Chapter 5 Accrual Adjustments and Financial Statement Preparation. Revenue recognition Matching expenses to revenues Expenses related to periods

Size: px
Start display at page:

Download "Chapter 5 Accrual Adjustments and Financial Statement Preparation. Revenue recognition Matching expenses to revenues Expenses related to periods"

Transcription

1 Chapter 5 Accrual Adjustments and Financial Statement Preparation Revenue recognition Matching expenses to revenues Expenses related to periods 1

2 The Measurement of Income major function of accounting to monitor business performance one important way of doing it measuring and reporting a company s net income Net income = revenues expenses Revenues: Value retrieved in exchange for goods sold or services rendered to customers Expenses: cost of goods and services used in the process of obtaining revenues 2

3 Impact of Basic Accounting Principles on Income Measurement Periodicity assumption Businesses need regular progress reports, so accountants prepare financial statements for specific periods and at regular intervals. yearly - twelve-month accounting period is called a fiscal year quarterly / monthly - reporting is called interim reporting Going-concern assumption allows cost allocation over several periods Revenue Recognition and Matching Principle Recognize revenues when earned and let cost follow the revenues 3

4 Realization Principle Revenues of a transaction are realized when each of the following conditions hold: 1. the company is expected to receive economic benefits from the transaction 2. the benefits and the costs from the transaction can reliably be measured In the case of sales of goods: economic ownership of the object has been transferred to the customer economic ownership means that the customer has acquired all the property rights that have to be transferred according to the contract and has taken over all the respective risks Revenue realization usually is documented by sending an invoice to the customer when the customer remains silent after a due time, (s)he has accepted that (s)he is in charge of the return; that s when the revenue is realized Long-term contracts: percentage of completion method: realisation is assumed pro rata based on conditions 1. and 2. 4

5 Recognition of expenses Production costs are attributed to revenue they are matched with the revenue they were sacrificed for Nonproduction costs are to be matched to an indefinite set of future revenues they are recognized in the period in which they occurred Modifying principle: Prudence (Conservatism) expected losses are anticipated; they are recognized in the period in which they come to be known example: a construction company has to deliver a project at a fixed price, but it turns out that the costs will exceed the price because of unexpected difficulties with the underground; then the uncovered part of cost is expensed as soon as possible: it is considered as a loss actually obtained when the contract was signed 5

6 Accrual basis versus cash basis Instead of accrual basis accounting cash basis could be used i.e. Revenues and Expenses are recognized when the corresponding cash flows occur Cash basis Accounting is less informative as a basis for assessing regular performance and may be outright misleading cash flows occur far from the basic economic processes e.g. purchasing durable equipment provisions of pension liabilities provisions for closing down a nuclear power plant revenues from long-term contracts 6

7 Trial Balance as the Starting Point of the Adjustment Process Trial Balance ZiscoSys Magdeburg Trial Balance September 30, 2003 Cash Accounts Receivable Equipment Supplies 500 Prepaid Insurance Accounts Payable 300 Unearned Revenue Owner's Investment Owner's Withdrawal 800 Revenues 5000 Rent Expense 500 Utility Expense

8 The Adjustment Process adjusting entries to apply accrual accounting to transactions that span more than one accounting period adjusting entries required whenever financial statements are prepared Deferral: postponement of the recognition of an expense already paid for or of a revenue already received examples: prepaid expenses, unearned revenues Accrual: recognition of an expense or revenue that has arisen but has not yet caused an expenditure (or receipt, respectively) examples: accrued expenses, accrued revenues 8

9 Adjusting entries accomplish four things: Deferrals Apportion recorded costs among two or more accounting periods prepaid expenses e.g. cost of machinery, prepaid rent Apportion recorded revenues among two or more accounting periods Accruals unearned revenues e.g. sale of a one-year contract for wireless phone service Record unrecorded expenses accrued expenses e.g. interest payable on a loan Record unrecorded revenues accrued revenues e.g. fees earned but not yet billed to customers 9

10 How do we make the adjustment(s)? (1) record the transaction in the journal journalizing (2) transfer the journal entry to the ledger account posting... we basically run through the accounting cycle again!... that s why we need a new trial balance, the adjusted trial balance! 10

11 Adjusting Entries for Deferrals deferral expiry-of-asset / liability adjustment required to record the portion of the prepayment (deferral) that represents the expense incurred or the revenue earned in the current accounting period decrease a balance sheet account increase an income statement account Prepaid expenses: adjusting entry increase an expense account, decrease an asset account Unearned revenues: adjusting entry increase a revenue account, decrease a liability account 11

12 Prepaid Expense... refers to expenses paid in cash and recorded as assets before they are used or consumed initial account entry: debit an asset account prepaid expenses expire in two ways: with passage of time (e.g. prepaid rent and insurance) through use or consumption (e.g. equipment, supplies) if used or expired record the expenses that apply to the current period & prepare adjusting entry 12

13 Asset Account Expense Account Unadjusted Adjusting Adjusting Balance Entry Entry Credit Debit Amount equals cost of goods or services used up or expired Note: asset expense relation 13

14 Adjustments for Supplies Used Up supplies used difference between balance in the supplies account and cost of supplies still in store ZiscoSys had bought supplies for 500 at the beginning of September. At the end of September, supplies still on hand are counted and valued at historical cost. Amount: 300. Hence, 200 must be recorded as an expense. Journal entry Sept. 30 Supplies expense 200 Supplies

15 now we can transfer the journal entry to the ledger Supplies Supplies Expense Sept Sept. 30 Adj. 200 Sept. 30 Adj. 200 Sept. 30 Bal. 300 adjustment without adjusting entries: (1) September expenses will be underand net income overstated by 200 (2) both assets and owner s equity will be overstated by

16 Adjustment for Insurance Expired insurance expired equal to the insurance premium times the length of the accounting period over the entire term of coverage ZiscoSys bought a one-year insurance policy. At the end of September 100 have expired ( * 1 month / 12 months). Journal entry Sept. 30 Insurance expense 100 Prepaid insurance

