, ;?H, notepayable in t+e amount of <>,>>> on $ctober ;* Prepare t+e
ad0usting entry on $ct* ; to record t+e accrual of interest*
LO &
d'sting !ntries for ccred !"penses
P#0!!& 54!&#S#0 !0CG #0C.B l S$ td' ti ! t i
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3-+1 LO &
#llstration 3-3)
#llstration 3-3)
Balance S$eetctober 31( 291%
P#0!!& 54!&#S#0 !0CG #0C.
#ncome Statement
or t$e ont$ !nded ctober 31( 291%
d'sting !ntriesfor ccred
!"penses
d' ti ! t i f d !
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3-+2
Accrued (alaries and +ages. At $ctober ;, t+e salaries and
)ages for t+ese days represent an accrued e2pense and a
related liability to Pioneer* T+e employees receive total salaries of
<;>,>>> for a five4day )or( )ee(, or <?,>>> per day*
LO &
d'sting !ntries for ccred !"penses
d' ti ! t i f d !
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3-+3
Salaries and Wages Payable @,>>>
Salaries and Wages 2pense @,>>>$ct* ;
#ebit Credit
Salaries and Wages 2pense
=>,>>>=>,>>> *(999
#ebit Credit
Salaries and Wages Payable
Accrued (alaries. mployees receive total salaries and )ages
of <;>,>>> for a five4day )or( )ee(, or <?,>>> per day* Prepare
t+e ad0usting entry on $ct* ; to record accrual for salaries*
*(999
%*(999
LO &
d'sting !ntries for ccred !"penses
d' sting !ntries for ccr ed ! penses
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3-+%
Salaries and Wages 2pense =,>>>
Salaries and Wages Payable @,>>>Nov* ?
#ebit Credit
3%(999 @,>>>@,>>>
#ebit Credit
Cas+ =>,>>>
*(999
LO &
Salaries and Wages 2pense Salaries and Wages Payable
d'sting !ntries for ccred !"penses
Accrued (alaries. $n November ?, Pioneer )ill again pay
total salaries and )ages of <=>,>>>* Prepare t+e entry to
record t+e payment of salaries on November ?*
P#0!!& 54!&#S#0 !0CG #0C.Balance S$eetd'sting !ntries
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3-+)
#llstration 3-3)
#llstration 3-3)
LO &
Balance S$eetctober 31( 291%
P#0!!& 54!&#S#0 !0CG #0C.
#ncome Statement
or t$e ont$ !nded ctober 31( 291%
d'sting !ntriesfor ccred
!"penses
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3-+*
!at+er t+an purc+asing insurance to cover casualty losses and ot+er
obligations, some companies 7self4insure*8 T+at is, a company decides
to pay for any possible claims, as t+ey arise, out of its o)n resources*
T+e company also purc+ases an insurance policy to cover losses t+at
e2ceed certain amounts* &or e2ample, Almost &amily, Inc*, a
+ealt+care services company, +as a self4insured employee +ealt+4benefit program* 'o)ever, Almost &amily ran into accounting problems
)+en it failed to record an accrual of t+e liability for benefits not
covered by its bac(4up insurance policy* T+is led to restatement of
Almost &amily:s fiscal results for t+e accrual of t+e benefit e2pense*
WHAT’S YOUR PRINCIPLE AM I COVERED?
LO & Explain the reasons for preparing ad%usting entries
and identify ma%or types of ad%usting entries.
d'sting !ntries for ccred !"penses
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3-++
ad )ebts. Pioneer Advertising reasonably estimates a bad
debt e2pense for t+e mont+ of <;,@>>* Prepare t+e entry to
record t+e bad debts for t+e mont+ of $ctober*
LO &
Allo)ance for #oubtful Accounts ;,@>>
Bad #ebt 2pense ;,@>>$ct* ;
#llstration 3-32
d'sting !ntries for ccred !"penses
P#0!!& 54!&#S#0 !0CG #0C.Balance S$eetd'sting !ntries
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3-+, LO &
#llstration 3-3)
#llstration 3-3)
Balance S$eetctober 31( 291%
P#0!!& 54!&#S#0 !0CG #0C.
