201Lec04.

PPT

Accountants divide the economic life of a business

into reporting periods (PeriodicityAssumption).
.....
Jan. Feb. Mar. Apr. Dec.

Generally a month, a quarter, or a year.

End of year can be December 31 (calendar year)
or any other month (fiscal year)

1
Accounting
Accounting Method
Method .. .. .. .. ..
Determines which time period revenues and
expenses are recorded.
Example: Suppose that Chuck’s Painting Co. paints a large
building in 2011. It bills the customer $80,000, but does
not receive payment until 2012.
What year would you record the revenue?
Suppose that in 2011 Chuck pays $50,000 cash for paint and
supplies. Half of these were used on the job above. When
and how much would you record as expense?
Two general methods exist:
- Cash Basis
- Accrual Basis
2
CASH
CASH BASIS
BASIS Method
Method

Defined:

Record revenue when cash is received.

Record expense when cash is paid out.
Not GAAP -> We won’t use in class.
Possible manipulation.
(Receipt or payment of cash
can be controlled.)
Allowed for Income
Taxes (sometimes).

3
 ACCRUAL
ACCRUAL Method
Method
Defined:

Record revenues when earned.

(When goods are sold or services performed)
Called Revenue Recognition Principle
Record expenses when incurred.
(When they were used up to produce revenue)
Called Matching Principle.
GAAP -> We will concentrate on in class.
Requires adjustments and additional accounts.

4
Chuck’s Painting Co.
2011 2012
Revenue$80,000 Revenue$ 0
Expense -25,000 Expense - 0
Net Income $55,000 Net Income $ 0

Revenue$ 0 Revenue$ 80,000

Expense -50,000 Expense - 0
Net (loss) $(50,000) Net (loss) $ 80,000

5
Adjusting
Adjusting Journal
Journal Entries
Entries (AJE)
(AJE) .. .. .. .. ..
Are used to handle inter-period timing issues
Split up a revenue or expense (when needed)
and record part of it in one accounting period
and the rest of it in a later period.
In the previous example 1/2 of the paint and
supplies.
Getting revenues and expenses in the correct
accounting periods is referred to
as achieving a proper “Cut-Off” of the
accounting period.

6
Adjusting
Adjusting Journal
Journal Entries
Entries (AJE)
(AJE) .. .. .. .. ..
Adjustments needed when:
Deferrals: Pay or receive cash but delay
putting effect on income statement.
Unearned revenues, Prepaid expenses,
Supplies, Depreciation
Accruals: Revenue or expense is recorded
before cash is received or paid.
Accrued revenues or Accrued expenses

7
EXAMPLE: Sierra Corporation
Trial Balance
October 31, 2012
Unadjusted Trial Balance
Debit Credit
Cash 15,200
Accounts Receivable 0
Advertising Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Accumulated Depreciation 0
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200
Salaries Payable 0
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Supply Expense 0
Rent Expense 900
Insurance Expense 0
Interest Expense 0
Depreciation Expense 0
Interest Payable 0

28,700 28,700
Information for Sierra October AJEs (monthly statements)
• Supplies: Per count, only $1,000 are left at Oct 31.
• Insurance: Paid $600 for a 1 year policy on Oct 1.
• Equipment (Depreciation): Assume depreciation
expense = $40/month
• Notes Payable (Interest): Interest is due when note is
paid next year. Rate is 12% per year.
• Unearned Revenue: 1/3 of the $1,200 received was
earned during October.
• Service Revenue: 50% of a $400 project was completed
during the last day of October. Nothing was recorded.
• Salaries Expense: Oct 31 is a Wednesday. Employees
are paid Fridays for the M->F week. Salaries total
$400/day.

