Transcript
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Chapter 3
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Douglas CollegeAccounting 1235all 2014
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Learning objective
1 Relate accrual accounting and cash fows
2 Recognize revenue and record expenses
3 Adjust the accounts
4 Prepare the nancial stateents! Close the "oo#s
$ %se the nancial stateents in decision a#ing
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Appl& the recognition criteria 'orrevenues and expenses
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(nsures that accounting in'oration isreported at regular intervals
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Interacts !ith the re"enue-
and e#pense-recognitioncriteria$ and the %atchingo&'ecti"e
(e)uires that inco%e &e
%easured accuratelyeach period
Period: Monthly, Quarterly, Annually
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)usinesses need periodic *annual+ reportson their progress
,iscal &ear ends do not need to "e the sae
as the calendar &ear end
-nteri stateents can "e presented. /onthl&
0uarterl& eiannuall&
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Revenue recognition states that revenue should"e recognized when it is earned
Revenue is earned when.a. Goods delivered or services completed
b. Contractual agreements have been met Record revenue eual to the cash value o' the
goods or service trans'erred to the custoer
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5ave the criteria 'or recognition o' revenues"een et in the 'ollowing scenarios6
1A custoer is considering purchasingeuipent 'ro &our copan&
27our copan& delivers an order o' pencils to8ouglas College and 8ouglas pa&s ondeliver&
39estjet sells airline tic#ets to /aui 'or next'all
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/atching principle.
a /atches expenses incurred with revenuesearned during the accounting period
e!nition o" #$penses:
Cost o" assets and services consumed%hen earning revenue.
:o atch expenses against revenues eansto su"tract the related expenses 'ro therevenue to copute net incoe &or netloss'
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,or the 'ollowing expenses; can &ou lin# thedirectl& to revenue *sales+; or should we recordthe on a period"&period "asis6
1
Rent2:he cost to a#e the product that &ou are selling
*cost o' goods sold+
3 alaries
4 Coissions
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8istinguish accrual"asis accounting'ro cash"asis accounting
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Accrualasis
Records revenues when the& areearned
Records expenses when the& areincurred
Cash
asis
Records cash receipts as revenue
Records cash pa&ents asexpenses
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>> o' supplies onaccount
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Called accrual accounting
)ased on the tie period assuption and
recognition criteria 'or revenues andexpenses
,or the a"ove reason; accrual accounting is
reuired "& ?AAP 'or "oth AP( and -,R
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/a#ing adjusting entries
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:rial)alance
Adjusting
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:o correct an error
:o update account "alances
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:o 'ollow accrual "asis o' accounting
:o appl& the atching principle
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Adjusting entries.
Assign revenues to the period in which the& areearned
Assign expenses to the period in which the& areincurred
%pdate the asset and lia"ilit& accounts
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Prepaid expenses Aortization o' propert&; plant; and
euipent; and intangi"le assets %nearned revenues
Accrued expenses
Accrued revenues
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Prepaids
(Deferrals)
Accruals
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Prepaid expenses are advance pa&ents o'the expense
(xaples include. prepaid rent;
prepaid insurance; and
supplies
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n April 1; 2>14; 5(C purchases an annual
insurance polic& 'or =3;$>>B the journalentr& would "e.
:he adjusting entr& on April 3> is.
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A(: (P(D(Prepaid -nsurance -nsurance (xpense
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Correct asseta%ount$3$300
otal accountedor$3$*00
Correct e#pensea%ount$300
Apr. 1 3,600 Apr. 30 300Bal. 3,300
Apr. 30 300Bal. 300
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tarter 34 on page 1!4
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n April 2; 2>14; 5(C purchases supplies
'or =1;!>> cash :he April 2; 2>14; journalentr& would "e.
n April 3>; a ph&sical count o' the suppliesindicated that =1;>>> reainedB the
adjusting entr& would "e.
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A(: (P(D( upplies upplies (xpense
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Correct asseta%ount$1$000
otalaccounted or$
1$500
Correct e#pensea%ount$
500
Apr. 2 1,500 Apr. 30 500
Bal. 1,000
Apr. 30 500
Bal. 500
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Aortization *depreciation+ dened. :heprocess o' allocating the cost o' propert&;
plant; and euipent to an expenseaccount over its estiated use'ul li'e
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-ntangi"le assets; such as patents and
tradear#s; are aortized over the intangi"leasset@s use'ul li'e
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n April 3; 5(C purchases 'urniture 'or=4!;>>> with an expected li'e o' ! &ears
:he April 3 journal entr&; to record the
purchase.
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A portion o' the 'urniture@s cost istrans'erred 'ro the asset account toAortization (xpense each period the assetis used A'ter one onth; the April 3>; 2>14
entr& is.
Calculation. 4!;>>> E ! &ears F =G;>>> per &ear
=G;>>> E 12 onths F =H!> per onth
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IAccuulated Aortization J,urniture@ is
#nown as a contra account
A contra account has. a copanion account
a noral "alance opposite that o' thecopanion account
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Property, Plant, and Equipment
Furniture $ 45,000
Less: Accumulated amortization !urniture "50 $ 44,250
hat !ould the alance heet loo lie on April 30$ 2014 or the capital assetsection6
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5(C owns a "uilding that cost =12>;>>>with annual aortization o' =$;>>>*onthl& aortization o' =!>>+
:he aortization expense to "e recorded onApril 3> is.
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Property, Plant, and Equipment
Furniture $ 45,000
Less: Accumulated amortization !urniture "50 $ 44,250
Buildin# 120,000
Less: Accumulated amortization uildin# 500 11%,500
&ropert', &lant, and ()uipment, net $163,"50
hat !ould the alance heet loo lie on April 30$ 2014 or the capital assetsection6 Consider the urniture and the &uilding.
