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Getting Started

To the uneducated, the details of the accounting processes that support organizations may seem trivial. In the real world, however, the consequences can be serious. Financial data is used to support decision making and to guide the organization. Employees may be laid off, operations may be shut down, or new product development efforts canceled, all based on financial statements and analysis. With the stakes so high, the members of an organization’s accounting and finance teams are likely to spend as much or more time explaining financial statements to decision makers as they do actually developing them. This is the situation you will face in this assignment.

Upon successful completion of this assignment, you will be able to:

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  • Explain the impact of adjusting transactions on a company’s financial statements.
  • Evaluate the impact of various managerial decisions on a company’s financial position.

Resources

  • Textbook: Principles of Accounting: Volume 1, Financial Accounting
  • File: Financial Accounting Chapter 3
  • File: Financial Accounting Chapter 4  
  • Video-recording Software 

Background Information

Parsi Onious is upset. As a manager in the purchasing department, he has just received an ugly surprise, which has brought him to your doorstep. 

Parsi manages the team of professional buyers responsible for procuring all of the company’s raw materials. This includes hundreds of millions of dollars of metals, chemicals, and plastics each year from around the globe. These materials are used in the manufacture of the company’s products, including a new line of refrigerators that was launched just last year. As buyers, Parsi’s team is primarily measured on the cost of the materials they purchase. They are expected to work hard to continuously bring down these costs and to help the company stay competitive. 

However, Parsi is also personally responsible for producing financial forecasts. Using his inside knowledge of material costs, he is expected to create estimates of how much the company will spend on these materials each month and quarter. These forecasts are used by executives when they communicate with investors. The company sets public earnings targets, so it is critical the forecasts be reliable. Unfortunately, Parsi’s forecast for the last quarter was off by a large margin, and now the Vice President of Operations is demanding answers.

When the company purchases raw materials, a debit is recorded against inventory, while a credit is made to accounts payable. Later, after the company manufactures and ships its products to the customer, a credit is made against inventory, recording the consumption of the raw materials. Meanwhile, in accordance with the expense recognition (matching) principle, cost of goods sold is debited. Parsi’s team is measured based upon the cost of materials, so this transaction is very important to them. Parsi is forecasting how much cost of goods sold will be expensed each month and quarter.

Finished products contain a certain amount of raw material. Herein lies the problem. The engineering team estimated that each refrigerator contains 11.22 pounds of polyurethane foam, an expensive chemical used for insulation. When the refrigerators are shipped, inventory is credited for 11.22 pounds of polyurethane, while 11.22 pounds is simultaneously debited against cost of goods sold as an expense. However, a physical inventory count conducted at the end of the quarter determined that $350,000 of polyurethane was missing. Apparently much more than 11.22 pounds was being consumed in the manufacture of each refrigerator.

The inventory report triggered the company’s accounting department to create an adjusting journal entry. Since this was unexpected, the adjustment resulted in Parsi’s forecast for cost of goods sold to be off by $350,000. As a member of the finance team supporting Parsi, it has now fallen to you to explain the transaction. He doesn’t understand why he is being “penalized” for an apparent inventory control problem at the manufacturing plant, and fears being blamed. Parsi wants to be able to defend himself to the Vice President of Operations, which means he needs to know what happened and how it can be prevented in the future.

Instructions

  1. Review the rubric to make sure you understand the criteria for earning your grade.
  2. In your textbook, Principles of Accounting, read Chapters 3 and 4, “Analyzing and Recording Transactions” and “The Adjustment Process.”
  3. Download and review the Financial Accounting Chapter 3 and Financial Accounting Chapter 4 PowerPoints to help you further understand the chapter concepts.
  4. Using PowerPoint, create a presentation that explains the adjusting entry and what actions could be taken to improve financial forecasting in the future.
  5. Your presentation should include at least four slides and last three to five minutes. Content must include:
    1. Background and introduction (one slide)
    2. An explanation of how inventory transactions are related to cost of goods sold and how the process for recording material costs normally works. Show a typical journal entry and T-accounts in your presentation (one slide).
    3. An explanation of the adjusting entry that was necessary due to the inventory count and how it would affect cost of goods sold and Parsi’s forecast. Show the adjusting journal entry that occurred and the T-accounts (one slide).
    4. A couple of suggestions for what changes could be made to avoid this forecasting error in the future (one slide)
  6. Create a video of yourself making the presentation to Parsi Ominous using a screen recording software application of your choice. You can sit in front of your computer and use the built-in camera. Screencast-o-Matic offers a free version that will be more than adequate for this assignment. If there is another video software option you are more familiar with, you may use that as well.
  7. Your video should be both professionally formatted and professionally presented, in a manner that would be understandable to novices in accounting and finance.
  8. When you finish, publish your video on a website such as Vimeo, YouTube, or another public video publishing site, and submit both the link to your video and your presentation by the end of the workshop.

Chapter 3 ANALYZING AND RECORDING TRANSACTIONS

Principles of Accounting, Volume 1: Financial Accounting

PowerPoint Image Slideshow

Chapter Outline

3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements

3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions

3.3 Define and Describe the Initial Steps in the Accounting Cycle

3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements

3.5 Use Journal Entries to Record Transactions and Post to T-Accounts

3.6 Prepare a Trial Balance

Module 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements

The Financial Accounting Standards Board (FASB) is an independent, nonprofit organization that sets the standards for financial accounting and reporting, including generally accepted accounting principles (GAAP), for both public- and private-sector businesses in the United States.

GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements.

US accounting rules are called US GAAP.

International accounting rules are called International Financial Reporting Standards (IFRS).

Some companies that operate on a global scale may be able to report their financial statements using IFRS.

Publicly traded companies (those that offer their shares for sale on exchanges in the United States) have the reporting of their financial operations regulated by the Securities and Exchange Commission (SEC).

Teacher Notes: By having proper accounting standards such as US GAAP or IFRS, information presented publicly is considered comparable and reliable. As a result, financial statement users are more informed when making decisions.

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The conceptual framework is a set of concepts that guide financial reporting. These concepts help ensure information is comparable and reliable to stakeholders.

Revenue recognition principle: directs a company to recognize revenue in the period in which it is earned; is earned when a product or service has been provided

Expense recognition (matching) principle: states that we must match expenses with associated revenues in the period in which the revenues were earned

Cost principle: states that virtually everything the company owns or controls (assets) must be recorded at its value at the date of acquisition

Full disclosure principle: states that a business must report any business activities that could affect what is reported on the financial statements

The Conceptual Framework

Teacher Notes: Revenue recognition is not dependent on when cash is received.

Expense recognition is not dependent on when cash is paid.

Matching is important so as not to overstate or understate income.