17 Prepaid Insurance Insurance Expense Sept Sept. 30 Adj. 100 Sept. 30 Adj. 100 Sept. 30 Bal adjustment without adjusting entries: (1) September expenses will be under- and net income overstated by 100 (2) both assets and owner s equity will be overstated by

18 Adjustment for Depreciation depreciation allocation of the cost of an asset to expense over its useful life in a rational and systematic manner amount of depreciation is an estimate and not a factual measurement ZiscoSys invested in office equipment which will provide service for four years, that means monthly depreciation will be appr. 84. ( / 48 months = 84 per month) Sept Office Equipment Accumulated Depreciation - Office Equipment Depreciation Expense Sept. 30 Adj. 84 Sept. 30 Adj

19 contra accounts accumulated depreciation office equipment is a contra-asset account a valuation account that is paired with and deducted from a related account in the financial statements Why not credit the asset account directly? Because depreciation is an estimate, and... to preserve original cost of the asset separate Accumulated depreciation accounts for each long-lived asset difference between cost of asset and accumulated depreciation is called carrying value or book value 19

20 Balance sheet presentation of accumulated depreciation Plant and Equipment Office Equipment Less Accumulated Depreciation 84 Total Plant and Equipment the entries show: original cost of 4.000, cost that have expired to date ( 84), and the balance left to be depreciated ( 3.916) 20

21 Unearned Revenue... is an obligation arising from receiving cash before providing a service initial account entry: credit a liability account if a fraction of the service is rendered or goods are delivered, the adjusting entry recognizes this revenue Liability Account Revenue Account Adjusting Unadjusted Adjusting Entry Balance Entry Debit Credit Amount equals price of services performed or goods delivered Note: liability revenue relation 21

22 ZiscoSys received for maintenance work that should be performed over the course of a year. At month-end of September, 200 were earned. Unearned Revenue Service Revenue Sept. 30 Adj. 200 Sept Sept Sept. 30 Adj. 200 Sept. 30 Bal without adjusting entries: (1) September revenues and net income would be understated by 200 in the income statement (2) liabilities would be over- and owner s equity will be understated by 200 on the balance sheet. 22

23 Adjusting Entries for Accruals accrual passage of time adjustment required to record revenues earned and expenses incurred in the current period that have not been recognized or recorded adjusting entry for accruals will increase both a balance sheet and an income statement account. accrued revenues: adjusting entry increase an asset account, -increase a revenue account accrued expenses: adjusting entry increase an expense account, increase a liability account Note: The following examples do not pertain to the ZiscoSys example and, thus, will not affect the adjusted trial balance. 23

24 Accrued Revenues revenues for which services have been performed or goods delivered but are unrecorded so far may accumulate with passing of time (interest, rent etc.) or from services that are neither billed nor collected Asset Receivable Account Revenue Account Adjusting Adjusting Entry Entry Debit Credit Amount equals price of services performed 24

25 Let s assume a company has provided a service worth 750 to a client that hasn t been billed to him/her. The following adjusting entry would be made at month-end Accounts Receivable Service Revenue 10/31 Adj / Adj /31 Bal without adjustment assets, owner s equity, revenues and net income would all be understated 25

26 Accrued Expenses expenses that have been incurred but not yet recorded in the accounts accrue from the same sources as accrued revenues Expense Account Liability Account Adjusting Adjusting Entry Entry Debit Credit Amount equals cost of expense incurred 26

27 let s assume we have borrowed money for which 100 interest accrues every month Interest Expense Interest Payable 10/31 Adj /31 Adj. 100 without adjusting entries: (1) expenses and liabilities will be understated by 100 (2) net income and owner s equity will be overstated by

28 Summary of the adjusting entries Type of Reason for Accounts before Adjusting Adjustment Adjustment Adjustment Entry 1. Prepaid expenses Prepaid expenses originally recorded in Assets overstated Dr. Expenses asset accounts have been used Expenses understated Cr. Assets 2. Unearned revenues Unearned revenues initially recorded in Liabilities overstated Dr. Liabilities liability accounts have been earned Revenues understated Cr. Revenues 3. Accrued revenues Revenues have been earned but not yet Assets understated Dr. Assets received in cash or recorded Revenues understated Cr. Revenues 4. Accrued expenses Expenses have been incurred but not Expenses understated Dr. Expenses yet paid in cash or recorded Liabilities understated Cr. Liabilities 28

29 Summary of Adjusting Entries for ZiscoSys General Journal J2 Date Account Titles and Explanation Ref. Debit Credit 2003 Adjusting Entries a Sept. 30 Supplies Expense c c 200 Supplies o 200 (to record supplies used) u n 30 Insurance Expense t 100 Prepaid Insurance 100 (to record insurance expired) n 30 Depreciation Expense u m 84 Accumulated Depreciation - Office Equipment b 84 (to record monthly depreciation) e r 30 Unearned Revenue s 200 Service Revenue 200 (to record revenue for service provided) 29

30 Adjusted Trial Balance The Adjusted Trial Balance ZiscoSys Magdeburg Adjusted Trial Balance September 30, 2003 Cash Accounts Receivable Equipment Supplies 300 Prepaid Insurance Accumulated Depreciation - Office Equipement 84 Accounts Payable 300 Unearned Revenue Owner's Investment Owner's Withdrawal 800 Revenues Supplies Expense 200 Rent Expense 500 Utility Expense 200 Insurance Expense 100 Depreciation Expense Entries affected by adjustments are in bold numbers. The financial statements can be prepared directly from the adjusted trial balance. 30

