Operating Cycle

1) Purchase Goods and Services

2) Pay Cash to Suppliers
3) Sell goods to customers
4) Receive Cash from customers

Time Period Assumption

indicates that the long life of a company can be reported
in shorter time periods

Revenues
increases in assests or settlements of liabilities from
ongoing operations

Expenses
decreases in assets or increases in liabilities from
ongoing operations incurred to generate revenues
during the period

Operating Expense (type)

cost of sales

Operating Expense (type)

salaries/wages

Peripheral Activities
not related to producing a product

Gains
peripheral activity that increases assets or settlements
(decreases) in liabilities from peripheral transactions
(selling land at a profit)

Losses
peripheral activity decreases in assets or increases in
liabilities

Cash Basis Accounting 1

Only count revenue when you receive cash

Cash Basis Accounting 2

financial performance is the differenece between cash
balance at the beginning of the period and at the end of
the period

Revenue Accounting

records revenues when earned and expenses when

incurred, regardless of the time of cash receipts or
payments

Revenue Principle
1) Delivery has occurred or services have been
rendered***
2) There is a persuasive evidence of an arrangement for
customer payment
3) the price is fixed or determinable
4) Collection is reasonably assured

Cash was received before service and not yet earned

Cash (+A)
Unearned Revenue (+L)

Cash received before service performed but now

earned (delivers goods or services)
Unearned Revenue (-L)
Revenue (+R)

Cash received and earned on date of service

Cash (+A)
Revenue (+R +SE)

Cash to be Received After services performed (services

have already been delivered but no payment yet)
Accounts Receivable (+A)
Revenue (+R +SE)

Cash owed for services performed now received

Cash (+A)
Accounts Receivable (-A)

Matching Principle
resources consumed to earn revenues in an accounting
period should be recorded in that period

Cash was paid before expense incurred

Prepaid Expense (+A)
Cash (-A)

Cash paid on date expense incurred

Expense (+E)
Cash (-A)

Cash to be paid after company receives services (after

expense incurred)

Expense (+E)
Accounts Payable (+L)

Cash paid on for expense previously incurred

Accounts Payable (-L)
Cash (-A)

Paying off a prepaid expense

Expense (+E)
Prepaid Expense (-A)

Examples of Expense
wages, utilities, costs of sales, rent/facilities,
depreciation expense

Expanded Transaction Analysi

1) Identify and Classify Accounts and Effects
a. Identify the accounts (by title) affected
i. Was revenue earned?
1. If so, (when was it received)?
ii. Was an expense incurred?
1. If so, then what was given?
iii. If no expense or revenue, what was received and
given
b. Classify them by type - A, L, SE, a revenue (R), or an
expense (E)
c. Determine the Direction of the Effect - Increase or
Decrease
2) Verify accounting equation is in balance
a. Verify that debits = credits
b. Assets = Liabilities + Stockholders' Equity

Accounting Cycle (during period)

1) Analyze transactions
2) Record Journal Entries in general journal
3) post amounts to general ledger

Accounting Cycle (end of period

1) Prepare trial balance
2) adjust revenues and expenses
3) Prepare complete set of financial statements and
disseminate it to users
4) Close revenues, gains, expenses, losses to retained
earnings(record in journal and post to ledger)

Preparing Financial Statements 2 step

Step 1 Prepare unadjusted trial balance
Step 2 adjust journal entries

Trial Balance
a spreadsheet that lists the names of the T-accounts in
one column, usually in financial statement order, with
their ending debit or credit balances in the next two
columns.
1. Listing of individual accounts, usually in financial
statement order
2. Ending debit or credit balances are listed in in two
separate columns
3. Total debit account balances should equal total credit
account balances

Adjusting Entries
are entries necessary at the end of the accounting
period to measure all revenues and expenses of that
period.
1. Revenues are recorded when they are earned ( the
revenue principle)
2. Expenses are recorded when they are incurred to
generate revenue (the matching principle)
3. Assets are reported at amounts that represent the
probably future benefits remaining at the end of the
period
4. Liabilities are reported at amounts that represent the
probable future sacrifices of assets or services owed at
the end of the period.

Deferred (or unearned) Revenues

liabilities have balances at the end of the period
because cash was received before it was earned. If all or
part of the liability has been satisfied by the end of the
period, revenue needs to be recorded and the liability
reduced.