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Separate entity concept: prescribes that a business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally

Conservatism: states if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount

Monetary measurement concept: must be a monetary unit by which to value the transaction

Going concern assumption: assumes a business will continue to operate in the foreseeable future

Time period assumption: states a company can present useful information in shorter time periods, such as years, quarters, or months

The Conceptual Framework (continued)

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Figure 3.2

GAAP Accounting Standards Connection Tree. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

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The accounting equation can be thought of from a “sources and claims” perspective. Everything a company owns must equal everything the company owes to creditors (lenders) and owners (individuals for sole proprietors or stockholders for companies or corporations).

For the rest of the text, we switch the structure of the business to a corporation, and instead of owner’s equity, we begin using stockholder’s equity, which includes account titles such as common stock and retained earnings to represent the owners’ interests.

Accounting Equation

Teacher Notes: Remind students of a home, mortgage, equity example. Common stock and retained earnings will be discussed/explained in more detail later.

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Double-Entry Bookkeeping

The basic components of even the simplest accounting system are accounts and a general ledger.

An account is a record showing increases and decreases to assets, liabilities, and equity; each of these categories includes many individual accounts.

A general ledger is a comprehensive listing of all of a company’s accounts with their individual balances.

Recording transactions in the general ledger utilizes a double-entry accounting system:

Each time we record a transaction, we must record a change in at least two different accounts. Having two or more accounts change will allow us to keep the accounting equation in balance.

Not only will at least two accounts change, but there must also be at least one debit and one credit side impacted.

The sum of the debits must equal the sum of the credits for each transaction.

Teacher Notes: The double-entry accounting system has been around since the 11th or 12th century when it was first formally written about by Luca Pacioli, a Franciscan friar and mathematician who was good friends with Leonardo da Vinci. It had been used in various forms since the 1300s, and likely even way before that, but it had never been formalized until Pacioli. After his 615 page book—a summary of everything we knew about math at that point—was published, the double-entry accounting system was used more, but it really took off during the Industrial Revolution.

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Debits and Credits

In order for companies to record the myriad of transactions they have each year, there is a need for a simple, but detailed, system. Each account can be split into a right side and a left side.

A debit (DR) records financial information on the left side of each account. A credit (CR) records financial information on the right side of an account. One side of each account will increase and the other side will decrease. The ending account balance is found by calculating the difference between debits and credits for each account.

This graphic representation of a general ledger account is known as a T-account:

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Depending on the account type, the sides that increase and decrease will vary.

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The normal balance is the expected balance each account type maintains, which is the side that increases.

Account Normal Balances and Increases

Table 3.1

Type of AccountIncreases withNormal balance
AssetDebitDebit
LiabilityCreditCredit
Common StockCreditCredit
DividendsDebitDebit
RevenueCreditCredit
ExpenseDebitDebit

Teacher Notes: It is important to understand normal balances, as these help not only with recording transactions, but also with putting together the financial statements and tracking recording errors.

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Accounting equation with expanded equity side:

Expanded Accounting Equation. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Module 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions

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Various Asset Accounts

Cash: includes paper currency as well as coins, checks, bank accounts, and money orders

Accounts receivable: money that is owed to the company, usually from a customer

Inventory: goods available for sale; are an asset until they are sold

Supplies: (office supplies) include pens, paper, and pencils; considered assets until an employee uses them, at which time they have lost their economic value and their cost is now an expense to the business

Prepaid expenses: items paid for in advance of their use, such as rent and insurance; considered assets until used

Notes receivable: similar to accounts receivable, is money owed to the company by a customer or other entity, but includes interest and specific time payment terms

Equipment: includes desks, chairs, and computers; has a long-term value and is considered a long-term asset, meaning it can be used for more than one accounting period; will lose value over time in a process called depreciation

Buildings, machinery, and land: all considered long-term assets; building and machinery depreciate; land is not depreciated

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Figure 3.4

Assets. Cash, buildings, inventory, and equipment are all types of assets. (credit clockwise from top left: modification of “Cash money! 140606-A-CA521-021” by Sgt. Michael Selvage/Wikimedia Commons, Public Domain; modification of “41 Cherry Orchard Road” by “Pafcool2”/Wikimedia Commons, Public Domain; modification of “ASM-e1516805109201” by Jeff Green, Rethink Robotics/ Wikimedia Commons, CC BY 4.0; modification of “Gfp-inventory-space” by Yinan Chen/Wikimedia Commons, CC0)

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Various Liability Accounts

Accounts payable: recognizes that the company owes money and has not paid

Notes payable: similar to accounts payable in that the company owes money and has not yet paid, but the terms are usually longer, are typically more formal (written agreements), and include interest

Unearned revenue: represents a customer’s advanced payment for a product or service that has yet to be provided by the company; the company cannot record revenue yet, and must record a liability, as the company is liable to the customer to either complete the service (or deliver the goods) or return the customer’s money.

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Equity Account Components

Stockholders’ equity is the owner’s (stockholders’) investments in the business and earnings.

Two components of stockholders’ equity:

Contributed capital: amounts paid into the business for an ownership interest (stock); business uses that money to grow and develop the business

Retained earnings: income that has been earned by the business that has been paid out in the form of dividends to the owners (stockholders)

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Assets = Liabilities + Stockholders’ Equity

Assets = Liabilities + [Contributed Capital + Retained Earnings]

Assets = Liabilities + [Contributed Capital + {Beg. Retained Earnings + Net Income – Dividends}]

Assets = Liabilities + [Contributed Capital + {Beg. Retained Earnings + (Revenues – Expenses) – Dividends}]

Income Statement

Statement of Stockholders’ (Owners’) Equity

Balance Sheet

Financial Statement and Accounting Equation Interrelationships Review

Teacher Notes: This helps show why the income statement must be completed first, then the income is moved to the statement of stockholder’s (owner’s) equity, and finally, the final stockholder’s equity balances are part of the balance sheet. In Chapter 4, students will be presented with the statement of retained earnings.

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Sample Exercise

EA11. Identify whether each of the following transactions would be recorded with a debit (Dr) or credit (Cr) entry.

Debit or credit?
A.Cash increase
B.Supplies decrease
C.Accounts Payable increase
D,Common Stock decrease
E.Interest Payable decrease
F.Notes Payable decrease

Module 3.3 Define and Describe the Initial Steps in the Accounting Cycle

The accounting cycle is a step-by-step process to record business activities and events to keep financial records up to date. The process occurs over one accounting period, and the cycle will begin again in the following period. A period is one operating cycle of a business, which could be a month, quarter, or year.

Figure 3.5

The Accounting Cycle. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The entire cycle is meant to keep financial data organized and easily accessible to both internal and external users of information.

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Figure 3.6

Accounting Cycle. The first four steps in the accounting cycle. Modified for PPT. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The first four steps of the accounting cycle are

This takes information from original sources or activities and translates that information into usable financial data.

This takes analyzed data from Step 1 and organizes it into a comprehensive record of every company transaction.

Posting takes all transactions from the journal during a period and moves the information to a general ledger.

