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![Page 1: Review of a Company’s Accounting System C hapter 3 COPYRIGHT © 2010 South-Western/Cengage Learning Intermediate Accounting 11th edition Nikolai Bazley.](https://reader033.fdocuments.in/reader033/viewer/2022051516/56649e875503460f94b8ae00/html5/thumbnails/1.jpg)
Review of a Company’s
Accounting System
Chapter 3
COPYRIGHT © 2010 South-Western/Cengage Learning
Intermediate AccountingIntermediate Accounting 11th edition 11th edition
Nikolai Bazley JonesNikolai Bazley Jones
An electronic presentationAn electronic presentationBy Norman SundermanBy Norman Sundermanand Kenneth Buchananand Kenneth BuchananAngelo State University
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2
1. Understand the components of an accounting system.
2. Know the major steps in the accounting cycle.
3. Prepare journal entries in the general journal.
4. Post to the general ledger and prepare a trial balance.
5. Prepare adjusting entries.
6. Prepare financial statements.
Objectives
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Objectives
7. Prepare closing entries.
8. Complete a worksheet (spreadsheet).
9. Prepare reversing entries
10. Use subsidiary ledgers.
11. Understand special journals.
12. Convert cash-basis financial statements to accrual-basis (Appendix).
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Accounting Equation
AssetsAssets = +LiabilitiesLiabilities Stockholder’s Equity
Stockholder’s Equity
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Assets
Accounting Equation
Assets are the corporation’s economic resources and have future value.
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= LiabilitiesDebts
Accounting Equation
Liabilities are obligations or debts. A liability is a present
obligation for a future sacrifice as a result of a past transaction.
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+ Stockholders’ Equity+ Stockholders’ Equity
Net Worth
Accounting Equation
Stockholders’ equity is the
residual interest in assets or net worth,
which is assets minus liabilities.
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Assets = Liabilities + Stockholders’ Equity
Stockholders’ Equity = Contributed Capital + Retained Earnings
Retained Earnings = Beginning Retained Earnings + Net Income – Dividends
Net Income = Revenues – Expenses
Interrelated Accounting Equations
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Revenues
Revenues are charges to customers for goods or services provided.
Revenues are charges to customers for goods or services provided.
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Expenses
Expenses are assets that have expired, been
consumed, or become cost of goods sold and have no
future value.
Expenses are assets that have expired, been
consumed, or become cost of goods sold and have no
future value.
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Title
Account titleAccount title
Accounts
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Title
Debit
“Debit” refers to the left side.
“Debit” refers to the left side.
Accounts
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Title
Debit Credit
Credit refers to the right side.
Credit refers to the right side.
Accounts
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In the double-entry system, for each transaction that a company records, the total dollar amount of the debits entered in all the related accounts must equal the total
dollar amount of the credits.
In the double-entry system, for each transaction that a company records, the total dollar amount of the debits entered in all the related accounts must equal the total
dollar amount of the credits.
Accounts
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Permanent (Real) Accounts
Assets = Liabilities + Stockholders’ Equity
Asset Accounts (debit) (credit) Increase Decrease
Liability Accounts (debit) (credit) Decrease Increase
Capital Stock Accounts (debit) (credit) Decrease Increase
Retained Earnings (debit) (credit) Decrease Increase
Accounts
The debits must equal the creditsThe debits must equal the credits
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Temporary (Nominal) Accounts
Revenue Accounts (debit) (credit) Decrease Increase
Expense Accounts (debit) (credit) Increase Decrease
Retained Earnings (debit) (credit) Decrease Increase
Dividend Accounts (debit) (credit) Increase Decrease
Accounts
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1. Income Statement—Summarizes the results of a company’s income-producing activities for the accounting period.
2. Balance Sheet—Summarizes the amounts of a company’s assets, liabilities, and stockholders’ equity at the end of the accounting period.
3. Statement of Cash Flows—Summarizes a company’s cash receipts and cash payments during the accounting period.
Financial Statements
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1. Record the daily transactions in a journal
2. Post the journal entries to the accounts in the ledger
3. Prepare and post adjusting entries
4. Prepare the financial statements
5. Prepare and post closing entries for revenue, expense, and dividend accounts
The Accounting Cycle
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Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Step 1: Journalizing: Step 1: Journalizing: Recording in the Recording in the General JournalGeneral Journal
Step 1: Journalizing: Step 1: Journalizing: Recording in the Recording in the General JournalGeneral Journal
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GENERAL JOURNAL
On January 1, 2010, various stockholders On January 1, 2010, various stockholders invest in Dapple by purchasing 2,000 invest in Dapple by purchasing 2,000
shares of no-par stock at $10 per share.shares of no-par stock at $10 per share.
