Presentation on theme: "The Accounting Cycle Continued – Preparing Worksheets and Financial Statements Chapter 4 2."— Presentation transcript:
1 The Accounting Cycle Continued – Preparing Worksheets and Financial Statements Chapter 42
2 Following GAAP GAAP is Generally Accepted Accounting Principles. Accrual based accounting is used.Revenue is recognized when earned.Expenses are recorded in order to be matched against the generated revenue.4
3 Following GAAP What are adjusting entries? Adjusting entries are made to bring accounts to correct balances before preparing financial statements.Worksheets assist in this process.4
4 The Accounting Cycle 1 2 Journal 3 Ledger Business Transactions Book ofOriginal EntryBook ofFinal Entry54WorksheetTrial Balance4
5 The Accounting Cycle Worksheet Adjusted Trial Adjustments Trial Income BalanceBalance Balance Statement Sheet6 FinancialStatementsBalanceSheetStatement ofOwner’s EquityIncomeStatement4
6 Adjustments: prepaid rent, office supplies, depreciation on Learning Objective 1Adjustments: prepaid rent,office supplies, depreciation onequipment, and accrued salaries.6
7 Preparing a worksheet: Learning Unit 4-1Preparing a worksheet:A worksheet is used to facilitate the preparation of adjusting entries and financial statements.The worksheet is not a formal report.Correct heading information is used.6
8 Learning Unit 4-1 Adjusting entries: Assets must be adjusted to show amounts used or allocated to periods and are recorded as expenses.supplies usedprepaid rent expired over timeequipment depreciated7
9 Learning Unit 4-1Expenses incurred must be recorded in the correct period before the period closes.What is an example?accrued salaries which have not been previously recorded8
10 Learning Unit 4-1 Depreciation is a unique adjustment. Equipment and other long-lived assets help produce revenue over long periods of time.Original cost (amount paid) is also known as historical cost.9
11 Learning Unit 4-1Historical cost of the asset remains in the financial statements.This cost remains in the records as a balance in the asset account.This cost is allocated to expense over the life of the asset.What is the accompanying account?9
12 Learning Unit 4-1The accompanying (contra-asset) account is called Accumulated Depreciation.This account is used for the yearly credited amounts.The normal balance is a credit balance.
13 Learning Unit 4-1 Worksheet Sections The Trial Balance The Adjustments The Adjusted Trial BalanceIncomeStatementBalanceSheet11
14 Learning Unit 4-1 Income Statement: List Revenues & Expenses Only Balanceswith the netincome/loss.BalanceSheet:Balanceswith the netincome/loss.A = L + OE
15 Preparation of adjusted trial balance on the worksheet. Learning Objective 2Preparation of adjusted trialbalance on the worksheet.6
16 Adjustments Example What are the adjusting entries for supplies? Journal: Debit Credit Supplies Expense x Supplies (record correct amounts) xThe balance in the supplies account after adjusting entries will be equal to the dollar amount of the supplies on hand at the end of the accounting period.17
17 Adjustments Example Adjusting entries for depreciation. Journal: Debit Credit Depreciation Expense x Accum. Depr. Equip x To record the proper amounts for all relevant asset accounts19
18 Adjustments ExampleWhat are the adjusting entries for accrued service revenue?Journal: Debit Credit Accounts Receivable x Revenue x To record the proper amounts for relevant asset and revenue accounts17
19 Adjustments Example Adjusted Trial Balance Adjustments Trial Balance Account Title Dr. Cr Dr Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableCapitalRevenueVarious expensesSupplies expenseDepreciation expenseTotals4,0658503001,2001,2057,6201705,0002,4507,620
20 Adjustments ExampleThe business has earned revenue of $1,000 that will be collected next month.Inventory of supplies at month end totaled $100.Depreciation for the period was calculated as $50.
21 Adjustments Example Adjusted Trial Balance Adjustments Trial Balance Account Title Dr. Cr Dr Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableCapitalRevenueVarious expensesSupplies expenseDepreciation expenseTotals4,0658503001,2001,2057,620a) 1,000b)c)1,250b)c)a) 1,0001,2501705,0002,4507,620
22 Adjustments Example Adjusted Trial Balance Adjustments Trial Balance Account Title Dr. Cr Dr Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableCapitalRevenueVarious expensesSupplies expenseDepreciation expenseTotals4,0658503001,2001,2057,6204,0651,8501001,2001,205200508,670a) 1,000b)c)1,250b)c)a) 1,0001,2501705,0002,4507,620501705,0003,4508,670
23 The income statement and balance sheet sections Learning Objective 3The income statement andbalance sheet sectionsof the worksheet.6
24 Adjustments Example Adjusted Income Balance Trial Balance Statement SheetAccount Title Dr Cr Dr Cr. Dr Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableCapitalRevenueVarious expensesSupplies expenseDepreciation expenseTotals4,0651,8501001,2001,205200508,6701,205200501,4554,0651,8501001,2007,215501705,0003,4508,6703,450501705,0005,2201,9951,995
26 Preparing the financial statements from the worksheet Learning Unit 4-2Preparing the financial statements from the worksheetThe Income StatementRevenue and expenses are reported on the income statement.
27 The Statement of Owner’s Equity Learning Unit 4-2The Statement of Owner’s EquityIt uses the beginning capital balance from the balance sheet columns.Subtract withdrawals amount and net loss and then add net income.
28 Learning Unit 4-2 The Balance Sheet Use the asset and liability balances from the balance sheet columns.Use the corrected owner’s equity amounts from the Statement of Owner’s Equity.