Accounting principles 1c
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This document outlines the process of preparing financial statements using a worksheet, focusing on adjustments, closing entries, and accounting for revenues and expenses. It details the steps needed to create a trial balance, adjust entries, and prepare income statements and balance sheets. Additionally, it discusses concepts like unearned revenue, accrued expenses, and the differences between temporary and permanent accounts.
Accounting principles 1c
- 1. www.mba4help.com Jose Cintron, MBA-CPC (954) 374-8298 Josecintron.mba@gmail.com Accounting Principles 1c
- 2. www.mba4help.com Worksheet A worksheet is a multiple-column form used in the adjustment process and in preparing financial statements. As its name suggests, the worksheet is a working tool. It is not a permanent accounting record; it is neither a journal nor a part of the general ledger. The worksheet is merely a device used in preparing adjusting entries and the financial statements.
- 9. www.mba4help.com (a) Pioneer debits an additional account, Advertising Supplies Expense, $1,500 for the cost of supplies used, and credits Advertising Supplies $1,500. (b) Pioneer debits an additional account, Insurance Expense, $50 for the insurance that has expired, and credits Prepaid Insurance $50. (c) The company needs two additional depreciation accounts. It debits Depreciation Expense $40 for the month's depreciation, and credits Accumulated Depreciation— Office Equipment $40. (d) Pioneer debits Unearned Revenue $400 for services provided, and credits Service Revenue $400. (e) Pioneer debits an additional account, Accounts Receivable, $200 for services provided but not billed, and credits Service Revenue $200. (f) The company needs two additional accounts relating to interest. It debits Interest Expense $50 for accrued interest, and credits Interest Payable $50. (g) Pioneer debits Salaries Expense $1,200 for accrued salaries, and credits an additional account, Salaries Payable, $1,200. Step 1. Prepare a Trial Balance on the Worksheet Step 2. Enter the Adjustments in the Adjustments Columns
- 10. www.mba4help.com Step 3. Enter Adjusted Balances in the Adjusted Trial Balance Columns Pioneer determines the adjusted balance of an account by combining the amounts entered in the first four columns of the worksheet for each account. For example, the Prepaid Insurance account in the trial balance columns has a $600 debit balance and a $50 credit in the adjustments columns. The result is a $550 debit balance recorded in the adjusted trial balance columns. For each account, the amount in the adjusted trial balance columns is the balance that will appear in the ledger after journalizing and posting the adjusting entries
- 11. www.mba4help.com Step 4. Extend Adjusted Trial Balance Amounts to Appropriate Financial Statement Columns The fourth step is to extend adjusted trial balance amounts to the income statement and balance sheet columns of the worksheet. Pioneer enters balance sheet accounts in the appropriate balance sheet debit and credit columns. For instance, it enters Cash in the balance sheet debit column, and Notes Payable in the credit column. Pioneer extends Accumulated Depreciation to the balance sheet credit column; the reason is that accumulated depreciation is a contra-asset account with a credit balance.
- 12. www.mba4help.com Preparing Financial Statements from a Worksheet After a company has completed a worksheet, it has at hand all the data required for preparation of financial statements. The income statement is prepared from the income statement columns. The balance sheet and owner's equity statement are prepared from the balance sheet columns.
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- 14. www.mba4help.com Closing the books At the end of the accounting period, the company makes the accounts ready for the next period. This is called closing the books. In closing the books, the company distinguishes between temporary and permanent accounts. Temporary accounts relate only to a given accounting period. They include all income statement accounts and the owner's drawing account. The company closes all temporary accounts at the end of the period.
- 15. www.mba4help.com Closing the books* In contrast, permanent accounts relate to one or more future accounting periods. They consist of all balance sheet accounts, including the owner's capital account. Permanent accounts are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period
- 16. www.mba4help.com Closing Entries At the end of the accounting period, the company transfers temporary account balances to the permanent owner's equity account, Closing entries formally recognize in the ledger the transfer of net income (or net loss) and owner's drawing to owner's capital. The owner's equity statement shows the results of these entries. Closing entries also produce a zero balance in each temporary account. The temporary accounts are then ready to accumulate data in the next accounting period separate from the data of prior periods. Permanent accounts are not closed.
- 17. www.mba4help.com Closing entries Companies close the revenue and expense accounts to another temporary account, Income Summary, and they transfer the resulting net income or net loss from this account to owner's capital. Companies record closing entries in the general journal Then the company posts the closing entries to the ledger accounts.
- 18. www.mba4help.com Closing entries Companies generally prepare closing entries directly from the adjusted balances in the ledger. 1. Debit each revenue account for its balance, and credit Income Summary for total revenues. 2. Debit Income Summary for total expenses, and credit each expense account for its balance. 3. Debit Income Summary and credit Owner's Capital for the amount of net income. 4. Debit Owner's Capital for the balance in the Owner's Drawing account, and credit Owner's Drawing for the same amount.
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- 23. www.mba4help.com Merchandising Operations They buy and sell merchandise rather than perform services as their primary source of revenues.
