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Intermediate Financial Accounting I The Accounting Information System.

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Presentation on theme: "Intermediate Financial Accounting I The Accounting Information System."— Presentation transcript:

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2 Intermediate Financial Accounting I The Accounting Information System

3 Accounting Cycle2 Objectives of the Chapter I.Learning the accounting process in preparing financial statements. II.Introduce the accrual accounting concept and the adjusting entries. III.Introduce the worksheet (including the trial balance, the adjustments and the adjusted trial balance, the I/S and the B/S columns), the preparation of financial statements from the worksheet and the closing entries.

4 Accounting Cycle3 I. Accounting Process 1.Identification and measurement of business transactions and other events; 2.Journalization (general or special journals); 3.Post (to ledger accounts and subsidiaries); 4.Prepare worksheet (including unadjusted T/B, adjustments; adjusted T/B, I/S, B/S…); 5.Prepare financial statements;

5 Accounting Cycle4 Accounting Process (contd.) 6. Prepare and post adjusting entries; 7. Prepare and post closing entries; 8. Prepare post-closing trial balance (T/B) (optional); 9. Prepare and post reversing entries.

6 The Accounting Cycle (Source: Kieso, et al., 14 th E, Illustration 3-6) Accounting Cycle5

7 6 1. Identifying Accounting Events n External Events: Purchase of assets, sales of goods, loss from flood, … n Internal Events: Consumption of prepaid rent, use of depreciable assets, transfer of raw material to W-I-P, …

8 Accounting Cycle7 1. Identifying Accounting Events (contd.) n Events are recognized as accounting events and would be recorded if: a. have occurred; b. affect the financial position of the business; c. can be measured in monetary terms (measurable); d. relevant, reliable.

9 Accounting Cycle8 Examples 1. Two months of prepaid insurance expired. 2. Purchase of a machine. 3. Sales of merchandise. 4. Changes in managerial policies. 5. Value of human resources. 6. The development of a new product. 7. Sign a contract to buy a building. 8. Investment from owners. 9. Distribution to owners.

10 Accounting Cycle9 2. Journalization n Introduction of the Double-Entry System and Journal Entries: A. Double-entry system; B. T-account; C. Increases and decrease in the accounts.

11 Accounting Cycle10 A. Double-Entry System n Each transaction affects at least two accounts and the balance of the accounting equation must be maintained. n Example: Purchases inventory and charges to accounts payable. Assets= Liabilities+Equity Inventory Accounts Payable ++

12 Accounting Cycle11 A. Double-Entry System (contd.)

13 Accounting Cycle12 B. Introduction of the T-account Inventory DebitCredit Accounts Payable DebitCredit

14 Accounting Cycle13 Debit A Credit Revenue Debit Expense Credit C. Increases and Decreases in the Accounts Credit L Debit Credit E Debit

15 Accounting Cycle14 Examples of the Journal Entries:

16 Accounting Cycle15 Special Journals (Cash Disbursements and Receipts) Cash Disbursements Journal

17 Accounting Cycle16 Special Journals (Cash Disbursements and Receipts) Cash Receipts Journal

18 Accounting Cycle17 3. Posting (to ledger accounts and subsidiaries) n The Ledger: all individual accounts (assets, liability, and stockholders equity accounts) combined make up the ledger.

19 Another Example of Posting (Kieso, et al., 14 th edition, Illustration 3-8) Accounting Cycle18

20 Accounting Cycle19 Accounts ReceivableNo. 3 20x1 Mar 31Balance672.00Apr 30CR81,136.00 Apr 30S62,662.00 General Ledger (T-Account Format)

21 Examples of Posting using T-accounts (Kieso, et al., 14 th edition, Illustrations 3-9 and 3-10) Accounting Cycle20

22 Accounting Cycle21 Accounts Receivable SUBSIDIARY LEDGER Ellen Odom202 20x1 Mar 31Balance520 Apr 2S6910 Nita Doty204 20x1 Mar 31Balance30Apr 18CR8750 Apr 6S6750 Joe Leo206 20x1 Mar 31Balance122Apr 16CR8200 Apr 4S6816 Rex Road208 20x1 Apr 1S6186Apr 7CR8186 Subsidiary Ledger 21

23 Accounting Cycle22 Examples of Controlling Accounts General Ledger Controlling Acct.Type of Subsidiary Record Accounts Receivable Accounts Payable Capital Stock Notes Receivable Individual customers ledger accounts, or a file of uncollected sales invoices. Individual ledger accounts, or a file of unpaid purchase invoices. A record of the stock certificates and number of shares held by each shareholder. A file of uncollected N/R, or a register or book in which the notes are listed.