This takes information from the general ledger and transfers it onto a document showing all account balances, and ensures debits = credits.

Teacher Notes: In this chapter, we focus on the first four steps in the accounting cycle: identify and analyze transactions, record transactions to a journal, post journal information to a ledger, and prepare an unadjusted trial balance.

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Figure 3.7: Sample General Journal (Used in Step 2)

General Journal. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The general journal will contain a chronological listing of transactions. A transaction is a business activity or event that has an effect on financial information presented on financial statements and comes from an original source. The journal is where a company can find a record of all transactions that occurred during a given time period, such as a day.

Teacher Notes: These next few slides will show in very general form the first four steps of the accounting cycle. Those four steps will be detailed in the remaining sections of the chapter/slides.

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Figure 3.8: Sample General Ledger in T-Account Form (Used in Step 3)

General Ledger in T-Account Form. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The general ledger provides a record of transactions for each individual account in chronological order within that account. The ledger is where a company will find the balance for a specific account. These account balances will make up the trial balance created in Step 4.

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Figure 3.9: Sample Trial Balance (Created in Step 4)

Unadjusted Trial Balance. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The trial balance will include all account balances. Those balances will come from the general ledger.

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Module 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements

The first step in the accounting cycle is to identify and analyze transactions.

Each original source must be evaluated for financial implications. Meaning, will the information contained on this original source affect the financial statements? If the answer is yes, the company will then analyze the information for how it affects the financial statements.

One task is to determine the value of the transaction; sometimes this is obvious, and others times it is less clear.

Your Turn: Monetary Value of Transactions

You are the accountant for a small computer programming company. You must record the following transactions. What values do you think you will use for each transaction?

The company purchased a secondhand van to be used to travel to customers. The sellers told you they believe it is worth $12,500 but agreed to sell it to your company for $11,000. You believe the company got a really good deal because the van has a $13,000 Blue Book value.

Your company purchased its office building five years ago for $175,000. Values of real estate have been rising quickly over the last five years, and a realtor told you the company could easily sell it for $250,000 today. Since the building is now worth $250,000, you are contemplating whether you should increase its value on the books to reflect this estimated current market value.

Your company has performed a task for a customer. The customer agreed to a minimum price of $2,350 for the work, but if the customer has absolutely no issues with the programming for the first month, the customer will pay you $2,500 (which includes a bonus for work well done). The owner of the company is almost 100% sure she will receive $2,500 for the job done. You have to record the revenue earned and need to decide how much should be recorded.

The owner of the company believes the most valuable asset for his company is the employees. The service the company provides depends on having intelligent, hardworking, dependable employees who believe they need to deliver exactly what the customer wants in a reasonable amount of time. Without the employees, the company would not be so successful. The owner wants to know if she can include the value of her employees on the balance sheet as an asset.

Transaction 1: Issues $20,000 shares of common stock for cash.

Analysis: Cash is an asset and common stock is stockholder’s equity. When a company collects cash, this will increase assets because cash is coming into the business. When a company issues common stock, this will increase a stockholder’s equity because he or she is receiving investments from owners.

Recording Transactions: Understanding Impact on the Accounting Equation

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Transaction 2: Purchases equipment on account for $3,500, payment due within the month.

Analysis: Equipment is an asset. There is an increase to assets because the company has equipment it did not have before. We also know that the company purchased the equipment on account, meaning it did not pay for the equipment immediately and asked for payment to be billed instead and paid later—this is a liability, specifically labeled as accounts payable. There is also an increase to liabilities because the company now owes money.

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Transaction 3: Receives $4,000 cash in advance from a customer for services not yet rendered.

Analysis: We know that the company collected cash, which is an asset. This collection of $4,000 increases assets because money is coming into the business.

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Transaction 4: Provides $5,500 in services to a customer who asks to be billed for the services.

Analysis: The company performed a service and therefore earned revenue. However, the customer asked to be billed for the service, meaning the customer did not pay with cash immediately. The customer owes money and has not yet paid, signaling an accounts receivable. Accounts receivable is an asset that is increasing in this case.

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Transaction 5: Pays a $300 utility bill with cash.

Analysis: The company paid with cash, an asset. Assets are decreasing by $300 since cash was used to pay for this utility bill. The company no longer has that money.

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Transaction 6: Distributed $100 cash in dividends to stockholders.

Analysis: The company paid the distribution with cash, an asset. Assets decrease by $100 as a result. Dividends affect equity and, in this case, decrease equity by $100.

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All six transactions summarized:

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Your Turn: Debbie’s Dairy Farm

Debbie’s Dairy Farm had the following transactions:

Debbie ordered shelving worth $750.

Debbie’s selling price on a gallon of milk is $3.00. She finds out that most local stores are charging $3.50. Based on this information, she decides to increase her price to $3.25. She has an employee put a new price sticker on each gallon.

A customer buys a gallon of milk paying cash.

The shelving is delivered with an invoice for $750.

Which events will be recorded in the accounting system?

Sample Exercise

EA3. Provide the missing amounts of the accounting equation for each of the following companies.

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Module 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts

Accountants use special forms called journals to keep track of their business transactions. A journal is the first place information is entered into the accounting system. 

Formatting when recording journal entries:

Include a date of when the transaction occurred.

The debit account title(s) always come first and on the left.

The credit account title(s) always come after all debit titles are entered, and on the right.

The titles of the credit accounts will be indented below the debit accounts.

You will have at least one debit (possibly more).

You will always have at least one credit (possibly more).

The dollar value of the debits must equal the dollar value of the credits or else the equation will go out of balance.

You will write a short description after each journal entry.

Skip a space after the description before starting the next journal entry.

Teacher Notes: The process of recording entries using the accounting equation is not how transactions are recorded by businesses. They use a systematic process to follow the steps of the accounting cycle.

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Date

Debit Accounts First

Credit Accounts Indented

Description

Dollar Values of Debits Equal Dollar Values of Credits

Modified for PPT.

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A compound entry is when there is more than one account listed under the debit and/or credit column of a journal entry.

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Putting the First Three Steps of the Accounting Cycle Together

Printing Plus, Inc. had the following transactions for the month of January:

On January 3, 2019, issues $20,000 shares of common stock for cash.

On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.

On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.

On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.

On January 12, 2019, pays a $300 utility bill with cash.

On January 14, 2019, distributed $100 cash in dividends to stockholders.

On January 17, 2019, receives $2,800 cash from a customer for services rendered.

On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.

On January 20, 2019, paid $3,600 cash in salaries expense to employees.

On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.

On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.

On January 30, 2019, purchases supplies on account for $500, payment due within three months.

Teacher Notes: The following series of slides will detail the various steps in the accounting cycle.

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Transaction 1: On January 3, 2019, issues $20,000 shares of common stock for cash.

Analysis: Cash, an asset, increases and Common Stock, an equity, increases.

Financial Statement Impact:

Step 1: Record the Transactions in the General Journal

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Transaction 2: On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.

