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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Review of the Accounting Process
2
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
2 - 2
The Accounting Equation
A = L + OE- Owner Withdrawals+ Owner Investments
- Expenses- Losses
+ Revenues+ Gains
2 - 3
Accounting Equation for a Corporation
A = L + SE+ Retained Earnings+ Paid-in Capital
- Expenses- Losses
+ Revenues+ Gains
- Dividends
2 - 4
Accounting Equation, Debits and Credits, Increases and Decreases
Permanent Accounts—assets, liabilities, paid-in capital, retained earningsTemporary Accounts-revenues, gains, expenses, losses
2 - 5
The Accounting Processing
Cycle
Source documents
Record in Journal
Transaction Analysis
Post to Ledger
During the Accounting Period
Financial Statements
Unadjusted Trial Balance
Adjusted Trial Balance
At the End of the Accounting Period
Record & Post Adjusting
Entries
Close Temporary Accounts
Post-Closing Trial Balance
At the End of the Year
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The Accounting Processing Cycle
On July 1, two individuals each invested $30,000 in a new business, Dress Right Clothing Corporation. Each
investor was issued 3,000 shares of common stock.
Two accounts are affected:Cash (an asset) increases by $60,000.Common stock (a shareholders’ equity) increases
by $60,000.
July 1Cash 60,000
Common stock 60,000
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General Ledger
The “T” account is a shorthand format of an account used by accountants to analyze transactions.
It is not part of the bookkeeping system.
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Posting Journal Entries
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After recording all entries for the period, Dress Right’s Unadjusted Trial Balance would be as follows:
After recording all entries for the period, Dress Right’s Unadjusted Trial Balance would be as follows:
Debits = Credits
A Trial Balance is a
list of all accounts and their
balances at a particular
date.
A Trial Balance is a
list of all accounts and their
balances at a particular
date.
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Transactions where cash is paid or received
before a related expense or revenue is
recognized.
Transactions where cash is paid or received after a related expense
or revenue is recognized.
Adjusting Entries
Prepayments Accruals Estimates
Accountants must often make estimates in order
to comply with the accrual accounting
model.
At the end of the period, adjusting entries are required to satisfy the realization principle and
the matching principle.
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Asset Expense
UnadjustedBalance
CreditAdjustment
DebitAdjustment
Prepaid Expenses
Today, I will payfor my first
6 months’ rent. Prepaid Expenses
Items paid for in advance of receiving their benefits
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Depreciation
Depreciation is the process of allocating the cost of plant and equipment over their expected
useful lives.
Straight-LineDepreciation =
Asset Cost - Salvage Value
Useful Life
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Depreciation
Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance. Assume the
following:
Let’s calculate the depreciation expense for the month ended July 31, 2011.
Asset Cost 12,000$ Salvage Value - Useful Life 60 months
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JulyDepreciation
Expense=
$12,000 - $0
60 months= $200 per month
Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance.
Asset Cost 12,000$ Salvage Value - Useful Life 60 months
Depreciation
July 31Depreciation expense 200
Accumulated depreciation-furniture and fixtures 200
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Depreciation
After posting, the accounts look like this:
Beg. bal. - 12,000
Bal. 12,000
Furniture and FixturesBeg. bal. -
200 Bal. 200
Depreciation Expense
- Beg. bal.200 200 Bal.
Accumulated Depreciation
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Liability RevenueUnadjusted
BalanceCredit
AdjustmentDebit
Adjustment
Unearned Revenues
“Go Big Red”
Buy your season tickets forall home basketball games NOW! Unearned Revenue
Cash received in advance of performing
services
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Alternative Approach to Record Prepayments
Unearned RevenueRecord initial cash receipts as follows:
Cash $$$ Revenue $$$
Adjusting EntryRecord the amount for the
unearned liability as follows:
Revenue $$$ Unearned revenue $$$
Prepaid ExpensesRecord initial cash
payments as follows:
Expense $$$ Cash $$$
Adjusting EntryRecord the amount for
the prepaid expense as follows:
Prepaid expense $$$ Expense $$$
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Expense LiabilityCredit
AdjustmentDebit
Adjustment
Accrued Liabilities
I won’t pay youuntil the job is done!
Accrued Liabilities
Liabilities recorded when an expense has been incurred
prior to cash payment.
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Asset Revenue
CreditAdjustment
DebitAdjustment
Accrued Receivables
Yes, you can pay mein May for your April
15 tax return.Accrued Receivables
Revenue earned in a period prior to the cash
receipt.
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Estimates
• Examples– Depreciation – Uncollectible accounts
$$
Accountants often must make estimates of future events to comply with the accrual
accounting model.
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Estimates
Assume that Dress Right’s management determines that of the $2,000 of accounts
receivable recorded at July 31, only $1,500 will ultimately be collected. Prepare the adjusting
entry for July 31.
