Transcript hho9e_ch03_stud

Chapter 3
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Differentiate between accrual and cash-basis
accounting
Define and apply the accounting period
concept, revenue recognition and matching
principles, and time period concept
Explain why adjusting entries are needed
Journalize and post adjusting entries
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Explain the purpose of and prepare an
adjusted trial balance
Prepare the financial statements from the
adjusted trial balance
Understand the alternate treatment of
unearned revenues and prepaid expenses
(see Appendix 3A, located at
myaccountinglab.com)
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Differentiate between accrual and cash-basis
accounting
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Accrual Basis
Cash Basis
Revenues
recognized when
earned
Revenues
recognized when
cash received
Expenses
recognized when
incurred
Expenses
recorded when
cash paid
Not GAAP
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Accrual basis revenue transactions
Cash-basis revenue transactions
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Accrual basis
Cash-basis
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The Johnny Flowers Law Firm uses a client
database. Suppose Johnny Flowers paid $2,900
for a computer.
Requirements:
1. Describe how the business should account for
the $2,900 expenditure under
a. the cash basis.
b. the accrual basis.
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S3-2: COMPARING ACCRUAL AND CASH-BASIS
ACCOUNTING
2. State why the accrual basis is more realistic for
this situation.
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Define and apply the accounting period
concept, revenue, and matching principles
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Businesses prepare financial statements for
specific periods to evaluate performance
Basic accounting period = one year
Interim periods
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When to record revenue?
When it is earned
Not when cash is received, accrual method
The amount of revenue to recorded?
Value of item or service transferred to customer
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Measure all expenses incurred during the
period
Match the expenses against the revenues
earned during the same period
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Requires that accounting information be
reported at regular intervals
Accounts are updated at the end of each
accounting period
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On May 31, Smart Touch recorded
salary expense of $900 that is owed to
an employee at the end of the month.
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Explain why adjusting entries are needed
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Prepared at end of an accounting period
Update asset and liability accounts
Need to properly match revenues and expenses
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Never
involve
the cash
account
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Either
increase
revenue
or
increase an
expense
When
worded as
“accrued”,
journalize
the stated
amount
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Journalize and post adjusting entries
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Prepaid
expenses
Depreciation
Accrued
expenses
Accrued
revenues
Unearned
revenues
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Advance payments of expenses
Recorded as an asset
Adjusting entry records amount used as an
expense
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At May 31st, this amount is too high.
One month has been used.
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Plant assets
Long-lived tangible assets used in business
operations
Depreciation
Allocation of a plant asset’s cost to expense over its
useful life
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Contra asset
Holds sum of all depreciation recorded on a
plant asset
Book value
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Expenses incurred before payment is made
Opposite of a prepaid expense
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Revenue earned before cash is received
Results in a receivable
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Cash is collected before revenue is earned
Also called deferred revenue
BEFORE
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A select list of transactions for Anuradha’s Goals
follows:
Apr 1 Paid six months of rent, $4,800.
10 Received $1,200 from customer for six-month
service contract that began April 1.
15 Purchased computer for $1,000.
Requirement:
1. For each transaction, identify what type of adjusting
entry would be needed.
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A select list of transactions for Anuradha’s Goals
follows:
Apr 18 Purchased $300 of office supplies on account.
30 Work performed but not yet billed to customer,
$500.
30 Employees earned $600 in salary that will be paid
May 2.
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The following data at January 31, 2012 is given for
EBM, Inc.
a. Depreciation, $500
b. Prepaid rent expired, $600
c. Interest expense accrued, $300
d. Employee salaries owed for Monday through Thursday of
a five-day workweek; weekly payroll, $13,000
e. Unearned service revenue earned, $1,300
Requirement:
1. Journalize the adjusting entries needed on January 31,
2012.
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Journal
ACCOUNTS AND
POST.
DATE
EXPLANATIONS
REF. DEBIT CREDIT
2013
Adjusting Entries
Jan
31 Depreciation expense
a.
Accumulated depreciation
b.
31 Rent expense
Prepaid rent
c.
31 Interest expense
Interest payable
d.
31 Salary expense
Salary payable
e.
31 Unearned service revenue
Service revenue
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2. Suppose the adjustments made in Requirement 1
were not made. Compute the overall overstatement
or understatement of net income as a result of the
omission of these adjustments.
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To properly measure net income for the period
To update the balance sheet
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Category of Adjusting Entry
Debit
Credit
Prepaid expense
Depreciation
Accrued expense
Accrued revenue
Unearned revenue
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5
Explain the purpose of and prepare an adjusted
trial balance
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Prepared after adjusting entries are posted
Useful step in preparing financial statements
Often appears on a work sheet
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a) 300
$ 800
600
19,100
$ 2,000
200
600
2,500
7,400
14,800
b)1,000
c) 600
4,500
300
1,000
1,200
a) 300
b)1,000
c) 600
$1,900
$1,900
$27,500
______
$27,500
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Prepare the financial statements from the
adjusted trial balance
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The Balance Sheet is
prepared last.
A=L+E
Statement of Retained
Earnings is second
Income Statement is
prepared first.
Revenue - Expenses
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Refer to the data in Short Exercise 3-10.
Famous Cut Hair Stylists
Income Statement
Year Ended December 31, 2012
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Famous Cut Hair Stylists
Statement of Owner’s Equity
Year Ended December 31, 2012
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Compute Famous Cut’s total assets at December 31, 2012.
Famous Cut Hair Stylists
Balance Sheet
December 31, 2012
ASSETS
LIABILITIES
OWNER’ S EQUITY
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Prepaid Expenses (normally)
Alternative
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Initially debit and expense account
Adjust at end of period for unused amount
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Unearned Revenues (normally)
Alternative
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Initially credit a revenue account
Adjust at end of period for unearned amount
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Copyright
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otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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