Analysis: Equipment, an asset, increases and Accounts Payable, a liability, increases.

Financial Statement Impact:

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Transaction 3: On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.

Analysis: Cash, an asset, increases and Unearned Revenue, a liability, increases.

Financial Statement Impact:

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Transaction 4: On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.

Analysis: Accounts Receivable, an asset, increases and Service Revenue, which positively impacts equity, increases.

Financial Statement Impact:

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Transaction 5: On January 12, 2019, pays a $300 utility bill with cash.

Analysis: Cash, an asset, decreases and Utility Expense, which negatively impacts equity, increases.

Financial Statement Impact:

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Transaction 6: On January 14, 2019, distributed $100 cash in dividends to stockholders.

Analysis: Cash, an asset, decreases and Dividends, which negatively impacts equity, increases.

Financial Statement Impact:

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Transaction 7: On January 17, 2019, receives $2,800 cash from a customer for services rendered.

Analysis: Cash, an asset, increases and Service Revenue, which positively impacts equity, increases.

Financial Statement Impact:

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Transaction 8: On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.

Analysis: Cash, an asset, decreases and Equipment, an asset, increases.

Financial Statement Impact:

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Transaction 9: On January 20, 2019, paid $3,600 cash in salaries expense to employees.

Analysis: Cash, an asset, decreases and Salaries Expense, which negatively impacts equity, increases.

Financial Statement Impact:

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Transaction 10: On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.

Analysis: Cash, an asset, increases and Accounts Receivable, an asset, decreases.

Financial Statement Impact:

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Transaction 11: On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.

Analysis: Accounts Receivable, an asset, increases and Service Revenue, which positively impacts equity, increases.

Financial Statement Impact:

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Transaction 12: On January 30, 2019, purchases supplies on account for $500, payment due within three months.

Analysis: Supplies, an asset, increases and Accounts Payable, a liability, increases.

Financial Statement Impact:

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All the transactions as they would appear, chronologically, in the general journal

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Sample Exercise

EA15. Journalize for Harper and Co. each of the following transactions or state no entry required and explain why. Be sure to follow proper journal writing rules.

A corporation is started with an investment of $50,000 in exchange for stock.

Equipment worth $4,800 is ordered.

Office supplies worth $750 are purchased on account.

A part-time worker is hired. The employee will work 15–20 hours per week starting next Monday at a rate of $18 per hour.

The equipment is received along with the invoice. Payment is due in three equal monthly installments, with the first payment due in sixty days.

Posting example:

The January 3 entry entered in the journal is shown here, posted to the general ledger accounts for Cash and Common Stock.

Each account will show the current balance.

Step 2: Posting Transactions from General Journal to the General Ledger

Modified for PPT.

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These are all the transactions recorded in the journal during the month of January that affected the cash account.

Teacher Notes: Only the cash entries were extracted from the journal in order to show how to post to the general ledger.

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The cash transactions from the journal would be posted to the Cash account in the ledger.

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Running Balance

Modified for PPT.

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Using the same transactions:

Transaction 1: On January 3, 2019, issues $20,000 shares of common stock for cash.

Determining Account Balance Using T-Accounts

Modified for PPT.

Teacher Notes: These are the same transactions, only showing how the running account balances would appear if we posted the entries to a T-account. It is important to understand that T-accounts are only used for illustrative purposes in a textbook, classroom, or business discussion. They are not official accounting forms. Companies will use ledgers for their official books, not T-accounts.

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Transaction 2: On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.

Modified for PPT.

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Transaction 3: On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.

Notice the entry from Jan. 3, still appears in the T-account.

Modified for PPT.

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Transaction 4: On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.

Modified for PPT.

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Transaction 5: On January 12, 2019, pays a $300 utility bill with cash.

Modified for PPT.

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Transaction 6: On January 14, 2019, distributed $100 cash in dividends to stockholder.

Modified for PPT.

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Transaction 7: On January 17, 2019, receives $2,800 cash from a customer for services rendered.

Modified for PPT.

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Transaction 8: On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.

Modified for PPT.

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Transaction 9: On January 20, 2019, paid $3,600 cash in salaries expense to employees.

Modified for PPT.

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Transaction 10: On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.

Modified for PPT.

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Transaction 11: On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.

Modified for PPT.

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Transaction 12: On January 30, 2019, purchases supplies on account for $500, payment due within three months.

Modified for PPT.

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Figure 3.10

Summary of T-Accounts for Printing Plus. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

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Sample Exercise

EA24. Post the following November transactions to T-accounts for Accounts Payable and Inventory, indicating the ending balance (assume no beginning balances in these accounts).

purchased merchandise inventory on account, $22,000

paid vendors for part of inventory purchased earlier in month, $14,000

purchased merchandise inventory for cash, $6,500

Your Turn: Journalizing Transactions

You have the following transactions the last few days of April.

Prepare the necessary journal entries for these four transactions.

Explain why you debited and credited the accounts you did.

What will be the new balance in each account used in these entries?

Apr. 25You stop by your uncle’s gas station to refill both gas cans for your company, Watson’s Landscaping. Your uncle adds the total of $28 to your account.
Apr. 26You record another week’s revenue for the lawns mowed over the past week. You earned $1,200. You received cash equal to 75% of your revenue.
Apr. 27You pay your local newspaper $35 to run an advertisement in this week’s paper.
Apr. 29You make a $25 payment on account.

Your Turn: Normal Account Balances

Calculate the balances in each of the following accounts. Do they all have the normal balance they should have? If not, which one? How do you know this?

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Module 3.6 Prepare a Trial Balance (Step 4)

The trial balance is prepared from the general ledger. Each account balance is listed by title and with its current balance in the appropriate debit or credit column. The total of all the amounts in the debit column should equal the total amount in the credit column.

Connection Between Ledger Account Balances and the Trial Balance

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The Final Unadjusted Trial Balance

Teacher Notes: An unadjusted trial balance is one that is created before adjusting entries (in Chapter 4) are posted to the journal and ledger. If the trial balance does not balance, then there is an error. The last part of Module 3.6 explains more on how to find errors.

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Your Turn: Completing a Trial Balance

Complete the trial balance for Magnificent Landscaping Service using the following T-account final balance information for April 30, 2018.

77

Sample Exercise

EA19. A business has the following transactions:

The business is started by receiving cash from an investor in exchange for common stock $20,000

The business purchases supplies on account $500

The business purchases furniture on account $2,000

The business renders services to various clients on account totaling $9,000

The business pays salaries $2,000

The business pays this month’s rent $3,000

The business pays for the supplies purchased on account.

The business collects from one of its clients for services rendered earlier in the month $1,500.

What is total income for the month?

Summary

The Financial Accounting Standards Board (FASB) is an independent, nonprofit organization that sets the standards for financial accounting and reporting standards for both public- and private-sector businesses in the United States, including generally accepted accounting principles (GAAP).

GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements.

The Securities and Exchange Commission (SEC) is an independent federal agency that is charged with protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements.

The FASB uses a conceptual framework, which is a set of concepts that guide financial reporting.

The expanded accounting equation breaks down the equity portion of the accounting equation into more detail to show common stock, dividends, revenue, and expenses individually.

The chart of accounts is a numbering system that lists all of a company’s accounts in the order in which they appear on the financial statements, beginning with the balance sheet accounts and then the income statement accounts.

Summary (continued)

Step 1 in the accounting cycle: Identifying and analyzing transactions requires a company to take information from an original source, identify its purpose as a financial transaction, and connect that information to an accounting equation.

Step 2 in the accounting cycle: Recording transactions to a journal takes financial information identified in the transaction and copies that information, using the accounting equation, into a journal. The journal is a record of all transactions.

Step 3 in the accounting cycle: Posting journal information to a ledger takes all information transferred to the journal and posts it to a general ledger. The general ledger in an accumulation of all accounts a company maintains and their balances.

Step 4 in the accounting cycle: Preparing an unadjusted trial balance requires transfer of information from the general ledger (T-accounts) to an unadjusted trial balance showing all account balances. The trial balance contains a listing of all accounts in the general ledger with nonzero balances. Information is transferred from the T-accounts to the trial balance.

This file is copyright 2019, Rice University. All Rights Reserved.

Chapter 4 THE ADJUSTMENT PROCESS

Principles of Accounting, Volume 1: Financial Accounting

PowerPoint Image Slideshow

Chapter Outline

4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries

4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries

4.3 Record and Post the Common Types of Adjusting Entries

4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance

4.5 Prepare Financial Statements Using the Adjusted Trial Balance

Module 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries

Public companies use either US generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS), as allowed by the Securities and Exchange Commission (SEC) regulations.

Companies, public or private, using US GAAP or IFRS prepare their financial statements using the rules of accrual accounting.

With accrual basis accounting, revenues and expenses are recorded in the accounting period in which they were earned or incurred, no matter when cash receipts or payments occur. Individually, these are the revenue recognition principle and the expense recognition principle. Collectively they are known as the matching principle.

The accrual method standardizes reporting information for comparability purposes.

Comparable information is important to external users of information trying to make investment or lending decisions, and to internal users trying to make decisions about company performance, budgeting, and growth strategies.

Some nonpublic companies may choose to use cash basis accounting rather than accrual basis accounting to report financial information.

Teacher Notes: In this chapter, we look at Steps 5, 6, and 7 of the accounting cycle, but to understand why these stages occur, it is first necessary to understand the following concepts: accrual accounting, accounting period, and calendar versus fiscal year.

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An accounting period breaks down company financial information into specific time spans and can cover a month, a quarter, a half-year, or a full year.

Public companies governed by GAAP are required to present quarterly (three-month) accounting period financial statements called 10-Qs.

Most public and private companies keep monthly, quarterly, and yearly (annual) period information. This is helpful for users needing up-to-date financial data to make decisions about company investment and growth.

Accounting Period

A company may choose its yearly reporting period to be based on a calendar or fiscal year.

A calendar year shows financial data from January 1 to December 31 of a specific year.

A fiscal year is a twelve-month reporting cycle that can begin in any month and records financial data for that consecutive twelve-month period.

An interim period is any reporting period shorter than a full year (fiscal or calendar). They can be monthly, quarterly, or half-year statements. The information contained on these statements is timelier than waiting for a yearly accounting period to end. The most common interim period is three months, or a quarter. For companies whose common stock is traded on a major stock exchange, meaning these are publicly traded companies, quarterly statements must be filed with the SEC on a Form 10-Q. The companies must file a Form 10-K for their annual statements.

Fiscal Year versus Calendar Year

Figure 4.2

The Basic Accounting Cycle. In this chapter, we examine the next three steps in the accounting cycle—5, 6, and 7—which cover adjusting entries (journalize and post), preparing an adjusted trial balance, and preparing the financial statements. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Teacher Notes: You can use this as a reminder of the ten stages of the accounting cycle. This cycle must be repeated for each reporting period.

6

Figure 4.3

Steps 5, 6, and 7 in the Accounting Cycle. Modified for PPT. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Adjusting entries update accounting records at the end of a period for any transactions that have not yet been recorded. 

An adjusted trial balance is a list of all accounts in the general ledger, including adjusting entries, which have nonzero balances.  

Based on the adjusted trial balance, the company will prepare an income statement, a statement of retained earnings, a balance sheet, and a statement of cash flows.

7

Module 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries

Suppose in January you prepaid your rent for six months. The total you paid was $6,000. Obviously you spent $6,000, but what did that $6,000 get you? You have the right to use your apartment for the next six months. That “right to use” is considered an asset to you. But if you are creating a monthly expense report, what would you say your rent expense is for January? February? March?

Your rent expense is $1,000 per month. Your landlord does not send you an email at the beginning of each month to say “you’ve used up part of your asset (prepaid rent) and your rent expense for the month is $1,000.” You simply know this is the case. For businesses, this type of situation requires adjusting entries to make the accounts correct.

Teacher Notes: Start off with a conceptual example of adjusting entries.

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Adjusting Entries

Adjusting entries update accounting records at the end of a period for any transactions that have not yet been recorded.

These entries are necessary to ensure the income statement and balance sheet present the correct, up-to-date numbers. Adjusting entries are also necessary because the initial trial balance may not contain complete and current data due to several factors:

It is inefficient to record every single day-to-day event, such as the use of supplies.

Some costs are not recorded during the period but must be recognized at the end of the period, such as depreciation, rent, and insurance.

Some items are forthcoming for which original source documents have not yet been received, such as a utility bill.

9

Several guidelines support the need for adjusting entries:

Revenue recognition principle: Adjusting entries are necessary because the revenue recognition principle requires revenue recognition when earned, thus the need for an update to unearned revenues.

Expense recognition (matching) principle: This requires matching expenses incurred to generate the revenues earned, which affects accounts such as insurance expense and supplies expense.

Time period assumption: This requires useful information be presented in shorter time periods, such as years, quarters, or months. This means a company must recognize revenues and expenses in the proper period, requiring adjustment to certain accounts to meet these criteria.

Adjusting Entries (continued)

Adjusting entries requires updates to specific account types at the end of the period. Not all accounts require updates—only those not naturally triggered by an original source document. There are two main types of adjusting entries that we explore further: deferrals and accruals.

Types of Adjusting Entries

Deferrals are prepaid expenses and revenue accounts that have delayed recognition until they have been used or earned. This recognition may not occur until the end of a period or future periods.

Prepaid expenses (prepayments) are assets for which advanced payment has occurred, before the company can benefit from use. A company has prepaid for an expense but has not “used” the asset yet, such as paying six months rent expense in advance. That prepaid rent is not an expense until it is used—in other words, until each month passes. The prepaid asset becomes an expense once it is used (appropriate time has passed). Some common examples of prepaid expenses are supplies, depreciation, insurance, and rent.

