1. Review of the Accounting Process
Chapter 2
Review of the Accounting Process

2. The Accounting Equation
A = L + OE
- Owner Withdrawals
+ Owner Investments
- Expenses
+ Revenue

3. Accounting Equation for a Corporation
A = L + SE
+ Retained Earnings
+ Paid-in Capital
- Expenses
- Losses
+ Revenues
+ Gains
- Dividends

4. Account Relationships
Debits and credits affect the Balance Sheet Model as follows:
A = L + PIC + RE + R - E
Assets
Dr. +
Cr. -
Liabilities
Paid-in
Capital
Retained Earnings
Revenues and Gains
Expenses and Losses

5. Account Relationships
Debits and credits affect the Balance Sheet Model as follows:
A = L + PIC + RE + R - E
Permanent accounts represent the basic financial position elements of the accounting equation.
Temporary accounts keep track of the changes in the retained earnings component of shareholders’ equity.

6. The Accounting Processing Cycle
Source documents
Transaction Analysis
Record in Journal
Post to
Ledger
Financial Statements
Adjusted Trial Balance
Record & Post Adjusting Entries
Unadjusted Trial Balance
The Accounting Processing Cycle
Close Temporary Accounts
Post-Closing Trial Balance

7. Accounting Processing Cycle
On January 1, 2004, CWC, Inc. borrows $10,000 from the bank.
Two accounts are affected:
Cash (an asset) increases by $10,000.
Notes Payable (a liability) increases by $10,000.
Prepare the journal entry.

8. Accounting Processing Cycle
Two accounts are affected:
Cash (an asset) increases by $10,000.
Notes Payable (a liability) increases by $10,000.

9. Accounting Processing Cycle
Two accounts are affected:
Cash (an asset) increases by $10,000.
Notes Payable (a liability) increases by $10,000.
Account numbers are references for posting to the General Ledger.

10. General Ledger The “T” account is a shorthand used by
accountants to analyze transactions. It
is not part of the bookkeeping system.

11. Posting Journal Entries
On July 1, 2003, the owners invest $60,000 in a new business, Dress Right Clothing Corporation.
Post the debit portion of the entry to the Cash ledger account.

12. Posting Journal Entries1

13. Posting Journal Entries2 3

14. Posting Journal Entries4 5

15. Posting Journal Entries6

16. Posting Journal Entries
Post the credit portion of the entry to the Common Stock ledger account. 1

17. Posting Journal Entries2 3

18. Posting Journal Entries4 5

19. Posting Journal Entries6

20. After recording all entries for the period, Dress Right’s Trial Balance would be as follows:
A Trial Balance is a listing of all accounts and their balances at a point in time.
Debits = Credits

21. Additional Consideration
Perpetual Inventory System
Periodic Inventory System
Discussed in more depth in Chapters 8 & 9.
Inventory account is continually updated to reflect purchases and sales.
Cost of goods sold account is continually updated to reflect sales.
Purchases account reflects purchases of inventory.
Cost of goods sold and inventory are adjusted at period end.

22. Adjusting Entries
At the end of the period, some transactions or events remain unrecorded.
Because of this, several accounts in the ledger need adjustments before their balances appear in the financial statements. 3

23. Transactions where cash is paid or received before a related expense or revenue is recognized.
Transactions where cash is paid or received after a related expense or revenue is recognized.

24. Items paid for in advance of receiving their benefits
Prepaid Expenses
Asset
Expense
Unadjusted
Balance
Credit
Adjustment
Debit
Adjustment
Today, I will pay
for my first
6 months’ rent.
Prepaid Expenses
Items paid for in advance of receiving their benefits 15 15

25. Prepaid Expenses
On December 1, 2004, Scott Company paid $12,000 to cover rent for December 2004 through May Let’s look at the adjusting journal entry needed on December 31, 2004. 16 16

26. Prepaid Expenses
On December 1, 2004, Scott Company paid $12,000 to cover rent for December 2004 through May Let’s look at the adjusting journal entry needed on December 31, 2004.
$12,000 ÷ 6 months = $2,000 per month 17 17

27. After posting, the accounts look like this:
Prepaid Expenses
After posting, the accounts look like this:
Prepaid Rent
Rent Expense
12/1 $12,000
12/31 $2,000
12/ $2,000
Bal. $10,000 18 18

28. Asset Cost - Salvage Value
Depreciation
Depreciation is the process of computing expense by allocating the cost of plant and equipment over their expected useful lives.
Straight-Line
Depreciation
Expense =
Asset Cost - Salvage Value
Useful Life 19 19

29. Depreciation
On January 1, 2004, Monroe, Inc. purchased the following oil pumping equipment:
Let’s record depreciation expense for the year ended December 31, 2004. 20 20

30. Now, prepare the adjusting entry for December 31, 2004.
Depreciation
On January 1, 2004, Monroe, Inc. purchased the following oil pumping equipment:
2000
Depreciation
Expense
$62, $2,000 5 = =
$12,000
Now, prepare the adjusting entry for December 31, 2004. 21 21

31. Let’s see how the accounts would look after posting!
Depreciation
Contra Asset
Let’s see how the accounts would look after posting! 22 22

32. After posting, the accounts look like this:
Depreciation
After posting, the accounts look like this:
Equipment
Depreciation Expense
1/1 $62,000
12/ $12,000
Accumulated Depreciation
12/31 $12,000 23 23

33. Depreciation
The equipment account is shown on the balance sheet like this.
The equipment account is shown on the balance sheet like this. 24 24

