Lecture Intermediate accounting (IFRS/e) - Chapter 2: RevieW of the accounting process

Chapter 2

REVIEW OF THE
ACCOUNTING PROCESS

© 2013 The McGraw-Hill Companies, Inc.


Slide 2

The Accounting Equation

A = L + OE
  

+ Owner Investments

- Owner Withdrawals

+ Revenue
+ Gains

- Expenses
- Losses


Slide 3

Accounting Equation for a Corporation

A = L + SE

+ Issued Capital

+ Retained Earnings

+ Revenues - Expenses - Dividends
+ Gains
- Losses


Slide 4

Account Relationships
Debits
Debits and
and credits
credits affect
affect the
the Statement
Statement of
of
Financial
Financial Position
Position Model
Model as
as follows:
follows:

A = L + PIC + RE
Assets
Dr. Cr.

+
-

Liabilities
Dr. Cr.
+

Permanent
Accounts
Temporary Accounts

Issued
Capital
Dr. Cr.
+

Retained
Earnings
Dr. Cr.
+

Revenues
and Gains
Dr. Cr.
+

Expenses
and Losses
Dr. Cr.
+

-


During the Accounting Period

Source
documents

Transaction
Analysis

Record in
Journal

Slide 5

Post to
Ledger

At the End of the Accounting Period

Financial
Statements

Adjusted
Trial Balance

Record & Post
Adjusting
Entries

At the End
of the Year
Close Temporary
Accounts

Post-Closing
Trial Balance

Unadjusted
Trial Balance

The
Accounting
Processing
Cycle


Slide 6

Accounting Processing Cycle
On January 1, $40,000 was borrowed from a
bank and a note payable was signed.

Two accounts are affected:
 Cash

(an asset) increases by $40,000.
 Notes Payable (a liability) increases by $40,000.

Prepare the journal entry.


Slide 7

General Ledger

The “T” account is a shorthand format of an account
used by accountants to analyze transactions.
It is not part of the bookkeeping system.


Slide 8

Posting Journal Entries
On July 1, the owners invest $60,000 in a new
business, Dress Right Clothing Corporation.
GENERAL JOURNAL
Date

July

Description

1

Cash

Page
Post.

Ref.

Debit

1
Credit

60,000
Ordinary Share Capital

60,000

Post
Post the
the debit
debit portion
portion of
of the
the entry
entry to
to the
the Cash
Cash
ledger
ledger account.
account.


Slide 9

Posting Journal Entries


Slide 10

Posting Journal Entries

We
Wefollow
followthe
thesame
sameprocedure
procedure to
topost
postthe
thecredit
credit
portion
portionof
of the
theentry
entryto
tothe
theOrdinary
OrdinaryShare
ShareCapital
Capital
account.
account.

After
Afterrecording
recordingall
allentries
entriesfor
forthe
theperiod,
period,Dress
DressRight’s
Right’s
Unadjusted
UnadjustedTrial
Trial Balance
Balance would
would be
beas
asfollows:
follows:

AATrial
Trial
Balance
Balance is
isaa
listing
listingof
of all
all
accounts

accounts
and
and their
their
balances
balancesat
at
aapoint
pointin
in
time.
time.

Debits = Credits


Slide 12

A d ju s tin g E n tr ie s

P r e p a y m e n ts
(D e fe r r a ls )

A c c r u a ls

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.

E s tim a te s


Slide 13

Prepaid Expenses
Expense

Asset
Unadjusted
Balance

Credit
Adjustment

Today, I will pay
for my first
6 months’ rent.

Debit
Adjustment

Prepaid Expenses
Items paid for in advance

of receiving their benefits


Slide 14

Depreciation
Depreciation is the process of computing
expense by allocating the cost of plant and
equipment over their expected useful lives.
Straight-Line
Depreciation
Expense

Asset Cost - Salvage Value
=
Useful Life


Slide 15

Depreciation
Recall the Furniture and Fixtures for $12,000 listed on
Dress Right’s unadjusted trial balance. Assume the
following:
Asset Cost
$
12,000
Salvage Value
Useful Life
60 months

Let’s calculate the depreciation expense for the month
ended July 31, 2013.


Slide 16

Depreciation
Recall the Furniture and Fixtures for $12,000 listed on
Dress Right’s unadjusted trial balance.
Asset Cost
$
12,000
Salvage Value
Useful Life
60 months
July
Depreciation
Expense

$12,000 - $0
=

=

$200 per month

60 months

GENERAL JOURNAL

Date

Description

July 31 Depreciation Expense
Accumulated Depr. Furniture & Fixtures
To record depreci a ti on

Page 2
PR

Debit

Credit

200
200


Slide 17

Depreciation
After posting, the accounts look like this:
Furniture and Fixtures
Beg. bal.
12,000
Bal.
12,000

Depreciation Expense

Beg. bal.
200
Bal.
200

Accumulated Depreciation
Beg. bal.
200
200 Bal.


Slide 18

Unearned Revenues
Liability
Debit
Adjustment

Unadjusted
Balance

Buy your season tickets for
all home basketball games NOW!

“Go Big Blue”

Revenue
Credit
Adjustment

Unearned Revenue
Cash received in
advance of performing
services


Slide 19

Alternative Approach to Record Prepayments
Prepaid Expenses
Record initial cash 
payments as follows:
Expense       $$$
     Cash              $$$
Adjusting Entry
Record the amount for the 
prepaid expense as   
follows:
Prepaid expense      $$$
     Expense                   $$$

Unearned Revenue
Record initial cash receipts 
as follows:
Cash             $$$
     Revenue         $$$
Adjusting Entry
Record the amount for the 
unearned liability as 
follows:

Revenue                     $$$
     Unearned revenue      $$$


Slide 20

Accrued Liabilities
Expense
Debit
Adjustment

I won’t pay you
until the job is done!

Liability
Credit
Adjustment

Accrued Liabilities
Liabilities recorded when an
expense has been incurred
prior to cash payment.


Slide 21

Accrued Receivables
Asset
Debit
Adjustment

Yes, you can pay me
in May for your April
15 tax return.

Revenue
Credit
Adjustment

Accrued Receivables
Revenue earned in a
period prior to the cash
receipt.


Slide 22

Estimates
Uncollectible

accounts and
depreciation of fixed
assets are estimated.

An

estimated item is
a function of future
events and
developments.

$


Slide 23

Estimates
The estimate of bad debt expense at the end of the
period is an example of an adjusting entry that requires
an estimate.
Assume that Dress Right’s management determines that
of the $2,000 of accounts receivable recorded at July 31,
only $1,500 will ultimately be collected. Prepare the
adjusting entry for July 31.


DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2013
Account Title
Debits
Credits
Cash
$
68,500
Accounts receivable
2,000
Allowance for uncollectible accounts
$
500

Supplies
1,200
Prepaid rent
22,000
Inventory
38,000
Furniture and fixtures
12,000
Accumulated depr.-furniture & fixtures
200
Accounts payable
35,000
Note payable
40,000
Unearned rent revenue
750
Salaries payable
5,500
Interest payable
333
Ordinary share capital
60,000
Retained earnings
1,000
Sales revenue
38,500
Rent revenue
250
Cost of goods sold
22,000

Salaries expense
10,500
Supplies expense
800
Rent expense
2,000
Depreciation expense
200
Interest expense
333
Bad debt expense
500
Totals
$
181,033 $ 181,033

This is the Adjusted
Trial Balance for
Dress Right after all
adjusting entries have
been recorded and
posted.
Dress Right will use
these balances to
prepare the financial
statements.


Slide 25

The income statement summarizes the results
of operating activities of the company.