3-1 copyright gayle m. richardson, cpa, professor. all rights reserved. chapter 3 measuring...
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3-3-11Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Chapter 3Chapter 3Measuring Business IncomeMeasuring Business Income
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3-3-22Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
LEARNING OBJECTIVESLEARNING OBJECTIVES
1.Define net income and its two major components, revenues and expenses.
2.Explain the difficulties of income measurement caused by:(a) the accounting period issue,(b) the continuity issue,(c) the matching issue.
3.Define accrual accounting and explain two broad ways of accomplishing it.
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3-3-33Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
4.State four principal situations that require adjusting entries.
5.Prepare typical adjusting entries.
6.Prepare financial statements from an adjusted trial balance.
LEARNING OBJECTIVES LEARNING OBJECTIVES (continued)(continued)
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3-3-44Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Profitability Measurement:Profitability Measurement:The Role of Business IncomeThe Role of Business Income
Objective 1 Define net income and its
two major components, revenues and expenses.
0
20
40
60
80
100
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
East
West
North
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3-3-55Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Profitability Measurement: The Profitability Measurement: The Role of Business IncomeRole of Business Income
Profitability and liquidity are the two major goals of a business.
To survive, a business must earn a profit.
Profit, as a word, may be ambiguous. Net income is the preferred term
because it can be defined more precisely from an accounting point of view.
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3-3-66Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Net IncomeNet Income Net income is the net
increase in owner’s equity that results from the operations of a company.
Net Income = Revenues - Expenses.
R > E, net profit. R < E, net loss.
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3-3-77Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
RevenuesRevenues Revenues are increases in OE
resulting from selling goods or providing services.
Revenue for a given period equals:Cash + Receivables from goods and services provided.
Liabilities are generally not affected by revenues.
Owner’s investments increase OE but are not revenues.
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3-3-88Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
ExpensesExpenses Expenses are decreases in OE resulting
from the costs of selling goods, rendering services, or performing other business activities.
Expenses are the costs of doing business. Not all cash payments are expenses. Prepaid expenses are recorded as assets.
As they expire, they become expenses. Not all decreases in OE arise from
expenses. Withdrawals are not expenses.
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3-3-99Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
DiscussionDiscussion
Q. Why does the accountant use the term net income instead of profit?
A. Profit has many meanings. Accountants use the term net income to define the net increase in owner’s equity produced by business operations. Net income equals revenues minus expenses when revenues exceed expenses.
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3-3-1010Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Accounting Period IssueThe Accounting Period Issue
Objective 2a Explain the difficulties of
income measurement caused by the accounting period issue.
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3-3-1111Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Accounting Period IssueThe Accounting Period Issue The difficulty of assigning revenues and
expenses to a short period of time. Not all transactions can easily be assigned to a
time period. The accountant makes an assumption about
periodicity. The net income for any period of time less
than the life of the business, although tentative, is still a useful estimate of the net income for the period.
Time periods are usually of equal length for comparability.
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3-3-1212Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Measurement of The Measurement of Business Income Business Income
Financial statements may be prepared for any time period, usually a calendar year.
Accounting periods of less than one year are called interim periods.
The fiscal year is the twelve-month accounting period used by a company.
Can be the same as the calendar year. Can be different from the calendar year as
the needs of the business dictate.
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3-3-1313Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Fiscal Year ExamplesFiscal Year Examples
Year ended June 30, 2001
(The year starts on July 1, 2001 and concludes on June 30, 2002.)
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3-3-1414Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
DiscussionDiscussion
Q. Why does the need for an accounting period cause problems?
A. Any measurement of net income over a short period of time is necessarily tentative, and not all transactions can be easily assigned to specific periods. It is necessary to recognize that the life of the business is a useful approximation of the net income for the period.
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3-3-1515Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Continuity IssueThe Continuity Issue
Objective 2bExplain the difficulties ofincome measurement
caused bythe continuity issue.
