Chapter 3 Notes

Chapter 3
Accrual Accounting
Accrual vs. Cash Basis Accounting

ACCRUAL ACCOUNTING
Records impact of transactions

when they occur
Required by IAS1
Presentation of Financial
Statements
Records:
Revenue when ________
Expenses when ________
Use by virtually all businesses
Copyright 2014 Pearson Education
CASH BASIS
Records transactions only if

cash is involved
Cash receipts
Cash payments
Ignores underlying economic
activities
Used by ________ or
________ operations
2
Learning Objective 1
Relate accrual accounting and cash flows
Accrual accounting
Records _____ cash and non-cash transactions
Cash transactions
Non-cash transactions
Collecting payments from customers
Sales on account
Receiving cash from interest earned
Purchases of inventory on
account
Paying salaries, rent, and other

expenses
Accrual of expenses incurred but

not yet paid
Borrowing money
Depreciation expense
Paying off loans
Usage of prepaid rent, insurance,

and supplies
Issuing shares (for cash)
Earning of revenue when cash

was collected in advance
Time Period Concept

Accounting information is reported at regular
intervals
Basic accounting period is ________
Calendar year
January 1 December 31
Fiscal year
12-month period ending on a date other than
December 31
Interim periods
Month or quarter
Learning Objective Two

Apply the revenue and matching principles
1-7
Time-period concept
Ensures that accounting information is
reported at regular intervals
IAS 1 requires an entity to present a
complete set of financial statements at
least annually.
Companies also prepare financial
statements for interim periods of less
than a year.
2010 Pearson Prentice Hall. All rights reserved.
Revenue Recognition Principle

What is Revenue?
Exchange of __________________
When should revenue be recorded?

Transfer of __________
The entity has transferred to the buyer the significant risks and rewards of
ownership of the goods
Transfer of __________
The entity retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold
Amounts _______________
The amount of revenue can be measured reliably
______________
It is probably that the economic benefits associated with the transaction will
flow to the entity
______________
The costs incurred or to be incurred in respect of the transaction can be
measured reliably
Matching Principle
Identify
expenses
incurred
Measure
the
expenses
Match
against
revenues
earned
Learning Objective Three

Adjust the accounts
10
Adjusting the Accounts

Transactions
In chapter 2, we discussed transactions and
accounting when they occur
Some events do not relate to specific transactions,
so we have to adjust for them
Adjusting Entries
Financial statements issued at end of period
Several accounts on trial balance need to be
brought up-to-date
Certain transactions that have not been recorded
11
Categories of Adjustments
Think of
what is
being
deferred or
accrued:
_________
_________
Deferrals
Depreciation
Accruals
12
Deferrals
Business has paid or received cash in advance
Prepaid expense
Unearned revenue
Recorded as an
_____ when
purchased
_______ when
used or expired
Recorded as a
________ when
payment is
received
Recorded as
________ when
earned
13
Prepaid Expenses
Recorded as assets when purchased
Example: On June 1, you prepay 3 months of rent
for $3,000
Expensed when used (or when time passes)

JOURNAL
Date
Accounts and explanation
Jun 1
_______________
Debit
Credit
3,000
Cash
3,000
Paid three months rent in advance
Jun 30
Rent expense
_____________
Copyright
2014 Pearson Education
To record rent
expense
1,000
1,000
14
Prepaid Rent
Prepaid rent
Jun 1
Rent expense
Jun 30
Jun 30
Amount
remaining
Amount
expired
Balance
Sheet
Income
Statement
15
Prepaid Expenses
Recorded as assets when purchased
Some pass with time.
Other assets expensed when used
Example: Purchase $700 of supplies on Jun 2
JOURNAL
Date
Jun 2
Supplies
Debit
Credit
700
Cash
700
Paid cash for supplies
Jun 30
Supplies expense
Supplies
To record rent expense
300
300
How do we know this number?
16
Supplies
Supplies
Jun 2
$700
Supplies expense
$___
Jun 30
Jun 30
$___
$400
Amount on
hand
Amount used
Balance
Sheet
Income
Statement
Supplies/Inventory _____
17
Depreciation
Allocates cost of Property, Plant and Equipment
(PPE) to expense over __________
_______= estimated duration of how long longterm asset will last
Depreciation represents wear-and-tear and
obsolescence
Examples of PPE:
Buildings
Equipment
Furniture
18
Accumulated Depreciation (__)

Depreciation expense (Exp)
amount allocated to __________
Accumulated Depreciation (XA)

Sum of ____________ expense and increases
over plant assets life
______-asset
Normal credit balance (opposite to the contra)
Always has a companion account
Book value (sometimes called Net Book Value)

