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Chapter 3

Copyright 2014 Pearson CanadaInc.

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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


4

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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*

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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


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


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

Copyright 2014 Pearson Canada Inc.3 -2,

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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

Copyright 2014 Pearson Canada Inc.3 -3,

*+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


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 -,// -,//

Copyright 2011 PearsonCanada Inc.2 - 4,

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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3 -*1

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9or# in groups on (333 *p1$1+ teps M1>

*Closing (ntries; ratio anal&sis+

03 - Chapter 3 (Student) (1)

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