Recap Accounting Process Prepared by Mubashar majeed.

Recap Accounting Process

Prepared by Mubashar majeed

Introduction to Financial Statements

• Companies prepare interim financial statements

• and annual financial statements.

Introduction to Financial Statements

Three primary financial

statements.Income Statement

Balance Sheet

Statement of Cash FlowsWe will use a corporation

to describe these statements.

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Introduction to Financial StatementsIntroduction to Financial Statements

Describes where the enterprise stands at a

specific date.

Income Statement

Balance Sheet

Statement of Cash Flows

Depicts the revenue and

expenses for a designated

period of time.

The Concept of the Business Entity

Vagabond Travel Agency

A business entity is

separate from the personal affairs of its

owner.

Assets and Liabilities

• Assets are economic resources that are owned by the business and are expected to provide positive future cash flows.

• Liabilities are debts that represent negative future cash flows for the enterprise.

• Owners’ equity represents the owner’s claim to the assets of the business.

Vagabond Travel AgencyBalance Sheet

December 31, 2002Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' EquityOffice equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

The Accounting Equation

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

AA = LL + OEOEASSETSASSETS

Debit for

Increase

Credit for

Decrease

EQUITIESEQUITIES

Debit for

Decrease

Credit for

Increase

LIABILITIESLIABILITIES

Debit for

Decrease

Credit for

Increase

Debits and credits affect accounts as follows:

Debits and credits affect accounts as follows:

Debit and Credit Rules

AA = LL + OEOEDebit

balancesCredit Credit

balancesbalances=In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.

In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.

Double Entry AccountingThe Equality of Debits and Credits

May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.


Will Cash increase or decrease?

Will Capital Stock increase or decrease?

Capital Stock5/1 8,000

Cash5/1 8,000



Cash increases $8,000 with a debit.

Capital Stock increases $8,000

with a credit.

May 2: JJ’s purchased a riding lawn mower for $2,500 cash.



Will Tools & Equipment increase

or decrease?



Tools & Equipment5/2 2,500

Cash5/1 8,000 5/2 2,500

Cash decreases $2,500 with a credit.

Tools & Equipment increases $2,500

with a debit.

May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.


Will Truck increase or decrease?

Will Cash and Notes Payable

increase or decrease?



Truck5/8 15,000

Cash5/1 8,000 5/2 2,500

5/8 2,000

Notes Payable5/8 13,000

Truck increases $15,000 with a debit.

Cash decreases $2,000 with a credit.

Notes Payable increases $13,000

with a credit.

In an actual accounting system, transactions are initially recorded in the journal.

In an actual accounting system, transactions are initially recorded in the journal.

GENERAL JOURNAL

Date Account Titles and ExplanationPR Debit Credit

2003

May 1 Cash 8,000

Capital Stock 8,000

Owners invest cash in the business.

The Journal

Posting involves copying

information from the

journal to the ledger

accounts.

Posting Journal Entries to the Ledger Accounts

The Ledger

The entire group of accounts is kept

together in an accounting record

called a ledger.

The entire group of accounts is kept

together in an accounting record

called a ledger.

Cash

Accounts Payable

Capital Stock

Accounts are individual records showing increases

and decreases.

Accounts are individual records showing increases

and decreases.

The Use of Accounts

Increases are recorded on one

side of the T-account, and decreases are

recorded on the other side.

Left or

Debit Side

Right or

Credit Side

Title of Account

Cash5/1 8,000 5/2 2,500

5/25 75 5/8 2,0005/29 750 5/28 150

5/31 50 5/31 4,125Bal.

Cash5/1 8,000 5/2 2,500

5/25 75 5/8 2,0005/29 750 5/28 150

5/31 50 5/31 4,125Bal.

Receipts are on the debit

side.

Payments are on the credit

side.

The balance is the difference between the

debit and credit entries in the account.

The balance is the difference between the

debit and credit entries in the account.