Cost of plant asset less accumulated depreciation
19
20
Depreciation
Example: Company buys Equipment with 5-year
useful life for $24,000 on June 2.
Assume the asset has no salvage value
Depreciation = $24,000/60 months =
$400/month
JOURNAL
Date
Jun 2
Equipment
Debit
24,000
Cash
Jun 30
Accumulated depreciation
*Note:___________________
Credit
24,000
400
400
Depreciation
Equipment
Jun 2
Depreciation Expense
Jun 30
$24,000
$400
Balance
Sheet
Accumulated Depreciation
$400
Income
Statement
Jun 30
$24,000/60 = $400
21
Book Value
Balance Sheet
December 31, 2010
Equipment
Less: Accumulated Depreciation
Book value
$24,000
(400)
$23,600
22
Unearned Revenue
Sometimes called Advances from Customer
Receive cash before revenue is earned
Creates a liability
Business owes customer a good or service
JOURNAL
Date
Jun 1
Cash (A)
Debit
Credit
400
Unearned service revenue (L)
400
Received cash for revenue in advance.
23
Unearned Revenue
When revenue is earned
Liability is reduced
Revenue is increased
JOURNAL
Date
Jun 30
Unearned revenue
Service revenue
Debit
Credit
200
200
To record unearned service revenue

that has been earned.
24
Accruals
Accrued Expenses
Accrued Revenues
Record expense
before paying
cash
Salaries, interest,
and income taxes
Record revenue
before collecting
cash
Earned and will
collect next
period
25
Accrued Salaries
2-days accrued
$15,000 weekly salaries
$6,000
$15,000
Jan 3 (Fri)
Dec 31 (Tues)
JOURNAL
Date
Dec 31
Salaries expense
Salaries Payable
Debit
Credit
6,000
6,000
To accrue salaries expense
26
Accrued Salaries
$15,000 weekly salaries
$6,000
Jun 1
$15,000
Jan 3
Dec 31
JOURNAL
Date
Jan 3
Salaries Payable
6,000
Salaries Expense (Salaries Payable)
9,000
Cash
Debit
Credit
15,000
Pay Salaries
27
Accrued Revenue
Revenue earned but not yet received
Assume that a company is hired on June 15 to
wash trucks each month for $600 (starting on
June 15). The company will be paid on July 15.
JOURNAL
Date
Jun 30
Accounts receivable ($600 x )

Service revenue
Debit
Credit
300
300
To accrue service revenue.

28
Prepaids and Accruals

PREPAIDS CASH FIRST
FIRST
LATER
Prepaid
expenses
Prepaid expense
Expense
Unearned
revenues
Cash
Cash
Prepaid expense
Unearned revenue
Unearned revenue
Revenue
ACCRUALS CASH LATER

FIRST
LATER
Accrued
expenses
Expense
Payable
Accrued
revenues
Receivable
Payable
Revenue
Cash
Cash
Receivable
29
Summary of the Adjusting Process

Two purpose of adjusting process
Measure (_____) income
Update balance sheet
Every adjusting entry affects at least one (of

each):
Revenue or expense
Asset or liability
30
Summary of Adjusting Entries

Type of Account
Category of Adjustment
Debit
Credit
Prepaid expense
Expense
Asset
Depreciation
Expense
Contra asset
Accrued expense
Expense
Liability
Accrued revenue
Asset
Revenue
Unearned revenue
Liability
Revenue
31
1-32
Exercise 3-22A
Jenkins Motor Company faced the following situations.
Journalize the adjusting entry needed at December
31, 2010, for each situation. Consider each fact
separately.
a. The business has interest expense of $9,500 incurred
during 2010 that it must pay early in January 2011.
b. Interest revenue of $4,500 has been earned but not yet
received.
c. On July 1, when we collected $13,600 rent in advance, we
debited Cash and credited Unearned Rent Revenue. The
tenant was paying us for 2 years rent, starting on July 1,
2010.
Exercise 3-22A
JOURNAL
Date
Debit
Credit
(a)
(b)
(c)
33
1-34
Exercise 3-22A
d. Salary expense is $1,800 per dayMonday
through Fridayand the business pays employees
each Friday. This year, December 31 falls on a
Wednesday.
e. The unadjusted balance of the Supplies account
is $3,300. The total cost of supplies on hand is
$1,200.
f. Equipment was purchased at the beginning of
this year at a cost of $100,000. The equipments
useful life is 5 years with no salvage value.
Exercise 3-22A
JOURNAL
Date
Debit
Credit
(d)
(e)
(f)
35
36
Exercise 3-22A
Record depreciation for this year and then
determine the equipments book value.
Balance Sheet
December 31, 20X6
Equipment
Less: Accumulated Depreciation
Book value
$100,000
(
)
The Adjusted Trial Balance

Prepared after adjustments are journalized and
posted
Useful step in preparing financial statements
37
Learning Objective Four

Prepare the financial statements
38
The Financial Statements

Income Statement
Lists revenues & expenses
Statement of Changes in Equity

Shows changes in components of equity
Balance Sheet
Reports assets, liabilities and shareholders
equity
39
Flow of Data in Financial Statements

Income Statement
Revenues
$$,$$$
Less: Expenses
Net Income
($$,$$$)
$$,$$$
Statement Changes in Equity