#ncome Statement
or t$e ont$ !nded ctober 31( 291%
d'sting !ntriesfor ccred
!"penses
d'sted rial Balance
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3-+7
S+o)s t+e
balance of all
accounts, after
ad0usting entries,
at t+e end of t+e
accounting
period*
d'sted rial Balance
#llstration 3-33
P#0!!& 54!&#S#0 !0CG #0C.d'sted rial Balance
ctober 31( 291%
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3-,9
1. Understand basic acconting
terminology.
2. !"plain doble-entry rles.
3. #dentify steps in t$e acconting cycle.
%. &ecord transactions in 'ornals( post toledger acconts( and prepare a trial
balance.
). !"plain t$e reasons for preparing
ad'sting entries and identify ma'or types
of ad'sting entries.
*. Prepare financial statements from t$e
ad'sted trial balance.
+. Prepare closing entries.
,. Prepare financial statements for a
merc$andising company.
After studying this chapter, you should be able to:
$e cconting
#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S
Preparing inancial Statements
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3-,1
Preparing inancial Statements
LO - 'repare financial statement from the ad%usted trial balance.
&inancial Statements are prepared directly from t+e Ad0usted Trial Balance*
&inancial Statements are prepared directly from t+e Ad0usted Trial Balance*
BalanceS+eet
IncomeStatement
!etainedarnings
Statement
Preparing inancial Statements
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3-,2
Preparing inancial Statements
LO -
#llstration 3-3%
Preparing inancial Statements
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3-,3
Preparing inancial Statements
#llstration 3-3)
LO -
WHAT’S YOUR PRINCIPLE
24/7 ACCOUNTING
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3-,%
To ac+ieve t+e vision of 7?=M accounting,8 a company must be able to
update revenue, income, and balance s+eet numbers every day )it+in
t+e uarter and publis+ t+em on t+e Internet* Suc+ real4time reporting
responds to t+e demand for more timely financial information made
available to all investorsnot 0ust to analysts )it+ access to company
management* T)o obstacles typically stand in t+e )ay of ?=Maccounting- +aving t+e necessary accounting systems to close t+e
boo(s on a daily basis, and reliability concerns associated )it+
unaudited real4time data* $nly a fe) companies +ave t+e necessary
accounting capabilities* Cisco Systems, )+ic+ pioneered t+e concept
of t+e ?=4+our close, is one suc+ company*
WHAT’S YOUR PRINCIPLE 24/7 ACCOUNTING
LO - 'repare financial statement from the ad%usted trial balance.
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3-,)
1. Understand basic acconting
terminology.
2. !"plain doble-entry rles.
3. #dentify steps in t$e acconting cycle.
%. &ecord transactions in 'ornals( post toledger acconts( and prepare a trial
balance.
). !"plain t$e reasons for preparing
ad'sting entries and identify ma'or types
of ad'sting entries.
*. Prepare financial statements from t$e
ad'sted trial balance.
+. Prepare closing entries.
,. Prepare financial statements for a
merc$andising company.
After studying this chapter, you should be able to:
$e cconting
#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S
Closing !ntries
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3-,*
Closing !ntries
LO 'repare closing entries.
To reduce t+e balance of t+e nominal 3temporary5 accounts
to Eero in order to prepare t+e accounts for t+e ne2t
period:s transactions*
To transfer all income statement account balances to t+e
!etained arnings account in o)ner:s euity*
Balance s+eet 3asset, liability, and e6ity5 accounts are
not closed* #ividends are closed directly to t+e !etained arnings
account*
Basic Process
Closing !ntries
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3-,+
Closing !ntries
LO 'repare closing entries.