24 Accounting Cycle23 Examples of Controlling Accounts (contd.) General Ledger Controlling Acct.Type of Subsidiary Record Raw Material on Hand Equipment Land Separate record card for each item of material used in manufacturing. Separate record card for each item of equipment. This is often known as a plant ledger. Separate record card for each parcel of land owned.

25 Accounting Cycle24 The Flows of Accounting Data Transaction Occurs Source Documents Prepared Transaction Analysis Takes Place Transaction Entered in Journal Amounts Posted to Ledger

26 Accounting Cycle25 XYZ Corp. Trail Balance 4/30/20x1 Cash33,300 Accounts receivable2,000 Office supplies500 Land18,000 Accounts payable100 Common Stock50,000 Dividends2,100 Service revenue8,500 Rent Expense1,100 Salary Expense1,200 Utilities Expense 400. Total58,60058,600. 25

27 Accounting Cycle26 II. Accrual Accounting The time-period concept, the revenue recognition and matching principles. Accrual versus cash basis accounting. Adjusting entries.

28 Accounting Cycle27 The Time-Period Concept, the Revenue Recognition & Matching Principles n The time-period concept: n Income and financial position of a business are reported periodically, not until the end of life of a business.

29 Income Measurement And Profit Analysis28 Revenue Recognition Principle (SFAS No. 5) (-An Accrual Basis) n Revenue is recognized when it is earned and realized or realizable (SFAC 5, par. 83). n Earned : the entity has substantially accomplished what it must do to be entitled to compensation. n Realized: goods are exchanged for cash or claims. n Realizable: assets received as compensation are readily convertible into cash or claims to cash. n In general, these conditions are met at time of sale (delivery) or when services are rendered regardless whether cash is collected or not (SFAC 5, par. 84). n.n.

30 Income Measurement And Profit Analysis29 Revenue Recognition Principle n Other conditions for revenue recognition (Staff Accounting Bulletin No. 101(1999)): n Persuasive evidence of a sale. n Price is fixed or determinable. n Collectibility is reasonably assured. n Delivery has occurred or services have been rendered.

31 Accrual Accounting and the Financial Statements30 The Expense Recognition (Matching) Principle n If revenues are recognized in a period, all related expenses should be recognized in the same period regardless whether expenses are paid or not. n The related expenses include traceable costs (e.g. product costs), period costs, (e.g. interest and rent expenses) and estimated expenses (e.g. depreciation expense and bad debt expense).

32 Accrual Accounting and the Financial Statements31 Accrual vs. Cash Basis Accounting n Accrual-basis accounting: Revenues are recognized based on revenue recognition principle (i.e., recognized when realized and earned regardless whether cash is collected or not). Expenses are recognized based on matching principle (i.e., recognized when incur regardless whether they are paid or not). Note: revenue and expense recognize before cash settlement.

33 Accrual vs. Cash Basis Accounting (contd.) Cash-basis accounting: The accountant does not record a transaction until cash is received or paid. Cash-basis accounting is NOT acceptable for financial reporting. Accrual Accounting and the Financial Statements32

34 Accrual Accounting and the Financial Statements33 Adjusting Entries n Due to the periodicity concept, financial reports are prepared periodically. n Based on revenue recognition principle, adjusting entries are prepared at the end of a period to recognize revenues earned during the period but not yet recorded (i.e., accrued revenues).

35 Accrual Accounting and the Financial Statements34 Adjusting Entries (contd.) n Based on the matching principle, the accrued expenses (i.e., expenses incurred but not yet paid/recorded) and estimated expenses (i.e., depreciation expense and bad debt expense) are recorded at the end of a period.