9
 Sierra Corporation
Trial Balance
Supplies:
Supplies:PerPercount,
count,only
only $1,000
$1,000 are
October
are 31, 2012
Unadjusted Trial Balance Adjustments Adjusted Balance
left at 10/31.
left at 10/31. Debit Credit Debit Credit Debit Credit

Cash 15,200
Accounts Receivable 0
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600
Equipment 5,000
Accumulated Depreciation 0
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200
Salaries Payable 0
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Supply Expense 0 1,500 1,500
Rent Expense 900
Insurance Expense 0
Interest Expense 0
Depreciation Expense 0
Interest Payable 0

28,700 28,700
 Sierra Corporation
Trial Balance
Insurance: Paid $600 for
Insurance: Paid $600 foraa 11 year
year policy.
October 31, 2012
policy.
Unadjusted Trial Balance Adjustments Adjusted Balance
$600/12 months = $50/month
$600/12 months = $50/month
Debit Credit Debit Credit Debit Credit

Cash 15,200
Accounts Receivable 0
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600 50 550
Equipment 5,000
Accumulated Depreciation 0
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200
Salaries Payable 0
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Supply Expense 0 1,500 1,500
Rent Expense 900
Insurance Expense 0 50 50
Interest Expense 0
Depreciation Expense 0
Interest Payable 0

28,700 28,700
 Sierra Corporation
Trial Balance
Equipment (Depreciation):
Equipment (Depreciation): Assume
Assume October 31, 2012
Unadjusted Trial Balance Adjustments Adjusted Balance
depreciation
depreciationexpense
expense==$40/month
$40/month
Debit Credit Debit Credit Debit Credit

Cash 15,200
Accounts Receivable 0
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600 50 550
Equipment 5,000
Accumulated Depreciation 0 40 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200
Salaries Payable 0
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Supply Expense 0 1,500 1,500
Rent Expense 900
Insurance Expense 0 50 50
Interest Expense 0
Depreciation Expense 0 40 40
Interest Payable 0

28,700 28,700
 Sierra Corporation
Trial Balance
Notes Payable (Interest):
Notes Payable (Interest): Interest
Interest is dueon
is due
October 31, 2012
on
note Unadjusted Trial Balance Adjustments Adjusted Balance
notepaid
paidnext
nextyear.
year.Rate
Rateisis12%
12% per
per
Debit
year.
year. Credit Debit Credit Debit Credit
$5,000
$5,000xx.12
.12xx1/12
1/12==$50/month
$50/month
Cash 15,200
Accounts Receivable 0
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600 50 550
Equipment 5,000
Accumulated Depreciation 0 40 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200
Salaries Payable 0
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Supply Expense 0 1,500 1,500
Rent Expense 900
Insurance Expense 0 50 50
Interest Expense 0 50 50
Depreciation Expense 0 40 40
Interest Payable 0 50 50

28,700 28,700
 Sierra Corporation
Trial Balance
Unearned Revenue: 1/3
Unearned Revenue: 1/3 of
ofthe
the $1,200
October
$1,200 31, 2012
Unadjusted Trial Balance Adjustments Adjusted Balance
received
receivedwas
wasearned
earnedduring
during October.
DebitOctober.Credit Debit Credit Debit Credit
$1,200
$1,200xx1/3
1/3==$400
$400earned
earned
Cash 15,200
Accounts Receivable 0
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600 50 550
Equipment 5,000
Accumulated Depreciation 0 40 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200 400 800
Salaries Payable 0
Common Stock 10,000
Dividends 500
Service Revenue 10,000 400 10,400
Salaries Expense 4,000
Supply Expense 0 1,500 1,500
Rent Expense 900
Insurance Expense 0 50 50
Interest Expense 0 50 50
Depreciation Expense 0 40 40
Interest Payable 0 50 50