&etained !arnings )(999 #ividends ,>>>
Service !evenue ;>@,>>>Salaries O Wages 2pense =@,>>>
Supplies 2pense ;,>>>
!ent 2pense ,>>>
Insurance 2pense >>
Interest 2pense >>#epreciation 2pense =>>
Bad #ebt 2pense ;,@>>
&etained !arnings 33(999
#llstration 3-33
Closing ornal !ntriesE
P#0!!& 54!&#S#0 !0CG #0C.d'sted rial Balance
ctober 31( 291%
Post-Closing rial Balance
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3-,,
Post-Closing rial Balance
LO
#llstration 3-3,
P#0!!& 54!&#S#0 !0CG #0C.
Post-Closing rial Balancectober 31( 291%
cconting Cycle SmmariFed
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3-,7
cconting Cycle SmmariFed
LO 'repare closing entries.
;* nter t+e transactions of t+e period in appropriate 0ournals*
?* Post from t+e 0ournals to t+e ledger 3or ledgers5*
* Ta(e an unad0usted trial balance 3trial balance5*
=* Prepare ad0usting 0ournal entries and post to t+e ledger3s5*
* Ta(e a trial balance after ad0usting 3ad0usted trial balance5*
@* Prepare t+e financial statements from t+e second trial balance*
* Prepare closing 0ournal entries and post to t+e ledger3s5*
D* Ta(e a post4closing trial balance 3optional5** Prepare reversing entries 3optional5 and post to t+e ledger3s5*
!eversing entries arecovered in Appendi2 B*
WHAT’S YOUR PRINCIPLE
HEY IT’S COMPLICATED
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3-79
T+e economic volatility of t+e past fe) years +as left companies +ungering for
more timely and uniform financial information to +elp t+em react uic(ly to fast4c+anging conditions* As one e2pert noted, companies )ere e2tremely focused ontrying to reduce costs and plan for t+e future better, but a lot of t+em discoveredt+at t+ey didn:t +ave t+e information t+ey needed and t+ey didn:t +ave t+e ability toget t+at information* T+e unsteady recession environment also made it ris(y forcompanies to interrupt t+eir operations to get ne) systems up to speed* So )+at todo. Try to piecemeal upgrades eac+ year or start a ma0or over+aul of t+eir internalsystems. Best By, for e2ample, +as standardiEed as many of its systems aspossible and +as been steadily upgrading t+em over t+e past decade* Acuisitionscan )rea( +avoc on reporting systems* Best Buy is c+oosy about )+en tostandardiEe for companies it acuires, but it sometimes +as to implement ne)systems after international deals* In ot+er situations, a ma0or over+aul is needed*&or e2ample, it is common for companies )it+ a steady stream of acuisitions to
+ave > to > general ledger systems* In t+ose cases, a company cannot react )ellunless its systems are made compatible* So is it t+e big bang 3ma0or over+aul5 ort+e piecemeal approac+. It seems to depend* $ne t+ing is certaingoodaccounting systems are a necessity* Wit+out one, t+e ris( of failure is +ig+*
WHAT’S YOUR PRINCIPLE HEY, IT’S COMPLICATED
LO 'repare closing entries.
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3-71
1. Understand basic acconting
terminology.
2. !"plain doble-entry rles.
3. #dentify steps in t$e acconting cycle.
%. &ecord transactions in 'ornals( post toledger acconts( and prepare a trial
balance.
). !"plain t$e reasons for preparing
ad'sting entries and identify ma'or types
of ad'sting entries.
*. Prepare financial statements from t$e
ad'sted trial balance.
+. Prepare closing entries.
,. Prepare financial statements for a
merc$andising company.
After studying this chapter, you should be able to:
$e cconting
#nformation System3/!&0#0 B!C#4!S/!&0#0 B!C#4!S
inancial Statements of a erc$andising Company
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3-72
a c a State e ts o a e c a d s g Co pa y
LO /
#llstration 3-37
UPW0 CB#0! C&P.#ncome Statement
or t$e Gear !nded 5ecember 31( 291%
inancial Statements of a erc$andising Company
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3-73 LO / 'repare financial statements for a merchandising company.
#llstration 3-%9
UPW0 CB#0! C&P.Statement of &etained !arnings
or t$e Gear !nded 5ecember 31( 291%
g p y
inancial UPW0 CB#0! C&P.
