201Lec04.

PPTX

Accrual Accounting Concepts

Accountants divide the economic life of a business

into reporting periods (PeriodicityAssumption).
Reports made every month, quarter, or year.
GAAP allows end of year to be:
- December 31 (calendar year-end company) or
- Other month end (fiscal year-end company)

Accounting
Accounting Method
Method .. .. .. .. ..
Determines which time period revenues and
expenses are recorded.

Example: Suppose that Chucks Painting Co. paints a large

building in 2013. It bills the customer $80,000, but
does not receive payment until 2014.
What
year would you record the revenue?
Suppose that in 2013 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:

Basis
- Accrual Basis

- Cash

CASH
CASH BASIS
BASIS Method
Method
Defined:
Record revenue when cash is received.
Record expense when cash is paid out.

Not GAAP -> We wont use in class.

Possible manipulation.
(Receipt or
payment of cash
can be controlled.)
Allowed for Income
Taxes
(sometimes).

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.

Chucks Painting Co.

2013

2014

Revenue$80,000
Expense
-25,000
Net Income $55,000

Revenue$
0
Expense
Net Income $

Revenue$
Expense
Net (loss)

Revenue$ 80,000
Expense
0
Net (loss)
$ 80,000

0
-50,000
$(50,000)

0
0

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.

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,
Depreciation

Supplies,

Accruals: Revenue or expense is recorded

before cash is received or paid.
Accrued
revenues or Accrued expenses

EXAMPLE: Assume Sierra starts business in

early October 2014. Statements
are prepared every month.

Sierra Corporation
Trial Balance
October 31, 2014
Unadjusted Trial Balance

Debit

Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

Credit

15,200
0
2,500
600
5,000
0
5,000
2,500
1,200
0
0
10,000
500
10,000
4,000
0
900
0
0
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
October
31, 2014
Supplies:
$1,000
are
Supplies:Per
Percount,
count,only
only
$1,000
are
Unadjusted Trial Balance
Adjustments
left
at
10/31.
left at 10/31.
Debit
Credit
Debit
Credit

Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

15,200
0
2,500
600
5,000

1,500

Adjusted Balance
Debit
Credit

1,000

0
5,000
2,500
1,200
0
0
10,000
500
10,000
4,000
0
900
0
0
0
28,700

1,500

28,700

1,500

Sierra Corporation
Trial Balance
Insurance:
Paid
$600
for
a
1
year
policy.
October
31, 2014
Insurance: Paid $600 for a 1 year policy.
Unadjusted Trial Balance
Adjustments
$600/12
months
=
$50/month
Debit
Credit
Debit
Credit
$600/12 months = $50/month

Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

15,200
0
2,500
600
5,000

1,500
50

Adjusted Balance
Debit
Credit

1,000
550

0
5,000
2,500
1,200
0
0
10,000
500
10,000
4,000
0
900
0
0
0
28,700

28,700

1,500

1,500

50

50

Sierra Corporation
Trial Balance
Equipment
(Depreciation):
Assume
October
31, 2014
Equipment (Depreciation): Assume
Unadjusted Trial Balance
Adjustments
depreciation
depreciationexpense
expense==$40/month
$40/month
Debit
Credit
Debit
Credit

Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

15,200
0
2,500
600
5,000

1,500
50

Adjusted Balance
Debit
Credit

1,000
550

40

0
5,000
2,500
1,200
0

40

0
10,000
500
10,000
4,000
0
900
0
0
0
28,700

28,700

1,500

1,500

50

50

40

40

Sierra Corporation
Trial Balance
Notes
Payable
(Interest):
Interest
is
due
October
31, 2014
Notes Payable (Interest): Interest is dueon
on
Unadjusted
Trial Balance
Adjustments
note
per
year.
notepaid
paidnext
nextyear.
year.Rate
Rateisis12%
12%
per
year.
Debit
Credit
Debit
Credit