Debit and Credit Entries

GENERAL JOURNAL


2003

May 1 Cash 8,000

Capital Stock 8,000

Owners invest cash in the business.General LedgerCash

Date Debit Credit Balance2003

May 1 8,000 8,000


GENERAL JOURNAL


2003

May 1 Cash 8,000

Capital Stock 8,000

Owners invest cash in the business.General LedgerCapital Stock


May 1 8,000 8,000


General LedgerCash


May 1 8,000 8,000 2 2,500 5,500

This ledger format is referred to as a running balance (as opposed to simple

T accounts).

This ledger format is referred to as a running balance (as opposed to simple

T accounts).

Ledger Accounts After Posting

Net income is not an asset it’s an increase in owners’ equity from profits of the business.

Net income is not an asset it’s an increase in owners’ equity from profits of the business.

AA = LL + OEOEIncrease Decrease Increase

Either (or both) of these effects occur as net income

is earned . . .

. . . but this is what “net income”

really means.

What is Net Income?

AA = LL + OEOERetained Earnings

Capital Stock

Retained Earnings

The balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as

dividends.

Revenue and ExpensesThe price for goods sold and services rendered during a given accounting period.

Increases owner’s equity.

The costs of goods and services used up in the process of earning revenue.

Decreases owner’s equity.

The Realization Principle: When To Record Revenue

Realization Principle

Revenue should be recognized at the

time goods are sold and services are

rendered.

The Matching Principle: When To Record Expenses

Matching Principle

Expenses should be recorded in the

period in which they are used up.

Debits and Credits for Revenue and ExpenseEQUITIESEQUITIES

Debit for

Decrease

Credit for

Increase

REVENUESREVENUES

Debit for

Decrease

Credit for

Increase

EXPENSESEXPENSES

Credit for

Decrease

Debit for

Increase

Expenses decrease owner’s equity.

Revenues increase owner’s equity.

Let’s analyze the revenue, and

expense transactions for JJ’s Lawn Care Service for the month of May.

We will also analyze a dividend

transaction.

Let’s analyze the revenue, and

expense transactions for JJ’s Lawn Care Service for the month of May.

We will also analyze a dividend

transaction.

May 29: JJ’s provided lawn care services for a client and received $750 in cash.



Will Sales Revenue increase or decrease?

Sales Revenue5/29 750



Cash increases $750 with a debit.

Sales Revenue increases $750 with

a credit.

Cash5/1 8,000 5/2 2,500

5/29 750 5/8 2,000

May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash.



Will Gasoline Expense increase or

decrease?

Gasoline Expense5/31 50



Cash decreases $50 with a credit.

Gasoline Expense increases $50 with a

debit.

Cash5/1 8,000 5/2 2,500

5/29 750 5/8 2,000 5/31 50

May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend.



Will Dividends increase or decrease?

Dividends5/31 200



Cash decreases $200 with a credit.

Dividends increase $200 with a debit.

Cash5/1 8,000 5/2 2,500

5/29 750 5/8 2,000 5/31 50 5/31 200

Now, let’s look at the Trial Balance

for JJ’s Lawn Care Service for the month of May.

Now, let’s look at the Trial Balance

for JJ’s Lawn Care Service for the month of May.

JJ's Lawn Care Service Unadjusted Trial Balance

May 31, 2003

Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Truck 15,000 Notes payable 13,000$ Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Total 21,900$ 21,900$

All balances are taken from

the ledger accounts on May 31 after

considering all of JJ’s

transactions for the month.

Proves equality of debits and

credits.

Journalize transactions.

Post entries to the ledger accounts.

Prepare trial balance.

Make end-of-year

adjustments.

Prepare adjusted trial balance.

Prepare financial

statements.

Prepare after closing trial balance.

Journalize and post closing

entries.

The Accounting Cycle

Adjusting Entries

• THE ACCOUNTING CYCLE:

• Accruals and Deferrals

At the end of the period, we need to

make adjusting entries to get the accounts up to date for the financial

statements.

Adjusting

entries areneeded whenever

revenue or expenses

affect more than oneaccounting

period.

Every adjusting

entry involves a change in either a

revenue or expense and an asset

or liability.