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3-3-1616Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Continuity IssueThe Continuity Issue The measurement of business income
requires that certain expenses and revenues be allocated over several accounting periods.
The continuity issue relates to the estimated number of accounting periods in the business entity’s life.
The accountant assumes that an entity is a going concern, that the entity will continue indefinitely.
If a firm is not a going concern, financial statements may be prepared on the basis of the liquidation value of the assets -- that is, what they will bring in cash.
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3-3-1717Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Matching IssueThe Matching Issue Objective 2c Explain the difficulties
of income measurement caused by the matching issue.
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3-3-1818Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Matching IssueThe Matching Issue The cash basis of accounting recognizes
revenues when received in cash and expenses when paid in cash.
Cash basis accounting has matching problems.
To adequately measure net income, revenues and expenses must be assigned to the appropriate accounting period.
The matching rule states that: Revenues must be assigned to the accounting
period in which the goods are sold or services performed.
Expenses must be assigned to the accounting period in which they are used to produce revenue.
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3-3-1919Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Matching Rule/PrincipleThe Matching Rule/Principle
Revenues arerecorded in the books when they are earned.
Expenses are recorded in the books when they are incurred. (happen)
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3-3-2020Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Definition of “incur”Definition of “incur” To occur as a result or to bring down
upon oneself.
Example: A business incurs rent expense as it occupies a building. This expense happens every day as the business occupies the building.
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3-3-2121Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Accrual AccountingAccrual Accounting
Objective 3Define accrual
accounting and explain two broad ways of accomplishing it.
Pronounced ah-crew-ahl
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3-3-2222Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Accrual AccountingAccrual Accounting Accrual accounting “attempts to
record the financial effects on an enterprise of transactions and other events and circumstances . . . in the periods in which those transactions, events, and circumstances occur rather than only in the periods in which cash is received or paid by the enterprise.”
Accrual accounting is an application of the matching rule.
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3-3-2323Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Implementation of Implementation of Accrual AccountingAccrual Accounting
Accrual accounting is done in two ways. 1. By recording revenues when
earned and expenses when incurred. When a sale is made on credit, revenue is
recorded before the cash is received in the Accounts Receivable account.
When an expense is incurred on credit, an expense is recorded before the cash is paid in the Accounts Payable account.
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3-3-2424Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Those transactions that span the cutoff period must be allocated to the proper accounting period.
A prepayment of 6 months’ office rent must be adjusted on a monthly basis if accurate monthly financial statements are to be prepared.
2. By adjusting the accounts.
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3-3-2525Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
DiscussionDiscussion
Q. In what two ways is accrual accounting accomplished?
A. Accrual accounting is accomplished by (1) recording revenues when earned and expenses when incurred, and (2) making end-of-period adjustments to revenue and expense accounts.
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3-3-2626Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Adjustment ProcessThe Adjustment Process Objective 4 State four principal
situations that require adjusting entries.
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3-3-2727Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Adjustment ProcessThe Adjustment Process Adjusting entries are used to apply
accrual accounting to transactions that span more than one accounting period.
Adjusting entries involve at least one balance sheet account and at least one income statement account.
Adjusting entries never involve the Cash account (Note: this rule applies to this textbook.)
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3-3-2828Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Four Types of Adjusting EntriesFour Types of Adjusting Entries Costs have been recorded that must be
allocated between two or more accounting periods.
Expenses have been incurred but are not yet recorded.
Revenues have been recorded that must be allocated between two or more accounting periods.
Revenues have been earned but not yet recorded.
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3-3-2929Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
DeferralsDeferrals
The recognition of an expense already paid or
A revenue received in advance
A deferral is the postponement of:
CASH HAS BEEN RECEIVED OR PAID AHEAD OF TIME!!!!!
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3-3-3030Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Deferral means to set asideDeferral means to set aside
We are setting aside the
recognition of revenue/expense
.
