adjusting accounts and preparing financial statements
DESCRIPTION
Chapter 3. ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENTS. The Accounting Period. C 1. Accrual Basis versus Cash Basis. C 2. Cash Basis Revenues are recognized when cash is received and expenses are recorded when cash is paid. Accrual Basis - PowerPoint PPT PresentationTRANSCRIPT
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
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 3
ADJUSTING ACCOUNTS AND PREPARING FINANCIAL
STATEMENTS
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THE ACCOUNTING PERIODC 1
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Accounting
ACCRUAL BASIS VERSUS CASH BASIS
Accrual Basis
Revenues are recognized when earned and expenses are recognized when incurred.
Cash Basis
Revenues are recognized when cash is received and expenses are recorded when cash is paid.
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Cash Basis
Revenues are recognized when cash is received and expenses are recorded when cash is paid.
Accounting
ACCRUAL BASIS VERSUS CASH BASIS
Non-GAAPNon-GAAPNon-GAAPNon-GAAP
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Accrual Basis
Revenues are recognized when earned and expenses are recognized when incurred.
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ACCRUAL BASIS VERSUS CASH BASIS
On the cash basis, the entire $2,400 would be recognized as insurance expense in 2011. No insurance expense from this policy would be recognized in 2012 or
2013, periods covered by the policy.
On the cash basis, the entire $2,400 would be recognized as insurance expense in 2011. No insurance expense from this policy would be recognized in 2012 or
2013, periods covered by the policy.
Jan Feb Mar Apr
-$ -$ -$ -$ May Jun Jul Aug
-$ -$ -$ -$ Sep Oct Nov Dec
-$ -$ -$ 2,400$
Insurance Expense 2009
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ACCRUAL BASIS VERSUS CASH BASIS
Jan Feb Mar Apr
-$ -$ -$ -$ May Jun Jul Aug
-$ -$ -$ -$ Sep Oct Nov Dec
-$ -$ -$ 100$
Jan Feb Mar Apr
100$ 100$ 100$ 100$ May Jun Jul Aug
100$ 100$ 100$ 100$ Sep Oct Nov Dec
100$ 100$ 100$ 100$
Jan Feb Mar Apr
100$ 100$ 100$ 100$ May Jun Jul Aug
100$ 100$ 100$ 100$ Sep Oct Nov Dec
100$ 100$ 100$ -$
Insurance Expense 2009
Insurance Expense 2010
Insurance Expense 2011
On the accrual basis, $100 of insurance
expense is recognized in 2011, $1,200 in 2012,
and $1,100 in 2013. The expense is matched with the periods benefited by the insurance coverage.
On the accrual basis, $100 of insurance
expense is recognized in 2011, $1,200 in 2012,
and $1,100 in 2013. The expense is matched with the periods benefited by the insurance coverage.
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We have delivered theproduct to our customer,
so I think we should recordthe revenue earned.
We have delivered theproduct to our customer,
so I think we should recordthe revenue earned.
RECOGNIZING REVENUES & EXPENSES
Revenue Recognition Principle
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RECOGNIZING REVENUES & EXPENSES
Revenue Recognition PrincipleMatching Principle
Summaryof Expenses
Rent
Gasoline
Advertising
Salaries
Utilities
and . . . .
$1,000
500
2,000
3,000
450
. . . .
Now that we haverecognized the revenue,let’s see what expenses
we incurred togenerate that revenue.
Now that we haverecognized the revenue,let’s see what expenses
we incurred togenerate that revenue.
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An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.
ADJUSTING ACCOUNTS
Prepaid (Deferred) expenses*
Prepaid (Deferred) expenses*
Unearned (Deferred) revenues
Unearned (Deferred) revenues
AccruedexpenseAccruedexpense
AccruedrevenuesAccruedrevenues
Framework for Adjustments
*including depreciation
Paid (or received) cash before expense (or revenue) recognizedPaid (or received) cash before
expense (or revenue) recognizedPaid (or received) cash after
expense (or revenue) recognizedPaid (or received) cash after
expense (or revenue) recognized
AdjustmentsAdjustments
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Here is the checkfor my 24-monthinsurance policy.
Here is the checkfor my 24-monthinsurance policy.
PREPAID (DEFERRED) EXPENSES
Resources paid for prior to
receiving the actual benefits.
Resources paid for prior to
receiving the actual benefits.
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PREPAID INSURANCE (a) On 12/1/11, FastForward paid $2,400 for insurance for
2-years (24-months, December 2011 through November 2013). FastForward recorded the expenditure as Prepaid
Insurance on 12/31/11.
What adjustment is required?
(a) On 12/1/11, FastForward paid $2,400 for insurance for 2-years (24-months, December 2011 through November 2013). FastForward recorded the expenditure as Prepaid
Insurance on 12/31/11.
What adjustment is required?
Dec. 31 Insurance Expense 100 Prepaid Insurance 100
To record first month's expired insurance
Dec. 1 2,400 Dec. 31 100Bal. 2,300
Prepaid Insurance 637Dec. 31 100
Insurance Expense 128
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SUPPLIES (b) During 2011, FastForward purchased $9,720 of supplies.
FastForward recorded the expenditures in the asset account, “Supplies.” On December 31, 2011, a count of the supplies indicated $8,670 on hand, so $1,050 of supplies were used
during December.
What adjustment is required?
Dec. 31 Supplies Expense 1,050 Supplies 1,050
To record supplies used during 2011
Bought 9,720 Dec. 31 1,050Bal. 8,670
Supplies 126Dec. 31 1,050
Supplies Expense 652
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OTHER PREPAID EXPENSES
1. Other prepaid expenses, such as Prepaid Rent, are accounted for exactly as Insurance and Supplies.
2. We should note that some prepaid expenses are both paid for and fully used up within a single period.
3. For example, a company may pay monthly rent on the first day of each month. This payment creates a prepaid expense on the first day of the month that fully expires by the end of the month.
4. In these special cases, we can record the cash paid with a debit to the expense account instead of an asset account.
1. Other prepaid expenses, such as Prepaid Rent, are accounted for exactly as Insurance and Supplies.
2. We should note that some prepaid expenses are both paid for and fully used up within a single period.
3. For example, a company may pay monthly rent on the first day of each month. This payment creates a prepaid expense on the first day of the month that fully expires by the end of the month.
4. In these special cases, we can record the cash paid with a debit to the expense account instead of an asset account.
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Straight-LineDepreciationExpense
= Asset Cost - Salvage Value
Useful Life
DEPRECIATION
Depreciation is the process of allocating the cost of a plant asset over its useful life in a
systematic and rational manner.
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END OF CHAPTER 3