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tarter 3! on page 1!4
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Accrued expenses dened. An expense thatthe "usiness has incurred "ut has not &etpaid
Accrued expenses alwa&s create a liability
Accruals are the recording o' the expense or
revenue "e'ore the related cash is paid orreceived
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5(C pa&s its two eplo&ees a seionthl&salar& o' =4;>>> in total on the 1!thand onthe last da& o' the onth
:he eplo&ees are paid on April 1!; "ut
April 3> is a aturda&. thus eplo&ees willreceive their pa& cheues on /onda&; /a&2
:he journal entr& on April 3> to accrue thesalaries is.
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(P(D( K-A)-K-:-( alaries (xpense alaries Pa&a"le
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*+at do t+e -accounts !or salaries epense andsalaries pa'ale loo/ li/e at April 30, 2014
Apr. 15 4,000
Apr. 30 4,000
Bal. ,000
Apr. 30 4,000
Bal. 4,000
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Accrued revenues dened. Revenue thathas "een earned "ut not &et invoiced orcollected
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5(C is hired on April 1! to provide onthl&
services 'or =3;>>> onthl&; with the rstpa&ent to "e received on /a& 1! ervice isprovided 'ro April 1! to April 3>
:he adjusting entr& on April 3> is.
Adjusting 'or accrued revenues illustrates theconcept o' revenue recognition
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%nearned revenue dened. Receiving Cashin advance 'ro custoers prior to providingthe service or delivering the product
%nearned revenue is a lia"ilit&
nl& when the service is provided or productdelivered is the revenue earned
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5(C receives a cash advance o' =3;>>> onApril 2> 'ro a custoer
:he journal entr& on April 2> is.
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n April 3>; =1;>>> o' the cash advance has"een earned "& 5(C. :he adjusting entr& onApril 3> is.
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:he "alance prior to adjustent was=24;>>>
K-A)-K-:-( R(L(D%(%nearned ervice Revenue ervice Revenue
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Correct lia&ilitya%ount$2$000
otalaccounted or$
3$000
Correct re"enuea%ount$1$000
Apr. 30 1,000 Apr. 20 3,000
Bal. 2,000
24,000
Apr. 30 1,500
Apr. 30 1,000
Bal. 26,500
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tarter 3G on page 1!!
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Prepare an adjusted trial balance
5ow do we get the accounting records read& to
prepare the nancial stateents6
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:he adjusting process starts with theunadjustedtrial "alance
Adjusting entries arejournalizedandposted to the ledgers
:he adjusted trial "alance is prepared;
which serves as a "asis 'or the preparationo' the nancial stateents
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Mo(at )et Practice
:rial )alance
epte"er 3; 2>14
Acct*o.
Account *ame ebit Credit
1>>> Cash 2H;G>>
13>> Accounts Receiva"le $;M>>
1!>> upplies G;!>>
2>>> Accounts Pa&a"le G;!>>
3>>> Capital; /oNat 32;>>>
4>>> Revenue $;M>>!!>> Rent (xpense 4;1>>
+otal -,// -,//
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7oat rial &alance ro% chapter 2 slides8
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*a+ n ept 3; the supplies were counted
=2;>>> worth o' supplies reainsSept 3
Supplies Expense $2,000
Supplies $2,000
To adjust for the value of supplies based on count
*"+ /oNat per'ored wor# which she will "illlater in the onth 'or =!;>>>Sept 3
Accounts receivable $5,000
Service evenue $5,000
To record service revenue accrued
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Mo(at )et Practice
Adjusted :rial )alance
epte"er 3; 2>14
0nadjusted +rial1alance
Adjustments Adjusted +rial 1alance
Account *ame ebit Credit ebit Credit ebit Credit
Cash 2H;G>>
AccountsReceiva"le
$;M>>
upplies G;!>>
AccountsPa&a"le
G;!>>
Capital; /oNat 32;>>>
Revenue $;M>>upplies (xp
Rent (xpense 4;1>>
+otal -,//
-,//
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Mo(at )et Practice
Adjusted :rial )alance
epte"er 3; 2>14
0nadjusted+rial 1alance Adjustments Adjusted +rial1alance
Account *ame ebit Credit ebit Credit ebit Credit
Cash 2H;G>> 2H;G>>
AccountsReceiva"le
$;M>> (b)5,000
11;M>>
upplies G;!>> (a)2,000
H;!>>
AccountsPa&a"le
G;!>> G;!>>
Capital;/oNat
32;>>> 32;>>>
Revenue $;M>> (b)5,000
11;M>>
upplies (xp (a)2,000
2;>>>
Rent (xpense 4;1>> 4;1>>
.alance
4heet
9
/
I:4
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Assets and Kia"ilities are "ro#en out into. Current J 9ill "e realizedOpaid within one &ear
DonCurrent J All other assets and lia"ilities
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Current Ratio F Current Assets
Current Kia"ilities
8e"t Ratio F :otal lia"ilities
:otal Assets
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Prot /argin F Det -ncoe
ales
7our "oo# calls this Qreturn on sales
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9or# in groups on (333 *p1$1+ teps 1H
*
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:eporar& accounts *revenues; expenses;dividendsOwithdrawals+ are closed at theend o' the accounting period
:hese accounts are closed toetainedEarnin!s
-' the account is in a de"it position; use acredit to "ring it to zero and vice versa
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9or# in groups on (333 *p1$1+ teps M1>
*Closing (ntries; ratio anal&sis+
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