BELL RINGER1. Name the accounting principle that each of the following describes:

A. If $51,000 cash is paid to buy land, the land is reported on the buyer’s balance sheet as $51,000.

B. A person owns more than one company (A B and C). In preparing financial statements for A company, the owner makes sure that expense transactions for B & C companies are kept separate and not reported on A’s financial statements.

C. In December 2013, a company received an order for work that would be completed by March 31 of the following year. The company would record the revenue in March 2014, not December 2013.

2. A trial balance has total debits of $20,000 and total credits of $24,500. Which of the following errors would create this imbalance?A. A $4,500 debit posting to Equipment was posted mistakenly as a debit to Cash.B. A $4,500 debit to Salaries Expense in a journal entry is incorrectly posted to the

ledger as a $4,500 credit.C. A $2,250 debit to Utilities Expense in a journal entry is incorrectly posted to the

ledger as a credit.D. A $2,250 credit to Service Fees in a journal entry was incorrectly posted to the

ledger as a $2,250 debit.

Blue Raider –

Accounting Lab

Study Groups

Exam 1 Study Guide–

Available on D2L under “Contents”

There are check figures

available for Steps 4, 6,

& 7.

CAT: “Increase” “Decrease” or “No Change”

Assets

Liabilities

Equity

Net Income

The owner invests cash into the company

The company buys supplies (with cash)

The company performs services on account

The company receives cash from a customer who was previously billed

The company pays for advertising

The owner withdrawals cash

The company buys supplies on account

The company performs services for cash

The company pays bill for supplies previously bought on account

CAT: “Increase” “Decrease” or “No Change”

Assets

Liabilities

Equity

Net Income

The owner invests cash into the company

INCREASE

NO CHANGE INCREASE

NO CHANGE

The company buys supplies (with cash)

NO CHANGE

NO CHANGE NO CHANGE

NO CHANGE

The company performs services on account

INCREASE

NO CHANGE INCREASE

INCREASE

The company receives cash from a customer who was previously billed

NO CHANGE

NO CHANGE NO CHANGE

NO CHANGE

The company pays for advertising

DECREASE

NO CHANGE DECREASE

DECREASE

The owner withdrawals cash DECREASE

NO CHANGE DECREASE

NO CHANGE

The company buys supplies on account

INCREASE

INCREASE NO CHANGE

NO CHANGE

The company performs services for cash

INCREASE

NO CHANGE INCREASE

INCREASE

The company pays bill for supplies previously bought on account.

DECREASE

DECREASE NO CHANGE

NO CHANGE

Chapter 3: Accrual Accounting

ACTG 2110

Sid C. Bundy

GOAL:

Accruals vs Deferrals

AJE Examples

ANNOUNCEMENTS:

EXAM 1 – Next Friday

Check due date/time for Homework #3

NABA Meeting Today

Accrual basis accounting is…

…using the adjusting process to recognize revenues when earned and to match expenses with revenues when incurred.

…required by GAAP.

Cash basis of accounting is…

…recognizes revenue when cash is received and expenses when cash is

paid.

Adjusting Entries…

…impact at least one account from the balance sheet and one account from the income statement. (this is important!!)

…2 types of adjusting entries:1. Deferrals – Cash comes BEFORE

Prepaid expenses Unearned revenues Depreciation

2. Accruals – Cash comes AFTER Accrued expenses (like salaries or interest) Accrued revenue (unbilled, but work

complete)

QUESTION: Think of two journal entries from Chapter 2 that do NOT impact both the income statement and the balance sheet.

DEFERRALS (cash before)

…prepaid expense…unearned revenues…depreciation expense

DEFERRALS

…prepaid expense…unearned revenues…depreciation expense

DEFERRALS

…prepaid expense…unearned revenues…depreciation expense

What is this depreciation stuff?Depreciation… …expense created by allocating the cost of property or equipment to periods in which they are used…represents the expense of using an asset…this is COST ALLOCATION not MARKET PRICE VALUATION

The Adjusting Journal Entry will always debit the expense account and credit the contra-asset account, like so:

a Depreciation Expense - Equipment 100

Accumulated Depreciation*-Equipment

100

What is this depreciation stuff?

Office Equipment (Computer) Equipment (Truck)

Bought a computer for $500. You expect to use the computer in your company for 4 years. Each year, you depreciate $125.

Bought a truck for $30,000 to be used for 6 years. Each year you depreciate $5,000.

c Depreciation Expense - Equipment 5,000

Accumulated Depreciation*-Equipment

5,000

b Depreciation Expense – Office Equipment

125

Accumulated Depreciation*- Office Equipment

125

13

Land

Does not depreciate since its usefulness and revenue producing ability generally remain intact, or increase.

A company doesn’t “use up” land.

14

CA

SH

WARNING:The balance in Accumulated Depreciation is not a cash fund.