28,700 28,700
 Sierra Corporation
Trial Balance
Service Revenue: 50% of a $400
Service Revenue: 50%Unadjusted
of a $400 project
October
project31,was
2012
was completed
completed
Trial Balance Adjustments Adjusted Balance
during
duringthe
thelast
lastday
dayof
ofOctober.
October. Nothing
Debit Nothing
was recorded.
Credit was Debit
recorded.Credit Debit Credit
$400 x .5 = $200 to be
berecorded.
$400 x .5 = $200 to recorded.
Cash 15,200
Accounts Receivable 0 200 200
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600 50 550
Equipment 5,000
Accumulated Depreciation 0 40 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200 400 800
Salaries Payable 0
Common Stock 10,000
Dividends 500
Service Revenue 10,000 200+ 400 10,600
10,400
Salaries Expense 4,000
Supply Expense 0 1,500 1,500
Rent Expense 900
Insurance Expense 0 50 50
Interest Expense 0 50 50
Depreciation Expense 0 40 40
Interest Payable 0 50 50

28,700 28,700
 Sierra Corporation
Trial Balance
Salaries Expense: 10/31
Salaries Expense: 10/31 is
is aa Wednesday.
October
Wednesday. 31, 2012
Unadjusted Trial Balance Adjustments Adjusted Balance
Employees
Employeesarearepaid
paidFridays
Fridays
Debit
for
forthe
the M->F
M->F
Credit Debit Credit Debit Credit
week.
week. Salaries
Salariestotal
total$400/day.
$400/day.
Cash 15,200
$400 x 33 = $1,200 to berecorded.
= $1,200
$400 xReceivable
Accounts to be recorded.
0 200 200
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600 50 550
Equipment 5,000
Accumulated Depreciation 0 40 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200 400 800
Salaries Payable 0 1,200 1,200
Common Stock 10,000
Dividends 500
Service Revenue 10,000 400+200
10,600 1,200 5,200
Salaries Expense 4,000
Supply Expense 0 1,500 1,500
Rent Expense 900
Insurance Expense 0 50 50
Interest Expense 0 50 50
Depreciation Expense 0 40 40
Interest Payable 0 50 50

28,700 28,700
 Sierra Corporation Use to prepare
Trial Balance
October 31, 2012 Financial
Unadjusted Trial Balance Adjustments Statements
Adjusted Balance
Debit Credit Debit Credit Debit Credit

Cash 15,200 15,200

Accounts Receivable 0 200 200
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600 50 550
Equipment 5,000 5,000
Accumulated Depreciation 0 40 40
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Service Rev 1,200 400 800
Salaries Payable 0 1,200 1,200
Common Stock 10,000
10,000
Dividends 500 500
Service Revenue 10,000 400+200
10,600
Salaries Expense 4,000 1,200 5,200
Supply Expense 0 1,500 1,500
Rent Expense 900 900
Insurance Expense 0 50 50
Interest Expense 0 50 50
Depreciation Expense 0 40 40
Interest Payable 0 50 50

28,700 28,700 30,190

 Sierra Corporation
Trial Balance
Modification: Prepare insurance
insurance entryas
Modification: Prepare Unadjusted entry
October of
as31, 12/31/11
12/31/11assuming
of2012 assumingSierra
Sierraprepares
prepares
Trial Balance Adjustments Adjusted Balance
statements
statementsonly annually?On
onlyannually? On 10/1
10/1paid
Debit paid $600 for
Credit $600 for
aa11year
Debit year policy.
Credit policy.Debit Credit
$600/12 months ==$50/month
$50/monthxx33months
months(Oct,
(Oct,Nov,
Nov,Dec)
Cash $600/12 months 15,200 Dec)
Accounts Receivable 0
Advertising Supplies 2,500 1,500 1,000
Prepaid Insurance 600 150 450
Equipment 5,000
Accumulated Depreciation 0
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Rev 1,200
Salaries Payable 0
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Supply Expense 0 1,500 1,500
Rent Expense 900
Insurance Expense 0 150 150
Interest Expense 0
Depreciation Expense 0
Interest Payable 0

28,700 28,700
CLOSING
CLOSING ENTRIES
ENTRIES

All accounts are

classified as
either
permanent or
temporary.