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3-3-3131Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
AccrualsAccruals An accrual is the recognition
of a revenue or expense that has arisen but has not yet been recorded.
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3-3-3232Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Accrual means to gatherAccrual means to gather
We can tell an accrual entry
because an account ending in “ble” is
debited or credited.Receivable/Payable
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3-3-3333Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
DiscussionDiscussion
Q. What do plant and equipment, office supplies, and prepaid insurance have in common?
A. They are all assets that must be allocated to expenses over time; this means they all require adjusting entries at the end of the accounting period.
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3-3-3434Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Allocating Recorded Costs Allocating Recorded Costs Between Two or More Accounting Between Two or More Accounting
PeriodsPeriods
Objective 5Prepare typical adjusting
entries.
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3-3-3535Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
3-1
Asset Account Expense Account
Adjusting
Entry
Credit
Adjusting
Entry
Debit
Amount equals cost of goods or services used up or expired
3-1
Asset Account Expense Account
Adjusting
Entry
Credit
Adjusting
Entry
Debit
Amount equals cost of goods or services used up or expired
Adjustment for Prepaid ExpensesAdjustment for Prepaid Expenses
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3-3-3636Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 2: Short Exercise 2: AllocatingAllocating Deferred Deferred ExpensesExpenses
Prepaid Expenses: Insurance ExpensePrepaid Expenses: Insurance ExpenseTurn to your text, page 159
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3-3-3737Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 2: Short Exercise 2: AllocatingAllocating Deferred Deferred ExpensesExpenses
Prepaid Expenses: Insurance ExpensePrepaid Expenses: Insurance Expense
Prepaid Insurance•Transaction
•Analysis
•Rules
•Entry
Beg Bal 230Additions 570Balance 800
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3-3-3838Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Balance is $800The Balance is $800
But this asset has to be adjusted to a balance
of $350, because this is the amount of the
resource that benefits a future period.
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3-3-3939Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 2: Short Exercise 2: AllocatingAllocating Deferred Deferred ExpensesExpenses
Prepaid Expenses: Insurance ExpensePrepaid Expenses: Insurance Expense Dr. Cr.
Dec. 31 Insurance Expense 450 Prepaid Insurance 450
Insurance Expense
Dec. 31 450Dec. 31 450
Prepaid Insurance•Transaction
•Analysis
•Rules
•Entry
Bal Before Adj 800 Dec. 31 450Dec. 31 450
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3-3-4040Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 2: Short Exercise 2: AllocatingAllocating Deferred Deferred ExpensesExpenses
Prepaid Expenses: Insurance ExpensePrepaid Expenses: Insurance Expense Dr. Cr.
Dec. 31 Insurance Expense 450 Prepaid Insurance 450
Insurance Expense
Dec. 31 450Dec. 31 450
Prepaid Insurance•Transaction
•Analysis
•Rules
•Entry
Bal Before Adj 800New Balance 350
Dec. 31 450Dec. 31 450
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3-3-4141Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part b of Problem 2Part b of Problem 2 Now for the insurance part of Problem 2…………….Turn to page 164 in your text --Prob 2,
part b
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3-3-4242Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part b of Problem 2Part b of Problem 2
There are three policies:
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3-3-4343Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part b of Problem 2Part b of Problem 2
There are three policies: The policy for $7,160 in the beginning balance has expired.
It is now November 30th.
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3-3-4444Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
First Policy, Problem 2 part bFirst Policy, Problem 2 part b
Policy total $7,160
Amount expired $7,160
Amount unexpired 0
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3-3-4545Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part b of Problem 2Part b of Problem 2
Second policy: The policy was purchased
on July 1 and will expire on June 30th.
Remember: it is now November 30th.So…..5 months have expired! July, August, September,
October and November. Use your fingers if you have to!