36 Types of Adjusting Entries (Kieso, et al. textbook, 14 th edition, illustration 3-20) Accounting Cycle35

37 Accounting Cycle36 Adjusting Entries and Reversing Entries

38 Adjusting Entries for Accruals (Kieso, et al. 14 th edition, illustration 3-27) Accounting Cycle37

39 Accounting Cycle38 1. Accruals: Unrecorded Revenue or Expenses a. Accrued expense: u A one-year note payable was issued on 11/1/x1 to purchase an equipment. The face amount of the note is $2,400. The annual interest rate is 10% and interests are paid on 4/30/x2 and 11/1/x2. 11/1/x1 Equipment2,400 Notes Payable2,400 Adj. Entry 12/31/x1

40 Accounting Cycle39 Accruals: (contd.) b. Accrued revenue: u A one year note was received from a credit sale with a face amount of $3,000 and an annual interest rate of 12% on 9/1/x1. Interests are received on 3/1/x2 and 9/1/x2. 9/1/x1 N/R3,000 Sales3,000 Adj. Entry 12/31/x1

41 Adjusting Entries for Deferrals (Kieso, et al. textbook, 14 th edition, illustration 3-21) Accounting Cycle40

42 Accounting Cycle41 2. Deferrals: Postponing the Recognition of Revenues or Expenses a. Unearned revenues u Receiving $2,400 for one-year advanced rent payment from tenant on 12/1/x1 (B/S Approach)(I/S Approach) 12/1/x1 Cash2400 Unearned Rent2400 12/31/x1 Unearned Rent 200 Rent Revenue200 12/1/x1 Cash2400 Rent Revenue2400 12/31/x1 Rent Revenue 2200 Unearned Rent 2200

43 Accounting Cycle42 Deferrals (contd.) b. Prepaid expenses u Prepaid 12 month insurance of $1,200 on 11/1/x1 (B/S Approach)(I/S Approach) 11/1/x1 Prepaid Ins.1200 Cash1200 12/31/x1 Ins. Exp. 200 Prepaid Ins.200 11/1/x1 Ins. Exp.1200 Cash1200 12/31/x1 Prepaid Ins. 1000 Ins. Exp. 1000

44 Accounting Cycle43 3. Estimated Expenses (no reversing entry except for I/T) Examples - Depreciation Exp.: 12/31Depreciation Exp.XXX Accumulated Depr.XXX Bad Debt Exp.: 12/31B/D Exp. XXX Allowance for B/DXXX Income Tax 12/31Income Tax Exp.XXX Income Tax PayableXXX

45 Accounting Cycle44 III. Worksheet Example A. The adjusting entries information for the worksheet example. B. Preparing financial statements from a worksheet. C. Closing and reversing entries.

46 Accounting Cycle45 A. Adjusting Entries Information n The following items are the adjusting entries information for the worksheet example (source: Kieso, et al. textbook): (a)Furniture and equipment is depreciated at the rate of 10% per year based on original cost of $67,000. Depreciation Expense --Furniture and Equipment6,700 Accumulated Depreciation --Furniture and Equipment6,700

47 Accounting Cycle46 A. Adjusting Entries Information (contd.) (b)Estimated bad debts, one-quarter of 1% of sales ($400,000). Insurance Expense360 Prepaid Insurance360 Bad Debts Expense1,000 Allowance for Doubtful Accounts1,000 (c)Insurance expired during the year, $360.

48 Accounting Cycle47 A. Adjusting Entries Information (contd.) (d)Interest accrued on notes receivable as of December 31, $800. Interest Receivable800 Interest Revenue800 (e)The Rent Expense account contains $500 rent paid in advance, which is applicable to next year. Prepaid Rent Expense500 Rent Expense500

49 Accounting Cycle48 A. Adjusting Entries Information (contd.) (f)Property taxes accrued December 31, $2,000. Property Tax Expense 2,000 Property Tax Payable 2,000 (g ) Income taxes accrued December 31, $3,440 Income tax expense 3,440 Income tax payable 3,440

50 Accounting Cycle49 Uptown Cabinet Corp.(source: Kieso, et al. Illu. 3C-1) TEN-COLUMN WORK SHEET (with Periodic Inventory System) For the Year Ended December 31, 2010 Accounts Cash N/R A/R Allow. for double Accounts Inventory, 1/1/12 Prepaid insurance Furniture & equip. Accu. Depr. -- furniture & equip. Dr. Cr. Dr. Cr. Dr. Cr.12001600041000 2000(b) 1000300036000 900(c) 36054067000 12000(a)670018700 Adjusted Trial Balance Adjustments Trial Balance 49