On January 1, 2010, various stockholders On January 1, 2010, various stockholders invest in Dapple by purchasing 2,000 invest in Dapple by purchasing 2,000
shares of no-par stock at $10 per share.shares of no-par stock at $10 per share.
Date Account Titles and Explanations Debit Credit2010Jan. 1 Cash 20,000
Capital Stock 20,000Issued 2,000 shares of no-par stock at $10 per share.
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
2010Jan. 1 Cash 20,000
Capital Stock 20,000Issued 2,000 shares of no-par stockat $10 per share.
On January 16, Dapple purchases On January 16, Dapple purchases two acres of land as a building two acres of land as a building
site, paying $1,500 an acre.site, paying $1,500 an acre.
On January 16, Dapple purchases On January 16, Dapple purchases two acres of land as a building two acres of land as a building
site, paying $1,500 an acre.site, paying $1,500 an acre.
16 Land 3,000Cash 3,000
Purchased 2 acres of land at $1,500 per acre.
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Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Step 2: Posting to Step 2: Posting to the Ledgerthe Ledger
Step 2: Posting to Step 2: Posting to the Ledgerthe Ledger
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
2010Jan. 1 Cash 20,000
Capital Stock 20,000Issued 2,000 shares of no-par stock at $10 per share.
16 Land 3,000Cash 3,000
Purchased 2 acres of land at $1,500 per acre.
Cash 1/1 20,000 Capital Stock
1/1 20,000
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
2010Jan. 1 Cash 20,000
Capital Stock 20,000Issued 2,000 shares of no-par stock at $10 per share.
16 Land 3,000Cash 3,000
Purchased 2 acres of land at $1,500 per acre.
Cash 1/1 20,000 1/16 3,000
Land1/16 3,000
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After posting, the general ledger accounts contain the same information as in the general journal, just in a
different format.
After posting, the general ledger accounts contain the same information as in the general journal, just in a
different format.
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Cash1/1 20,000 1/16 3,0004/2 8,000 3/30 10,84012/1 450 3/30 36012/2 2,000 4/8 7,300
7/15 3,30010/1 1,80012/28 42812/29 500
Balance 2,922
Ledger T Account
The balance of each permanent account is
calculated.
Determine the account balance.
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After the journal entries are posted for the accounting period, a trial balance is
often prepared.
After the journal entries are posted for the accounting period, a trial balance is
often prepared.
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The trial balance is used to verify that the total of the
debit balances is equal to the total of the credit balances.
The trial balance is used to verify that the total of the
debit balances is equal to the total of the credit balances.
DebitsDebits
CreditsCredits
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Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Step 3: Preparation Step 3: Preparation of Adjusting Entriesof Adjusting EntriesStep 3: Preparation Step 3: Preparation of Adjusting Entriesof Adjusting Entries
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Adjusting Entries
1. The purpose of adjusting entries is to record revenues and expenses in the correct period
2. Dated the last day of the accounting period
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On March 30, Dapple Corporation purchased a one-On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.year comprehensive insurance policy.
On March 30, Dapple Corporation purchased a one-On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.year comprehensive insurance policy.
Prepaid Expense
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
2010Jan. 1 Cash 20,000
Capital Stock 20,000Issued 2,000 shares of no-par stock at $10 per share.
Mar. 30 Prepaid Insurance 360Cash 360
Purchased a 1-year comprehensive insurance policy.
On March 30, Dapple Corporation purchased a one-On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.year comprehensive insurance policy.
On March 30, Dapple Corporation purchased a one-On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.year comprehensive insurance policy.
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
Adjusting EntriesDec. 31 Insurance Expense 270
Prepaid Insurance 270To record expiration of 9 months of insurance coverage purchased on March 30.
By December 31, nine months of the By December 31, nine months of the policy had expired.policy had expired.
By December 31, nine months of the By December 31, nine months of the policy had expired.policy had expired.
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3/30 360
Prepaid Insurance
12/31 Adj. 270
12/31 Adj. 270
Insurance Expense
By December 31, nine months of the By December 31, nine months of the policy had expired.policy had expired.