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3-3-4646Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
First and Second Policies, First and Second Policies, Problem 2 part bProblem 2 part b
Policy total
$7,160
Amount expired
$7,160
Amount unexpired
0$8,400 $3,500 $4,900
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3-3-4747Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
First and Second Policies, First and Second Policies, Problem 2 part bProblem 2 part b
Policy total
$7,160
Amount expired
$7,160
Amount unexpired
0$8,400$14,544
$3,500 $4,900
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3-3-4848Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part b of Problem 2Part b of Problem 2 Third policy: The policy purchased October 1 is good for 36 months. Two months have passed (October and November)
So 2/36 has expired
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3-3-4949Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
All of the Insurance, Problem 2 All of the Insurance, Problem 2 part bpart b
Policy total
$7,160
Amount expired
$ 7,160
Amount unexpired
0 8,400 3,500 $4,900
14,544 808 13,736
14544/36 months x 2 mos.
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3-3-5050Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
All of the Insurance, Problem 2 All of the Insurance, Problem 2 part bpart b
Policy total
$7,160
Amount expired
$ 7,160
Amount unexpired
0 8,400 3,500 $4,900
14,544 808 13,736
$30,104 $11,468 $18,636
Balance in the account before adjustment
Expense Amount Prepaid
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3-3-5151Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Problem 2, Part b Problem 2, Part b Adjusting Journal Entry Adjusting Journal Entry (AJE)(AJE)
Dr. Cr. Nov 30 Insurance Expense 11,468 Prepaid Insurance 11,468
Insurance Expense
June 30 11,468June 30 11,468
Prepaid Insurance•Transaction
•Analysis
•Rules
•Entry
Bal. B/4 Adjust 30,104New Balance 18,636
Nov. 30 AJE Nov. 30 AJE 11,46811,468
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3-3-5252Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 3Short Exercise 3 Allocating Deferred Allocating Deferred ExpensesExpenses
Prepaid Expenses: Supplies ExpensePrepaid Expenses: Supplies Expense
Turn back to SE 3 on page 159
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3-3-5353Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 3Short Exercise 3 Allocating Deferred Allocating Deferred ExpensesExpenses
Prepaid Expenses: Supplies ExpensePrepaid Expenses: Supplies Expense
Supplies
Beg Bal 190Purchases 490Balance 680
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3-3-5454Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Balance is $680The Balance is $680
But this asset has to be adjusted to a balance
of $220, because this is the amount of supplies we actually have. The rest were used, so they
are an expense.
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3-3-5555Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 3Short Exercise 3 Allocating Deferred Allocating Deferred ExpensesExpenses
Prepaid Expenses: Supplies ExpensePrepaid Expenses: Supplies Expense Dr. Cr.
Dec. 31 Supplies Expense 460 Supplies 460
Supplies
Dec. 31 AJE 460Dec. 31 AJE 460
Supplies Expense
•Transaction
•Analysis
•Rules
•Entry
Bal.B/4 Adj 680Ending Bal 220
Dec. 31 AJE 460Dec. 31 AJE 460
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3-3-5656Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part a. of Problem 2Part a. of Problem 2Prepaid Expenses: Supplies ExpensePrepaid Expenses: Supplies Expense
Page 164 in text!
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3-3-5757Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part a. of Problem 2Part a. of Problem 2Prepaid Expenses: Supplies ExpensePrepaid Expenses: Supplies Expense
Supplies
Beg Bal 4,348Purchases 9,052Balance 13,400
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3-3-5858Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part a. of Problem 2 Part a. of Problem 2
The Balance is $13,400The Balance is $13,400
But this asset has to be adjusted to a balance of $2,794 because this
is the amount of supplies we actually have. The rest were used, so they are an
expense.
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3-3-5959Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Computing the adjustmentComputing the adjustment
The unadjusted balance of $13,400 minus the actual
amount on hand of $2,794 equals
$10,606.
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3-3-6060Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part a. of Problem 2 Part a. of Problem 2 Dr. Cr.
