Stu Ch04 Completing The Accounting Cycle

Completing theAccounting CycleCompleting theAccounting Cycle

C H A P T E R 4

Learning Objective 1

Describe how accrual accounting allows for timely reporting and a better measure of a company's economic performance.

Why Use Accrual Accounting?

Define the Time Period Concept.

Time Period

Financial ReportsMost companies report to

stockholders at fiscal year-end.

Other reports are issued more frequently, perhaps monthly or quarterly.

This frequency of reports forces accountants to use data based on judgments and estimates.

ABC Inc.Annual Report

Define Accrual Accounting

Revenue Recognition

Revenues are recorded when two main criteria are met: What are they?

Define The Matching Principle

Define Cash-Basis Accounting

Example: Accrual- vs. Cash-Basis Accounting

Crown ConsultingReported Income for 2006

During 2006, Crown Consulting billed its client for $48,000. On December 31, 2006, it had received $41,000, with the remaining $7,000 to be received in 2007. Total expenses during 2006 were $31,000 with $3,000 of these costs not yet paid at December 31. Determine net income under both methods.


Explain the need for adjusting entries and make adjusting entries for unrecorded receivables, unrecorded liabilities, prepaid expenses, and unearned revenues.

What Are the Steps in the Accounting Cycle?

Why DO Adjusting Entries?

Adjusting Entries Tips

Each adjusting entry always involves at least one income statement account and one balance sheet account.

Each adjusting entry always involves at least one income statement account and one balance sheet account.

Adjusting entries never involve cash.

Define Each of These Common Adjusting Entries

Unrecorded Receivables

Unrecorded Liabilities

Prepaid Expenses

Unearned Revenues

What Is the 3-Step Process for Adjusting Entries?

Bullseye Management earns a rent revenue of $500 in 2006 but will not receive the payment until January 10, 2007. An adjustment will be needed. What is the adjusting entry?

Example: Unrecorded Receivables

Original entry none none

Correct balances 500 500

Rent Receivable Rent Revenue

Original entry none none

Correct balances 1,000 1,000

MoneyTree Inc. is assessed property taxes of $1,000 for 2006, but will not make this payment until January 5, 2007. An adjustment will be needed. What is the adjusting entry?

Property TaxExpense

Property Tax Payable

Example: Unrecorded Liabilities

Example: Prepaid Expenses

Rent ExpensePrepaid Rent

Original entry 3,600 3,600

Adjusting entry 1,800 1,800


Cash

On July 1, 2006, I Think I Can Inc. pays $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry?

Example: Unearned RevenuesOn July 1, 2006, Clean As A Whistle Co. received $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry?




Unearned RentRent Revenue Cash


Explain the preparation of the financial statements, the explanatory notes, and the audit report.

Review The Steps in the Accounting Cycle

PreparingFinancial Statements

Prepared directly from the data in the adjusted ledger accounts.

Explanatory notes clarify the methods and assumptions.

The auditor reviews the statements with GAAP.

Describe the Preparation of Financial Statements

What Are The Notes and Why Have Them?

Tell Me About The Audit

Using a Work Sheet

What Is a Work Sheet? How Does It Work?


Complete the closing process in the accounting cycle.

Describe The Closing Process

Real Accounts Nominal Accounts

Closing Entries Identify Nominal and Real Accounts

Dec. 31 Sales Revenue. . . . . . . . . . . 1,500

Rent Revenue. . . . . . . . . . . . 100

Cost of Goods Sold . . . . . 1,100

Salaries Expense. . . . . . . 200

Other Expenses . . . . . . . . 150

Retained Earnings . . . . . . 150

real (permanent) account

nominal or temporaryaccounts

Step 1. Close all revenue accounts by debiting them.

Sales Revenue. . . . . . . . . 15,000Retained Earnings . . . . 15,000

Closing Entries Describe Which Accounts Are Used For Each

Entry

Step 2. Close all expense accounts by crediting them.

Retained Earnings. . . . . . . 13,600Cost of Goods Sold. . . . 12,800Insurance Expense. . . . 500Supplies Expense. . . . . 300

Dividends

Closing Dividends Discuss the Dividends Account

Declaration of Dividends:

Payment of Dividends:

Closing Entry for Dividends:

Make All Three Dividends Entries for $200

Dividends

Bal. xxx

Retained Earnings Revenues

Bal. xxx Beg. Bal. xxx

Expenses

Bal. xxx

The Closing Process Revenues

Since the revenues account is a nominal account, it is closed at the end of the period to Retained Earnings.

xxx

Revenues

Dividends

Bal. xxx

Retained Earnings

Beg. Bal. xxx

Expenses

Bal. xxx

The Closing Process Expenses

The expenses account is also a nominal account and is debited to Retained Earnings to close it.

xxx

Expenses Revenues

Revenues

Bal. xxxxxx

Dividends

Bal. xxx

Retained Earnings

xxx

Revenues


The Closing Process Dividends

The dividends account, which is also nominal, is credited to close out the balance.

xxx

Dividends

Expenses Revenues

Expenses

Bal. xxx xxx

Dividends

Bal. xxx

Retained Earnings

xxx

Revenues


The Closing Process

xxx

Dividends

Expenses Revenues

Expenses

Bal. xxx xxx

End. Bal. xxx

Net income for the period is determined by these two entries.

Retained Earnings is a real account and always carries a balance.

Optimal last step.

Information taken from the General Ledger after all closing entries are posted.

Lists all real account balances at the end of the closing process.

Assures that total debits equal total credits prior to the beginning of the new accounting period.

Only real accounts will have a balance at this time.

Optimal last step.

Information taken from the General Ledger after all closing entries are posted.

Lists all real account balances at the end of the closing process.

Assures that total debits equal total credits prior to the beginning of the new accounting period.

Only real accounts will have a balance at this time.

Post-Closing Trial Balance

Three Monkeys Inc. Post-Closing Trial Balance December 31, 2006

Debits CreditsCash $ 8,200Accounts Receivable 4,000Inventory 3,000Supplies 1,000Accounts Payable $ 5,000Capital Stock 10,000Retained Earnings ______ 1,200 Totals $16,200 $16,200

Example: Post-ClosingTrial Balance


Understand how all the steps in the accounting cycle fit together.

Summary of theAccounting Cycle

Financial statements:

Result from the accounting cycle.

Provide useful information to investors, creditors, and other users.

Are included in the annual reports provided to stockholders.

Can be analyzed and compared to statements of similar firms to detect strengths and weaknesses.

Learning Objective 7Expanded Material

Make adjusting entries for prepaid expenses and unearned revenues when the original cash amounts are recorded as expenses and revenues.




Example: Prepaid Expenses

Rent ExpensePrepaid Rent Cash

On July 1, 2006, Time Flies Company pays $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry using the expense approach?

Unearned RentRent Revenue Cash




Example: Prepaid ExpensesOn July 1, 2006, Pot Of Gold Inc. pays the Rainbow Company $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. Use the revenue approach.

END CHAPTER 4

Stu Ch04 Completing The Accounting Cycle

Business

Transcript of Stu Ch04 Completing The Accounting Cycle