Adjusting Entries

Types of adjustment

• Two types of adjustment• 1- Deferrals• Result from prepayments made or received • E.g. Payment of six month rent paid or received

• 2- Accrual• These are items are unrecorded , unpaid or not

yet received • E.g. Salaries payable, Services revenue receivable

Adjustment

Rules for Adjusting Entries

• Affect 1 Income statement account• Affect 1 balance sheet account• Cash account is never be involved

Jan. 1 Dec. 31

$2,400 Insurance Policy Coverage for 12 Months

$200 Monthly Insurance Expense

On January 1, Webb Co. purchased a one-year insurance policy for $2,400.

On January 1, Webb Co. purchased a one-year insurance policy for $2,400.

Converting Assets to Expenses

GENERAL JOURNAL


Jan. 1 Unexpired Insurance 2,400

Cash 2,400

Purchase a one-year insurance policy.

Initially, costs that benefit more than one accounting period are recorded as assets. Initially, costs that benefit more than one

accounting period are recorded as assets.


The costs are expensed as they are used to generate revenue.

The costs are expensed as they are used to generate revenue.

GENERAL JOURNAL


Monthly Adjusting Entry for Insurance

Jan. 31 Insurance Expense 200

Unexpired Insurance 200

Insurance expense for January.


Insurance Expense1/31 200

Unexpired Insurance1/1 2,400 1/31 200

Bal. 2,200

Income Statement

Cost of assets used this period to generate revenue.

Income Statement

Cost of assets used this period to generate revenue.

Balance Sheet

Cost of assets that benefit

future periods.

Balance Sheet

Cost of assets that benefit

future periods.


Depreciation is the systematic allocation of the cost of a depreciable asset to

expense.

Depreciation is the systematic allocation of the cost of a depreciable asset to

expense.

Depreciable assets are physical objects that retain their size and shape but lose

their economic usefulness over time.

Depreciable assets are physical objects that retain their size and shape but lose

their economic usefulness over time.

The Concept of Depreciation

On May 2, 2003, JJ’s Lawn Care Service purchased a lawn mower with a useful

life of 50 months for $2,500 cash.

Using the straight-line method, calculate the monthly depreciation expense.

$2,50050

=$50$50

Depreciationexpense (per

period)=

Cost of the assetEstimated useful life

Depreciation Is Only an Estimate

JJ’s Lawn Care Service would make the following adjusting entry.

JJ’s Lawn Care Service would make the following adjusting entry.

GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

May 31 Depreciation Expense: Tools & Eq. 50

Accumulated Depreciation: Tools & Eq. 50

To record one month's depreciation.

Contra-asset Contra-asset


JJ’s $15,000 truck is depreciated over 60 months as follows:

JJ’s $15,000 truck is depreciated over 60 months as follows:

GENERAL JOURNAL


May 31 Depreciation Expense: Truck 250

Accumulated Depreciation: Truck 250

To record one month's depreciation.

$15,00060 months = $250 per month$15,00060 months = $250 per month


Accumulated depreciation would appear on the balance sheet as

follows:

Accumulated depreciation would appear on the balance sheet as

follows:

Prior Periods Current Period Future Periods

TransactionCollected from customers in

advance (creates a liability).

TransactionCollected from customers in

advance (creates a liability).

End of Current Period

Adjusting Entry Recognize portion earned as revenue, and Reduce balance of liability account.

Adjusting Entry Recognize portion earned as revenue, and Reduce balance of liability account.

Converting Liabilities to Revenue

Examples Include:

Airline Ticket Sales

Sports Teams’ Sales of Season Tickets


Jan. 1 Dec. 31

$6,000 Rental Contract Coverage for 12 Months

$500 Monthly Rental Revenue

On January 1, Webb Co. received $6,000 in advance for a one-year rental contract.

On January 1, Webb Co. received $6,000 in advance for a one-year rental contract.


GENERAL JOURNAL


Jan. 1 Cash 6,000

Unearned Rental Revenue 6,000

Collected $6,000 in advance for rent.

Initially, revenues that benefit more than one accounting period are recorded as liabilities.

Initially, revenues that benefit more than one accounting period are recorded as liabilities.


Over time, the revenue is recognized as it is earned.