Unearned revenues represent a customer’s advanced payment for a product or service that the company has yet to provide. Because the company has not yet provided the product or service, it cannot recognize the customer’s payment as revenue. At the end of a period, the company will review the account to see if any of the unearned revenue has been earned—that is, if the company did the work or delivered the goods during that period. If so, this amount will be recorded as revenue in the current period.

Deferrals

Teacher Notes: Examples and numerical explanations will be presented after the definitions/theory for deferrals and accruals.

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Accruals are types of adjusting entries that accumulate during a period when amounts were previously unrecorded. The two specific types of adjustments are accrued revenues and accrued expenses.

Accrued revenues are revenues earned in a period but have yet to be recorded, and no money has been collected. Some examples include interest and services completed where a bill has yet to be sent to the customer.

Accrued expenses are expenses incurred in a period but have yet to be recorded, and no money has been paid. Some examples include interest, tax, and salary expenses.

Accruals

The unadjusted trial balance from Step 4 of the accounting cycle:

Figure 4.4

Unadjusted Trial Balance for Printing Plus. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Figure F04_02_UTB01

Teacher Notes: Chapter 3 ended on this step of the accounting cycle.

14

Think It Through: Keep Calm and Adjust . . .

Elliot Simmons owns a small law firm. He does the accounting himself and uses an accrual basis for accounting. At the end of his first month, he reviews his records and realizes there are a few inaccuracies on this unadjusted trial balance.

One difference is the supplies account; the figure on paper does not match the value of the supplies inventory still available. Another difference was interest earned from his bank account. He did not have anything recognizing these earnings.

Why did his unadjusted trial balance have these errors? What can be attributed to the differences in supply figures? What can be attributed to the differences in interest earned?

15

A company paid for supplies with cash in the amount of $400. The following entry occurs for the initial payment.

At the end of the month, the company took an inventory of supplies used and determined the value of those supplies used during the period to be $150. The following adjusting entry is made:

Prepaid Expenses Example

16

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

17

A contra account to the Equipment account

Depreciation Example

Depreciation is the systematic method to record the allocation of cost over a given period of certain assets.

A company pays $2,000 for equipment that is supposed to last four years. The company wants to depreciate the asset over those four years equally. This means the asset will lose $500 in value each year ($2,000/four years). In the first year, the company would record the following adjusting entry to show depreciation of the equipment.

Modified for PPT.

Teacher Notes: More detail about depreciation is covered in another chapter. For now, the original entry would have been DR Equipment and CR Cash (or whatever the payment source is). Contra accounts are accounts that are paired with another account (asset or liability) and will have a normal balance that is the opposite of the account with which they are paired. The purpose is to show a decrease in the original account value without actually adjusting the original account. This way, the historical value of the original account is known, but the net of the original account and the contra account provide the book value of the original asset or liability. Technically, depreciation is a type of prepaid adjustment. The equipment was paid for in advance, but as a cost of the business, it should be allocated or recognized over the periods it benefits the company. Thus, we prepaid for the equipment and will recognize the cost (expense) of that equipment over time.

18

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

19

A company pays $4,500 for an insurance policy covering six months. It is the end of the first month and the company needs to record an adjusting entry to recognize the insurance used during the month. The following entries show the initial payment for the policy and the subsequent adjusting entry for one month of insurance usage.

Prepaid Account Example 1

Teacher Notes: We just saw that depreciation is a form of prepaid entry, but in accounting we usually do not refer to deprecation as a prepaid adjustment because there is no asset account created called prepaid equipment; it is merely recorded as equipment. However, other prepaid items are labeled as prepaid assets as in the case here.

20

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

21

A company pays $8,000 in advance for four months of rent. After the first month, the company records an adjusting entry for the rent used. The following entries show initial payment for four months of rent and the adjusting entry for one month’s usage.

Prepaid Account Example 2

22

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

23

During the year, a law firm collected retainer fees totaling $48,000 from clients. Retainer fees are money lawyers collect in advance of starting work on a case. When the company collects this money from its clients, it will debit cash and credit unearned fees. 

At the end of the year after analyzing the unearned fees account, 40% of the unearned fees have been earned. This 40% can now be recorded as revenue. Total revenue recorded is $19,200 ($48,000 × 40%).

Unearned Revenue Account Example

Unearned revenue represents a customer’s advanced payment for a product or service that has yet to be provided by the company. Since the company has not yet provided the product or service, it cannot recognize the customer’s payment as revenue. At the end of a period, the company will review the account to see if any of the unearned revenue has been earned. If so, this amount will be recorded as revenue in the current period.

24

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

25

A company has one outstanding note receivable in the amount of $100,000. Interest on this note is 5% per year. Three months have passed, and the company needs to record interest earned on this outstanding loan. The calculation for the interest revenue earned is $100,000 × 5% × 3/12 = $1,250. The following adjusting entry occurs.

Interest Revenue Account Example

Teacher Notes: The interest revenue must record that the company is owed the interest for three months but has not been paid that amount because the interest is not yet legally due.

26

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

27

A company performs landscaping services in the amount of $1,500. However, they have not yet received payment. At the period end, the company would record the following adjusting entry.

Unpaid Service Revenue Account Example

28

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

29

A company accrued $300 of interest during the period. The following entry occurs at the end of the period.

Interest Expense Account Example

30

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

31

A company has accrued income taxes for the month for $9,000. The company would record the following adjusting entry.

Income Tax Expense Account Example

32

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

33

A company has five salaried employees, each earning $2,500 per month. In our example, assume that they do not get paid for this work until the first of the next month. The following is the adjusting journal entry for salaries.

Salaries Expense Account Example

34

In T-account form, the general ledger postings would be:

Balance Sheet Account

Income Statement Account

Modified for PPT.

35

Your Turn: Adjusting Entries

On a sheet of paper, draw the following:

Table 4.1

Review the three adjusting entries that follow. For each entry write down the income statement account and balance sheet account used in the adjusting entry in the appropriate column. Then in the last column answer yes or no.

ExampleIncome Statement AccountBalance Sheet AccountCash in Entry?

36

Your Turn: Adjusting Entries Take Two

Did we continue to follow the rules of adjusting entries in these two examples? Explain.

Table 4.3

ExampleIncome Statement AccountBalance Sheet AccountCash in Entry?

37

Sample Exercise

EA8. Supplies were purchased on January 1, to be used throughout the year, in the amount of $8,500. On December 31, a physical count revealed that the remaining supplies totaled $1,200. There was no beginning of the year balance in the Supplies account. Based on the information provided:

Create journal entries for the original transaction

Create journal entries for the December 31 adjustment needed to bring the balances to correct

Show the activity, with ending balance

Recall the journal entries recorded for Printing Plus and that resulted in this unadjusted trial balance.

