1. Acct 310 Accounting Review Part II Rick Hayes, Ph.D., CPA California State University L.A.

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3. Sierra Corporation Trial Balance October 31, 2007 Debit Credit Cash $15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable $ 5,000 Accounts Payable 2,500 Unearned Service Revenue 1,200 Common Stock 10,000 Dividends 500 Service Revenue 10,000 Salaries Expense 4,000 Rent Expense 900 $28,700 $28,700

4. 4 Prepaid Expenses Amount equals cost of goods or services used up or expired If not adjusted, expenses would be understated and assets overstated

5. On October 5 the company paid $2,500 for advertising supplies. GENERAL JOURNAL Debit Credit Oct 5 Supplies 2,500 Cash 2,500 Purchased advertising supplies Advertising Supplies 2,500Oct 5 Cash 2,500Oct 5 Advertising Supplies Expense Supplies

6. An inventory on October 31 reveals that $1,000 of supplies remain on hand; therefore $1,500 of supplies have been used. ($2,500 - $1,000) =$ 1,500 GENERAL JOURNAL Debit Credit Oct 5 Supplies Expense 1,500 Supplies 1,500 To record advertising supplies consumed 2,500 Oct 5 Cash 2,500Oct 5 Advertising Supplies Expense Supplies 1,500Oct 311,500Oct 31 Advertising Supplies Bal. 1,000

7. 7 Oct $1,500 Mar $1,435 Apr $1,510 May $1,592 Feb $1,601 Nov $1,800 Dec $1,410 Jan $1,425 June $1,652 July $1,621 Aug $1,427 Sept $1,555 Supplies expense is based on usage... so different amounts appear each month Supplies Expense

8. Prepaid Expenses On October 1 the company paid $600 for a 1-year insurance policy. Coverage began October 1. GENERAL JOURNAL Debit Credit Oct 1 Prepaid Insurance 600 Cash 600 Purchased one-year policy effective October 1 Prepaid Insurance 600Oct 1 Cash 600Oct 1 Insurance Expense

9. 9 Insurance Policy 1 Year $ 600 Oct $50 Mar $50 Apr $50 May $50 Feb $50 Nov $50 Dec $50 Jan $50 June $50 July $50 Aug $50 Sept $50

10. Prepaid Expenses On October 31st, $50 ($600/12 months) of the insurance was used-up or expired. GENERAL JOURNAL Debit Credit Oct 31 Insurance Expense 50 Prepaid Insurance 50 Record insurance expense for the month Prepaid Insurance 600Oct 1 Cash 600Oct 1 Insurance Expense 50 Oct 3150 Oct 31 550

11. 11 How do you apply the Matching Principle to the cost of a long lived asset ? Depreciation

12. 12 Allocates the cost of an asset to expense over its useful life – MATCHING PRINCIPLE Is an estimate Depreciation is ALLOCATION of cost- not VALUATION(Current Replacement Cost) We’re not attempting to reflect the actual change in value of an asset! Depreciation

13. 13 Office Equipment Depreciation= $480/year Oct $40 Mar $40 Apr $40 May $40 Feb $40 Nov $40 Dec $40 Jan $40 June $40 July $40 Aug $40 Sept $40

14. 14 GENERAL JOURNAL Debit Credit Oct 31 Depreciation Expense 40 Accumulated Depreciation-Office Equip 40 To record monthly depreciation Accumulated depreciation is a contra asset account - an offset against the fixed asset account. Accumulated Depreciation- Office Equipment 40Oct 31 Office Equipment 5,000Oct 2 Depreciation Expense 40 Oct 31

15. 15 Office equipment$ 5,000 Less : accumulated depreciation 40 $4,960 Balance Sheet Presentation Book Value or Carrying Value

16. Unearned Revenues Received on Oct. 2 $1,200 for advertising services expected to be completed by Dec 31. Unearned Service Revenue Cash 1,200Oct 2 1,200Oct 2 Service Revenue GENERAL JOURNAL Debit Credit Oct 2 Cash 1,200 Unearned Service Revenue 1,200 Collected money for work to be performed by Dec 31. 11 5

17. Unearned Revenues During October $400 of the revenue was earned. Unearned Service Revenue Cash 1,200Oct 2 Service Revenue 1,200Oct 2 GENERAL JOURNAL Debit Credit Oct 31 Unearned Service Revenue 400 Service Revenue 400 To record revenue earned Oct. 31 400 800Bal

18. 18 Accruals Revenue has been earned, but not collected. Expenses have been incurred, but not yet paid. 11 5

19. 19 Accrued Revenues Revenues earned but not yet received in cash or recorded at the statement date.

20. Accrued Revenues Earned $200 for advertising services to clients in October, but they were not billed until after October 31st. GENERAL JOURNAL Debit Credit Oct 31 Accounts Receivable 200 Service Revenue 200 Accounts Receivable 200Oct 31 Service Revenue 200Oct 31

21. 21 Accrued Expenses Expenses incurred but not yet paid or recorded at the statement date.

22. 22 The adjusted trial balance is used to prove the equity of total debit balances and total credit balances after the adjusting entries have been made. Financial statements (except Cash Flow Statement) can be easily prepared from the adjusted trial balance. Adjusted Trial Balance 11 6

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26. 26 Closing the Books Closing entries transfer the temporary account balances to the stockholders’ equity account... and reduce the balances in the temporary accounts to zero. 11 7

27. Temporary Permanent All revenues accountsAll asset accounts All expense accountsAll liability accounts Dividends Stockholders’ equity accounts

28. 28 Close Temporary Accounts Only Zero balance after closing entries! Do not close!

29. The Closing Process

33. 33 The Accounting Cycle 11 8

34. 34 Required Steps in the Accounting Cycle