July 31Bad debt expense 500
Allowance for uncollectible accounts 500
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DRESS RIGHT CLOTHING CORPORATIONAdjusted Trial Balance
July 31, 2011Account Title Debits CreditsCash 68,500$ Accounts receivable 2,000 Allowance for uncollectible accounts 500$ Supplies 1,200 Prepaid rent 22,000 Inventory 38,000 Furniture and fixtures 12,000 Accumulated depr.-furniture & fixtures 200 Accounts payable 35,000 Note payable 40,000 Unearned rent revenue 750 Salaries payable 5,500 Interest payable 333 Common stock 60,000 Retained earnings 1,000 Sales revenue 38,500 Rent revenue 250 Cost of goods sold 22,000 Salaries expense 10,500 Supplies expense 800 Rent expense 2,000 Depreciation expense 200 Interest expense 333 Bad debt expense 500 Totals 181,033$ 181,033$
This is the Adjusted Trial Balance for
Dress Right after all adjusting entries have
been recorded and posted.
Dress Right will use these balances to
prepare the financial statements.
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The income statement summarizes the results of profit-generating activities of the company.
The Income Statement
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Current assets: Cash 68,500$ Accounts receivable 2,000$ Less: Allowance for uncollectible accounts 500 1,500 Supplies 1,200 Inventory 38,000 Prepaid rent 22,000 Total current assets 131,200 Property and equipment: Furniture and fixtures 12,000 Less: Accumulated depreciation 200 11,800 Total assets 143,000$
Dress Right Clothing CorporationBalance SheetAt July 31, 2011
Assets
The balance sheet presents the financial position of the company on a particular date.
The Balance Sheet
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Current liabilities: Accounts payable 35,000$ Salaries payable 5,500 Unearned rent revenue 750 Interest payable 333 Note payable 10,000 Total current liabilities 51,583 Long-term liabilities: Note payable 30,000 Shareholders' equity: Common stock 60,000$ Retained earnings 1,417 Total shareholders' equity 61,417 Total liabilities and shareholders' equity 143,000$
Dress Right Clothing CorporationBalance SheetAt July 31, 2011
Liabilities and Shareholders' Equity
Notice that assets of $143,000 equals total liabilities plus shareholders’ equity of $143,000.
The Balance Sheet
2 - 26
Cash flows from Operating Activities:Cash inflows: From customers 36,500$ From rent 1,000 Cash outflows: For rent (24,000) For supplies (2,000) To suppliers for merchandise (25,000) To employees (5,000) Net cash used by operating activities (18,500)$ Cash flows from Investing Activities: Purchase of furniture and fixtures (12,000) Cash flows from Financing Activities: Issue of capital stock 60,000$ Increase in notes payable 40,000 Payment of cash dividend (1,000) Net cash provided by financing activities 99,000 Net increase in cash 68,500$
Dress Right Clothing CorporationStatement of Cash Flows
For the Month of July 2011
The Statement of Cash Flows
The statement of cash flows discloses the changes in cash during a period.
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The statement of shareholders’ equity presents the changes in permanent
shareholder accounts.
Common Stock
Retained Earnings
Total Shareholders'
EquityBalance at July 1, 2011 -$ -$ -$ Issue of capital stock 60,000 60,000 Net income for July 2011 2,417 2,417 Less: Dividends (1,000) (1,000) Balance at July 31, 2011 60,000$ 1,417$ 61,417$
Dress Right Clothing CorporationStatement of Shareholders' Equity
For the Month of July 2011
The Statement of Shareholders’ Equity
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Temporary Accounts
Revenues
Income Summary
Exp
ense
s
Divid
end
s
Permanent Accounts
Assets
Lia
bili
ties
Sh
areho
lders’
Eq
uity
The closing process applies only to temporary accounts.
The Closing Process
2 - 29
Post-Closing Trial Balance
Lists permanent accounts and their
balances.
Total debits equal total credits.
DRESS RIGHT CLOTHING CORPORATIONPost-Closing Trial Balance
July 31, 2011Account Title Debits CreditsCash 68,500$ Accounts receivable 2,000 Allowance for uncollectible accounts 500$ Supplies 1,200 Prepaid rent 22,000 Inventory 38,000 Furniture and fixtures 12,000 Accumulated depr.-furniture & fixtures 200 Accounts payable 35,000 Note payable 40,000 Unearned rent revenue 750 Salaries payable 5,500 Interest payable 333 Common stock 60,000 Retained earnings 1,417 Totals 143,700$ 143,700$
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Conversion From Cash Basis to Accrual Basis
Increases Decreases
Assets Add Deduct
Liabilities Deduct Add
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Appendix 2A: Use of a Worksheet
A worksheet can be used as a tool to facilitate the preparation of adjusting and closing entries and the
financial statements.