31 ZiscoSys Magdeburg Income Statement For the Month Ended September 2003 Income Statement and Owner s Equity Statement Revenues Service Revenues Expenses Rental Expense 500 Utility Expense 200 Supplies Expense 200 Insurance Expense 100 Depreciation Expense 84 Total Expenses Net Income ZiscoSys Magdeburg Statement of Owner's Equity For the Month Ended September 2003 ZiscoSys Capital, September 1, Add: Owner's Investment Net Income for the Month Subtotal Less: Withdrawal 800 ZiscoSys Capital, September 30, Recall the unadjusted numbers: Net income: ZiscoSys Capital:

32 The Balance Sheet ZiscoSys Magdeburg Balance Sheet September 30, 2003 Assets Liabilities Cash Accounts Payable 300 Accounts Receivable Unearned Revenue Supplies 300 Prepaid Insurance Owner's Equity Equipment ZiscoSys, Capital Less: Accumulated Depreciation Total Liabilities and Total Assets Owner's Equity

33 Alternative Treatment of Deferrals Prepaid expenses, usual treatment: debit an asset account (initially) alternative treatment: debit an expense account (initially) Why? Because we expect to use up, say, the supplies completely before the next financial statement date. Advantage: We do not need to make adjusting entries (provided that we in fact use up the supplies completely)! If, however, we do not completely use up the supplies, we make the following adjustments (numbers taken from our example): Supplies Supplies Expense Sept. 30 Adj. 300 Sept Sept. 30 Adj. 300 Sept. 30 Bal

34 Alternative treatment of Unearned Revenues Instead of crediting a liability account, we can alternatively credit a revenue account. Why? Because we expect to earn the revenue, e.g. perform the service, until the next financial statement date. Advantage: If we do earn the revenue until the next financial statement date, no adjusting entry is needed. If, however, we do not fully earn the revenue until the next financial statement day, we make the following adjustment (numbers taken from our example): Unearned Revenue Service Revenue Sept. 30 Adj Sept. 30 Adj Sept Sept. 30 Bal

CHAPTER 3 ADJUSTING THE ACCOUNTS

CHAPTER 3 ADJUSTING THE ACCOUNTS CHAPTER 3 ADJUSTING THE ACCOUNTS TIME PERIOD ASSUMPTION The time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial time periods generally a

More information

BAT 4M: Chapter 3 ANSWERS TO QUESTIONS

BAT 4M: Chapter 3 ANSWERS TO QUESTIONS BAT 4M: Chapter 3 ANSWERS TO QUESTIONS 01. (a) Under the time period assumption, an accountant is required to determine the relevance of each business transaction to specific accounting periods, and its

More information

Accounting Cycle. Matching Principle

Accounting Cycle. Matching Principle CHAPTER 3 Accounting Cycle Analyze and record the transactions Post the transactions and prepare trial balance Adjust the accounts and prepare trial balance Prepare the financial statements Close the accounts

More information

Time Period Assumption

Time Period Assumption ILLUSTRATION 3-1 GUIDELINES TO REPORT REVENUE AND EXPENSES Time Period Assumption Economic life of business can be divided into artificial time periods Revenue Recognition Principle Revenue recognized

More information

Vol. 1, Chapter 3 - Accounting Adjustments

Vol. 1, Chapter 3 - Accounting Adjustments Vol. 1, Chapter 3 - Accounting Adjustments Problem 1 1. ($20,000 2,000) 48 = $375 per month 2. Jan. 31 Depreciation Expense $375 Accumulated Depreciation Van $375 To record depreciation expense for January

More information

Chapter 4: Adjusting the accounts and preparing Financial statements. 4.1 Measurement of Profit Income Expense = profit

Chapter 4: Adjusting the accounts and preparing Financial statements. 4.1 Measurement of Profit Income Expense = profit Chapter 4: Adjusting the accounts and preparing Financial statements 4.1 Measurement of Profit Income Expense = profit Cash basis Income is recorded wen cash is received Expenses are recorded when cash

More information

> DO IT! Chapter 3 Adjusting the Accounts. Timing Concepts. Adjusting Entries for Deferrals D-12. Solution

> DO IT! Chapter 3 Adjusting the Accounts. Timing Concepts. Adjusting Entries for Deferrals D-12. Solution Chapter 3 Adjusting the Accounts Timing Concepts Review the glossary terms. Study carefully the revenue recognition principle, the expense recognition principle, and the time period assumption. Several

More information

(a) Prepaid Insurance to recognize insurance expired during the period.

(a) Prepaid Insurance to recognize insurance expired during the period. BRIEF EXERCISE 4-1 (a) (b) (c) (d) (e) (f) Cash $ 100 0 0 +800 2,500 0 Net Income $0 20 +1,300 0 0 600 BRIEF EXERCISE 4-2 (a) Prepaid Insurance to recognize insurance expired during the period. (b) Depreciation

More information

ACCT1115. Review Package - Midterm SOLUTION Fall 2013

ACCT1115. Review Package - Midterm SOLUTION Fall 2013 ACCT1115 Review Package - Midterm SOLUTION Fall 2013 Part I Multiple Choice 1) How should you record the purchase of an expensive automobile? a) Decrease cash, increase assets b) Decrease cash, increase

More information

THE ACCOUNTING INFORMATION SYSTEM

THE ACCOUNTING INFORMATION SYSTEM CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM OVERVIEW Accounting information must be accumulated and summarized before it can be communicated and analysed. In this chapter, we will discuss the steps involved

More information

Chapter 3 Adjusting the Accounts

Chapter 3 Adjusting the Accounts Bennett S. LeBow College of Business Financial Accounting Professor Jane Kaplan Professor Notes Chapter 3 Adjusting the Accounts Measuring Revenues and Expenses o Accrual accounting is a form of accounting

More information

Accrual Accounting Process: Part II

Accrual Accounting Process: Part II Accrual Accounting Process: Part II 15.511 Corporate Accounting Summer 2003 Professor S.P. Kothari Sloan School of Management Massachusetts Institute of Technology June 14, 2003 1 Agenda for Today Continue

