ACCT 201

Reporting and
3
Chapter

Preparing Financial
Statements
ACCT 201

UAA – ACCT 201
ACCT 201

Principles of Financial
Accounting
Dr. Fred Barbee

ACCT 201 ACCT 201 ACCT 201

ACCT 201
What Have We Learned?
ACCT 201

I have
some bad
news . . .
ACCT 201

Dr. Fred Barbee 3

ACCT 201
What Have We Learned?

I have
ACCT 201

some good
news . . .
ACCT 201

Dr. Fred Barbee 4

. The basic accounting equation ACCT 201 . .and the definition of each of its components Assets = Liabilities + ACCT 201 Owners’ Equity Dr. Fred Barbee 5 .ACCT 201 We Have Learned .

.ACCT 201 We Have Learned . Fred Barbee 6 . Double-entry accounting ACCT 201 Assets = Liabilities + Owners’ Equity Debits=Credits ACCT 201 Dr. .

ACCT 201 We Have Learned . . . Acronym: ssets Dr.Nothing more. xpenses ACCT 201 nothing less. The debit/credit rules and how ACCT 201 each impacts accounting. ncrease Debit = “Left” side of an account ebits . Fred Barbee 7 .

ACCT 201 We Have Learned . nothing less. ACCT 201 ncrease Acronym: redits Dr. The debit/credit rules and how ACCT 201 each impacts accounting. . Fred Barbee 8 . evenue quity Credit = “Right” side of an account iabilities . .Nothing more.

Income Net Income Statement ACCT 201 Retained Stmt of Earnings Retained Earnings About the basic financial Balance ACCT 201 statements and how Sheet they interrelate.ACCT 201 We Have Learned . . . .

. The first five steps in the accounting Prepare ACCT 201 cycle.ACCT 201 We Have Learned . . Trial Balance Post Transactions Record Transactions ACCT 201 Analyze Transactions Examine Source Documents .

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ACCT 201 Preparing Financial Statements Financial Prepare ACCT 201 Statements Trial Balance Post Transactions Record Transactions ACCT 201 Analyze Transactions Examine Source Documents .

ACCT 201 Problems in Accounting Measurements The identification of the ACCT 201 accounting period. ACCT 201 The appropriate moment to record an expense. Dr. The proper point in time to recognize revenue. Fred Barbee 13 .

ACCT 201 ACCT 201 Identification of the Accounting Period ACCT 201 .

etc. ACCT 201 years. Fred Barbee 15 . an ACCT 201 organization’s life can be divided into separate accounting periods months.ACCT 201 Time Period Principle For reporting purposes. Dr. quarters.

E E G N I 96 97 98 99 00 01 02 03 04 05 D N I N Life of the Firm N I G N G . Time Period Principle Discrete (separate) accounting B periods.

Exh.1 The Accounting Period Annual 1 2 Semiannual 1 2 3 4 Quarter 1 2 3 4 5 6 7 8 9 10 11 12 Month . 3.

ACCT 201 ACCT 201 The proper point in time to recognize revenues. ACCT 201 .

and An exchange has taken place.ACCT 201 Revenue Recognition . Fred Barbee 19 . Dr. . Revenues are recorded when two ACCT 201 main criteria have been met: The earnings process is substantially complete (a sale has taken place or service has been ACCT 201 rendered). .

ACCT 201 Dr.ACCT 201 Revenue Recognition . . Revenue is generally recognized ACCT 201 At the time services are performed. or When goods are sold and delivered to a customer. . Fred Barbee 20 .

ACCT 201 .ACCT 201 ACCT 201 The proper point in time to recognize expenses.

ACCT 201 The Matching Principle The matching principle requires ACCT 201 that all expenses incurred to generate the revenues recognized in an accounting period be matched with those revenues. ACCT 201 Dr. Fred Barbee 22 .

. ACCT 201 Let the expense follow the revenue. ACCT 201 Sometimes referred to as “The Expense Recognition Principle. First the revenue .ACCT 201 The Matching Principle Another view .” Dr. . . Then the expense. . Fred Barbee 23 .

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Accounting Accrual Basis ACCT 201 ACCT 201 ACCT 201 .