34. Unearned Revenue Revenue Liability “Go Big Blue”
Debit
Adjustment
Unadjusted
Balance
Credit
Adjustment
Buy your season tickets for
all home basketball games NOW!
Unearned Revenue
Cash received in advance of performing services
“Go Big Blue” 26 26

35. Unearned Revenue
On December 1, 2004, Ox University sold 1,000 seasons tickets to its 20 home basketball games for $100 each. OxU makes the following entry:
Liability Account 27 27

36. Unearned Revenue
By December 31, OxU has played 8 of its regular home games, winning 6 and losing 2. 28 28

37. Unearned Revenue
By December 31, OxU has played 8 of its regular home games, winning 6 and losing 2. 29 29

38. Unearned Basketball Revenue
Unearned Revenue
After posting, the accounts will look like this . . .
Unearned Basketball Revenue
Basketball Revenue
12/31 $40,000
12/1 $100,000
12/31 $40,000
Bal. $60,000 30 30

39. Alternative Approach to Record Prepayments
Prepaid Expenses Record initial cash payments as follows:
Expense $$$ Cash $$$
Adjusting Entry Record the amount for the prepaid expense as follows:
Prepaid expense $$ Expense $$
Unearned Revenue Record initial cash receipts as follows:
Cash $$$ Revenue $$$
Adjusting Entry Record the amount for the unearned liability as follows:
Revenue $$ Unearned revenue $$ 30 30

40. Costs incurred in a period that are both unpaid and unrecorded
Accrued Liabilities
Expense
Liability
Debit
Adjustment
Credit
Adjustment
I won’t pay you
until the job is done!
Accrued Liabilities
Costs incurred in a period that are both unpaid and unrecorded 32 32

41. Accrued Liabilities Denton, Inc.’s weekly salaries are $78,750.
Last pay
date
12/26/04
Next pay
date
1/2/05
12/1/04
12/31/04
Year end
Record adjusting
journal entry.
On December 31, 2004, the employees have earned salaries of $47,250. 33 33

42. Accrued Liabilities 34 34

43. After posting, the accounts will look like this . . .
Accrued Liabilities
After posting, the accounts will look like this . . .
Salaries Expense
Salaries Payable
12/26 $78,750
12/31 $47,250
12/ ,250
Bal. $126,000 35 35

44. in May for your April 15 tax return.
Accrued Receivables
Asset
Revenue
Debit
Adjustment
Credit
Adjustment
Yes, you can pay me
in May for your April 15 tax return.
Accrued Receivables
Revenues earned in a period that are both unrecorded and not yet received 37 37

45. Accrued Receivables
At year-end, Smith & Jones, CPAs, had completed $31,200 of work but had not yet billed the clients. Prepare the adjusting entry for December 31, 2004. 38

46. Accrued Receivables
At year-end, Smith & Jones, CPAs, had completed $31,200 of work but had not yet billed the clients. Prepare the adjusting entry for December 31, 2004. 39

47. After posting, the accounts involved will look like this . . .
Accrued Receivables
After posting, the accounts involved will look like this . . .
Accounts Receivable
Service Revenue
12/31 $31,200
12/31 $31,200 40 40

48. Estimates
Uncollectible accounts and depreciation of fixed assets are estimated.
An estimated item is a function of future events and developments. $

49. Estimates
The estimate of bad debt expense at the end of the year is an example of an adjusting entry that requires an estimate.

50. Let’s look at financial statements.

51. The income statement summarizes the results of operating activities of the company.

52. The balance sheet presents the financial position of the company on a particular date.

53. The balance sheet presents the financial position of the company on a particular date.

54. The statement of cash flows discloses the changes in cash during a period.

55. The statement of shareholders’ equity presents the changes in permanent shareholder accounts.

56. The Closing Process
Resets revenue, expense and dividend account balances to zero at the end of the period.
Helps summarize a period’s revenues and expenses in the Income Summary account.
Identify accounts for closing.
Record and post closing entries.
Prepare post-closing trial balance.

57. Temporary and Permanent Accounts
Temporary Accounts
Revenues
Income Summary
Expenses
Dividends
Permanent Accounts
Assets
Liabilities
Shareholders’ Equity
The closing process applies only to temporary accounts.

58. Let’s prepare the closing entries for Consulting Inc.!
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Retained Earnings.

59. Close Revenue accounts to Income Summary.

60. Close Revenue Accounts to Income Summary
Now, let’s look at the ledger accounts after posting this closing entry.

61. Close Revenue Accounts to Income Summary

62. Close Expense accounts to Income Summary.
If Consulting Inc. had a Cost of Goods Sold account, it would be closed with the expenses.

63. Close Expense Accounts to Income Summary
Now, let’s look at the ledger accounts after posting this closing entry.

64. Close Expense Accounts to Income Summary
Net Income

65. Close Income Summary to Retained Earnings.

66. Close Income Summary to Retained Earnings
Now, let’s look at the ledger accounts after posting this closing entry.

67. Close Income Summary to Retained Earnings

68. Post-Closing Trial Balance
Lists permanent accounts and their balances.
Total debits equal total credits.

69. Conversion From Cash Basis to Accrual Basis
Adjusting entries, for the most part, are conversions from cash to accrual.
Let’s look at an example.

70. Conversion From Cash Basis to Accrual Basis
Jeter, Inc. paid $20,000 cash for insurance during the current period. On Jan. 1, Prepaid Insurance was $5,000, and on Dec. 31, the account balance was $3,000. Determine Insurance Expense for the period.

71. Conversion From Cash Basis to Accrual Basis
Jeter, Inc. paid $20,000 cash for insurance during the current period. On Jan. 1, Prepaid Insurance was $5,000, and on Dec. 31, the account balance was $3,000.

72. End of Chapter 2