Over time, the revenue is recognized as it is earned.

GENERAL JOURNAL


Monthly Adjusting Entry for Rent Revenue

Jan. 31 Unearned Rental Revenue 500

Rental Revenue 500

Rental revenue for January.


Rental Revenue1/31 500

Unearned Rental Revenue

1/31 500 1/1 6,000Bal. 5,500

Income Statement

Revenue earned this period.

Income Statement


Balance Sheet

Liability for future periods.

Balance Sheet

Liability for future periods.



TransactionLiability will be

paid.

TransactionLiability will be

paid.


Adjusting Entry Recognize expense incurred, and Record liability for future payment.

Adjusting Entry Recognize expense incurred, and Record liability for future payment.

Accruing Unpaid Expenses

Examples Include:

Interest

Wages and Salaries

Property Taxes

Hey, when do we get

paid?


Monday,May 29

Friday, June 2

$3,000 Wages Expense

On May 31, Webb Co. owes wages of $3,000. Pay day is Friday, June 2.

On May 31, Webb Co. owes wages of $3,000. Pay day is Friday, June 2.

Wednesday,May 31


GENERAL JOURNAL


May 31 Wages Expense 3,000

Wages Payable 3,000

To accrue wages owed to employees.

Initially, an expense and a liability are recorded.

Initially, an expense and a liability are recorded.


Wages Expense5/31 3,000

Wages Payable5/31 3,000

Income Statement

Cost incurred this period to generate

revenue.

Income Statement

Cost incurred this period to generate

revenue.

Balance Sheet

Liability to be paid in a future

period.

Balance Sheet

Liability to be paid in a future

period.


Monday,May 29

Friday, June 2

$5,000 Weekly Wages

Let’s look at the entry for June 2.Let’s look at the entry for June 2.

Wednesday,May 31




The liability is extinguished when the debt is paid.

The liability is extinguished when the debt is paid.

GENERAL JOURNAL


June 2 Wages Expense (for June) 2,000

Wages Payable (accrued in May) 3,000

Cash 5,000

Weekly payroll for May 29-June 2.



TransactionReceivable will be

collected.

TransactionReceivable will be

collected.


Adjusting EntryRecognize revenue earned but not yet recorded, andRecord receivable.

Adjusting EntryRecognize revenue earned but not yet recorded, andRecord receivable.

Accruing Uncollected Revenue

Examples Include:

Interest Earned

Work Completed But Not Yet Billed to Customer


Saturday,Jan. 15

Tuesday, Feb. 15

$170 Interest Revenue

On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the 15th

day of each month.

On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the 15th

day of each month.

Monday,Jan. 31


GENERAL JOURNAL


Jan. 31 Interest Receivable 170

Interest Revenue 170

To recognize interest revenue.

Initially, the revenue is recognized and a receivable is created.

Initially, the revenue is recognized and a receivable is created.


Interest Revenue1/31 170

Interest Receivable1/31 170

Income Statement


Income Statement


Balance Sheet

Receivable to be collected in a

future period.

Balance Sheet

Receivable to be collected in a

future period.


Saturday,Jan. 15

Tuesday, Feb. 15

$320 Monthly Interest


Let’s look at the entry for February 15. Let’s look at the entry for February 15.

Monday,Jan. 31



The receivable is collected in a future period.The receivable is collected in a future period.

GENERAL JOURNAL


Feb. 15 Cash 320

Interest Revenue (for February) 150

Interest Receivable (accrued Jan. 31) 170

To record interest received.


As a corporation earns taxable income, it incurs income taxes expense, and also a liability to governmental tax authorities.

As a corporation earns taxable income, it incurs income taxes expense, and also a liability to governmental tax authorities.

GENERAL JOURNAL


Dec. 31 Income Taxes Expense 780

Income Taxes Payable 780

Estimated income taxes applicable to

taxable income earned in December.

Accruing Income Taxes Expense: The Final Adjusting Entry

Journalize transactions.

Post entries to the ledger accounts.

Prepare trial balance.

Make end-of-year

adjustments.

Prepare adjusted trial balance.