- 24. www.mba4help.com Operating circle The operating cycle of a merchandising company ordinarily is longer than that of a service company
- 25. www.mba4help.com Merchandising Operations* Merchandising companies that purchase and sell directly to consumers are called retailers. Merchandising companies that sell to retailers are known as wholesalers
- 26. www.mba4help.com Journal Entries Recording purchases of merchandise on credit for resale. Inventory 1000 Account Payable 1000 Recording payment of merchandise purchased. Account payable 1000 Cash 1000 Sold the merchandise on credit. Account Receivable 2000 Sales Revenue 2000 To show the real amount of inventory available. Cost of Goods sold 1000 Inventory 1000 To record the collection of receivables Cash 2000 Account Receivable 2000
- 27. www.mba4help.com Cost of goods sold under a periodic inventory system 1. Determine the cost of goods on hand at the beginning of the accounting period. 2. Add to it the cost of goods purchased. 3. Subtract the cost of goods on hand at the end of the accounting period.
- 28. www.mba4help.com Costs for a merchandising The flow of costs for a merchandising company is as follows: Beginning inventory is added to the cost of goods purchased to arrive at cost of goods available for sale. Cost of goods available for sale is assigned to the cost of goods sold (goods sold this period) and ending inventory (goods to be sold in the future). Companies use one of two systems to account for inventory: a perpetual inventory system or a periodic inventory system.
- 29. www.mba4help.com Unearned revenues Companies record cash received before revenue is earned by increasing a liability account called unearned revenues. Examples are rent, magazine subscriptions, and customer deposits for future service. Unearned revenues are the opposite of prepaid expenses. A landlord will have unearned rent revenue when a tenant has prepaid rent. When a company receives cash for future services, it increases (credits) an unearned revenue account (a liability) to recognize the liability.
- 30. www.mba4help.com Unearned Revenue Pioneer Advertising Agency received $1,200 on October 2 from R. Knox for advertising services expected to be completed by December 31. Pioneer credited the payment to Unearned Service Revenue; this account shows a balance of $1,200 in the October 31 trial balance. Analysis reveals that the company earned $400 of those fees in October. Thus, it makes the following adjusting entry.
- 31. www.mba4help.com Unearned Revenue Oct. 31 Unearned Revenue 400 Service Revenue 400 (To record monthly depreciation) The liability Unearned Revenue now shows a balance of $800. At the same time, Service Revenue shows total revenue of $10,400 earned in October.
- 32. www.mba4help.com Unearned Revenue Without this adjustment, revenues and net income are understated by $400 in the income statement. Also, liabilities are overstated and owner's equity understated by $400 on the October 31 balance sheet.
- 33. www.mba4help.com Accrued Expenses Expenses incurred but not yet paid or recorded at the statement date are accrued expenses. Interest, rent, taxes, and salaries are typical accrued expenses
- 34. www.mba4help.com Accrued Expenses Oct. 31 Interest Expense 50 Interest Payable 50 (To record interest on notes payable)
- 35. www.mba4help.com Accounting for accrued Revenues
- 36. www.mba4help.com Accrued revenues In October Pioneer Advertising Agency earned $200 for advertising services that have not been recorded. Pioneer makes the following adjusting entry on October 31. Oct. 31 Accounts Receivable 200 Service Revenue 200 (To record revenue for services provided) Nov. 10 Cash 200 Accounts Receivable 200 (To record cash collected on account)
- 37. www.mba4help.com Accrued Salaries Companies pay for some types of expenses after the services have been performed. Examples are employee salaries and commissions. Pioneer last paid salaries on October 26; the next payday is November 9. As the calendar
- 38. www.mba4help.com Accrued Salaries At October 31, the salaries for the last three days of the month represent an accrued expense and a related liability. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 × 3). Pioneer makes the following adjusting entry: Oct. 31 Salaries Expense 1,200 Salaries Payable 1,200 (To record accrued salaries)
- 39. www.mba4help.com Accrued Salaries The next payday is November 9, when the company will again pay total salaries of $4,000. The payment will consist of $1,200 of salaries payable at October 31 plus $2,800 of salaries expense for November Nov. 9 Salaries Payable 1,200 Salaries Expense 2,800 Cash 4,000 (To record November 9 payroll)
- 40. www.mba4help.com Adjusting Entries-Accrual 1. At August 31, Calvin and Hobbes owed employees $800 in salaries that the company will pay on September 1. 2. On August 1, Calvin and Hobbes borrowed $30,000 from a local bank on a 15-year note. The annual interest rate is 10%. 3. Service revenue on account unrecorded in August totaled $1,100. Make adjusting entries at the end of the period for revenues earned and expenses incurred in the period needed at Aug. 31, 2010.
- 41. www.mba4help.com Solution Adjusting entries for accruals will increase both a balance sheet and an income statement account. 1. Salaries Expense 800 Salaries Payable 800 (To record accrued salaries) 2. Interest Expense 250 Interest Payable 250 (To record interest) ($30,000 × 10% × 1/12 = $250) 3. Accounts Receivable 1,100 Service Revenue 1,100 (To record revenue for services provided)
- 42. www.mba4help.com It is up to you!