June 30 Supplies Expense 10,606 Supplies 10,606
Supplies
Nov 30 AJE 10,606Nov 30 AJE 10,606
Supplies Expense
•Transaction
•Analysis
•Rules
•Entry
BB. 4,348Purchases 9,052
Bal B/4Adj 13,400
Nov 30 AJE 10,606Nov 30 AJE 10,606
Adjusted Bal 2,794
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3-3-6161Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Depreciation of Property, Plant & EquipmentDepreciation of Property, Plant & Equipment
Depreciation is the matching of the cost of an asset to the period in which it was used to generate revenue.
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3-3-6262Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 4Short Exercise 4Depreciation of PP&E:Office EquipmentDepreciation of PP&E:Office Equipment
Dr. Cr.Mar. 31 Depreciation Expense, Off Equipment 50 Accumulated Depreciation, Off Equipment 50
Accumulated Depn, Office Equipment
Mar. 31 50Mar. 31 50
Depreciation Expense, Offi ce Equipment
•Transaction
•Analysis
•Rules
•Entry Mar. 31 50Mar. 31 50
Page 159 in the text!
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3-3-6363Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Mr. Ivey’s trick to remember the Mr. Ivey’s trick to remember the entryentry
Depreciation Expense
Accumulated Deprecation
Just remember DEAD
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3-3-6464Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Adjustment for DepreciationAdjustment for Depreciation3-2
Accumulated Depreciation Depreciation Expense
Adjusting
Entry
Credit
Adjusting
Entry
Debit
Amount equals cost of asset allocated
to accounting period
CONTRA-ASSET ACCOUNT EXPENSE ACCOUNT
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3-3-6565Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
This is the third month of This is the third month of depreciation, so we did this two depreciation, so we did this two times before….for the months of times before….for the months of
January and February!January and February! The beginning balance in Accumulated
Deprecation was
$50 X 2mos.=$100
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3-3-6666Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 4Short Exercise 4Depreciation of PP&E:Office EquipmentDepreciation of PP&E:Office Equipment
Dr. Cr.Mar. 31 Depreciation Expense, Off Equipment 50 Accumulated Depreciation, Off Equipment 50
Accumulated Depn, Office Equipment
Prev. BalPrev. Bal 100 100Mar. 31 Mar. 31 5050New Bal 150New Bal 150
Office Equipment
Bal 950
Contra-Asset Acct
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3-3-6767Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise 4Short Exercise 4
Balance Sheet PresentationBalance Sheet Presentation
Cash $ 100Accounts Receivable 100
Office Equipment $950 Less: Accumulated Depreciation 150
800Total Assets $1,000
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3-3-6868Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Short Exercise #5 Recognizing Unrecorded Recognizing Unrecorded ExpensesExpenses
Accrued Expenses: Accrued WagesAccrued Expenses: Accrued Wages
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3-3-6969Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Short Exercise #5 Recognizing Unrecorded Recognizing Unrecorded ExpensesExpenses
Accrued Expenses: Accrued WagesAccrued Expenses: Accrued Wages
Step 1: Compute the daily wage rate. Rules: All work weeks begin on Monday
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3-3-7070Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Recognizing Unrecorded ExpensesShort Exercise #5 Recognizing Unrecorded ExpensesAccrued Expenses: Accrued WagesAccrued Expenses: Accrued Wages
Step 1: Compute the daily wage rate. Wages for six days are $690$690 divided by six is
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3-3-7171Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Recognizing Unrecorded ExpensesShort Exercise #5 Recognizing Unrecorded ExpensesAccrued Expenses: Accrued WagesAccrued Expenses: Accrued Wages
Step 1: Compute the daily wage rate. Wages for six days are $690$690 divided by six is $115
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3-3-7272Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Recognizing Unrecorded ExpensesShort Exercise #5 Recognizing Unrecorded ExpensesAccrued Expenses: Accrued WagesAccrued Expenses: Accrued Wages