Steps to Follow for Worksheet Completion:
1. Enter account titles in column A and the unadjusted account balances in columns B and C.
2. Determine end-of-period adjusting entries and enter them in columns E and G.
3. Add or deduct the effects of the adjusting entries on the account balances and enter in columns H and I.
4. Transfer the temporary retained earnings account balances to columns J and K.
5. Transfer the balances in the permanent accounts to columns L and M.
Let’s look at the completed worksheet for Dress Right.
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A B C D E F G H I J K L MWorksheet, Dress Right Clothing Corporation, July 2011
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 68,500 68,500 68,500 Accounts receivable 2,000 2,000 2,000
Allowance for uncollectible accounts - (7) 500 500 500 Supplies 2,000 (1) 800 1,200 1,200 Prepaid rent 24,000 (2) 2,000 22,000 22,000 Inventory 38,000 38,000 38,000 Furniture and fixtures 12,000 12,000 12,000 Accumulated depr.- furniture & fixtures - (3) 200 200 200 Accounts payable 35,000 35,000 35,000 Note payable 40,000 40,000 40,000 Unearned rent revenue 1,000 (4) 250 750 750 Salaries payable - (5) 5,500 5,500 5,500 Interest payable - (6) 333 333 333 Common stock 60,000 60,000 60,000 Retained earnings 1,000 1,000 1,000 Sales revenue 38,500 38,500 38,500 Rent revenue - (4) 250 250 250 Cost of goods sold 22,000 22,000 22,000 Salaries expense 5,000 (5) 5,500 10,500 10,500 Supplies expense - (1) 800 800 800 Rent expense - (2) 2,000 2,000 2,000 Depreciation expense - (3) 200 200 200 Interest expense - (6) 333 333 333 Bad debt expense - (7) 500 500 500 Totals 174,500 174,500 9,583 9,583 181,033 181,033
Net income 2,417 2,417 Totals 38,750 38,750 144,700 144,700
Balance SheetUnadjusted Trial
Balance Adjusting Entries Adjusted Trial Balance Income Statement
2 - 33
Appendix 2B: Reversing Entries
Reversing entries remove the effects of some of the adjusting entries made at the end of the
previous reporting period for the sole purpose of simplifying journal entries made during the new period. Reversing entries are optional and are
used most often with accruals.
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Appendix 2C: Subsidiary Ledgers
Subsidiary ledgers contain a group of subsidiary accounts associated with particular general ledger control accounts. Subsidiary ledgers are commonly
used for accounts receivable, accounts payable, plant and equipment, and investments.
For example, there will be a subsidiary ledger for accounts receivable that keeps track of the increases
and decreases in the accounts receivable balance for each of the company’s customers purchasing
goods and services on credit.
After all of the postings are made from the appropriate journals, the balance in the accounts receivable control account should equal the sum of
the balances in the accounts receivable subsidiary ledger accounts.
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Appendix 2C: Special Journals
Special journals are used to capture the dual effect of repetitive types of transactions in
debit/credit form.
Special journals simplify the recording process in the following ways:
1. Journalizing the effects of a particular transaction is made more efficient through the use of specifically designed formats.
2. Individual transactions are not posted to the general ledger accounts but are accumulated in the special journals and a summary posting is made on a periodic basis.
3. The responsibility for recording journal entries for the repetitive types of transactions is placed on individuals who have specialized training in handling them.
2 - 36
Sales JournalSales journals record all credit sales. Every entry in the sales journal has the same effect on the accounts; the sales revenue account
is credited and the accounts receivable control account is debited.
Other columns capture
information needed for
updating the accounts
receivable subsidiary
ledger.
SALES JOURNAL Page 1
Date
Accounts Receivable Subsidiary
Account No. Customer Name
Sales Invoice Number
Cr. Sales Revenue
(400)Dr. Accounts Receivable
(110)
Aug. 5 801 Leland High School 10-221 1,500
9 812 Mr. John Smith 10-222 200
18 813 Greystone School 10-223 825
22 803 Ms. Barbara Jones 10-224 120
29 805 Hart Middle School 10-225 650
3,295
2011
2 - 37
Cash Receipts Journal
Cash receipts journals record all cash receipts, regardless of the source. Every
entry in the cash receipts journal produces a debit to the cash account with the credit to
various other accounts.CASH RECEIPTS JOURNAL Page 1
DateExplanation or Account Name
Dr. Cash (100)
Cr. Accounts
Receivable (110)
Cr. Sales
Revenue (400)
Cr. Other
Other Accounts
Aug. 7 Cash sale 500 500
11 Borrowed cash 10,000 10,000
Notes payable
(220)
17 Leland High School 750 750
20 Cash sale 300 300
25 Mr. John Smith 200 200
11,750 950 800 10,000
2011
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End of Chapter 2