Jan. 3, 2019issues $20,000 shares of common stock for cash
Jan. 5, 2019purchases equipment on account for $3,500, payment due within the month
Jan. 9, 2019receives $4,000 cash in advance from a customer for services not yet rendered
Jan. 10, 2019provides $5,500 in services to a customer who asks to be billed for the services
Jan. 12, 2019pays a $300 utility bill with cash
Jan, 14, 2019distributed $100 cash in dividends to stockholders
Jan. 17, 2019receives $2,800 cash from a customer for services rendered
Jan. 18, 2019paid in full, with cash, for the equipment purchase on January 5
Jan. 20, 2019paid $3,600 cash in salaries expense to employees
Jan. 23, 2019received cash payment in full from the customer on the January 10 transaction
Jan. 27, 2019provides $1,200 in services to a customer who asks to be billed for the services
Jan. 30, 2019purchases supplies on account for $500, payment due within three months

39

Think It Through: Cash or Accrual Basis Accounting?

You are a new accountant at a salon. The salon had previously used cash basis accounting to prepare its financial records but now considers switching to an accrual basis method. You have been tasked with determining if this transition is appropriate.

When you go through the records you notice that this transition will greatly impact how the salon reports revenues and expenses. The salon will now report some revenues and expenses before it receives or pays cash.

How will change positively impact its business reporting? How will it negatively impact its business reporting? If you were the accountant, would you recommend the salon transition from cash basis to accrual basis?

Transaction 13: On January 31, Printing Plus took an inventory of its supplies and discovered that $100 of supplies had been used during the month.

Analysis: Supplies is an asset that is decreasing (credit). Supplies Expense would increase (debit) for the $100 of supplies used during January.

41

Transaction 14: The equipment purchased on January 5 depreciated $75 during the month of January.

Analysis: Accumulated Depreciation–Equipment is a contra asset account (contrary to Equipment) and increases (credit) for $75. Depreciation Expense–Equipment is an expense account that is increasing (debit) for $75.

42

Transaction 15: Printing Plus performed $600 of services during January for the customer from the January 9 transaction.

Analysis: On January 9, a customer paid the company $4,000 in advanced payment for services. During January the company did $600 of the work. Unearned Revenue, a liability, will decrease. The company can now recognize the $600 as earned revenue.

43

Transaction 16: Reviewing the company bank statement, Printing Plus discovers $140 of interest earned during the month of January that was previously uncollected and unrecorded.

Analysis: Interest Revenue is a revenue account that increases (credit) for $140. Since Printing Plus has yet to collect this interest revenue, it is considered a receivable. Interest Receivable increases (debit) for $140.

44

Transaction 17: Employees earned $1,500 in salaries for the period of January 21–January 31 that had been previously unpaid and unrecorded.

Analysis: Salaries have accumulated since January 21 and will not be paid in the current period. Since the salaries expense occurred in January, the expense should be recorded in January. Salaries Expense increases $1,500. The company has not yet paid salaries for this time period. This creates a liability, and Salaries Payable increases $1,500.

45

Your Turn: Deferrals versus Accruals

Label each of the following as a deferral or an accrual, and explain your answer.

The company recorded supplies usage for the month.

A customer paid in advance for services, and the company recorded revenue earned after providing service to that customer.

The company recorded salaries that had been earned by employees but were previously unrecorded and have not yet been paid.

Determining Account Balance Using T-Accounts

Using the same transactions:

Transaction 13: On January 31, Printing Plus took an inventory of its supplies and discovered that $100 of supplies had been used during the month.

Modified for PPT.

47

Transaction 14: The equipment purchased on January 5 depreciated $75 during the month of January.

Modified for PPT.

48

Transaction 15: Printing Plus performed $600 of services during January for the customer from the January 9 transaction.

Modified for PPT.

49

Transaction 16: Reviewing the company bank statement, Printing Plus discovers $140 of interest earned during the month of January that was previously uncollected and unrecorded.

Modified for PPT.

50

Transaction 17: Employees earned $1,500 in salaries for the period of January 21–January 31 that had been previously unpaid and unrecorded.

Modified for PPT.

51

Figure 4.5

Printing Plus summary of T-accounts with Adjusting Entries. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

52

Module 4.3 Record and Post the Common Types of Adjusting Entries

Step 5: Prepare adjusting entries

The preceding 12 transactions were recorded as the occurred. On January 31, 2019, Printing Plus makes adjusting entries for the following transactions.

On January 31, Printing Plus took an inventory of its supplies and discovered that $100 of supplies had been used during the month.

The equipment purchased on January 5 depreciated $75 during the month of January.

Printing Plus performed $600 of services during January for the customer from the January 9 transaction.

Reviewing the company bank statement, Printing Plus discovers $140 of interest earned during the month of January that was previously uncollected and unrecorded.

Employees earned $1,500 in salaries for the period of January 21–January 31 that had been previously unpaid and unrecorded.

Module 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance

Step 6: Use the ledger balances to prepare an adjusted trial balance

Once all of the adjusting entries have been posted to the general ledger, step 6 of the accounting cycle takes place

An adjusted trial balance is a list of all accounts in the general ledger, including adjusting entries, which have nonzero balances

The trial balance is an important step in the accounting process because it helps identify any computational errors from prior steps

The adjusted trial balance leads to the formation of the financial statements.

Connection between Adjusting Entries and the Trial Balance

55

The Final Unadjusted Trial Balance

56

Module 4.5 Prepare Financial Statements Using the Adjusted Trial Balance

Income statement

Statement of retained earnings

Balance sheet

Ten-column worksheets

Your Turn: Magnificent Adjusted Trial Balance

Go over the adjusted trial balance for Magnificent Landscaping Service. Identify which account each will go on: Balance Sheet, Statement of Retained Earnings, or Income Statement.

58

Final Income Statement

59

Connection between Adjusted Trial Balance and Income Statement

60

Final Statement of Retained Earnings

61

Connection between Income Statement and Statement of Retained Earnings

62

Final Statement of Balance Sheet

63

Connection between Adjusted Trial Balance and the Balance Sheet

64

Trial balance entered

Adjusting entries posted

Adjusted trial balance computed

Income statement

Balance sheet

Teacher Notes: The 10-column worksheet is used to facilitate putting together the financial statements.

65

1. Trial Balance Accounts Entered

66

Trial Balance

67

2. Adjusting Entries Posted

68

3. Adjusted Trial Balance Computed

69

Adjusted Trial Balance

70

4. Income Statement

71

Formal Income Statement

72

5. Balance Sheet

73

Formal Statement of Retained Earnings and Balance Sheet

74

Your Turn: Frank’s Net Income and Loss

What amount of net income/loss does Frank have? What will be the company’s ending retained earnings balance?

75

Your Turn: Income Statement and Balance Sheet

Take a couple of minutes and fill in the income statement and balance sheet columns. Total them when you are done. Do not panic when they do not balance. They will not balance at this time.