More information

ACC Financial Accounting Review for Test 1 (includes chapters 1, 2 and 3)

ACC Financial Accounting Review for Test 1 (includes chapters 1, 2 and 3) ACC 201 - Financial Accounting Review for Test 1 (includes chapters 1, 2 and 3) From the following list of questions, I will pick 27 multiple choice questions(each worth 1.5 points=40.5points) and one

More information

CHAPTER 3: PREPARING FINANCIAL STATEMENTS

CHAPTER 3: PREPARING FINANCIAL STATEMENTS CHAPTER 3: PREPARING FINANCIAL STATEMENTS I. TIMING AND REPORTING A. The Accounting Period Time period assumption an organization s activities can be divided into specific time periods. Examples: a month,

More information

SMART TOUCH LEARNING Balance Sheet May 31, 2013 $ 4,800. $ 48,700 Accounts receivable 2,600. 900 Inventory 30,500. 100 Supplies.

SMART TOUCH LEARNING Balance Sheet May 31, 2013 $ 4,800. $ 48,700 Accounts receivable 2,600. 900 Inventory 30,500. 100 Supplies. 3 The Adjusting Process Are these balances correctly showing everything the company OWNS? SMART TOUCH LEARNING ance Sheet May 31, 2013 Are these balances correctly showing everything the company OWES?

More information

1. If the assets owned by a business total $100,000 and liabilities total $70,000, stockholders' equity totals $30,000.

1. If the assets owned by a business total $100,000 and liabilities total $70,000, stockholders' equity totals $30,000. Rallis Page 1 Name: _ Date: 1. If the assets owned by a business total $100,000 and liabilities total $70,000, stockholders' equity totals $30,000. A) True B) False 2. If total liabilities decreased by

More information

Adjusting the Accounts

Adjusting the Accounts HOSP 1210 (Financial Acct) Learning Centre Adjusting the Accounts Anytime we prepare financial statements or reach the end of an accounting period, there are account adjustments that need to be made to

More information

The Adjusting Process

The Adjusting Process Chapter 03.qxd 5/21/08 7:07 PM Page 99 C H A P T E R 3 AP Photo/Jeff Kravitz Fo r Sa le The Adjusting Process M A R V E L D E N T E R T A I N M E N T, N ot o you subscribe to any magazines? Most of us

More information

SOLUTIONS. Learning Goal 16

SOLUTIONS. Learning Goal 16 Learning Goal 16: Prepare Closing Entries S1 Learning Goal 16 Multiple Choice 1. d 2. a 3. b 4. d Because drawing is closed directly into the capital account, not into income summary. 5. c 6. b This a

More information

EXERCISES. Does not normally require adjustment. Normally requires adjustment (AE).

EXERCISES. Does not normally require adjustment. Normally requires adjustment (AE). EXERCISES Ex. 3 1 1. Prepaid expense 2. Accrued revenue 3. Unearned revenue 4. Accrued expense 5. Unearned revenue 6. Prepaid expense 7. Accrued expense 8. Accrued expense Ex. 3 2 Account Accounts Receivable...

More information

Accrual accounting ACCRUAL VERSUS CASH BASIS OF ACCOUNTING. ACCRUAL VERSUS CASH BASIS OF ACCOUNTING continued. Chapter 3

Accrual accounting ACCRUAL VERSUS CASH BASIS OF ACCOUNTING. ACCRUAL VERSUS CASH BASIS OF ACCOUNTING continued. Chapter 3 Chapter 3 Accrual accounting concepts PowerPoint presentation by Anne Abraham University of Wollongong 2009 John Wiley & Sons Australia, Ltd ACCRUAL VERSUS CASH BASIS OF ACCOUNTING Accrual-based accounting

More information

Adjusting Accounts and Preparing Financial Statements

Adjusting Accounts and Preparing Financial Statements wil79549_ch03_0090-0133 07/30/2008 5:36 pm Page 90 pinnacle 201:MHBR055:mhwiL19:wiL19ch03: A Look Back Chapter 2 explained the analysis and recording of transactions. We showed how to apply and interpret

More information

Adjusting the Accounts

Adjusting the Accounts 2794T_c03_094-143.qxd 6/5/08 5:54 PM Page 94 TEAM-B 108:JWCL039:Ch03: Chapter 3 Adjusting the Accounts STUDY OBJECTIVES The Navigator After studying this chapter, you should be Scan Study Objectives able

More information

CHAPTER 4 Accrual Accounting Concepts Study Objectives

CHAPTER 4 Accrual Accounting Concepts Study Objectives CHAPTER 4 Accrual Accounting Concepts Study Objectives Explain the revenue recognition principle and the matching principle. Differentiate between the cash basis and the accrual basis of accounting. Explain

More information

A = L + OE. Transaction 1 Assets = Liabilitites + Owners equity + 1,000,000 Cash + 1,000,000 Common stock

A = L + OE. Transaction 1 Assets = Liabilitites + Owners equity + 1,000,000 Cash + 1,000,000 Common stock FINANCIAL STATEMENT ANALYSIS Henry Jarva Aalto University, Spring 2015 Student name: EXERCISE 1. Provide journal entries for Transactions 5 8, Adjusting Entries 2 7, and prepare Exhibit 1. 2. Calculate

More information

Chapter 4 20/09/2012. Why Adjustments Are Needed. The Need for Adjustments. Adjustments. Types of Deferral Adjustments.