51 Accounting Cycle50 TEN-COLUMN WORK SHEET (contd.) Accounts N/P A/P B/P Common stock R/E, 1/1/12 Sales Purchases Sales Salaries exp. Advertising exp. Traveling exp. Office Sal. exp. T&T exp. Dr. Cr. Dr. Cr. Dr. Cr.2000013500300005000014200400000320000200002200800019000600 Trial Balance Adjustments Adj. T-B 50

52 Accounting Cycle51 TEN-COLUMN WORK SHEET (contd.) Accounts Rent exp. Property tax exp. Interest exp. Totals Dep. Exp-fur. & equ. Bad debts exp. Insurance exp. Int. receivable Int. revenue Prepaid rent exp. Property tax pay. Totals Dr. Cr. Dr. Cr. Dr. Cr. 4800(e) 5004300 3300(f) 20005300 1700 1700541700 (a) 67006700 (b) 10001000 (c) 360360 (d) 800800 (e) 500500 (f) 2000 2000 2000 11360 11360552200552200 Trial Balance Adjustments Adj. T-B 51

53 Accounting Cycle52 TEN-COLUMN WORK SHEET (contd.) Accounts Inv., 12/31/12 Totals Income bef. I/T Totals Income bef. I/T Income tax exp. Income tax payable Net income Totals Dr. Cr. Dr. Cr. Dr. Cr. (g) 3440 Trial Balance Adjustments Adj. T-B 52

54 Accounting Cycle53 Uptown Cabinet Corp. TEN-COLUMN WORK SHEET (contd.) Accounts Cash N/R A/R Allow. for double Accounts Inventory, 1/1/12 Prepaid insurance Furniture & equip. Accu. Depr. -- furniture & equip. Dr. Cr. Dr. Cr. Dr. Cr.120016000410003000360005406700018700 AdjustedIncome Trial Balance Statement Balance Sheet 53

55 Accounting Cycle54 TEN-COLUMN WORK SHEET (contd.) Accounts N/P A/P B/P Common stock R/E, 1/1/12 Sales Purchases Sales Salaries exp. Advertising exp. Traveling exp. Office Sal. exp. T&T exp. Dr. Cr. Dr. Cr. Dr. Cr2000013500300005000014200400000320000200002200800019000600 Adj. T-B I/S B/S 54

56 Accounting Cycle55 TEN-COLUMN WORK SHEET (contd.) Accounts Rent exp. Property tax exp. Interest exp. Totals Dep. Exp-fur. & equ. Bad debts exp. Insurance exp. Int. receivable Int. revenue Prepaid rent exp. Property tax pay. Totals Dr. Cr. Dr. Cr. Dr. Cr.43005300170067001000360800800500 20002000552200 Adj. T-B I/S B/S 55

57 Accounting Cycle56 TEN-COLUMN WORK SHEET (contd.) Accounts Inv., 12/31/12 Totals Income bef. I/T Totals Income bef. I/T Income tax exp. Income tax payable Net income Totals Dr. Cr. Dr. Cr. Dr. Cr 4000040000 425160440800 15640440800 3440 12200 12200 15640 15640167040167040 Adj. T-B I/S B/S 56

58 Accounting Cycle57 B. Preparing Financial Statements from a Worksheet Net sales$400,000 Cost of goods sold Inventory, 1/1/x2$ 36,000 Purchases 320,000 Cost of goods avail. for sale356,000 Subtract inv., 12/31/x2 40,000 Cost of goods sold 316,000 Gross profit on sales84,000 (Source: Illustration 3-39 of Kieso, et al. 14 th edition) Uptown Cabinet Corp. INCOME STATEMENT For the Year Ended December 31, 2012

59 Accounting Cycle58 INCOME STATEMENT (contd.) Selling expenses Sales salaries exp.20,000 Adv. exp.2,200 Traveling exp. 8,000 Total selling exp.30,200 Administrative exp. Office Salaries exp.$19,000 T&T exp.600 Rent exp.4,300 Property tax exp.5,300 Depr. exp.-fur. & equip.6,700 Bad debts exp.1,000 Insurance exp. 360 Total administrative exp. 37,260 58