76

Sample Problem

PA2. To demonstrate the difference between cash account activity and accrual basis profits (net income), note the amount each transaction affects cash and the amount each transaction affects net income.

paid balance due for accounts payable $6,900

charged clients for legal services provided $5,200

purchased supplies on account $1,750

collected legal service fees from clients for current month $3,700

issued stock in exchange for a note payable $10,000

Summary

The next three steps in the accounting cycle are adjusting entries (journalizing and posting), preparing an adjusted trial balance, and preparing the financial statements.

Accrual requires revenues and expenses to be recorded in the accounting period in which they occur, not necessarily where an associated cash event happened. This is unlike cash basis accounting that will delay reporting revenues and expenses until a cash event occurs.

Accounting periods help companies by breaking down information into months, quarters, half-years, and full years.

Need for adjustments: Some account adjustments are needed to update records that may not have original source documents or those that do not reflect change on a daily basis.

Rules for adjusting entries: The rules for recording adjusting entries are as follows: every adjusting entry will have one income statement account and one balance sheet account, cash will never be in an adjusting entry, and the adjusting entry records the change in amount that occurred during the period.

Summary (continued)

Posting adjusting entries: Posting adjusting entries is the same process as posting general journal entries. The additional adjustments may add accounts to the end of the period or may change account balances from the earlier journal entry step in the accounting cycle.

Income statement: The income statement shows the net income or loss as a result of revenue and expense activities occurring in a period.

Statement of retained earnings: The statement of retained earnings shows the effects of net income (loss) and dividends on the earnings the company maintains.

Balance sheet: The balance sheet visually represents the accounting equation, showing that assets balance with liabilities and equity.

10-column worksheet: The 10-column worksheet organizes data from the trial balance all the way through the financial statements.

This file is copyright 2019, Rice University. All Rights Reserved.

CREATE A PROFESSIONAL BIO

SEE THE SAMPLE FORMAT BELOW

Sentence 1: [Name] is a [job title] who [job description].

E.g., Lisa Green is an English teacher who teaches beginning to advanced literature courses for 10th and 11th grade students at Bloomfield High School.

Sentence 2: [Name] believes that [why you do the work you do].

E.g., Lisa believes that written and analytical skills are not only a fundamental part of academic excellence, but are also the building blocks of critical thinking in high school and beyond.

Sentence 3: [Name/pronoun] has [mention your achievements].

E.g., In addition to managing the English curriculum for the school, she runs an after school program where she works one-on-one with students.

Sentence 4: [Name/pronoun] is a [mention any relevant awards, training or honors].

E.g., She has also been nominated Teacher of the Year for two consecutive years.

Sentence 5: [Name/pronoun] holds a [insert degree] in [field of study] from [university].

E.g., Lisa holds a BA in Creative Writing and a Master’s Degree in Teaching from the University of Michigan.

Once you’ve filled in this template, put it all together into a single paragraph to create an initial framework for your professional biography. Note that you can shorten or expand upon this bio according to your unique needs.

Arrow Down with solid fill

Here is more info about the person:

SUMMARY ABOUT THE PERSON, DO NOT COPY ALL THIS.

A Front-End Developer and Service-Now Developer Providing solution with expertise in (Front-End) JavaScript, Html, CSS, Bootstrap (ServiceNow) Testing, Design, Development, and Implementation experience. Working in the Information Technology Sector for over ten years and seven years in Service-Now. Experienced in the Process flow, implementing solutions, Business Analysis, planning and management. Helped businesses reach their goal with best practices. Areas of Expertise are Agile Methodology ( Scrum ), GRC(Policy & Compliance, Risk Management, Vendor Risk Management), Human Resources Service Delivery, ITAM-SAM PRO || ITSM (Service-catalog, Knowledge, Incident, Change, Problem) as well as Design solutions. Always aggressively identify and resolve inefficient operational processes, Including knowledge in CMDB,MID-SERVER & Discovery. Very Resourceful, analytical, and detail-driven individual with capabilities in completing multiple projects with competing deadlines.

TECH INDUSTRY, OVER 10+ YEARS OF EXPERIENCE

WORK IN HEALTH CARE, MANUFACTURING, FINANCIAL, OIL AND GAS SECTOR

SO PLS GENERATE NICE WORDS ABOUT A PERSON WITH THE ROLE OF A TECHNOLOGY DIRECTOR

CREATE A PROFESSIONAL BIO

SEE THE SAMPLE FORMAT BELOW

Sentence 1: [Name] is a [job title] who [job description].

E.g., Lisa Green is an English teacher who teaches beginning to advanced literature courses for 10th and 11th grade students at Bloomfield High School.

Sentence 2: [Name] believes that [why you do the work you do].

E.g., Lisa believes that written and analytical skills are not only a fundamental part of academic excellence, but are also the building blocks of critical thinking in high school and beyond.

Sentence 3: [Name/pronoun] has [mention your achievements].

E.g., In addition to managing the English curriculum for the school, she runs an after school program where she works one-on-one with students.

Sentence 4: [Name/pronoun] is a [mention any relevant awards, training or honors].

E.g., She has also been nominated Teacher of the Year for two consecutive years.

Sentence 5: [Name/pronoun] holds a [insert degree] in [field of study] from [university].

E.g., Lisa holds a BA in Creative Writing and a Master’s Degree in Teaching from the University of Michigan.

Once you’ve filled in this template, put it all together into a single paragraph to create an initial framework for your professional biography. Note that you can shorten or expand upon this bio according to your unique needs.

Arrow Down with solid fill

Here is more info about the person:

SUMMARY ABOUT THE PERSON, DO NOT COPY ALL THIS.

A Front-End Developer and Service-Now Developer Providing solution with expertise in (Front-End) JavaScript, Html, CSS, Bootstrap (ServiceNow) Testing, Design, Development, and Implementation experience. Working in the Information Technology Sector for over ten years and seven years in Service-Now. Experienced in the Process flow, implementing solutions, Business Analysis, planning and management. Helped businesses reach their goal with best practices. Areas of Expertise are Agile Methodology ( Scrum ), GRC(Policy & Compliance, Risk Management, Vendor Risk Management), Human Resources Service Delivery, ITAM-SAM PRO || ITSM (Service-catalog, Knowledge, Incident, Change, Problem) as well as Design solutions. Always aggressively identify and resolve inefficient operational processes, Including knowledge in CMDB,MID-SERVER & Discovery. Very Resourceful, analytical, and detail-driven individual with capabilities in completing multiple projects with competing deadlines.

TECH INDUSTRY, OVER 10+ YEARS OF EXPERIENCE

WORK IN HEALTH CARE, MANUFACTURING, FINANCIAL, OIL AND GAS SECTOR

SO PLS GENERATE NICE WORDS ABOUT A PERSON WITH THE ROLE OF A TECHNOLOGY DIRECTOR

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