Chapter 4 20/09/2012. Why Adjustments Are Needed. The Need for Adjustments. Adjustments. Types of Deferral Adjustments. Chapter 4 Adjustments, Financial Statements, and the Quality of Financial Reporting Adjustments: How, When and Why? Preparing the Adjusted Trial Balance Preparing Adjusted Financial Statements The Closing

More information

Take-Off Trial Balance

Take-Off Trial Balance Closing Entries, and Accounting Worksheet Created 2007 By Michael Worthington Elizabeth City State University Take-Off is initial stage of 1. Copy (take-off) unadjusted from General Ledger to the worksheet

More information

Dr. M. D. Chase BA 201 Examination 1J

Dr. M. D. Chase BA 201 Examination 1J Dr. M. D. Chase BA 201 Examination 1J Instructions: 1. Place your Name, Code Number of the Examination and the Examination Number on your Scantron form. Failure to follow these instructions will result

More information

Chapter 3. Adjusting the accounts. Appendix 3A: An alternative method of recording deferrals

Chapter 3. Adjusting the accounts. Appendix 3A: An alternative method of recording deferrals 1 Chapter 3 Adjusting the accounts Appendix 3A: An alternative method of recording deferrals 2 Learning objectives 1. Prepare adjusting entries for prepaid expenses originally recorded in an expense account

More information

Module 3: Adjusting the accounts, preparing the statements, and completing the accounting cycle

Module 3: Adjusting the accounts, preparing the statements, and completing the accounting cycle Page 1 of 27 Module 3: Adjusting the accounts, preparing the statements, and completing the accounting cycle Overview In Module 2 you studied the fundamental steps in recording accounting information by

More information

Module 6 Intro to Adjusting Entries

Module 6 Intro to Adjusting Entries Module 6 Intro to Adjusting Entries Entries required at the end of each accounting period to recognize on accrual basis: Revenues earned for the period Expenses that match the revenue earned And to report

More information

b. Do not recognize revenue until steel is shipped. c. Do not recognize revenue until next year after the games are played.

b. Do not recognize revenue until steel is shipped. c. Do not recognize revenue until next year after the games are played. CHAPTER FOUR SE4-2 Revenue recognition a. Recognize revenue from car sales for 12,000. Notes receivable $12,000 Sales revenue $12,000 b. Do not recognize revenue until steel is shipped. c. Do not recognize

More information

The Measurement of the Business Income. 1 by recording revenues when earned and expenses when incurred. 2 by adjusting accounts

The Measurement of the Business Income. 1 by recording revenues when earned and expenses when incurred. 2 by adjusting accounts Recap from Week 3 The Measurement of the Business Income The primary objective of accounting is measuring the net income of the businesses according to the generally accepted accounting principles. Net

More information

Do it! Solution. Action Plan B2H1

Do it! Solution. Action Plan B2H1 1 The ledger of Hammond, Inc., on March 31, 2014, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated

More information

Periodicity Assumption... Time Period Assumption... Chapter 4 Accrual Accounting Concepts

Periodicity Assumption... Time Period Assumption... Chapter 4 Accrual Accounting Concepts Financial Accounting: Tools for Business Decision Making, 4th Ed. CHAPTER 4 Kimmel, Weygandt, Kieso Chapter 4 Accrual Accounting Concepts KEY THINGS WE LL DO: Refresh and expand Ch.3 concepts. Differentiate

More information

The Matching Concept and the Adjusting Process

The Matching Concept and the Adjusting Process The Matching Concept and the Adjusting Process o b j e c t i v e s After studying this chapter, you should be able to: 4 Explain how the matching concept relates to the accrual basis of accounting. Explain

More information

Accrual vs Deferral Accrual vs Cash Basis

Accrual vs Deferral Accrual vs Cash Basis 1 - Accrual vs Deferral Accrual vs Cash Basis - understanding debits and credits a transaction either increases or decreases the balance of accounts. increases and decreases in accounts are based on the

More information

Accruals and prepayments

Accruals and prepayments Accruals and prepayments Introduction These are adjustments which need to be carried out before the financial statements can be produced. The adjustments are necessary as accounts are prepared in accordance

More information

CHAPTER 3. BE3-2 Advertising. Dec. 31 Advertising Supplies Expense 7200 Advertising Supplies 7200 to adjust. BE3-3 Bere Co.

CHAPTER 3. BE3-2 Advertising. Dec. 31 Advertising Supplies Expense 7200 Advertising Supplies 7200 to adjust. BE3-3 Bere Co. CHAPTER 3 BE3-2 Advertising Advertising Supplies Supplies Expense 8700 7200 7200 1500 7200 Dec. Advertising Supplies Expense 7200 Advertising Supplies 7200 BE3-3 Bere Co. Prepaid Insurance Insurance Expense

More information

CHAPTER 3 Solutions MEASURING BUSINESS INCOME

CHAPTER 3 Solutions MEASURING BUSINESS INCOME CHAPTER 3 Solutions MEASURING BUSINESS INCOME Chapter 3, SE 1. 1. 2. 3. 4. c b d a Chapter 3, SE 2. Dec. 31 Insurance Expense 800 Prepaid Insurance To record insurance expired during the year $460 + $1,040

More information

ACCRUAL ACCOUNTING CONCEPTS

ACCRUAL ACCOUNTING CONCEPTS c04accrualaccountingconcepts.qxd 8/3/10 1:50 PM Page 162 chapter 4 ACCRUAL ACCOUNTING CONCEPTS 162 the navigator Scan Study Objectives Read Feature Story Scan Preview Read Text and Answer Do it! p. 175

More information

Review of the Accounting Process THE BASIC MODEL

Review of the Accounting Process THE BASIC MODEL THE BASIC MODEL The accounting information system is designed to collect and organize data into information that is useful for stakeholders. The Accounting Equation The basic accounting equation is what

More information

Information System. CHAPTER The Accounting. eeded: A Reliable Information System LEARNING OBJECTIVES

Information System. CHAPTER The Accounting. eeded: A Reliable Information System LEARNING OBJECTIVES 8658d_c03.qxd 11/4/02 11:11 AM Page 61 mac62 mac62:1st Shift: 3 CHAPTER The Accounting Information System eeded: A Reliable Information System N Maintaining a set of accounting records is not optional.