Step 2: Count the days in the year that has ended. If July 1 is Tuesday, the end of the year was Monday, June 30
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3-3-7373Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Recognizing Unrecorded ExpensesShort Exercise #5 Recognizing Unrecorded ExpensesAccrued Expenses: Accrued WagesAccrued Expenses: Accrued Wages
Step 2: Count the days in the year that has ended. If July 1 is Tuesday, the end of the year was Monday, June 30
One day was in June
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3-3-7474Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Recognizing Unrecorded ExpensesShort Exercise #5 Recognizing Unrecorded ExpensesAccrued Expenses: Accrued WagesAccrued Expenses: Accrued Wages
Step 2: Count the days in the year that has ended. If July 1 is Tuesday, the end of the year was Monday, June 30One day was in JuneThe daily wage rate was $115
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3-3-7575Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Recognizing Unrecorded ExpensesShort Exercise #5 Recognizing Unrecorded ExpensesAccrued Expenses: Accrued WagesAccrued Expenses: Accrued Wages
Step 3: Multiply the days in the year that has ended by the daily wage rate and record the wages payable and wages expense. 1 X115 = $115
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3-3-7676Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Short Exercise #5 Short Exercise #5 Recognizing Unrecorded Recognizing Unrecorded ExpensesExpenses
Accrued Expenses: Accrued WagesAccrued Expenses: Accrued WagesDr. Cr.
June 30 Wages Expense 115 Wages Payable 115
Wages Payable
June 30 115June 30 115
Wages ExpenseJune 30 115June 30 115
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3-3-7777Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Now look at part g of problem 2 Now look at part g of problem 2 in your text.in your text.
Step 1: Compute the daily wage rate.
Step 2: Count the days in the year that has ended.
Step 3: Multiply the days in the year that has ended by the daily wage rate and record the wages payable and wages expense.
Step 4: Make the entry.
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3-3-7878Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Now look at part g of problem 2 Now look at part g of problem 2 in your text.in your text.
Step 1: 24,600/6 =4,100 Step 2: Count the days in the year
that has ended = 4 days Step 3: 4 days times $4,100 =
16,400 Step 4: Salaries expense 16,400
Salaries payable 16,400
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3-3-7979Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part f of Problem 2: Part f of Problem 2: Recognizing Unrecorded Recognizing Unrecorded (Accrued) Expenses(Accrued) Expenses
Accrued Expenses: Interest ExpenseAccrued Expenses: Interest Expense
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3-3-8080Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part a of Problem 2: Part a of Problem 2: Recognizing Unrecorded Recognizing Unrecorded (Accrued) Expenses(Accrued) Expenses
Accrued Expenses: Interest ExpenseAccrued Expenses: Interest ExpenseDr. Cr.
Nov 30 Interest Expense 30,000 Interest Payable 30,000
Interest Payable
Nov 30 AJE 30,000Nov 30 AJE 30,000
Interest Expense
•Transaction
•Analysis
•Rules
•EntryNov 30 AJE 30,000Nov 30 AJE 30,000
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3-3-8181Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
3-5
Liability Account Expense Account
Adjusting
Entry
Credit
Adjusting
Entry
Debit
Amount equals cost of expense incurred
3-5
Liability Account Expense Account
Adjusting
Entry
Credit
Adjusting
Entry
Debit
Amount equals cost of expense incurred
Adjustment for Unrecorded (Accrued) ExpensesAdjustment for Unrecorded (Accrued) Expenses
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3-3-8282Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part e of Problem 2: APart e of Problem 2: Allocating Deferred llocating Deferred RevenuesRevenues
Deferred Revenues: Unearned FeesDeferred Revenues: Unearned Fees
When did we collect the $$$?
How much do we earn each month from this contract?
How much time has now passed?