ACCT 201 Revenue ACCT 201 Accrual Basis Recognition Accounting ACCT 201 Matching Principle .

ACCT 201 Yikes!! What is Accrual Basis ACCT 201 Accounting? ACCT 201 .

ACCT 201 Accrual Basis Accounting Revenues are recognized ACCT 201 (recorded) when earned. Expenses are recorded as incurred without regard to when ACCT 201 they are paid. Fred Barbee 28 . without regard to when cash is received. Dr.

. ACCT 201 The accrual basis of accounting .ACCT 201 The time period principle Gives rise to the need for The Revenue Recognition ACCT 201 Principle and the Matching Principle Resulting in . .

this really does ACCT 201 make sense? ACCT 201 .ACCT 201 Whoa! Let’s back up a bit here -.

Assumption 96 97 98 99 00 01 02 03 04 05 Periodicity ? ? ? ? ? ? How do we recognize revenues?  ThePrinciple Revenue Recognition How do we recognize expenses?  The Matching Principle Accrual Basis Accounting .

. . BOP EOP Recognized Revenues Matched Expenses Recognized Matched Accrual Net Revenues  Expenses  Income .Accrual Accounting .

Bertha. We probably better ask the professor! . are there any other bases for accounting? Yikes! I don’t know Claude.

You don’t think we would make it ACCT 201 that easy.ACCT 201 Absolutely. do you? ACCT 201 .

Accounting Cash Basis ACCT 201 ACCT 201 ACCT 201 .

ACCT 201 Dr. and Expenses are recognized in the period when cash is paid out.ACCT 201 Cash Basis Accounting With the cash basis . . Fred Barbee 36 . ACCT 201 Revenues are recognized in the period cash is received. .

. .Cash Basis Accounting . BOP EOP Revenue (Cash) Expenses (Cash) Revenue Expenses Cash Basis (Cash)  (Cash)  Net Income .

ACCT 201 Ahhh. but there is yet another one! ACCT 201 Fun! Fun! ACCT 201 .

ACCT 201 ACCT 201 Modified Cash ACCT 201 Basis Accounting .

. Dr. ACCT 201 Current period revenues and expenses are treated exactly as in the cash basis. .ACCT 201 Modified Cash Basis Accounting With the Modified Cash Basis . Expenses covering more than one ACCT 201 accounting period are allocated over the useful life of the asset. Fred Barbee 40 .

ACCT 201 ACCT 201 ACCT 201 .

ACCT 201 Dr.ACCT 201 Exh.4 Adjusting Accounts An adjusting entry is recorded to ACCT 201 bring an asset or liability account balance to its proper amount. 3. Fred Barbee 42 .

4 Framework for Adjustments F r a m e w o r k f o r A d ju s tm e n ts A d ju s tm e n ts P r e p a id D e p r e c ia tio n U n e a rn e d A c c ru e d A c c ru e d E xp en ses R even u es E xp en ses R even u es Transactions where cash is paid or received before a related expense or revenue is recognized. Transactions where cash is paid or received after a related expense or revenue is recognized. Exh. 3. .

Exh. 3.4 Framework for Adjustments F r a m e w o r k f o r A d ju s tm e n ts A d ju s tm e n ts P r e p a id D e p r e c ia tio n U n e a rn e d A c c ru e d A c c ru e d E xp en ses R even u es E xp en ses R even u es Transaction where cash is paid before a related expense is recognized. .

Asset Expense Unadjusted Credit Debit Balance Adjustment Adjustment . receiving the actual benefits. Adjusting Prepaid Expenses Resources paid Here is the check for my first for prior to 6 months’ rent.

Let’s look at the adjusting journal entry needed on December 31. 2001. Adjusting Prepaid Expenses On December 1. Scott Company paid $12.000 Prepaid Rent 2.000 to r ecord monthl y rent .000 to cover rent for December 2001 through May 2002. GENERAL JOURNAL Page 34 Date Description PR Debit Credit Dec. 31 Rent Expense 2. 2001.

000 .000 12/31 $2. the accounts involved look like this: Prepaid Rent Rent Expense 12/1 $12. Adjusting Prepaid Expenses After posting.000 12/31 $2.