$5,000
$5,000xx.12
.12xx1/12
1/12==$50/month
$50/month

Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

15,200
0
2,500
600
5,000

1,500
50
0
5,000
2,500
1,200
0

Adjusted Balance
Debit
Credit

1,000
550

40

40

50

50

10,000
500
10,000
4,000
0
900
0
0
0
28,700

28,700

1,500

1,500

50
50
40

50
50
40

Sierra Corporation
Trial Balance
Unearned
Revenue:
1/3
of
the
$1,200
October
Unearned Revenue: 1/3 of the $1,200 31, 2014
Unadjusted
Trial Balance
Adjustments
received
October.
receivedwas
wasearned
earnedduring
during
October.
Debit
Credit
Debit
Credit

$1,200
$1,200xx1/3
1/3==$400
$400earned
earned

Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

15,200
0
2,500
600
5,000

1,500
50
0
5,000
2,500
1,200
0

Adjusted Balance
Debit
Credit

1,000
550

40

40

400

800
50

50

10,000
500

400

10,000
4,000
0
900
0
0
0
28,700

28,700

10,400

1,500

1,500

50
50
40

50
50
40

Sierra Corporation
Trial Balance
Service
Revenue:
50%
of
a
$400
project
was
October
31,
2014completed
Service Revenue: 50% of a $400 project
was
completed
Unadjusted
Trial
Balance
Adjustments
during
Nothing
was recorded.
duringthe
thelast
lastday
dayof
ofOctober.
October.
Debit Nothing
Credit was recorded.
Debit
Credit

$400
$400xx.5
.5==$200
$200to
tobe
berecorded.
recorded.
Cash
15,200
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

200

0
2,500
600
5,000

1,500
50
0
5,000
2,500
1,200
0

Adjusted Balance
Debit
Credit

200
1,000
550

40

40

400

800
50

50

200+ 400

10,600
10,400

10,000
500
10,000
4,000
0
900
0
0
0
28,700

28,700

1,500

1,500

50
50
40

50
50
40

Sierra Corporation
Trial Balance
Salaries
SalariesExpense:
Expense:10/31
10/31isisaaWednesday.
Wednesday.
October 31, 2014
Employees
Unadjusted
for
Trial
the
Balance
M->F
Adjustments
Employeesare
arepaid
paidFridays
Fridays
for
the
M->F
Debit
Credit
Debit
Credit

week.
week.Salaries
Salariestotal
total$400/day.
$400/day.
Cash x 3 = $1,200 to be recorded.
$400
$400 x 3 = $1,200 to be 15,200
recorded.
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

0
2,500
600
5,000

200
1,500
50

0
5,000
2,500
1,200
0

Adjusted Balance
Debit
Credit

200
1,000
550

40

40

1,200
50

800
1,200
50

400+200

10,600

400

0
10,000
500
10,000
4,000
0
900
0
0
0
28,700

28,700

1,200
1,500

5,200
1,500

50
50
40

50
50
40

Sierra Corporation
Trial Balance
October 31, 2014
Unadjusted Trial Balance
Adjustments
Debit
Credit
Debit
Credit

Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

15,200
0
2,500
600
5,000

200
1,500
50
0
5,000
2,500
1,200
0

Use to prepare
Financial
Statements
Adjusted Balance
Debit
Credit

15,200
200
1,000
550
5,000

40

40
5,000
2,500
800
1,200
50
10,000

400
1,200
50

0
10,000
500

500
10,000

4,000
0
900
0
0
0
28,700

400+200
1,200
1,500
50
50
40

28,700

10,600
5,200
1,500
900
50
50
40
30,190

30,190

Sierra Corporation
Trial Balance
Modification:
Prepare
insurance
entry
October
31,
2014
Modification: Prepare insurance entryas
asof
of12/31/14
12/31/14assuming
assumingSierra
Sierraprepares
prepares
Unadjusted
Trial
Balance
Adjustments
Adjusted
Balance
statements
10/1
paid
$600
for
a
1
year
policy.
statementsonly
onlyannually?
annually?On
On
10/1
paid
$600
for
a
1
year
policy.
Debit
Credit
Debit
Credit
Debit
Credit

$600/12
xx33months
$600/12months
months==$50/month
$50/month
months(Oct,
(Oct,Nov,
Nov,Dec)
Dec)
15,200

Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Unearned Service Rev
Salaries Payable
Interest Payable
Common Stock
Dividends
Service Revenue
Salaries Expense
Supply Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense

0
2,500
600
5,000

1,500
150

1,000
450

0
5,000
2,500
1,200
0
0
10,000
500
10,000
4,000
0
900
0
0
0
28,700

28,700

1,500

1,500

150

150

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) at
at the
the end
end of
of
each
each accounting
accounting period
period

21

The
The CLOSING
CLOSING PROCESS
PROCESS
PURPOSE:
PURPOSE:

Set
Set the
the stage
stage for
for the
the next
next accounting
accounting
cycle.
cycle. (Revenue
(Revenue &
& Expense
Expense accounts
accounts will
will
contain
contain info
info for
for the
the next
next period
period only).
only).

Summarize
Summarize income
income and
and expenses
expenses for
for the
the
period
period just
just past
past and
and record
record this
this result
result in
in
the
the RETAINED
RETAINED EARNINGS
EARNINGS account.
account.

TIMING:
TIMING:

Performed
Performed after
after the
the period
period end,
end, after
after
statements
statements are
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
9000

JOURNAL

SERVICE REVENUE
9000INCOME SUMMARY

SERVICE
REVENUE
9000 9000
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
5000

INCOME
SUMMARY
9000

JOURNAL

SERVICE REVENUE
9000INCOME SUMMARY

SERVICE
REVENUE
9000 9000
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
5000 5000

INCOME
SUMMARY
5000 9000

JOURNAL

SERVICE REVENUE
9000INCOME SUMMARY
INCOME SUMMARY
OPERATING EXPENSE
5000

SERVICE
REVENUE
9000 9000
9000
5000

26

STEP 3
Determine the balance in the INCOME
SUMMARY account. Then close it out. Use
RETAINED EARNINGS for the other debit or
LEDGER
credit.
INCOME
SUMMARY
5000 9000
4000

RETAINED EARNINGS
Beginning
balance

27

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

RETAINED EARNINGS
Beginning
balance
4000

4000 4000

JOURNAL
INCOME SUMMARY
4000RETAINED 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
1000

RETAINED EARNINGS
Beginning
4000
Income
balance
Summary

29

STEP 4
Close the DIVIDENDS PAID out directly to
the RETAINED EARNINGS account. Not to
Income Summary!
LEDGER
DIVIDENDS PAID
1000
1000

RETAINED EARNINGS
Beginning
4000 Income
1000 balance
Summary
Ending balance

JOURNAL
RETAINED EARNINGS
1000DIVIDENDS PAID

1000

30

Summary
Summary of
of the
the Accounting
Accounting Cycle
Cycle
1.
1. Analyze
Analyze business
business transactions
transactions

Chapter
4-31

9.
9. Prepare
Prepare aa post-closing
post-closing trial
trial
balance
balance

2.
2. Journalize
Journalize the
the transactions
transactions

8.
8. Journalize
Journalize and
and post
post closing
closing
entries
entries

3.
3. Post
Post to
to ledger
ledger accounts
accounts

7.
7. Prepare
Prepare financial
financial statements
statements

4.
4. Prepare
Prepare aa trial
trial balance
balance

6.
6. Prepare
Prepare an
an adjusted
adjusted trial
trial balance
balance

5.
5. Journalize
Journalize and
and post
post adjusting
adjusting
entries
entries

31

Example:
On the next slide is the adjusted trial balance for Konk Co.

Required: Prepare closing journal entries.

32

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
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

D
O
N
T
C
L
O
S
E

33

General Journal

12/31 Advertising Revenue

61500
Income Summary
61500
To close revenue accounts
12/31 Income Summary
26050
Salaries Expense
11300
Insurance Expense
850
Interest Expense
150
Depreciation Expense
7000
Art Supplies Expense
2400
Rent Expense
4350
To close expense accounts
(11300+850+150+7000+2400+4350=26050)

34

General Journal

12/31 Income summary

35450
Retained Earnings
35450
To close income summary and update retained earnings
(61500cr net with 26050dr = 35450cr). Close with 35450dr.
12/31 Retained Earnings
12000
Dividends
To close dividends paid against retained earnings

12000

35

Konk Co. Agency

Post Closing Trial Balance
December 31

Debit Credit
$11,000

Cash
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