Upload
dawn-whirry-diskin
View
1.315
Download
3
Embed Size (px)
DESCRIPTION
College Accounting Chapter 5 Powerpoint
Citation preview
Chapter 5
AdjustingAccounts and PreparingFinancial Statements
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning Objective 1
Explain accrual accounting and how it improves
financial statements.
Explain accrual accounting and how it improves
financial statements.
LO1
5-2
Accrual Basis verses Cash Basis
Accrual basis accounting uses the adjusting process to recognize revenues when earned and expenses when incurred.
Accrual basis accounting uses the adjusting process to recognize revenues when earned and expenses when incurred.
Cash basis accounting recognizes revenue when cash is received and records expenses when cash is paid.Cash basis accounting recognizes revenue when cash is received and records expenses when cash is paid.
It is commonly held that accrual accounting better reflects business performance than cash basis accounting.
It is commonly held that accrual accounting better reflects business performance than cash basis accounting.
LO1
5-3
Recognizing Revenues and Expenses
Time period assumption assumes a business’ activities can be divided into specific periods, such as a month or year.
Time period assumption assumes a business’ activities can be divided into specific periods, such as a month or year.
Reports that cover a period of one year are called annual financial statements.Reports that cover a period of one year are called annual financial statements.
Interim financial statements cover one, three, or six months of activity.Interim financial statements cover one, three, or six months of activity.
LO1
5-4
Learning Objective 2
Identify the types of accounting
adjustments and their purpose.
Identify the types of accounting
adjustments and their purpose.
LO2
5-5
Types of Adjustments
Adjustments are necessary for transactions that extend over more than one accounting period.
Adjustments
Cash before work(Deferrals)
Work before cash (Accruals)
Unearned (Deferred) revenues
Prepaid (deferred) expenses
Accrued revenues
Accrued expenses
LO2
5-6
Learning Objective 3
Prepare and explain adjusting
entries.
Prepare and explain adjusting
entries.
LO3
5-7
Adjustments
An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. This
entry also updates a related expense or revenue account.
Three-step Process
1. Determine the current account balance.
2. Determine what the current account balance should be.
3. Record the adjusting journal entry to get from step 1 to step 2.
LO3
5-8
Here is the checkfor my first
six months’ rent.
Here is the checkfor my first
six months’ rent.
Prepaid Expenses
Resources paid for prior to
receiving the actual benefits.
Resources paid for prior to
receiving the actual benefits.
Asset Expense
UnadjustedBalance
CreditAdjustment
DebitAdjustment
LO3
5-9
Prepaid Insurance
On December 1, 2010, FastForward paid $2,400 for insurance for 24 months. FastForward recorded the expenditure as Prepaid Insurance on December 1.
What adjustment is required?
On December 1, 2010, FastForward paid $2,400 for insurance for 24 months. FastForward recorded the expenditure as Prepaid Insurance on December 1.
What adjustment is required?
Dec. 31 Insurance Expense 100 Prepaid Insurance 100
To record first month's expired insurance
Dec. 1 2,400 Dec. 31 100Bal. 2,300
Prepaid Insurance 637Dec. 31 100
Insurance Expense 128
LO3
5-10
Supplies
During December, FastForward purchased $9,720 of supplies. FastForward recorded the expenditures with a debit to Supplies. On December 31, a count of the supplies indicated $8,670 on hand.
What adjustment is required?
During December, FastForward purchased $9,720 of supplies. FastForward recorded the expenditures with a debit to Supplies. On December 31, a count of the supplies indicated $8,670 on hand.
What adjustment is required?
Dec. 31 Supplies Expense 1,050 Supplies 1,050
To record supplies used during December
Bought 9,720 Dec. 31 1,050Bal. 8,670
Supplies 126Dec. 31 1,050
Supplies Expense 652
LO3
5-11
Straight-LineDepreciation
Expense=
Asset Cost - Salvage Value
Useful Life
Depreciation
Depreciation is the process of spreading the costs of plant and equipment over their
expected useful lives.
LO3
5-12
Depreciation
FastForward purchased equipment for $26,000 in early December. The equipment is expected to have a useful life of four years and a salvage value of $8,000.
What is the amount of the depreciation expense for December 2010?
FastForward purchased equipment for $26,000 in early December. The equipment is expected to have a useful life of four years and a salvage value of $8,000.
What is the amount of the depreciation expense for December 2010?
MonthlyDepreciation
Expense= $26,000 - $8,000
48 months= $375
LO3
5-13
Dec. 31 Depreciation Expense 375 Accumulated Depreciation - Equipment 375
To record equipment depreciation
Accumulated depreciation isa contra asset account.
Accumulated depreciation isa contra asset account.
Depreciation
FastForward purchased equipment for $26,000 in early December. The equipment is expected to have a useful life of four years and a salvage value of $8,000.
FastForward purchased equipment for $26,000 in early December. The equipment is expected to have a useful life of four years and a salvage value of $8,000.
LO3
5-14
Equipment Depreciation Expense12/1 26,000 12/31 375
Accumulated Depreciation
12/31 375
Depreciation
Dec. 31 Depreciation Expense 375 Accumulated Depreciation - Equipment 375
To record equipment depreciation
LO3
5-15
Equipment is shown net of accumulated depreciation.
$
DepreciationLO3
5-16
We’re about one-halfdone with this job and
want to be paid forour work!
We’re about one-halfdone with this job and
want to be paid forour work!
Costs incurred in a period that are
both unpaid and unrecorded.
Costs incurred in a period that are
both unpaid and unrecorded.
Accrued Expenses
Expense LiabilityCredit
AdjustmentDebit
Adjustment
LO3
5-17
12/31/10Year end
Last paydate
12/26/10
Next paydate
1/9/11
Record adjustingjournal entry.
Record adjustingjournal entry.
FastForward’s employee earns $70 per day, or $350 for a five-day workweek beginning on Monday and ending on Friday. This employee is paid every two weeks on Friday. On December 12 and 26, the wages are paid, recorded in the journal, and posted to the ledger. At December 31, the employee has worked for three days for FastForward and will be paid on January 9, 2011.
FastForward’s employee earns $70 per day, or $350 for a five-day workweek beginning on Monday and ending on Friday. This employee is paid every two weeks on Friday. On December 12 and 26, the wages are paid, recorded in the journal, and posted to the ledger. At December 31, the employee has worked for three days for FastForward and will be paid on January 9, 2011.
Accrued Salaries ExpenseLO3
5-18
Dec. 31 Salaries Expense 210 Salaries Payable 210
To accrue three days' salary
Dec. 1-26 1,400Dec. 31 210Bal. 1,610
Salaries ExpenseDec. 31 210
Salaries Payable
Accrued Salaries ExpenseLO3
5-19
Learning Objective 4
Explain and prepare an
adjusted trial balance.
Explain and prepare an
adjusted trial balance.
LO4
5-20
Trial Balance
An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.
An adjusted trial balance is a list of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger.
LO4
5-21
Adjusted Trial BalanceLO4
5-22
Learning Objective 5
Prepare financial statements from an
adjusted trial balance.
Prepare financial statements from an
adjusted trial balance.
LO5
5-23
Preparing Financial StatementsLO5
5-24
Note: Investment by owner and withdrawals by owner come from the adjusted trial balance.
Preparing Financial StatementsLO5
5-25
Preparing Financial StatementsLO5
5-26
End of Chapter 5