3. .4 Framework for Adjustments F r a m e w o r k f o r A d ju s tm e n ts A d ju s tm e n ts P r e p a id D e p r e c ia tio n U n e a rn e d A c c ru e d A c c ru e d E xp en ses R even u es E xp en ses R even u es Transaction where cash is paid before a related expense is recognized. Exh.

Asset Cost – Salvage Value Straight-Line = Depreciation Useful Life . Adjusting for Depreciation Depreciation is the process of computing expense from allocating the cost of plant and equipment over its expected useful lives.

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ACCT 201 Monroe expects to sell the equipment at the end of its life for $2.ACCT 201 Adjusting for Depreciation On January 1. 2002. ACCT 201 purchased oil pumping equipment for $62.000 cash. Fred Barbee 51 .000 cash. Monroe. The equipment has an estimated useful life of 5 years. Dr. Inc.

ACCT 201
Adjusting for Depreciation

Let’s compute depreciation expense
ACCT 201

for the year ended December 31,
2002.

2002 $62,000 - $2,000
Depreciation =
5
ACCT 201

Expense
= $12,000

Dr. Fred Barbee 52

Adjusting for Depreciation
Prepare the journal entry.

GENERAL JOURNAL Page 2
Date Description PR Debit Credit
Dec. 31 Depreciation Exp. 12,000
Accum. Depreciation 12,000
To record a nnua l depreci a ti on

Accumulated depreciation is
a contra asset account.

Adjusting for Depreciation

After posting, the accounts involved
look like this:
Equipment Depreciation Expense
1/1 $62,000 12/31 $12,000

Accumulated Depreciation
12/31 $12,000

Adjusting for Depreciation

The
equipment
account is
shown on
the balance
sheet like
this.

.4 Framework for Adjustments F r a m e w o r k f o r A d ju s tm e n ts A d ju s tm e n ts P r e p a id D e p r e c ia tio n U n e a rn e d A c c ru e d A c c ru e d E xp en ses R even u es E xp en ses R even u es Transaction where cash is received before a related revenue is recognized. 3. Exh.

Adjusting Unearned Revenue Cash received in advance of Buy your season tickets for providing all home basketball games NOW! products or services. “GO SEAWOLVES” Liability Revenue Debit Unadjusted Credit Adjustment Balance Adjustment .

000 sea son ti ck ets .000 season tickets to its 20 home basketball games for $100 each. 1 Cash 100. Adjusting Unearned Revenue On October 1. UAA makes the following entry: GENERAL JOURNAL Page 34 Date Description PR Debit Credit Oct. 2002.000 Recei pts for 1. UAA sold 1.000 Unearned Basketball Revenue 100.

winning 8 and losing 2. UAA has played 10 of its regular home games. Adjusting Unearned Revenue On December 31. 31 Prepare Preparethe theappropriate appropriateAdjusting Adjusting Entry Entryon onDecember December31 31 . GENERAL JOURNAL Page 34 Date Description PR Debit Credit Dec.

31 Unearned Basketball Revenue 50. GENERAL JOURNAL Page 34 Date Description PR Debit Credit Dec.000 to recogni ze ba sk etba l l revenue . winning 8 and losing 2.000 Basketball Revenue 50. Adjusting Unearned Revenue On December 31. UAA has played 10 of its regular home games.

the accounts involved look like this Unearned Basketball Revenue Basketball Revenue 12/31 $50.000 12/31 $50.000 10/1 $100.000 .Adjusting Unearned Revenue After posting.

4 Framework for Adjustments F r a m e w o r k f o r A d ju s tm e n ts A d ju s tm e n ts P r e p a id D e p r e c ia tio n U n e a rn e d A c c ru e d A c c ru e d E xp en ses R even u es E xp en ses R even u es Transaction where cash is paid after a related expense is recognized. 3. Exh. .

Expense Liability Debit Credit Adjustment Adjustment .Adjusting for Accrued Expenses We’re about one-half Costs incurred in a done with this job and period that are want to be paid! both unpaid and unrecorded.