More information

CHAPTER 3 ADJUSTING THE ACCOUNTS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY. Multiple Choice Questions

CHAPTER 3 ADJUSTING THE ACCOUNTS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY. Multiple Choice Questions sg st a CHAPTER 3 ADJUSTING THE ACCOUNTS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT True-False Statements 1. 1 C 9. 2 C 17. 5 C

More information

Accrual Accounting Process

Accrual Accounting Process Accrual Accounting Process 15.501 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology Feb 17/18, 2004 1 An accountant s functions include Classifying

More information

Completing the Accounting Cycle

Completing the Accounting Cycle CHAPTER 4 Completing the Accounting Cycle Making a Statement INCOME STATEMENT Revenues Expenses = Net Income STATEMENT OF OWNER S EQUITY Beginning Balance + Net Income Withdrawals = Ending Balance BALANCE

More information

Accounting II Second Semester Final

Accounting II Second Semester Final Name: Class: Date: Accounting II Second Semester Final Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Profit is the difference between:

More information

Accounting Basics, Part 2

Accounting Basics, Part 2 Accounting Basics, Part 2 The Accounting Cycle, T-Accounts, Trial Balance, and from Ledger to Trial Closing Balance Part 2 What s Here Introduction The Accounting Cycle T-Accounts Trial Balance Adjusting

More information

UNIVERSITY OF WATERLOO School of Accounting and Finance

UNIVERSITY OF WATERLOO School of Accounting and Finance UNIVERSITY OF WATERLOO School of Accounting and Finance AFM 101 Professor Duane Kennedy Mid-Term Examination Fall 2008 Date and Time: October 16, 2008, 7:15 8:45pm Pages: 16, including cover Name: Student

More information

Chapter 4. Completing the accounting cycle

Chapter 4. Completing the accounting cycle 1 Chapter 4 Completing the accounting cycle 2 Learning objectives 1. Prepare an accounting worksheet and describe its purpose 2. Prepare a classified balance sheet and explain the major headings 3. Explain

More information

The Work Sheet and the Closing Process

The Work Sheet and the Closing Process C H A P T E R 4 The Work Sheet and the Closing Process A systematic approach is essential for efficient and accurate processing of large amounts of information. Whether work sheets are on paper or computerized,

More information

Adjusting Entries and the Work Sheet

Adjusting Entries and the Work Sheet Heintz & Parry th Edition Chapter 5 th Edition College Accounting Adjusting Entries and the Work Sheet 1 Prepare end-of-period adjustments. END-OF-PERIOD ADJUSTMENTS Changes occur that affect the business

More information

Chapter 4. Completing the accounting cycle. Appendix 4A: Reversing entries

Chapter 4. Completing the accounting cycle. Appendix 4A: Reversing entries 1 Chapter 4 Completing the accounting cycle Appendix 4A: Reversing entries 2 Learning objective 1. Prepare reversing entries and describe their purpose 3 Reversing entries Reversing entries are optional

More information

WHY ADJUSTING JOURNAL ENTRIES? CHAPTER FIVE. ADJUSTING ENTRIES Page 145 MATCHING PRINCIPLE WHY ENDING BALANCE NOT CORRECT?

WHY ADJUSTING JOURNAL ENTRIES? CHAPTER FIVE. ADJUSTING ENTRIES Page 145 MATCHING PRINCIPLE WHY ENDING BALANCE NOT CORRECT? CHAPTER FIVE ADJUSTING ENTRIES Page 1 WHY ADJUSTING JOURNAL ENTRIES?! All amounts must be correct before financial statements printed! Test ending balance in each account! Auditing! Test accounting system,

More information

Chapter 3: Double-Entry Bookkeeping

Chapter 3: Double-Entry Bookkeeping Chapter 3: Double-Entry Bookkeeping Double-entry bookkeeping underpins accounting A way of systematically recording the financial transactions of a company so that each transaction is recorded twice. Basic

More information

Student Solutions Manual to Accompany. Introduction to Financial Accounting. David Annand. Based on International Financial Reporting Standards

Student Solutions Manual to Accompany. Introduction to Financial Accounting. David Annand. Based on International Financial Reporting Standards Student Solutions Manual to Accompany Introduction to Financial Accounting Based on International Financial Reporting Standards David Annand Copyright 2014 David Annand Published by David Annand 4910C

More information

Basic Accounting Principles

Basic Accounting Principles Basic Accounting Principles Basic Accounting Model The basic accounting model represents the relationship between assets (what the company owns), liabilities (what the company owes), and owner s equity

More information

Baseline Assessment College Accounting. Directions: Read each question below and select the best answer.

Baseline Assessment College Accounting. Directions: Read each question below and select the best answer. Name: Date: Baseline Assessment College Accounting Directions: Read each question below and select the best answer. 1. Which accounting cycle step below comes after the others listed? 1. Entries are recorded

More information

CHAPTER 2 REVIEW OF THE ACCOUNTING PROCESS. Lecture Outline

CHAPTER 2 REVIEW OF THE ACCOUNTING PROCESS. Lecture Outline CHAPTER 2 REVIEW OF THE ACCOUNTING PROCESS Overview Chapter 1 explained that the primary means of conveying financial information to investors, creditors, and other external users is through financial

More information

Completing the Accounting Cycle

Completing the Accounting Cycle C H A P T E R 4 Completing the Accounting Cycle Financial Accounting 14e Warren Reeve Duchac human/istock/360/getty Images Flow of Accounting Information (slide 1 of 5) End-of-Period Spreadsheet (Work

More information

Chapter 4: Accounting Records

Chapter 4: Accounting Records Chapter 4: Accounting Records Structure and terminology of Double Entry Bookkeeping The T account records the effect of transactions under one accounting aspect two opposite effects possible, e.g. inflows

More information

The Accounting Process

The Accounting Process GAAP LITERATURE The Accounting Process Chapter 3 TRADITIONAL: Original pronouncements, issued by the FASB. SEPT. 2009 CHANGE: Codification issued by the FASB. DIFFERENCE: Codification is listed by topic