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3-7%
inancialStatements of a
erc$andisingCompany
LO /
#llstration 3-%1
Balance S$eets of 5ecember 31( 291%
WHAT’S YOUR PRINCIPLE
STATEMENTS PLEASE
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3-7)
T+e use of a )or(s+eet at t+e end of eac+ mont+ or uarter enables a
company to prepare interim financial statements even t+oug+ it closes t+eboo(s only at t+e end of eac+ year* &or e2ample, assume t+at oogle closesits boo(s on #ecember ;, but it )ants mont+ly financial statements* To dot+is, at t+e end of /anuary, %oogle prepares an ad0usted trial balance 3using a)or(s+eet as illustrated in Appendi2 C5 to supply t+e information needed forstatements for /anuary* At t+e end of &ebruary, it uses a )or(s+eet again*
Note t+at because %oogle did not close t+e accounts at t+e end of /anuary,t+e income statement ta(en from t+e ad0usted trial balance on &ebruary ?D )illpresent t+e net income for t)o mont+s* If %oogle )ants an income statementfor only t+e mont+ of &ebruary, t+e company obtains it by subtracting t+eitems in t+e /anuary income statement from t+e corresponding items in t+eincome statement for t+e t)o mont+s of /anuary and &ebruary* If %oogle
e2ecutes suc+ a process daily, it can realiEe 7?=M accounting8 3see t+e 7W+at#o t+e Numbers "ean.8 bo2 on page ;;>5*
WHAT S YOUR PRINCIPLE STATEMENTS, PLEASE
LO / 'repare financial statements for a merchandising company.
PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUS
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3-7*
PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0
"ost companies use accral-basis acconting* T+ey
recogniEe revenue )+en t+e performance obligation is satisfied
and
e2penses in t+e period incurred,
)it+out regard to t+e time of receipt or payment of cas+*
Under t+e strict cas$-basis, companies
record revenue only )+en t+ey receive cas+, and
record e2penses only )+en t+ey disperse cas+*
Cas+ basis financial
statements are not in
conformity )it+ %AAP*LO 0 )ifferentiate the cash basis of accounting
from the accrual basis of accounting.
PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUS
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3-7+
#llstrationE uality Contractor signs an agreement to construct a
garage for <??,>>>* In /anuary, uality begins construction, incurs
costs of <;D,>>> on credit, and by t+e end of /anuary delivers a
finis+ed garage to t+e buyer* In &ebruary, uality collects <??,>>>
cas+ from t+e customer* In "arc+, uality pays t+e <;D,>>> due t+e
creditors*#llstration 3-1
LO 0 )ifferentiate the cash basis of accounting
from the accrual basis of accounting.
PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0
Advance slide in presentation
mode to reveal ans)er*
PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUS
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3-7,
#llstrationE uality Contractor signs an agreement to construct a
garage for <??,>>>* In /anuary, uality begins construction, incurs
costs of <;D,>>> on credit, and by t+e end of /anuary delivers a
finis+ed garage to t+e buyer* In &ebruary, uality collects <??,>>>
cas+ from t+e customer* In "arc+, uality pays t+e <;D,>>> due t+e
creditors*#llstration 3-2
LO 0 )ifferentiate the cash basis of accounting
from the accrual basis of accounting.
PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0
Advance slide in presentation
mode to reveal ans)er*
PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUS
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3-77
Conversion rom Cas$ Basis o ccral Basis
#llstrationE #r* #iane Windsor, li(e many small business o)ners,
(eeps +er accounting records on a cas+ basis* In t+e year ?>;=, #r*
Windsor received <>>,>>> from +er patients and paid <;>,>>> for
operating e2penses, resulting in an e2cess of cas+ receipts over
disbursements of <;>,>>> 3<>>,>>> 4 <;>,>>>5* At /anuary ; and#ecember ;, ?>;=, s+e +as accounts receivable, unearned service
revenue, accrued liabilities, and prepaid e2penses as s+o)n in
Illustration A4*#llstration 3-)
LO 0 )ifferentiate the cash basis of accounting
from the accrual basis of accounting.
PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0
PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUSCC&U BS#S CCU0#0
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3-199
#llstrationE Calculate service revene on an accrual basis*
#llstration 3-)
#llstration 3-,
LO 0 )ifferentiate the cash basis of accounting
from the accrual basis of accounting.
PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0
Conversion rom Cas$ Basis o ccral Basis
Advance slide in presentation
mode to reveal ans)er*
PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUSCC&U/ BS#S CCU0#0
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3-191
#llstrationE Calculate operating e"penses on an accrual basis*
#llstration 3-)
#llstration 3-11
LO 0 )ifferentiate the cash basis of accounting
from the accrual basis of accounting.
PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0
Conversion rom Cas$ Basis o ccral Basis
Advance slide in presentation
mode to reveal ans)er*
PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUSCC&U/ BS#S CCU0#0
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3-192 LO 0
#llstration 3-12
PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0
Conversion rom Cas$ Basis o ccral Basis
PP!05#IPP!05#I 3 CSH-BS#S CCU0#0 4!&SUSCC&U/ BS#S CCU0#0
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3-193
LO 0 )ifferentiate the cash basis of accounting
from the accrual basis of accounting.
$eoretical Weanesses of t$e Cas$ Basis
Today:s economy is considerably more lubricated by credit t+an
by cas+*
T+e accrual basis, not t+e cas+ basis, recogniEes all aspects of
t+e credit p+enomenon*
Investors, creditors, and ot+er decision ma(ers see( timely
information about a company:s futur cas+ flo)s*
PP!05#IPP!05#I 3 CC&U/-BS#S CCU0#0
PP!05#IPP!05#I 3B US#0 &!4!&S#0 !0&#!S
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3-19% LO 1 "dentifying ad%usting entries that may be re*ersed.
#llstration of &eversing !ntriesJccrals
#llstration 3B-1
PP!05#IPP!05#I 3B
PP!05#IPP!05#I 3B US#0 &!4!&S#0 !0&#!S
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3-19) LO 1 "dentifying ad%usting entries that may be re*ersed.
#llstration of &eversing !ntriesJ5eferrals
PP!05#IPP!05#I 3B
#llstration 3B-2
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PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5
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3-19+ LO 11 'repare a 1column or3sheet.
A company prepares a )or(s+eet eit+er on
columnar paper or
)it+in a computer spreads+eet*
A company uses t+e )or(s+eet to ad0ust account balances and
to prepare financial statements*
PP!05#IPP!05#I 3C CGC/! &!4#S#!5
PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5
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3-19, LO 11 'repare a 1column or3sheet.
Trial Balance Columns
Ad0ustment Columns
Wors$eet Colmns
PP!05#I CGC/! &!4#S#!5
PP!05#IPP!05#I 3C
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3-197
#llstration 3C-1Wors$eet
US#0 W&KSH!!E H!
CCU0#0CGC/! &!4#S#!5
PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5
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3-119
T+e Wor(s+eet-
provides information needed for preparation of t+e
financial statements*
Sorts data into appropriate columns, )+ic+ facilitates t+e
preparation of t+e statements*
LO 11 'repare a 1column or3sheet.
Preparing inancial Statements from a Wors$eet
CGC/! &!4#S#!5
PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5
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3-111 LO 11
CGC/! &!4#S#!5
#llstration 3-37
UPW0 CB#0! C&P.#ncome Statement
or t$e Gear !nded 5ecember 31( 291%
PP!05#IPP!05#I 3C US#0 W&KSH!!E H! CCU0#0CGC/! &!4#S#!5
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3-112
CGC/! &!4#S#!5
#llstration 3-%9
UPW0 CB#0! C&P.Statement of &etained !arnings
or t$e Gear !nded 5ecember 31( 291%
LO 11 'repare a 1column or3sheet.
PP!05#IPP!05#I 3C UPW0 CB#0! C&P.Balance S$eet
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3-113
US#0
W&KSH!!E H!CCU0#0CGC/! &!4#S#!5
LO 11
#llstration 3-%1
s of 5ecember 31( 291%
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3-11% LO 12 4ompare the accounting information systems under 5AA' and "6$(.