Recall from the accounting cycle discussed in Chapter 3, that after the adjusting entries are made, an adjusted trial balance is prepared.

Recall from the accounting cycle discussed in Chapter 3, that after the adjusting entries are made, an adjusted trial balance is prepared.

Effects of the Adjusting Entries

THE ACCOUNTING CYCLE: Reporting Financial Results

JJ's Lawn Care Service Adjusted Trial Balance

May 31, 2003

Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accumulated depr.: tools & eq. 50$ Truck 15,000 Accumulated depr.: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depr. exp.: tools & eq. 50 Depr. exp.: truck 250 Total 22,200$ 22,200$

This is the Adjusted Trial

Balance for JJ’s.

This is the Adjusted Trial

Balance for JJ’s.

Now, let’s prepare the

financial statements for JJ’s Lawn Care Service for May.

Now, let’s prepare the

financial statements for JJ’s Lawn Care Service for May.

JJ's Lawn Care ServiceIncome Statement

For the month ending May 31, 2003

Sales revenue 750$ Operating expenses: Gasoline expense 50$ Depr. exp.: tools & eq. 50 Depr. exp.: truck 250 350 Net income 400$

Net income also appears on the Statement of Owner’s Equity.

Net income also appears on the Statement of Owner’s Equity.

•Business Earnings

•Dividends

•Business Losses

This statement summarizes the increases and decreases in Retained Earnings during

the period.

Statement of Retained Earnings

Now, let’s prepare the Balance Sheet.

JJ's Lawn Care ServiceBalance SheetMay 31, 2003

AssetsCash 3,925$ Accounts receivable 75 Tools & equipment 2,650$ Less: Accum. depr.: tools & eq. 50 2,600 Truck 15,000$ Less: Accum. depr.: truck 250 14,750 Total assets 21,350$

Liabilities & Stockholders' EquityLiabilities:Notes payable 13,000$ Accounts payable 150 Total liabilities 13,150$ Stockholders' equity:Capital stock 8,000$ Retained earnings 200 Total stockholders' equity 8,200 Total liabilities & stockholders' equity 21,350$

Closing the Temporary Equity Accounts

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Retained Earnings.

Close Dividends to Retained Earnings.

The closing process gets the temporary accounts ready for the next accounting period.

GENERAL JOURNAL


May 31 Sales Reveune 750

Income Summary 750

To close the revenue account.

Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue

account.

Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue

account.

Closing Entries for Revenue Accounts

Income Summary750

750

Sales Revenue750 750

-

Closing Entries for Revenue Accounts

GENERAL JOURNAL


May 31 Income Summary 350

Gasoline Expense 50

Depreciation Exp.: Tools & Equipment 50

Depreciation Exp.: Truck 250

To close the expense accounts.

Since expense accounts have a debit balance, the closing entry requires a credit to the expense

accounts.

Since expense accounts have a debit balance, the closing entry requires a credit to the expense

accounts.

Closing Entries for Expense Accounts

Closing Entries for Expense Accounts

Income Summary350 750

400

Gasoline Exp.50 50

-

Net Income

Depr. Exp.: Truck250 250

-

Depr. Exp.: Tools & Equipment

50 50 -

Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income

Summary.

Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income

Summary.

GENERAL JOURNAL


May 31 Income Summary 400

Retained Earnings 400

To close Income Summary.

Closing the Income Summary Account

Retained Earnings

- 400

400

Income Summary350 750 400

-

The balance in Income Summary is now zero.

Closing the Income Summary Account

After all closing

entries are made, JJ’s

After-Closing Trial Balance

looks like this.

After all closing

entries are made, JJ’s

After-Closing Trial Balance

looks like this.

Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accumulated depr.: tools & equipment 50$ Truck 15,000 Accumulated depr.: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Retained earnings 200 Total 21,650$ 21,650$

JJ's Lawn Care ServiceAfter-Closing Trial Balance

May 31, 2003

End of Topic

Recap Accounting Process Prepared by Mubashar majeed.

Documents

cash increase

jill jones

payable increase

truck increase

liabilities owners equity

jjs lawn care service

capital stock increase

negative future cash