1. Chapter 3

2. Differentiate between accrual and cash-basis accounting 2Copyright (c) 2009 Prentice Hall. All rights reserved.

3. 3 Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid. Not GAAP Copyright (c) 2009 Prentice Hall. All rights reserved.

4. 4 Accrual – Revenue recognized when services provided Cash – Revenue recognized when cash is received Copyright (c) 2009 Prentice Hall. All rights reserved.

5. 5 Accrual – Expense recognized when incurred Cash – Expense recognized when cash is paid Copyright (c) 2009 Prentice Hall. All rights reserved.

6. Define and apply the accounting period concept, revenue, and matching principles 6Copyright (c) 2009 Prentice Hall. All rights reserved.

7.  Businesses prepare financial statements for specific periods to evaluate performance  Basic accounting period = one year ◦ Calendar year ◦ Fiscal year  Interim periods ◦ Financial statements of less than one year  Monthly  Quarterly  Semiannually 7Copyright (c) 2009 Prentice Hall. All rights reserved.

8.  When to record revenue? ◦ When it is earned  When service is provided or product delivered  This is not necessarily the time when cash is received  What amount of revenue should be recorded? ◦ Value of item or service transferred to customer 8Copyright (c) 2009 Prentice Hall. All rights reserved.

9.  Measure all expenses incurred during the accounting period  Match the expenses against the revenues earned during the same period 9Copyright (c) 2009 Prentice Hall. All rights reserved.

10.  Requires that accounting information be reported at regular intervals  Accounts are updated at the end of each accounting period 10Copyright (c) 2009 Prentice Hall. All rights reserved.

11.  Which principle is a guide to accounting for expenses. Identify all expenses incurred during the period, measure the expenses, and match them against the revenue earned during that same time period.  A. Time-Period Principle  B. Matching Principle  C. Revenue Principle  D. Objectivity Principle  E. Reliability Principle Copyright (c) 2009 Prentice Hall. All rights reserved.11

12.  Which principle is a guide to accounting for expenses. Identify all expenses incurred during the period, measure the expenses, and match them against the revenue earned during that same time period.  A. Time-Period Principle  B. Matching Principle  C. Revenue Principle  D. Objectivity Principle  E. Reliability Principle Copyright (c) 2009 Prentice Hall. All rights reserved.12

13.  Which principle says:  Record revenue only after you have earned it.  A. Time-Period Principle  B. Matching Principle  C. Revenue Principle  D. Objectivity Principle  E. Reliability Principle Copyright (c) 2009 Prentice Hall. All rights reserved.13

14.  Record revenue only after you have earned it.  A. Time-Period Principle  B. Matching Principle  C. Revenue Principle  D. Objectivity Principle  E. Reliability Principle Copyright (c) 2009 Prentice Hall. All rights reserved.14

15. Explain why adjusting entries are needed 15Copyright (c) 2009 Prentice Hall. All rights reserved.

16.  Prepared at end of an accounting period  Assign: ◦ Revenues to the period when earned ◦ Expenses to the period when incurred  Update asset and liability accounts  Need to properly measure: ◦ Net Income ◦ Assets & Liabilities 16Copyright (c) 2009 Prentice Hall. All rights reserved.

17. Never involve cash Either increase revenue or increase an expense “Accrued” means amount must be recorded 17Copyright (c) 2009 Prentice Hall. All rights reserved.

18. Journalize and post adjusting entries 18Copyright (c) 2009 Prentice Hall. All rights reserved.

19. 19 Prepaid expenses Depreciation Accrued expenses Accrued revenues Unearned revenues Copyright (c) 2009 Prentice Hall. All rights reserved.

20.  Advance payments of expenses  Examples: ◦ Rent ◦ Insurance ◦ Supplies  Recorded as an asset  Adjusting entry records amount used as an expense 20Copyright (c) 2009 Prentice Hall. All rights reserved.

21. 21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 4/1 4,800 Prepaid rent Copyright (c) 2009 Prentice Hall. All rights reserved. Apr 1 Prepaid Rent 4,800 Cash 4,800 Prepaid rent for 6 months

22. 22 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Apr30Rent expense800 Prepaid rent800 To record rent expired in April 4/1 4,800 Prepaid rent 4/30 800 Rent expense 4/30 800 Bal 4,000 Copyright (c) 2009 Prentice Hall. All rights reserved.

23.  Plant assets ◦ Long-lived tangible assets used in business operations  Examples: ◦ Land, buildings, equipment, and furniture  Depreciation ◦ Allocation of a plant asset’s cost to expense over its useful life ◦ Land is not depreciated 23Copyright (c) 2009 Prentice Hall. All rights reserved.

24. 24 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 1231Depreciation expense $$$$ Accumulated depreciation $$$$ Amount calculated based on depreciation method Contra-asset account Copyright (c) 2009 Prentice Hall. All rights reserved.

25.  Contra asset ◦ Normal credit balance ◦ Always paired with related account  Holds sum of all depreciation recorded on a plant asset  Book value: ◦ Cost minus accumulated depreciation 25Copyright (c) 2009 Prentice Hall. All rights reserved.

26. 26  Expenses incurred before payment is made ◦ Results in a liability  Opposite of a prepaid expense  Examples: ◦ Salaries ◦ Interest Copyright (c) 2009 Prentice Hall. All rights reserved.

27. 27 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dec31Interest expense$$$$ Interest payable$$$$$ To record accrued interest GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dec31Salaries expense$$$$ Salaries payable$$$$ To record accrued salaries Copyright (c) 2009 Prentice Hall. All rights reserved.