60 Accounting Cycle59 INCOME STATEMENT (contd.) Total selling & admin. exp. 67,460 Income from operations16,540 Other revenues and gains Interest revenue 800 17,340 Other exp. And losses Interest exp. 1,700 Income bef. income taxes15,640 Income taxes 3,440 Net income$12,200 Earnings per share$1.22 59

61 Accounting Cycle60 (Source: Illustration 3-40 of KWW textbook, 14 th edition) Uptown Cabinet Corp. STATEMENT OF RETAINED EARNINGS For the Year Ended December 31, 2012 B. Preparing Financial Statements from a Worksheet (contd.) Retained earnings, Jan. 1, 2012$14,200 Add net income for 20x12 12,200 Retained earnings, Dec. 31, 2012$26,400 60

62 Accounting Cycle61 (Source: Illustration 3-41 of KWW textbook, 14 th edition ) Uptown Cabinet Corp. BALANCE SHEET As of December 31, 2012 B. Preparing Financial Statements from a Worksheet (contd.) Assets Current assets Cash$ 1,200 Notes receivable$16,000 Accounts receivable41,000 Interest receivable 800$57,800 Less allow. for doub. acct. 3,00054,800 Merchandise inv. on hand40,000 61

63 Accounting Cycle62 BALANCE SHEET (contd.) Prepaid insurance540 Prepaid rent 500 Total current assets97,040 Property, plant & equip. Furniture & equipment67,000 Less accu. Depr. 18,700 Total property, plant & equip. 48,300 Total assets$145,340 Liabilities and Stockholders Equity Current liabilities Notes payable$ 20,000 Accounts payable13,500 Property tax payable2,000 Income taxes payable 3,440 62

64 Accounting Cycle63 BALANCE SHEET (contd.) Total current liabilities38,940 Long-term liabilities B/P, due June 30, 20x7 30,000 Total liabilities 68,940 Stockholders equity Common stock, $5.00 par value, issued & outstanding, 10,000 shares$50,000 Retained earnings 26,400 Total stockholders equity 76,400 Total liabilities & stockholders equity$145,340 63

65 Accounting Cycle64 (Source: p. 98 of Kieso, et al., textbook, 13 th edition) General Journal December 31, 2012 C. Closing and Reversing Entries Closing Entries Inventory (12/31)40,000 Cost of Goods Sold316,000 Inventory (1/1)36,000 Purchases320,000 (To record ending inv. bal. & to determine CGS) Interest Revenue800 Sales400,000 CGS316,000 Sales Sal. Exp.20,000 Adv. Exp.2,200 64

66 Accounting Cycle65 Closing Entries (contd.) Traveling Exp.8,000 Office Salaries Exp.19,000 T&T Exp.600 Rent Exp.4,300 Property Tax Exp.5,300 Depr. Exp. - Fur. & Equip.6,700 Bad Debts Exp.1,000 Insurance Exp.360 Interest Exp.1,700 Income Tax Exp.3,440 Income Summary12,200 (To close revenues and expenses to Income Summary) Income Summary12,200 Retained Earnings12,200 (To close Income Summary to Retained Earnings) 65

67 Accounting Cycle66 January 1, 2012 C. Closing and Reversing Entries Reversing Entries (Optional) (D) Interest Revenue800 Interest Receivable800 (E) Rent Expense500 Prepaid Rent Expense500 (F) Property Tax Payable2,000 Property Tax Expense2,000 (G) Income Tax Payable3,440 Income Tax Expense3,440 66

68 Accounting Cycle67 Closing Entries for Periodic Inventory System( with Purchase Returns and Allow): An Example Inventory & Related Accounts InventoryPurchasesPur. R&A B.B 12,600 44,6503,700 Freight-In Income Summary 4,350 CGS Assuming Ending Inv. = 17,200 CGS= Beg. Inv + Net Purchases - Endings Inv. Net Purchases = Pur. -Pur. R&A - Pur. Dis + Freight-In

69 Accounting Cycle68 IFRS Insights (Source: Kieso, etc. 14 th e, p153- 155) Companies around the world use the same accounting process as shown in this chapter. Despite some differences in standards between IFRS and GAAP, the double entry accounting system is the basis of accounting systems worldwide. IFRS is growing in acceptance around the world. Approximately 40% of Global Fortune 500 companies use IFRS.


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