International companies use t+e same set of procedures and records to
(eep trac( of transaction data* T+us, t+e material in C+apter is t+e
same under bot+ %AAP and I&!S*
Transaction analysis is t+e same under I&!S and %AAP but, as you )ill
see in later c+apters, different standards sometimes impact +o)
transactions are recorded*
Bot+ t+e IASB and &ASB go beyond t+e basic definitions provided in t+is
te2tboo( for t+e (ey elements of financial statements, t+at is, assets,
liabilities, euity, revenues, and e2penses* A trial balance under I&!S follo)s t+e same format as s+o)n in t+e
te2tboo(*
&!/!40 CS 4 Similarities
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3-11) LO 12 4ompare the accounting information systems under 5AA' and "6$(.
!ules for accounting for specific events sometimes differ across
countries* &or e2ample, uropean companies rely less on +istorical cost
and more on fair value t+an U*S* companies* #espite t+e differences, t+e
double4entry accounting system is t+e basis of accounting systems
)orld)ide* Internal controls are a system of c+ec(s and balances designed to
prevent and detect fraud and errors* W+ile most companies +ave t+ese
systems in place, many +ave never completely documented t+em nor
+ad an independent auditor attest to t+eir effectiveness* Bot+ of t+ese
actions are reuired under S$Q* n+anced internal control standardsapply only to large public companies listed on U*S* e2c+anges*
&!/!40 CS 4 #ifferences
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3-11*
0 H! H&#L0
T+e definitional structure of assets, liabilities, euity, revenues, and e2penses
may c+ange over time as t+e IASB and &ASB evaluate t+eir overall conceptual
frame)or( for establis+ing accounting standards* In addition, +ig+4uality
international accounting reuires bot+ +ig+4uality accounting standards and
+ig+4uality auditing* Similar to t+e convergence of %AAP and I&!S, t+ere is amovement to improve international auditing standards* T+e International
Auditing and Assurance Standards Board 3IAASB5 functions as an independent
standard4setting body* It )or(s to establis+ +ig+4uality auditing and assurance
and uality4control standards t+roug+out t+e )orld* W+et+er t+e IAASB adopts
internal control provisions similar to t+ose in S$Q remains to be seen* Rou can
follo) developments in t+e international audit arena at
!tt"#//$$$%&f'(%)r*/&''+/%
LO 12 4ompare the accounting information systems under 5AA' and "6$(.
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3-11+
#&S S!/-!S MU!S#0Information in a company:s first I&!S statements must-
a* +ave a cost t+at does not e2ceed t+e benefits*
b* be transparent*
c* provide a suitable starting point*
d* All t+e above*
LO 12 4ompare the accounting information systems under 5AA' and "6$(.
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3-11,
#&S S!/-!S MU!S#0T+e transition date is t+e date-
a* )+en a company no longer reports under its national standards*
b* )+en t+e company issues its most recent financial statement
under I&!S*
c* t+ree years prior to t+e reporting date*
d* None of t+e above*
LO 12 4ompare the accounting information systems under 5AA' and "6$(.
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3-117
#&S S!/-!S MU!S#0W+en converting to I&!S, a company must-
a* recast previously issued financial statements in accordance
)it+ I&!S*
b* use %AAP in t+e reporting period but subseuently use I&!S*
c* prepare at least t+ree years of comparative statements*
d* use %AAP in t+e transition year but I&!S in t+e reporting year*
LO 12 4ompare the accounting information systems under 5AA' and "6$(.
Copyrig$t
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Copyrig+t ?>; /o+n Wiley O Sons, Inc* All rig+ts reserved*
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!euest for furt+er information s+ould be addressed to t+e
Permissions #epartment, /o+n Wiley O Sons, Inc* T+e purc+aser
may ma(e bac(4up copies for +isM+er o)n use only and not for
distribution or resale* T+e Publis+er assumes no responsibility for
errors, omissions, or damages, caused by t+e use of t+ese
programs or from t+e use of t+e information contained +erein*