More information

Accounting Notes. Cash - includes money and any medium of exchange that a bank accepts at face value

Accounting Notes. Cash - includes money and any medium of exchange that a bank accepts at face value Asset Accounts: Cash - includes money and any medium of exchange that a bank accepts at face value Accounts Receivable - a record of an oral or implied promise of future cash receipts in exchange for goods

More information

Chapter 2. Use accounting terms. Learning Objectives. Objective 1. Recording business transactions

Chapter 2. Use accounting terms. Learning Objectives. Objective 1. Recording business transactions PowerPoint to accompany Chapter 2 Recording business transactions Learning Objectives 1. Use accounting terms 2. Apply the rules of debit and credit 3. Record transactions in the journal 4. Post from the

More information

Module 3: Adjusting the accounts, preparing the statements, and completing the accounting cycle

Module 3: Adjusting the accounts, preparing the statements, and completing the accounting cycle Course Schedule Course Modules Review and Practice Exam Preparation Resources Module 3: Adjusting the accounts, preparing the statements, and completing the accounting cycle Overview In Module 2 you studied

More information

Adjusting and Closing Entries

Adjusting and Closing Entries Adjusting and Closing Entries Adjusting and Closing entries tend to be difficult to grasp at first. A reason for this might be due to the type of transactions requiring adjustment, which tend to be unfamiliar.

More information

Accounting 300A-10A The Operating Cycle: Worksheet/Closing Entries Page 1

Accounting 300A-10A The Operating Cycle: Worksheet/Closing Entries Page 1 Accounting 3A-1A The Operating Cycle: Worksheet/Closing Entries Page 1 THE WORKSHEET and CLOSING ENTRIES I. Review of Key Concepts and Terms: A. The purpose of the worksheet 1. To show that the accounts

More information

Accounting Basics. (Explanation)

Accounting Basics. (Explanation) Accounting Basics (Explanation) Your AccountingCoach PRO membership includes lifetime access to all of our materials. Take a quick tour by visiting www.accountingcoach.com/quicktour. Introduction to Accounting

More information

The Recording Process

The Recording Process HOSP 1210 (Financial Acct) Learning Centre The Recording Process The focus of this worksheet is the recording process which shows how s change during transactions using a system of debits and credits.

More information

The Double-Entry System EFFECTS OF TRANSACTIONS ON THE BALANCE SHEET. Initial Paid-in Capital. An Example Entity. Transaction 2.

The Double-Entry System EFFECTS OF TRANSACTIONS ON THE BALANCE SHEET. Initial Paid-in Capital. An Example Entity. Transaction 2. The Double-Entry System EFFECTS OF TRANSACTIONS ON THE BALANCE SHEET 2001 Richard S. Barr Transaction: Any event that affects the entity's financial position and requires recording Every accounting transaction

More information

CHAPTER 3 THE ADJUSTING PROCESS

CHAPTER 3 THE ADJUSTING PROCESS 1. a. Under cash-basis accounting, revenues are reported in the period in which cash is received and expenses are reported in the period in which cash is paid. b. Under accrual-basis accounting, revenues

More information

Completing the Accounting Cycle

Completing the Accounting Cycle HOSP 1210 (Financial Acct) Learning Centre Completing the Accounting Cycle At the end of the accounting cycle, the final steps are to journalize and post closing entries and to prepare a post-closing trial

More information

PART 1. BASIC CONCEPTS AND ACCOUNTING MODEL

PART 1. BASIC CONCEPTS AND ACCOUNTING MODEL CHAPTER 1 PART 1. BASIC CONCEPTS AND ACCOUNTING MODEL OBJECTIVES The objectives of this part are: To introduce a definition of accounting, the need for accounting information, and the various accounting

More information

Accrual Accounting and the Financial Statements

Accrual Accounting and the Financial Statements Accrual Accounting and the Financial Statements 3 LEARNING OBJECTIVES SPOTLIGHT Le Château has been selling fashion apparel, footwear, and accessories in Canada for over 50 years. What started as a single,

More information

SOLUTIONS. Learning Goal 5

SOLUTIONS. Learning Goal 5 Learning Goal 5: Prepare Adjusting Entries for s S1 Learning Goal 5 Multiple Choice 1. b To record the supplies used up. 2. d To record the amount of revenue earned as time passes. 3. d 4. d Debit an expense,

More information

Accounting Skills Assessment Practice Exam Page 1 of 10

Accounting Skills Assessment Practice Exam Page 1 of 10 NAU ACCOUNTING SKILLS ASSESSMENT PRACTICE EXAM & KEY 1. A company received cash and issued common stock. What was the effect on the accounting equation? Assets Liabilities Stockholders Equity A. + NE +

More information

Debits and Credits. (Quiz)

Debits and Credits. (Quiz) Debits and Credits (Quiz) Your AccountingCoach PRO membership includes lifetime access to all of our materials. Take a quick tour by visiting www.accountingcoach.com/quicktour. Answers on page 5 You will

More information

Closing Entries and the Postclosing Trial Balance

Closing Entries and the Postclosing Trial Balance 6-1 McGraw-Hill 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter Closing Entries and the Postclosing Trial Balance 6 Section 1: Closing Entries Section Objectives 1. Journalize and post

More information

CHAPTER II GENERAL LEDGER ACCOUNTS

CHAPTER II GENERAL LEDGER ACCOUNTS CHAPTER II GENERAL LEDGER ACCOUNTS A general ledger is basic to an accounting system. The General Ledger of a fund is a summary record containing the balance of assets, liabilities, deferred revenues,

More information

Assignment 6: Adjusting Journal Entries and

Assignment 6: Adjusting Journal Entries and Name: Due Date: December 12, 2011 Score: out of a possible 47 Course value: 7.5% Assignment 6: Adjusting Journal Entries and Worksheets A series of transactions are presented and their journal entries

