1. Recognition: formally recording an item in the financial statements of an entity Recognition and Measurement I know I need to record this... Measurement: quantification of the economic effects of the item on the entity...but at current value or historical cost? LO1 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2. Cash vs. Accrual Basis Cash basis: revenues and expenses are recorded only when cash is received or paid Accrual basis: revenues are recognized when earned; expenses are recognized when incurred LO2 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

3. Cash basis statement Accrual basis statement Statement of Cash Flows Cash flows from operating activities : $(4,000) Income Statement Net income: $ 7,000 What accounts for the difference? © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

4. Revenue Recognition Principle Exceptions:  Long-term contracts  Franchises  Commodities  Installment sales  Rent and interest Revenue is recognized when realized and earned—usually at time of sale LO3 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

5. Matching Principle Directly e.g., Inventory e.g., Buildings e.g., Utilities Match expenses with associated revenues Indirectly over period they provide benefits Simultaneously upon their acquisition LO4 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

6. Expense Recognition Income Statement PP&E Intangibles as used Balance Sheet when sold over period they provide benefits ASSETS: EXPENSES: Cost of goods sold Supplies expense Insurance expense Rent expense Depreciation expense Amortization expense Other expenses (as incurred) Inventory Supplies Prepaid assets l © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

7. Types of Adjusting Entries RECOGNIZE REVENUE OR EXPENSES BEFORE OR AFTER CASH IS EXCHANGED Deferred expense Accrued liability Accrued asset Deferred revenue LO5 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. Deferred Expense Cash paid before expense is incurred  Examples: Prepaid rent Prepaid insurance Office supplies Property and equipment  Costs are initially recorded as assets and allocated to expenses in future periods © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

9. Prepay rent on office space for one year on September 1 Initial journal entry: 9/1Prepaid Insurance2,400 Cash2,400 Monthly adjusting journal entry: 9/30Insurance Expense 200 Prepaid Insurance 200 ($2,400 annual × 1/12 = $200 per month for 12 months) Deferred Expense Example © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10. Deferred Revenue Cash received before revenue is earned  Examples: Insurance collected in advance Subscriptions collected in advance Gift certificates  Receipts are initially recorded as liabilities (unearned or refundable receipts) and recorded as revenues in future periods when earned © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11. Deferred Revenue Example Received $2,400 for an insurance policy in advance on September 1 Initial journal entry: 9/1 Cash 2,400 Insurance Collected in Advance 2,400 Monthly adjusting journal entry: 9/30Insurance Collected in Advance 200 Insurance Revenue200 ($2,400 annual × 1/12 = $200 per month for 12 months) © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

12. Accrued Liability Expense incurred before cash is paid  Examples: Payroll Taxes Interest  Record expense (and corresponding liability) in period incurred; pay for it in a future period  No cash flow on recording, only when paid © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

13. Accrued Liability Example At end of month, between pay periods: Wages Expense 40,000 Wages Payable 40,000 Next payday: Wages Payable 40,000 Wages Expense 240,000 Cash 280,000 Pay biweekly wages of $280,000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

14. Accrued Liability Example #2 Initial journal entry: 3/1Cash 20,000 Notes Payable 20,000 Monthly adjusting journal entry: 3/31Interest Expense 150 Interest Payable 150 ($20,000 principal × 9% × 3/12 = $450 for 3 months or $450/3 = $150 per month) On March 1, assume a 9%, 90-day, $20,000 loan is taken out with a bank © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

15. Accrued Liability Example #2 (continued) 5/30Interest Payable 300 Interest Expense 150 Notes Payable20,000 Cash20,450 To record payment of a 9%, 90-day, $20,000 loan with interest due on May 30 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. Accrued Asset Revenue earned before cash is received  Examples: Rent Interest  Record revenue (and corresponding receivable) in period earned; receive payment in a future period © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

17. Accrued Asset Example First day of the month: Rent Receivable 2,500 Rent Revenue 2,500 Upon receipt of cash: Cash 2,500 Rent Receivable 2,500 Rent payment of $2,500 due within first 10 days of month © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

18. Adjusting Entry Summary Examples:  Deferred Expense cash received before expense is incurred  Deferred Revenue cash received before revenue is earned  Accrued Liability expense incurred before cash is paid  Accrued Asset revenue is earned before cash is received © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

19. Steps in the Accounting Cycle 1. Collect and analyze info 2. Journalize transactions 3. Post transactions to general ledger 4. Prepare work sheet 5. Prepare financial statements 6. Record and post adjusting entries 7. Close the accounts LO6 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

20. The Closing Process Purpose:  To return the balance of revenue, expense, and dividend accounts to zero to begin the next period  to transfer the net income of the period to Retained Earnings © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

21. Revenues Normal balance Nominal Accounts Expenses Normal balance Dividends Normal balance $ XX Zero out nominal accounts to start accumulation of next period’s results Close to Income Summary $ XX Close to Income Summary $ XX Close to Retained Earnings $ XX LO7 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

22. Closing Entries (Net loss) or Net Income closed to Retained Earnings Income Summary $XX from revenue accounts $XX from expense accounts © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

23. Appendix Accounting Tools: Work Sheets © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

24. Unadjusted Trial Balance Columns Begin by filling in the trial balance accounts and amounts LO8 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

25. The Adjusting Entries Columns Make adjustments; formal journal entries are prepared later © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

26. Adjusted Trial Balance Columns Add or subtract adjustments for adjusted account balances © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

27. The Income Statement Columns Extend revenue and expense account balances to the income statement © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

28. The Balance Sheet Columns Extend asset, liability, and equity accounts to the balance sheet © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

29. End of Chapter 4