By December 31, nine months of the By December 31, nine months of the policy had expired.policy had expired.
Balance 90
Adjusting Entries
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On December 1, Dapple Corporation received On December 1, Dapple Corporation received $450 for three months’ rent in advance.$450 for three months’ rent in advance.
On December 1, Dapple Corporation received On December 1, Dapple Corporation received $450 for three months’ rent in advance.$450 for three months’ rent in advance.
Deferred Revenue
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
2010Jan. 1 Cash 20,000
Capital Stock 20,000Issued 2,000 shares of no-par stock at $10 per share.
Dec. 1 Cash 450Unearned Rent 450
Received 3 months’ rent in advance at $150 per month. Company owes use of portion of building to Fritz Company for the 3-month period.
On December 1, Dapple Corporation received $450 for three months’ rent in advance.
On December 1, Dapple Corporation received $450 for three months’ rent in advance.
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
Adjusting EntriesDec. 31 Insurance Expense 270
Prepaid Insurance 270To record expiration of 9 months of insurance coverage purchased onMarch 30.
31 Unearned Rent 150Rent Revenue 150
To record earning of 1 month of rent revenue from receipt collected in
advance on December 1.
By December 31, one month’s rent ($450 ÷ 3 = $150) has been earned.
By December 31, one month’s rent ($450 ÷ 3 = $150) has been earned.
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12/31 Adj. 150
Unearned Rent
12/1 450
12/31 Adj. 150
Rent Revenue
This entry is posted to the ledger. This entry is posted to the ledger.
Balance 300
Adjusting Entries
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On December 31, Dapple Corporation has accrued salaries of $900.
On December 31, Dapple Corporation has accrued salaries of $900.
Entries must be journalized before they are posted.
Entries must be journalized before they are posted.
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10/1 1,800
Salaries Expense
12/31 Adj. 900
Salaries Payable
Next, the adjusting entry is posted. Next, the adjusting entry is posted.
12/31 Adj. 900
Adjusting Entries
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On September 1, Dapple Corporation accepted a $1,320, 15% note as payment
when it sold an acre of land.
On September 1, Dapple Corporation accepted a $1,320, 15% note as payment
when it sold an acre of land.
Accrual of Interest Revenue
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
Adjusting Entries
Sept. 1 Notes Receivable 1,320Loss on Sale of Land 180
Land 1,500Sold 1 acre of land at less than itscost, incurring a loss. Buyer issueda note due in 6 months and bearing15% annual interest.
On September 1, Dapple Corporation accepted a $1,320, 15% note as payment
when it sold an acre of land.
On September 1, Dapple Corporation accepted a $1,320, 15% note as payment
when it sold an acre of land.
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Interest Receivable
12/31 Adj. 66
Interest Revenue
12/31 Adj. 66
By December 31, the company has earned 4 months of interest totaling $66 ($1,320 × 0.15 × 4/12).
By December 31, the company has earned 4 months of interest totaling $66 ($1,320 × 0.15 × 4/12).
Adjusting Entries
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Remaining Adjusting Entries
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
2010Jan. 1 Cash 20,000
Capital Stock 20,000Issued 2,000 shares of no-par stockat $10 per share.
Dec. 1 Cash 450Rent Revenue 450
31 Rent Revenue 300Unearned Rent 300
Adjusting entry using alternative method of recording deferred revenue.
Some companies may record the receipt of revenue in advance as revenues instead of
unearned revenues.
Some companies may record the receipt of revenue in advance as revenues instead of
unearned revenues.
At Dec. 31, some of the revenue has still not been earned and an adjusting entry must be made.
At Dec. 31, some of the revenue has still not been earned and an adjusting entry must be made.
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GENERAL JOURNAL Date Account Titles and Explanations Debit Credit
2010Jan. 1 Cash 20,000
Capital Stock 20,000Issued 2,000 shares of no-par stockat $10 per share.
Mar. 30 Insurance Expense 360Cash 360
Purchased a 1-year comprehensiveinsurance policy.
Dec. 31 Prepaid Insurance 90Insurance Expense 90
Prepaid expenses may be recorded as expenses and the unused portion adjusted at year end.
Prepaid expenses may be recorded as expenses and the unused portion adjusted at year end.