28. 28  Revenue earned before cash is received  Results in a receivable GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dec31Accounts receivable$$$$ Service revenue$$$$ To record accrued revenues Copyright (c) 2009 Prentice Hall. All rights reserved.

29. 29  Cash is collected before revenue is earned ◦ Results in a liability as the company owes a product or service or they will have to give the money back  Also called deferred revenue BEFORE Copyright (c) 2009 Prentice Hall. All rights reserved.

30. 30 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dec31Unearned revenue$$$$ Service revenue$$$$ To record earned portion of unearned revenue Copyright (c) 2009 Prentice Hall. All rights reserved. Dec 1 Cash $$$$ Unearned revenue $$$$ To record cash received before service is provided

31.  To properly measure net income on the income statement ◦ Each adjusting entry affects a revenue or an expense  To update the balance sheet ◦ Each adjusting entry affects an asset or a liability 31Copyright (c) 2009 Prentice Hall. All rights reserved.

32. Category of Adjusting EntryDebitCredit Prepaid expenseExpenseAsset DepreciationExpenseContra asset Accrued expenseExpenseLiability Accrued revenueAssetRevenue Unearned revenueLiabilityRevenue 32Copyright (c) 2009 Prentice Hall. All rights reserved.

33.  A. PRE-PAID & DEPRECIATION  B. PRE-PAID & ACCRUALS  C. UNEARNED & DEPRECIATION  D. ACCUMULATED DEPRECIATION & ACCRUALS  E. DEPRECIATION & ACCRUALS Copyright (c) 2009 Prentice Hall. All rights reserved.33

34.  A. PRE-PAID & DEPRECIATION  B. PRE-PAID & ACCRUALS  C. UNEARNED & DEPRECIATION  D. ACCUMULATED DEPRECIATION & ACCRUALS  E. DEPRECIATION & ACCRUALS Copyright (c) 2009 Prentice Hall. All rights reserved.34

35. Explain the purpose of and prepare an adjusted trial balance

36.  Prepared after adjusting entries are posted  Useful step in preparing financial statements  Often appears on a work sheet ◦ Tool accountants use at end of period 36Copyright (c) 2009 Prentice Hall. All rights reserved.

37. Any Company Worksheet December 31, 2010 Trial Balance Adjustments Adjusted Trial Balance Account TitleDr.Cr.Dr.Cr.Dr.Cr. Cash 5,400 Supplies 700 a. 500 200 Equipment 17,000 Accum. depr. - Equip. 1,000 b. 1,000 2,000 Accounts payable 200 Interest payable c. 100 100 Note payable 9,000 Josie Smith, Capital 6,000 Josie Smith, W/D1,000 Service revenue 12,000 Rent expense 4,000 Supplies expense a. 500 500 Depreciation expense b. 1,000 1,000 Interest expense 100 c. 100 200 Totals 27,200 1,600 28,300 37

38. Prepare the financial statements from the adjusted trial balance

39. Reports revenue and expenses Determines net income Income statement Shows why Capital changed during the period Computes ending Capital Statement of owner’s equity Reports assets, liabilities, and owner’s equity Needs ending Capital to balance Balance sheet 39Copyright (c) 2009 Prentice Hall. All rights reserved.

40. Any Company Worksheet December 31, 2010 Adjusted Trial Balance Account TitleDr.Cr. Cash Supplies Equipment Accum. depr. - Equip. Accounts payable Interest payable Note payable Josie Smith, Capital Josie Smith, W/D Service revenue Rent expense Supplies expense Depreciation expense Interest expense Totals 40 5,400 200 17,000 1,000 4,000 500 1,000 200 28,300 2,000 200 100 9,000 6,000 12,000 28,300 Balance sheet Income statement

41. 41Copyright (c) 2009 Prentice Hall. All rights reserved.

42. 42 Any Company Statement of Owner’s Equity Year ended December 31, 2010 Josie Smith, Capital, January 1, 2010 $ 5,000 Add: Net income 6,300 Josie Smith, Capital, December 31, 2010 $11,300 Copyright (c) 2009 Prentice Hall. All rights reserved.

43. 43Copyright (c) 2009 Prentice Hall. All rights reserved.

44.  A. Balance Sheet to Income Statement  B. Income Statement to Balance Sheet  C. Income Statement to Statement of Cash Flow  D. Income Statement to Statement of Equity  E. Statement of Equity to Income Statement  F. Statement of Cash Flow to Statement of Equity Copyright (c) 2009 Prentice Hall. All rights reserved.44

45.  A. Balance Sheet to Income Statement  B. Income Statement to Balance Sheet  C. Income Statement to Statement of Cash Flow  D. Income Statement to Statement of Equity  E. Statement of Equity to Income Statement  F. Statement of Cash Flow to Statement of Equity Copyright (c) 2009 Prentice Hall. All rights reserved.45

46.  A. Balance Sheet  B. Income Statement  C. Statement of Cash Flow  D. Statement of Equity  E. Balance Sheet & Income Statement  F. Statement of Cash Flow & Statement of Equity Copyright (c) 2009 Prentice Hall. All rights reserved.46

47.  A. Balance Sheet  B. Income Statement  C. Statement of Cash Flow  D. Statement of Equity  E. Balance Sheet & Income Statement  F. Statement of Cash Flow & Statement of Equity Copyright (c) 2009 Prentice Hall. All rights reserved.47