ACCRUALS (cash after)

…accrued expenses…accrued revenues

ACCRUALS

Accrued Expense Accrued Revenues

Accounts Payable Wages/Salaries

Payable Interest Payable

Accounts Receivable Interest Receivable

On the Board Page 127-128

QS 3:5-6 QS 3:8 QS 3:10 QS 3:12 QS 3:14 QS 3:15

A sole proprietorship had the following assets and liabilities at the beginning and end of this year.Assets Liabilities

Beginning of the year 85,000$ 35,000$ End of the year 130,000 50,000

Determine the net income earned or net loss incurred by the business during the year for each of thefollowing separate cases:

a. Owner made no investments in the business and no withdrawals were made during the year.b. Owner made no investments in the business but withdrew $2,000 cash per month for personal use.c. Owner made no withdrawals during the year but did invest an additional $45,000 cash.d. Owner withdrew $2,000 cash per month for personal use and invested an additional $35,000 cash.

a. b. c. d.$50,000 $50,000 $50,000 $50,000

0 0 45,000 35,0000 (24,000) 0 (24,000)

30,000 54,000 (15,000) 19,000$80,000 $80,000 $80,000 $80,000End of the year equity

Beginning of the year equity

Net income (loss)

Investments by ownerWithdrawals by owner

Exercise 2-16 page 80 Algorithm 2 - 18

A sole proprietorship had the following assets and liabilities at the beginning and end of this year.Assets Liabilities

Beginning of the year 85,000$ 35,000$ End of the year 130,000 50,000

Determine the net income earned or net loss incurred by the business during the year for each of thefollowing separate cases:

a. Owner made no investments in the business and no withdrawals were made during the year.b. Owner made no investments in the business but withdrew $2,000 cash per month for personal use.c. Owner made no withdrawals during the year but did invest an additional $45,000 cash.d. Owner withdrew $2,000 cash per month for personal use and invested an additional $35,000 cash.

a. b. c. d.$50,000 $50,000 $50,000 $50,000

0 0 45,000 35,0000 (24,000) 0 (24,000)

30,000 54,000 (15,000) 19,000$80,000 $80,000 $80,000 $80,000End of the year equity

Beginning of the year equity

Net income (loss)

Investments by ownerWithdrawals by owner

Exercise 2-16 page 80 Algorithm 2 - 19

GOALS

Finish QS Examples

Review AJE

How do AJE’s impact the financial statements? (What is wrong with leaving them out?) OR (Why do we record them?)

Finishing Steps 1-4 of the accounting cycle.

Quiz #4

ANNOUNCEMENTS:1. Complete Steps 1-4 in the BRAP Packet

and bring to the class before exam.2. Remember the Review Session…

check D2L for details.3. Homework is due SOON to allow for

studying with answer keys.4. Review exam policies in your syllabus!

Don’t forget your ID or room number!

** If you have made up a quiz, you have to submit written documentation of the excuse before it will be graded.**

Depreciation

On December 1, 2013, FastForward purchased equipment for $26,000 cash. The equipment has an estimated useful life of four years (48 months) and FastForward expects to sell the equipment at the end of its life for $8,000 cash.

(c) Let’s record depreciation expense for the month ended December 31, 2013.

Dec. 2013Depreciation

Expense=

$26,000 - $8,000

48 months= $375 per month

P 1

Supplies

(b) During 2013, FastForward purchased $9,720 of supplies. FastForward recorded the expenditures in the asset account, “Supplies.” On December 31, 2013, a count of the supplies indicated $8,670 on hand, so $1,050 of supplies were used during December.

What adjustment is required?

Bought 9,720 Dec. 31 1,050Bal. 8,670

Supplies 126Dec. 31 1,050

Supplies Expense 652

P 1

The Accounting

Cycle Analyze Transactio

ns

Journalize

Post

Unadjusted Trial

BalanceAdjusting Entries

Adjusted Trial

Balance

Closing Entries

Post Closing

Trial Balance

Statement of Cash Flows

Balance Sheet

Statement of Owner’s Equity

Income Statement

FINANCIAL STATEMENTS

Dr. Cr.Cash 4,350$

Accounts receivable 1,800

Supplies 8,670

Prepaid insurance 2,300

Equipment 26,000

Accum. depr. - Equip. 375$

Accounts payable 6,200

Salaries payable 210

Unearned revenue 2,750

C. Taylor, Capital 30,000

C. Taylor, Withdrawals 200

Consulting revenue 7,850

Rental revenue 300

Depr. expense 375

Salaries expense 1,610

Insurance expense 100

Rent expense 1,000

Supplies expense 1,050

Utilities expense 230

Totals 47,685$ 47,685$

Adjusted

December 31, 2013Trial Balance

P 3

1. Prepare the Income Statement

P 32. Prepare the Statement of Owner’s Equity

a

Dr. Cr.Cash 4,350$

Accounts receivable 1,800

Supplies 8,670

Prepaid insurance 2,300

Equipment 26,000

Accum. depr. - Equip. 375$

Accounts payable 6,200

Salaries payable 210

Unearned revenue 2,750

C. Taylor, Capital 30,000

C. Taylor, Withdrawals 200

Consulting revenue 7,850

Rental revenue 300

Depr. expense 375

Salaries expense 1,610

Insurance expense 100

Rent expense 1,000

Supplies expense 1,050

Utilities expense 230

Totals 47,685$ 47,685$

Adjusted

December 31, 2013Trial Balance

Dr. Cr.Cash 4,350$

Accounts receivable 1,800

Supplies 8,670

Prepaid insurance 2,300

Equipment 26,000

Accum. depr. - Equip. 375$

Accounts payable 6,200

Salaries payable 210

Unearned revenue 2,750

C. Taylor, Capital 30,000

C. Taylor, Withdrawals 200

Adjusted

December 31, 2013Trial Balance

3. Prepare The Balance SheetP 3

END CHAPTER 3

DAY 6-8