19
 Permanent Accounts


 Also
Also called
called Real
Real accounts
accounts

 Consist
Consist of
of all
all balance
balance sheet
sheet accounts
accounts

 Beginning
Beginning balances
balances are
are needed
needed to
to
arrive
arrive at
at ending
ending balances
balances

 DO
DO NOT
NOT get
get closed
closed

20
 Temporary
Temporary Accounts
Accounts


Also
Also called
called nominal
nominal accounts
accounts

Consist
Consist of
of all
all income
income statement
statement accounts
accounts and
and aa few
few
more
more

Have
Have aa temporary
temporary life
life == 11 accounting
accounting period
period

Are
Are closed
closed (zeroed
(zeroed out)
out) atat the
the end
end of
of each
each
accounting
accounting period
period

21
 The
The CLOSING
CLOSING PROCESS
PROCESS

PURPOSE:
PURPOSE:

 Set
Setthe
thestage
stagefor
forthe
thenext
nextaccounting
accountingcycle.
cycle.(Revenue
(Revenue
&
&Expense
Expenseaccounts
accountswill
willcontain
containinfo
infofor
forthe
thenext
next
period
periodonly).
only).

 Summarize
Summarizeincome
incomeand
andexpenses
expensesfor
forthe
theperiod
periodjust
just
past
pastand
andrecord
recordthis
thisresult
resultin
inthe
theRETAINED
RETAINED
EARNINGS
EARNINGSaccount.
account.
TIMING:
TIMING:
Performed
Performedafter
afterthe
theperiod
periodend,
end,after
afterstatements
statementsare
are
prepared.
prepared.

22
 CLOSING
CLOSING PROCEDURE
PROCEDURE
STEP 1
Debit all revenue accounts. Credit a new account called
INCOME SUMMARY.

LEDGER
INCOME SUMMARY SERVICE
REVENUE 9000

23
 CLOSING
CLOSING PROCEDURE
PROCEDURE
STEP 1
Debit all revenue accounts. Credit a new account called
INCOME SUMMARY.

LEDGER
INCOME SUMMARY SERVICE
9000 REVENUE
9000 9000

JOURNAL
SERVICE REVENUE 9000
INCOME SUMMARY 9000

24
 CLOSING
CLOSING PROCEDURE
PROCEDURE
STEP 1
Debit all revenue accounts. Credit a new account called
INCOME SUMMARY.
STEP 2
Credit all expense accounts. DEBIT goes to INCOME
SUMMARY.
LEDGER
OPERATING EXPENSE INCOME SUMMARY SERVICE REVENUE
5000 9000 9000 9000

JOURNAL
SERVICE REVENUE 9000
INCOME SUMMARY 9000

25
 CLOSING
CLOSING PROCEDURE
PROCEDURE
STEP 1
Debit all revenue accounts. Credit a new account called
INCOME SUMMARY.
STEP 2
Credit all expense accounts. DEBIT goes to INCOME
SUMMARY.
LEDGER
OPERATING EXPENSE INCOME SUMMARY SERVICE REVENUE
5000 5000 5000 9000 9000 9000

JOURNAL
SERVICE REVENUE 9000
INCOME SUMMARY 9000
INCOME SUMMARY 5000
OPERATING EXPENSE 5000

26
STEP 3
Determine the balance in the INCOME SUMMARY
account. Then close it out. Use RETAINED EARNINGS for
the other debit or credit.
LEDGER
INCOME SUMMARY RETAINED EARNINGS
5000 9000 Beginning balance

4000

27
STEP 3
Determine the balance in the INCOME SUMMARY
account. Then close it out. Use RETAINED EARNINGS for
the other debit or credit.
LEDGER
INCOME SUMMARY RETAINED EARNINGS
5000 9000 Beginning balance

4000 4000 4000

JOURNAL
INCOME SUMMARY 4000
RETAINED EARNINGS 4000

28
STEP 4
Close the DIVIDENDS PAID (or Drawing) out directly to
the RETAINED EARNINGS account. Not to Income
Summary!
LEDGER
DIVIDENDS PAID RETAINED EARNINGS
1000 Beginning balance
4000 Income Summary