More information

Objective Evidence. Unit of Measurement. Accounting Period Cycle. Business Entity. Going Concern. Adequate Disclosure. Matching Expenses with Revenue

Objective Evidence. Unit of Measurement. Accounting Period Cycle. Business Entity. Going Concern. Adequate Disclosure. Matching Expenses with Revenue Accounting Concept: A source document is prepared for each transaction Objective Evidence Accounting Concept: Business transactions are stated in numbers that have common values; that is, using a common

More information

Accounting 500 4A Balance Sheet Page 1

Accounting 500 4A Balance Sheet Page 1 Accounting 500 4A Balance Sheet Page 1 I. PURPOSE A. The Balance Sheet shows the financial position of the company at a specific point in time (a date) 1. This differs from the Income Statement which measures

More information

Supplement to CHAPTER 3 CLOSING ENTRIES AND THE WORK SHEET

Supplement to CHAPTER 3 CLOSING ENTRIES AND THE WORK SHEET Supplement to CHAPTER 3 CLOSING ENTRIES AND THE WORK SHEET Answers to Review Questions 1. No, the work sheet cannot be used as a substitute for the financial statements. It is a tool used in preparing

More information

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,

More information

Chapter 4 Adjustments, Financial Statements, and the Quality of Earnings

Chapter 4 Adjustments, Financial Statements, and the Quality of Earnings Chapter 4 Adjustments, Financial Statements, and the Quality of Earnings ANSWERS TO QUESTIONS 1. Adjusting entries are made at the end of the accounting period to record all revenues and expenses that

More information

is any organization for which financial statements are prepared. Reports of the amounts of assets, liabilities and equity as of one point in time.

is any organization for which financial statements are prepared. Reports of the amounts of assets, liabilities and equity as of one point in time. Accounting Balance Sheet Entity Balance Sheet is any organization for which financial statements are prepared. Reports of the amounts of assets, liabilities and equity as of one point in time. Left side

More information

Accounting for Accruals and Deferrals

Accounting for Accruals and Deferrals CHAPTER 2 Accounting for Accruals and Deferrals LEARNING OBJECTIVES After you have mastered the material in this chapter, you will be able to: SECTION 1: SHOW HOW ACCRUALS AFFECT FINANCIAL STATEMENTS LO

More information

FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - AUGUST 2012 NOTES: You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5. (If you provide answers to all

More information

TRANSACTIONS ANALYSIS EXAMPLE. Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations:

TRANSACTIONS ANALYSIS EXAMPLE. Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations: TRANSACTIONS ANALYSIS EXAMPLE Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations: 1. Billings to clients for services provided: $350,000

More information

Marist College ACCT 203 Financial Accounting Quiz Prep Chapter 3

Marist College ACCT 203 Financial Accounting Quiz Prep Chapter 3 Marist College ACCT 203 Financial Accounting Quiz Prep Chapter 3 The Accounting Cycle: Capturing Economic Events Peter Rivera August 2011 Disclaimer This Quiz Prep is provided as an outline of the key

More information

Accounting Norms and Principles January 7, 2003

Accounting Norms and Principles January 7, 2003 1 Accounting Norms and Principles January 7, 2003 The purpose of an accounting system is to provide credit union management with complete and accurate financial information that can be used to operate

More information

Basic Accounting. Supplement for Using Simply Accounting Version 8.0 for Windows by. M. Purbhoo and D. Purbhoo

Basic Accounting. Supplement for Using Simply Accounting Version 8.0 for Windows by. M. Purbhoo and D. Purbhoo Basic Accounting Supplement for Using Simply Accounting Version 8.0 for Windows by M. Purbhoo and D. Purbhoo Basic Accounting Contents: Accounting Theory 3 Basic Accounting 3 Balance Sheet 3 Income Statement

More information

Most of us have had to file a personal tax return. At

Most of us have had to file a personal tax return. At C H A P T E R Completing the Accounting Cycle AP Photo/Gregory Bull E L E C T R O N I C A R T S I N C. Most of us have had to file a personal tax return. At the beginning of the year, you estimate your

More information

COMPLETION OF THE ACCOUNTING CYCLE - Closing Entries -

COMPLETION OF THE ACCOUNTING CYCLE - Closing Entries - COMPLETION OF THE ACCOUNTING CYCLE - Closing Entries - Worksheet Overview Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Account Titles Debit Credit Debit Credit Debit

More information

a. $ 65,000. b. $ 80,000. c. $130,000. d. $145,000.

a. $ 65,000. b. $ 80,000. c. $130,000. d. $145,000. 注 意 1. 本 試 題 卷 共 50 題, 總 分 100 分 第 01-15 題, 每 題 1.75 分, 合 計 26.25 分 ; 第 16-35 題, 每 題 2 分, 合 計 40 分 ; 第 36-50 題, 每 題 2.25 分, 合 計 33.75 答 錯 不 倒 扣 2. 請 將 答 案 按 試 題 題 號, 依 序 填 入 答 案 卡 1.FastForward had cash

More information

revenue/ Accounts receivable/ Cash/Service revenue) account.

revenue/ Accounts receivable/ Cash/Service revenue) account. The correct answer is shown. On December 27, a business completed a $400 service that had not yet been billed or recorded as of December 31. Demonstrate the required adjusting entry of the business by

More information

Chapter 9. Plant Assets. Determining the Cost of Plant Assets

Chapter 9. Plant Assets. Determining the Cost of Plant Assets Chapter 9 Plant Assets Plant Assets are also called fixed assets; property, plant and equipment; plant and equipment; long-term assets; operational assets; and long-lived assets. They are characterized

More information

Paper 2 Accounting (Syllabus 2008)

Paper 2 Accounting (Syllabus 2008) Section A- FINANCIAL ACCOUNTING 1. Which of the following is not a Fixed Asset? (a) Building (b) Bank balance (c) Plant (d) Goodwill [Hints: (b) Fixed asset is an asset held with the intention of being

More information