Beginning equity balance
$$,$$$
Plus: Net income
$$,$$$
Less: Dividends
($,$$$)
Ending equity balance
$$,$$$
40
Flow of Data in Financial Statements

Statement of Changes in Equity
Beginning equity balance
$$,$$$
Plus: Net income
$$,$$$
Less: Dividends
($,$$$)
Ending equity balance
$$,$$$
Balance Sheet
Current assets
$$,$$$ Liabilities
$$,$$$
PPE
$$,$$$
Share Capital
$$,$$$
Other assets
$$,$$$
Retained earnings
$$,$$$
Total assets
Total liabilities &

$$$,$$$ shareholders equity
$$$,$$$
41
Learning Objective Five

Close the books
42
Closing the books

Prepares the accounts for next period
Temporary accounts are set to zero and closed
into Retained earnings
Permanent accounts are not closed
43
Temporary
Permanent
Closed
_______,
_______
and
_______
Not closed
Assets,
liabilities
and equity
44
Closing Entries
Close Revenues
Debit each revenue account
Credit Retained earnings
Close Expenses
Debit Retained earnings
Credit each expense account
Close Dividends
Debit Retained earnings
Credit Dividends
45
1-46
P3-67A
This is your trial balance. Record all of the closing entries. What
is the ending balance in Retained Earnings?
Account
Amount
Account
Amount
Accounts payable
$14,400
Interest expense
$900
Accounts receivable
16,100
Note payable, long term
6,100
Accumulated depreciation 6,900

Equipment
Other assets
14,400
Advertising expense
10,900
Prepaid expense
6,000
Cash
7,900
Retained Earnings
22,000
Share capital
5,600
Salary expense
17,800
Current portion of note

payable
1,000
Salary payable
2,900
1,700
Service revenue
95,000
Dividends
31,200
Supplies
3,600
Equipment
41,700
Supplies expense
4,400
Problem 3-67A
JOURNAL
Date
Debit
Credit
47
Problem 3-67A
Retained Earnings
Expenses
Beginning
Balance
Dividends
Revenues
Ending
Balance
48
Classifying Assets & Liabilities

Classified as current or long-term term based on
liquidity
How quickly an item can be converted to cash
Cash
Most liquid
Accounts receivable
Very liquid
Inventory
Somewhat liquid
PPE
Not liquid
49
Current
assets
Converted to cash, sold or

consumed in the next year
Non-current
assets
Held for longer than one year

Includes plant assets
Current
liabilities
Must be paid within one year
Non-current
liabilities
Due date more than one year

from balance sheet date
50
Classified Balance Sheet

Categorizes and subtotals assets and liabilities
Assets
Liabilities
Current assets
Current liabilities
Long-term investments
Long-term liabilities
Property, plant and equipment

Other assets
51

Chapter 3 Notes

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Chapter 3 Notes

Загружено:

Авторское право:

Доступные форматы

Chapter 3

Accrual vs. Cash Basis Accounting

Records impact of transactions

Copyright 2014 Pearson Education

Records transactions only if

Copyright 2014 Pearson Education

Collecting payments from customers

Receiving cash from interest earned

Paying salaries, rent, and other

Accrual of expenses incurred but

Paying off loans

Usage of prepaid rent, insurance,

Issuing shares (for cash)

Earning of revenue when cash

Copyright 2014 Pearson Education

Time Period Concept

Learning Objective Two

Copyright 2014 Pearson Education

Copyright 2014 Pearson Education

Revenue Recognition Principle

When should revenue be recorded?

Copyright 2014 Pearson Education

Learning Objective Three

Copyright 2014 Pearson Education

Adjusting the Accounts

Copyright 2014 Pearson Education

Expensed when used (or when time passes)

Accounts and explanation

Paid three months rent in advance

Copyright 2014 Pearson Education

Accounts and explanation

Paid cash for supplies

Copyright 2014 Pearson Education

Copyright 2014 Pearson Education

Accumulated Depreciation (__)

Accumulated Depreciation (XA)

Book value (sometimes called Net Book Value)

Copyright 2014 Pearson Education

Accounts and explanation

Copyright 2014 Pearson Education

Accounts and explanation

Unearned service revenue (L)

Received cash for revenue in advance.

Copyright 2014 Pearson Education

Accounts and explanation

To record unearned service revenue

Copyright 2014 Pearson Education

Copyright 2014 Pearson Education

$15,000 weekly salaries

Accounts and explanation

To accrue salaries expense

Copyright 2014 Pearson Education

$15,000 weekly salaries

Accounts and explanation

Salaries Expense (Salaries Payable)

Accounts and explanation

Accounts receivable ($600 x )

To accrue service revenue.

Prepaids and Accruals

ACCRUALS CASH LATER

Copyright 2014 Pearson Education

Summary of the Adjusting Process

Every adjusting entry affects at least one (of

Copyright 2014 Pearson Education