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3-3-8383Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Allocating Deferred RevenuesAllocating Deferred RevenuesDeferred Revenues: Unearned FeesDeferred Revenues: Unearned Fees
Dr. Cr.Nov 30 Unearned Revenue 8,400 Fees Earned 8,400
Unearned Revenue
Sept. 1 33,600
Fees Earned
•Transaction
•Analysis
•Rules
•Entry
Nov. 30 AJE 8,400Nov. 30 AJE 8,400
Nov. 30 AJE 8,400Nov. 30 AJE 8,400
Nov 30 Adj. Bal 25,200
33,600/12 months times 3 months
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3-3-8484Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
3-3
Liability Account Revenue Account
Adjusting
Entry
Debit
Adjusting
Entry
Credit
Amount equals price of services performed
or goods delivered
3-3
Liability Account Revenue Account
Adjusting
Entry
Debit
Adjusting
Entry
Credit
Amount equals price of services performed
or goods delivered
Adjustment for Unearned (Deferred) RevenuesAdjustment for Unearned (Deferred) Revenues
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3-3-8585Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part e of problem 2: Part e of problem 2: Recognizing Unrecorded Recognizing Unrecorded (Accrued) Revenues(Accrued) Revenues
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3-3-8686Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Part h of problem 2: Part h of problem 2: Recognizing Unrecorded Recognizing Unrecorded (Accrued) Revenues(Accrued) Revenues
Dr. Cr.June 30 Fees Receivable 8,000 Service Revenue 8,000
Fees Receivable
Nov. 30 AJE 8,000Nov. 30 AJE 8,000
Service Revenue
Nov. 30 AJE 8,000Nov. 30 AJE 8,000
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3-3-8787Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Adjustment for Unrecorded (Accrued) RevenuesAdjustment for Unrecorded (Accrued) Revenues
3-4
ASSET ACCOUNT
Receivable
REVENUE ACCOUNT
Revenue
Adjusting
Entry
Debit
Adjusting
Entry
Credit
Amount equals price of services performed
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3-3-8888Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
DiscussionDiscussion
Q. Where does unearned revenue appear on the balance sheet?
A. Unearned revenue appears as a liability on the balance sheet.
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3-3-8989Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Using the Adjusted Trial Using the Adjusted Trial Balance to Prepare Financial Balance to Prepare Financial
StatementsStatements Objective 6
Prepare financial statements from an adjusted trial balance.
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3-3-9090Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The Adjusted Trial Balance The Adjusted Trial Balance (ATB)(ATB)
The ATB is prepared after adjusting entries have been recorded and posted.
The ATB is a listing of all accounts and their balances.
The ATB should have equal debits and credits.
Financial statements are prepared from the ATB by copying the appropriate accounts to the appropriate financial statement.
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3-3-9191Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
DiscussionDiscussion
Q. Why is the income statement the first statement prepared from the adjusted trial balance? A. The income statement is prepared first
because the net income figure is needed to complete the Statement of Owner’s Equity or Retained Earnings Statement in the case of a corporation. These are needed to prepare the Balance Sheet.
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3-3-9292Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
Need More Review?Need More Review?
To Better Understand How to Prepare the Financial Statements…View the
PowerPoint for Chapter 1 on Problem Solving.
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3-3-9393Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
1. Define net income and its two major components, revenues and expenses.
2. Explain the difficulties of income measurement caused by:
(a) the accounting period issue,
(b) the continuity issue,
(c) the matching issue.
3. Define accrual accounting and explain two broad ways of accomplishing it.
OK, LET’S REVIEW . . .
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3-3-9494Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
4. State four principal situations that require adjusting entries.
5. Prepare typical adjusting entries.
6. Prepare financial statements from an adjusted trial balance.
AND FINALLY . . .
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3-3-9595Copyright Gayle M. Richardson, CPA, Professor. All rights reserved.
The End
Click on the TaeBo Baby!