Transcript Essentials of Managerial Finance
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
Chapter 3 The Adjusting Process
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Accrual Accounting Versus Cash-Basis Accounting
Accrual Basis Cash Basis
Revenues recognized when earned Revenues recognized when cash received Expenses recognized when incurred Expenses recorded when cash paid
Not GAAP
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accrual vs. Cash-Basis: Revenue
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accrual vs. Cash-Basis: Revenue
Accrual basis revenue transactions Cash-basis revenue transactions Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accrual vs. Cash-Basis: Expenses
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accrual vs. Cash-Basis Accounting
Accrual basis Cash-basis Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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S3-2: COMPARING ACCRUAL AND CASH-BASIS ACCOUNTING
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.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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S3-2: COMPARING ACCRUAL AND CASH-BASIS ACCOUNTING
2. State why the accrual basis is more realistic for this situation.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accounting Period Concept
• Businesses prepare financial statements for specific periods to evaluate performance • Basic accounting period = one year • Interim periods Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Revenue Recognition Principle
• When to record revenue?
– When it is
earned
• The amount of revenue to recorded?
– Value of item or service transferred to customer Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Recording Revenue: The Revenue Recognition Principle
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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The Matching Principle
• Measure all expenses incurred during the period • Match the expenses against the revenues earned during the same period Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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The Time-Period Concept
• Requires that accounting information be reported at regular intervals • Accounts are updated at the end of each accounting period Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Time-Period Concept
On May 31, Smart Touch recorded salary expense of $900 that is owed to an employee at the end of the month. Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Adjusting Entries
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Adjusting Entries
• Prepared at end of an accounting period • Assigns: – Revenues to the period when earned – Expenses to the period when incurred • Update asset and liability accounts • Need to properly match revenues and expenses to measure: – Net Income – Assets and Liabilities
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Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
Adjusting Entry Rules Never involve the cash account Either increase revenue or increase an expense When worded as “accrued”, journalize the stated amount
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Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
Types of Adjusting Entries Prepaid expenses Depreciation Accrued expenses Accrued revenues Unearned revenues
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Prepaid Expenses
• Advance payments of expenses • Recorded as an asset • Adjusting entry records amount used as an expense Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Prepaid Expense: Rent
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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• Plant assets
Depreciation
– Long-lived tangible assets used in business operations • Depreciation – Allocation of a plant asset’s cost to expense over its useful life Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Depreciation Entry
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accumulated Depreciation
• Contra asset • Holds sum of all depreciation recorded on a plant asset • Book value Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Depreciation Posting
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accrued Expenses
• Expenses incurred before payment is made • Opposite of a prepaid expense Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accrued Expense Entries
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Accrued Revenues
• Revenue earned before cash is received • Results in a receivable Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Unearned Revenue
• Cash is collected before revenue is earned • Also called deferred revenue BEFORE Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Unearned Revenue Entries
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Summary of Adjusting Entries
• To properly measure net income for the period • To update the balance sheet Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Summary of Adjusting Entries
Category of Adjusting Entry
Prepaid expense Depreciation Accrued expense Accrued revenue Unearned revenue
Debit
Expense Expense Expense Asset Liability
Credit
Asset Contra asset Liability Revenue Revenue Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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S3-5: IDENTIFYING TYPES OF ADJUSTING ENTRIES
• A select list of transactions for Anuradha’s Goals follows: Apr 1 Paid six months of rent, $4,800.
10Received $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.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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S3-5: IDENTIFYING TYPES OF ADJUSTING ENTRIES
• 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.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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E3-22: JOURNALIZING ADJUSTING ENTRIES AND ANALYZING THEIR EFFECT ON THE INCOME STATEMENT
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.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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E3-22: JOURNALIZING ADJUSTING ENTRIES AND ANALYZING THEIR EFFECT ON THE INCOME STATEMENT Journal DATE 2013 Jan ACCOUNTS AND EXPLANATIONS
Adjusting Entries
31 Depreciation expense Accumulated depreciation POST.
REF. DEBIT CREDIT 31 Rent expense Prepaid rent 31 Interest expense Interest payable 31 Salary expense Salary payable 31 Unearned service revenue Service revenue
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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E3-22: JOURNALIZING ADJUSTING ENTRIES AND ANALYZING THEIR EFFECT ON THE INCOME STATEMENT
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.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Adjusted Trial Balance
• Prepared after adjusting entries are posted • Useful step in preparing financial statements • Often appears on a work sheet Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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S3-10: PREPARING AN ADJUSTED TRIAL BALANCE
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Income Statement
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Statement of Retained Earnings
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Balance Sheet
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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E3-25: PREPARING THE FINANCIAL STATEMENTS
Refer to the adjusted trial balance in Exercise 3-21 for the month ended April 30, 2012.
Requirements:
1. Prepare the income statement.
2. Prepare the statement of retained earnings.
3. Prepare the balance sheet.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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E3-21: ADJUSTED TRIAL BALANCE
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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E3-25: PREPARING THE FINANCIAL STATEMENTS
Jobs-4-U Employment Service, Inc.
Income Statement Month Ended April 30, 2012 Revenue: Service revenue Expenses: Salary expense $ 3,700 Rent expense Depreciation expense Supplies expense Total expenses Net income 1,000 1,000 500 Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson $ 10,600 6,200 $ 4,400
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E3-25: PREPARING THE FINANCIAL STATEMENTS
Jobs-4-U Employment Service, Inc.
Statement of Retained Earnings Month Ended April 30, 2012 Retained earnings, March 31, 2012 Net income Dividends Retained earnings, April 30, 2012 $ 10,300 4,400 17,900 4,800 $ 9,900 Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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E3-25: PREPARING THE FINANCIAL STATEMENTS
Jobs-4-U Employment Service, Inc. Balance Sheet April 30, 2012
Assets Liabilities
Cash Accounts receivable $ 900 5,600 Salary payable Supplies 500
Stockholders’ Equity
$ 1,200 Equipment $32,500 Accu. Depr. (15,400) 17,100 Common stock Retained earnings Total stockholders’ equity 13,000 9,900 22,900 Total assets $24,100 Total liabilities and stockholders’ equity $24,100 Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Alternative Treatment of Prepaid Expenses
• Prepaid Expenses (normally) – Advance payments of expenses – Debit an asset account – Adjust at end of period • Alternative – Debit an expense account – Adjust at end of period
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Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
Prepaid Expense
Initially debit and expense account Adjust at end of period for unused amount Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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Unearned (Deferred) Revenues
• Unearned Revenues (normally) – Advance receipt of revenues–creates liability – Credit a liability account – Adjust at end of period • Alternative – Credit a revenue account – Adjust at end of period
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Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
Unearned (Deferred) Revenues
• Initially credit a revenue account Adjust at end of period for unearned amount Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3 rd ed. Pearson
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