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Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Step 4: Preparation Step 4: Preparation of the Financial of the Financial
StatementsStatements
Step 4: Preparation Step 4: Preparation of the Financial of the Financial
StatementsStatements
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1. If necessary, recompute the balance of each account in the ledger.
2. Prepare an adjusted trial balance to verify that debits equal credits.
3. Prepare an income statement.
4. Prepare a statement of retained earnings.
5. Prepare a balance sheet.
Preparation of the Financial Statements
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Income Statement
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Retained Earnings Statement
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Balance Sheet
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Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Comprehensive Comprehensive Illustration for Dapple Illustration for Dapple
CorporationCorporation
Step 5: Preparation Step 5: Preparation of Closing Entriesof Closing Entries
Step 5: Preparation Step 5: Preparation of Closing Entriesof Closing Entries
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Closing entries (1) reduce the balance in each
temporary account to zero, and...
Closing entries (1) reduce the balance in each
temporary account to zero, and...
…(2) update the retained earnings and inventory
accounts.
…(2) update the retained earnings and inventory
accounts.
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1. Close temporary accounts with credit balances to Income Summary and record the ending inventory.
2. Close temporary accounts with debit balances to Income Summary and close the beginning inventory.
3. Close Income Summary to Retained Earnings.
4. Close Dividends Distributed to Retained Earnings.
Typical Order of Closing Entries
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The following slide shows how the closing entries “closed” the
temporary accounts.
The following slide shows how the closing entries “closed” the
temporary accounts.
Closing Entries
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Closing Entries
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Sales Returns
Sales Returns and Allowances 500Accounts Receivable
500
OR debit Sales directly
Sales 500Accounts Receivable
500
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Periodic Inventory SystemInventory, January 1, 2010 $ 0
Purchases 12,600
Purchases returns and allowances (300)
Purchases discounts (100)
Cost of goods available for sale $12,200
Less: Inventory, December 31, 2010 (2,140)
Cost of goods sold $10,060
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A worksheet is prepared to facilitate preparing adjusting
entries, closing entries, and the financial statements.
A worksheet is prepared to facilitate preparing adjusting
entries, closing entries, and the financial statements.
Worksheet
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1. Adjusting entries that create accrued revenues or expenses to be collected or paid in the next accounting period
2. Adjusting entries related to prepayments of costs initially recorded as expenses or receipts-in-advance initially recorded as revenues
Reversing entries should be made for any adjusting entry that creates a new balance sheet account as follows:
General Guidelines for Reversing Entries
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1. Adjusting entries related to prepayments of costs initially recorded as assets or receipts-in-advance initially recorded as liabilities
2. Adjusting entries related to estimated items such as depreciation or bad debts
Reversing entries should not be made for:
REVERSING ENTRY
General Guidelines for Reversing Entries
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Reversing Accrued Revenues
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Reversing Accrued Expenses
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Why use a subsidiary ledger?1. To reduce the size of the general ledger
2. To minimize errors
3. To divide the accounting task
4. To keep up-to-date records of its credit customers and suppliers
Subsidiary Ledgers
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Subsidiary Ledgers
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Sales Journal. Used to record all (and only) sales of merchandise on credit.
Purchases Journal. Used to record all (and only) purchases of merchandise on credit.
Cash Receipts Journal. Used to record all cash receipts.
Cash Payments Journal. Used to record all cash payments.
General Journal. Used to record adjusting, closing, and reversing entries and other transactions not recorded in the special journals.
Special Journals
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Cash-basis accounting is used by small retail stores and professionals such as
dentists, doctors, and architects.
Cash-basis accounting is used by small retail stores and professionals such as
dentists, doctors, and architects.
Appendix: Cash-Basis Accounting
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Under cash-basis accounting, a company records revenues when cash
is collected and records expenses when cash is paid.
Under cash-basis accounting, a company records revenues when cash
is collected and records expenses when cash is paid.
Appendix: Cash-Basis Accounting
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Cash Basis
Collections from
customers
+ Ending accounts receivable– Beginning accounts receivable
= Sales revenue
Adjustments Accrual Basis
Payments to suppliers
= Cost of goods sold
+ Beginning inventory– Ending inventory+ Ending accounts payable– Beginning accounts payable
Payments for other
operating costs
= Operating expenses (except
depreciation)
+ Beginning prepaid expenses– Ending prepaid expenses+ Ending accrued expenses– Beginning accrued expenses
Appendix: Cash-Basis Accounting
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Chapter 3
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.