As of 12/31/02. the employees have earned salaries of $47. falls on a Wednesday. pays its employees every Friday. Year-end. . Last pay Next pay date date 12/26/02 1/2/03 12/1/02 12/31/02 Record adjusting Year end journal entry.Adjusting for Accrued Expenses Denton. Inc.250 for Monday through Wednesday of the week ended 1/02/03. 12/31/02.

As of 12/31/02. 12/31/02. pays its employees every Friday. Inc. falls on a Wednesday.250 to record sa l a ry a ccrua l .250 for Monday through Wednesday of the week ended 1/02/03.250 Salaries Payable 47. 31 Salaries Expense 47.Adjusting for Accrued Expenses Denton. GENERAL JOURNAL Page 34 Date Description PR Debit Credit Dec. the employees have earned salaries of $47. Year-end.

Salaries Expense Salaries Payable 12/31 $47.Adjusting for Accrued Expenses After posting.250 . . . the accounts involved will look like this .250 12/31 $47.

. Exh.4 Framework for Adjustments F r a m e w o r k f o r A d ju s tm e n ts A d ju s tm e n ts P r e p a id D e p r e c ia tio n U n e a rn e d A c c ru e d A c c ru e d E xp en ses R even u es E xp en ses R even u es Transaction where cash is received after a related revenue is recognized. 3.

are both unrecorded and not yet received.Adjusting for Accrued Revenues Revenues earned Yes. Asset Revenue Debit Credit Adjustment Adjustment . you can pay me for your tax return in a period that when I finish the work.

31 Accounts Receivable 31.Adjusting for Accrued Revenues Smith & Jones. GENERAL JOURNAL Page 34 Date Description PR Debit Credit Dec. had $31. Let’s make the adjusting entry necessary on December 31. CPAs.200 Service Revenues 31. 2002. the end of the company’s fiscal year.200 Revenues ea rned but not recei ved .200 of work completed but not yet billed to clients.

.200 12/31 $31. the accounts involved will look like this .200 . . Accounts Receivable Service Revenue 12/31 $31.Adjusting for Accrued Revenues After posting.

ACCT 201 ACCT 201 ACCT 201 .

Liability Dr.18 Summary of Adjustments and Before Adjusting Adjusting Category Financial B/S Statement I/S Links Entry Dr. Expense Accrued Expenses Liability Expense Cr. Expense Prepaid Expense Asset Expense Cr.18 Exh.Exhibit 3. Asset Accrued Revenues Asset Revenue Cr. Asset Dr. Revenue Overstated Understated . Revenue Dr. 3. Liability Unearned Revenue Liability Revenue Cr.

worksheet. the the initial initial unadjusted unadjusted amounts amounts are are added added to to the the worksheet.19 Trial Balance December 31. FastForward Exh. First. . 2001 First. 3.

19 Trial Balance December 31. 2001 Next. 3. FastForward’s FastForward’s adjustments adjustments are areadded. added. FastForward Exh. . Next.

totals Trial Balance 3. 2001 .the thetotals Exh. December 31. determined.19 are aredetermined. FastForward Finally.Finally.

ACCT 201 ACCT 201 ACCT 201 .

ACCT 201 Preparing Financial Statements Let’s use ACCT 201 FastForward’s adjusted trial balance to prepare the company’s financial ACCT 201 statements. Dr. Fred Barbee 77 .

20 Step One: Prepare the Income Statement. Exh. 3. .

Note: The Net Income from the Income Statement carries to the Statement of Retained Earnings. Step Two: 3.20 Prepare the Statement of Retained Earnings. Exh. .

Exh.20 Balance Sheet December 31.185 Total liabilities and equity $ 42.345 Step Three: Prepare the Balance Sheet. .625 Total assets $ 42.750 Total liabilities $ 9.000 Less: accum.800 Supplies 8.950 Accounts receivable 1. depr. FastForward 3.000 Retained Earnings 3.670 Prepaid insurance 2.300 Equipment 26.345 Liabilities Accounts payable $ 6.200 Salaries payable 210 Unearned revenue 2.160 Owner's Equity Common Stock 30. 2001 Assets Cash $ 3. (375) 25.