29
STEP 4
Close the DIVIDENDS PAID out directly to the
RETAINED EARNINGS account. Not to Income Summary!

LEDGER
DIVIDENDS PAID RETAINED EARNINGS
1000 Beginning balance
4000 Income Summary
1000 1000
Ending balance
JOURNAL
RETAINED EARNINGS 1000
DIVIDENDS PAID 1000

30
 Summary
Summary of
of the
the Accounting
Accounting Cycle
Cycle

1. Analyze business transactions

9. Prepare a post-closing trial

2. Journalize the transactions
balance

8. Journalize and post closing

3. Post to ledger accounts
entries

7. Prepare financial statements 4. Prepare a trial balance

5. Journalize and post adjusting

6. Prepare an adjusted trial balance
entries

Chapter
4-31
31
Example:
Example:
On
Onthe
thenext
nextslide
slideisisthe
theadjusted
adjustedtrial
trialbalance
balancefor
forKonk
KonkCo.
Co.
Required:
Required: Prepare
Prepare closing
closing journal
journal entries.
entries.

32
Cash $11,000
Accounts Receivable 21,500 D
Art Supplies 6,000 O
Prepaid Insurance 2,500 N’
Printing Equipment 60,000 T
Accumulated Depreciation $35,000
Accounts Payable 5,000
Interest Payable 150 C
Notes Payable 5,000 L
Unearned Advertising Revenue 5,600 O
Salaries Payable 1,300 S
Common Stock 20,000 E
Retained Earnings 5,500
Dividends 12,000
Advertising Revenue 61,500
Salaries Expense 11,300
Insurance Expense 850
Depreciation Expense 7,000
Art Supplies Expense 2,400
Rent Expense 4,350
$139,050 $139,050 33
 General
GeneralJournal
Journal
12/31
12/31Advertising
AdvertisingRevenue
Revenue 61500
61500
Income
IncomeSummary
Summary 61500
61500
To
Toclose
closerevenue
revenueaccounts
accounts
12/31
12/31Income
IncomeSummary
Summary 26050
26050
Salaries
SalariesExpense
Expense 11300
11300
Insurance
InsuranceExpense
Expense 850
850
Interest
InterestExpense
Expense 150
150
Depreciation
DepreciationExpense
Expense 7000
7000
Art
ArtSupplies
SuppliesExpense
Expense 2400
2400
Rent
RentExpense
Expense 4350
4350
To
Toclose
closeexpense
expenseaccounts
accounts
(11300+850+150+7000+2400+4350=26050)
(11300+850+150+7000+2400+4350=26050)

34
 General
GeneralJournal
Journal
12/31
12/31Income
Incomesummary
summary 35450
35450
Retained
RetainedEarnings
Earnings 35450
35450
To
Toclose
closeincome
incomesummary
summaryand
andupdate
updateretained
retainedearnings
earnings
(61500cr
(61500crnetnetwith
with26050dr
26050dr==35450cr).
35450cr).Close
Closewith
with35450dr.
35450dr.
12/31
12/31Retained
RetainedEarnings
Earnings 12000
12000
Dividends
Dividends 12000
12000
To
Toclose
closedividends
dividendspaid
paidagainst
againstretained
retainedearnings
earnings

35
 Konk Co. Agency
Post Closing Trial Balance
December 31
Debit Credit
Cash $11,000
Accounts Receivable 21,500
Art Supplies 6,000
Prepaid Insurance 2,500
Printing Equipment 60,000
Accumulated Depreciation $35,000
Accounts Payable 5,000
Interest Payable 150
Notes Payable 5,000
Unearned Advertising Revenue 5,600
Salaries Payable 1,300
Common Stock 20,000
Retained Earnings (Begin 5,500 + 35,450 - 12,000) 28,950
$101,000 $101,000
36