Deferred Revenues (journal entry)

-L, +R +SE

Accrued Revenues
the company has earned revenue, but the cash will be
received in the next period. Since nothing has been
recorded yet, revenue needs to be recognized and an
asset (a receivable) increased.

Accrued Revenues (journal entry )

+ A, +R +SE

Deferred (or unearned) Expenses

previously recorded assets, such as prepaid rent,

supplies, and equipment, that were created when cash
was paid in advance and that must be reduced for the
amount of expense actually incurred during the period
through use of the asset.

Deferred (or unearned) Expenses (journal entry)

+E -SE, -A

Accrued Expenses
expenses that have been incurred but not yet recorded
because cash will be paid after the goods or services are
used.

Accrued Expenses (journal entry)

+E -SE, +L

Adjustment Process
Adjustment Process
Step 1 - Was revenue earned or an expense incurred
that is not yet recorded?
If yes, credit the revenue account or debit the expense
account in adjusting entry
Step 2 - Was the related cash received or paid in the
past or will it be received or paid in the future
1. If received (deferred revenue [liability]) - reduce the
liability account (usually unearned revenue)
2. If will be received - increase the receivable account
(such as interest receivable or rent receivable)
3. If cash was paid [deferred expense account] - reduce
the asset account (supplies, prepaid expenses)
4. If will be paid - create an accrued expense increase
payable account (interest payable, wages payable) to
recoed what is owed by the company to others.
iii. Step 3 - compute the amount of revenue earned or
expense incurred.

Contra-Account
an account that is an offset to, or the reduction to the
primary account.

Accumulated Depretiation
a CREDIT account and contra-account that allocates the
assets cost over times.

Depreciation (Journal Entry)

Depreciation Expense (+E -SE)
Accumulated Depreciation (+AX, -A)

Interest Calculation
Principle Loan Amount x Rate x (Months Used/12)

Income tax calculation

compute adjusted pretax income by taking the balances
from the unadjusted trial balance + the effects of all
other adjustments.

Net Profit Margin Ratio

Net Income / Net sales (operating revenues)
A rising number signifies more efficient management

Permanent Real Accounts

when closing the books the balance sheet accounts that
carry their ending balances into the next accounting
period

temporary nominal accounts

are income statement accounts that are closed to the
RE at the end of the period

Closing Entry
transfers balance in temporary accounts to RE and
establishes a zero balance
Closing entries reverse the +/- equation and then
compute the difference and add to retained earning

Post-closing trial balance

ONLY ASSESTS< LIABLITIES AND SE appear!
i. check that debits equals credits and all temporary
accounts have been closed.

Earnings per share

Net Income / Average number of common shares
outstanding during the period

Sears, a retail store, sells a $100 lamp to a customer

who charges the sale on his store credit card. Answer
from Sear's standpoint
Sales Revenue $100

Incurred $68 Utility usage during the year. Paid $55 in

cash and owed the rest on account
Utilities expense (+E, SE) 68
Cash (A) 55
Accounts payable (+L) 13

Paid payroll, $3500 during the year

Wages expense (+E, SE) 3,500
Cash (A) 3,500

Cardon's used boatlifting equipment that cost $220k,

$22 k was the estimated depreciation for 2012
Depreciation expense (+E, SE) 22,000
Accumulated depreciation (+XA, A)22,000

Year Ending Nov, 30, 2012. Wages earned by

employees Nov. 2012, unpaid and unrecorded at Nov.
30, 2012 amounted to $3800. The next payroll date is
December 5, 2012
Wages expense (+E, SE) 3,800
Wages payable (+L) 3,800

Year. Ending Nov. 30, 2012. On Oct. 1 2012, Cardon's

paid 1200 to the local newspaper for an advert to run
every Thurs. for 12 weeks. All ads have been run
except for three Thursdays in Dec. to complete the 12
week contract
Advertising expense (+E, SE) 900 Prepaid advertising
(A) 900
($1,200 x 9/12 =$900 used)

Boat Repair Supplies on hand at Dec. 31 2011 totaled

16,500. Repair supplies purchased and debited to
Supplies during the year amounted to $46k. the yearend count showed $12400 of the supplies on hand
Supplies expense (+E, SE) 50,100
Supplies (A) 50,100
$16,500 +
$46,000 - $12,400
= $50,100 used