Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All...

Spiceland | Thomas | Herrmann

Financial Accounting

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The Accounting

Cycle:End of the

PeriodChapter 3


3-2

Learning Objectives

• Understand when revenues and expenses are recorded

• Distinguish between accrual-basis and cash-basis accounting

• Demonstrate the purposes and recording of adjusting entries

• Post adjusting entries and prepare an adjusted trial balance


3-3

Learning Objectives

• Prepare financial statements using the adjusted trial balance

• Demonstrate the purposes and recording of closing entries

• Post closing entries and prepare a post-closing trial balance


Part A

Accrual-Basis Accounting

3-4


Learning Objective 1

Understand when revenues and expenses are recorded

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3-6

Revenue and Expense Reporting

• Revenue recognition• Recognize revenue when it is earned

• Expense recognition• Expenses are reported with the revenues they help

to generate

• Revenue recognition principle• Matching principle


3-7

Illustration 3.1—Expense Recognition



Distinguish between accrual-basis and cash-basis accounting

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3-9

Accrual-Basis Compared with Cash-Basis Accounting

Point of Difference

Accrual Basis Cash Basis

Revenue Recognition

When revenue is earned

When cash is received

Recording Expenses

With related revenues When cash is paid

GAAP Part of GAAP Not a part of GAAP


3-10

Illustration 3.2—Accrual-Basis Revenue versus Cash-Basis Revenue


3-11

Illustration 3.3—Accrual-Basis Expense versus Cash-Basis Expense


Part B

The Measurement Process

3-12



Demonstrate the purposes and recording of adjusting entries

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Illustration 3.4—The Accounting Cycle


3-15

Adjusting Entries

Prepayments

Prepaid expenses

Unearned revenues

Accruals

Accrued expenses

Accrued revenues


3-16

Purpose of Adjusting Entries

• To account for transactions that have not been recorded by the end of the period

• To record revenues in the period earned• To record expenses in the period they are

incurred to generate those revenues• To correctly state assets and liabilities


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Prepaid Expenses

• Cost of assets acquired in one period that will be expensed in a future period


3-18

Example: Prepaid Expenses


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Unearned Revenues

• Cash received in advance from a customer for products or services to be provided in the future


3-20

Example: Unearned Revenues


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Accrued Expenses

• Company has incurred a cost but hasn’t yet paid cash or recorded an obligation


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Example: Accrued Expenses


3-23

Accrued Revenues

• Revenue earned but hasn’t yet received cash or recorded an amount receivable


3-24

Example: Accrued Revenues



Post adjusting entries and prepare an adjusted trial balance

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Adjusted Trial Balance

• Lists all account balances after updating them for adjusting entries

• Prepared after posting the adjusting entries to the general ledger


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Illustration 3.10—Adjusted Trial Balance


Part C

The Reporting Process:

Financial Statements

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Prepare financial statements using the adjusted trial balance

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3-30

Illustration 3.11—Relationship between Adjusted Trial Balance and Financial Statements


3-31

Illustration 3.12—Income Statement


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Illustration 3.13—Statement of Stockholders’ Equity


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Illustration 3.14—Classified Balance Sheet


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Statement of Cash Flows

• The final financial statement• Measures activities involving cash receipts and

cash payments• Reflecting a company’s operating, investing, and

financing activities.


Part D

The Closing Process

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Demonstrate the purposes and recording of

closing entries

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Closing Entries

• To transfer the balances of temporary accounts to the Retained Earnings

• To reduce the balances of these temporary accounts to zero


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Illustration 3.15—Closing Entries



Post closing entries and prepare a post-closing trial balance

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Post-Closing Trial Balance

• Lists all accounts balances after updating for closing entries.

• Prepared accounts for the next period


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Illustration 3.18—Post-Closing TrialBalance


End of Chapter 3

3-42

Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All...

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