Intermediate accounting 15e kieso warfield chapter 03

Income Statement For the Month Ended October 31, 2014 Adjusting Entries for Prepaid Expenses... 31 Debit CreditPrepaid Insurance Debit CreditInsurance Expense 500 Adjusting Entries for P

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Intermediate

Accounting

INTERMEDIATE ACCOUNTING

F I F T E E N T H E D I T I O N

ki e so

w e ygandt warfi e ld

team for success

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PREVIEW OF CHAPTER

Intermediate Accounting

15th Edition Kieso Weygandt Warfield

3

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1 Understand basic accounting

terminology.

2 Explain double-entry rules.

3 Identify steps in the accounting cycle.

4 Record transactions in journals, post to

6 Prepare financial statements from the adjusted trial balance.

7 Prepare closing entries.

8 Prepare financial statements for a merchandising company.

After studying this chapter, you should be able to:

The Accounting Information System

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LEARNING OBJECTIVES

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Accounting information system

Collects and processes transaction data.

Disseminates the financial information to interested parties.

Accounting Information System

LO 1 Understand basic accounting terminology.

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Helps management answer such questions as:

How much and what kind of debt is outstanding?

Were sales higher this period than last?

What assets do we have?

What were our cash inflows and outflows?

Did we make a profit last period?

Are any of our product lines or divisions operating at a loss?

Can we safely increase our dividends to stockholders?

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3-6 LO 1 Understand basic accounting terminology.

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terminology.

3

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3-8 LO 2 Explain double-entry rules.

asset, liability, equity, revenue, or expense account.

 Double-entry accounting system (two-sided effect).

crediting another.

 DEBITS must equal CREDITS

Debits and Credits

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Account Name

Debit / Dr Credit / Cr

effect of transactions on an account.

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If the sum of Debit entries are greater than the sum of

Credit entries, the account will have a debit balance.

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Account Name

If the sum of Credit entries are greater than the sum of

Debit entries, the account will have a credit balance.

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Normal Balance

Expense

Chapter 3-24

Liabilities

Normal Balance

Chapter 3-25

Normal Balance

Stockholders’ Equity

Chapter 3-26

Normal Balance

Revenue

Normal Balance

Credit

Normal Balance

Credit

Normal Balance

Debit

Normal Balance

Debit

Debits and Credits Summary

LO 2 Explain double-entry rules.

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The Accounting Equation

Relationship among the assets, liabilities and stockholders’

equity accounts of a business:

The equation must be in balance after every transaction For

every Debit there must be a Credit.

Illustration 3-3

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Double-Entry System Illustration

Assets = Liabilities + Stockholders’ Stockholders’ Equity Equity

1 Owners invest $40,000 in exchange for common

stock.

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Assets = Liabilities +

3 Purchase office equipment priced at $5,200, giving a

10 percent promissory note in exchange.

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Assets = Liabilities +

8 Pay cash of $16,000 for a delivery van.

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Ownership structure dictates the types of accounts that are

part of or affect the equity section.

Proprietorship or Partnership

Proprietorship or Partnership Corporation

Owner’s Capital

Owner’s Drawing

Common Stock

Paid-in Capital in Excess of Par

Dividends

Financial Statements and Ownership Structure

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3-24 LO 2 Explain double-entry rules.

Stockholders’ Equity

Balance Sheet

Statement of Retained Earnings

Net income or Net loss

(revenues less expenses)

Income Statement

Net income or Net loss

(revenues less expenses)

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terminology.

3

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The Accounting Cycle

LO 3 Identify steps in the accounting cycle.

Transactions

Journalization

Statement preparation

Closing Post-closing trail balance Reversing entries

Trial balance Posting

Adjusted trial balance

Adjustments

Work Sheet

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Identify and Recording Transactions

What to Record?

events and circumstances that affect a business enterprise.”

Types of Events:

 External – between an entity and its environment

 Internal – event occurring entirely within an entity.

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terminology.

ledger accounts, and prepare a trial

balance.

5 Explain the reasons for preparing

adjusting entries and identify major types

of adjusting entries.

3

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General Journal – a chronological record of transactions

Journal Entries are recorded in the journal

Journalizing

September 1: Stockholders invested $15,000 cash in the corporation

in exchange for shares of stock Purchased computer equipment for

$7,000 cash

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An Expanded Example

Posting

The purpose of transaction analysis is

(1) to identify the type of account involved, and

(2) to determine whether a debit or a credit is required

Keep in mind that every journal entry affects one or more of the

following items: assets, liabilities, stockholders’ equity,

revenues, or expenses

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1 October 1: Stockholders invest $100,000 cash in an

advertising venture to be known as Pioneer Advertising Agency Inc

Posting

LO 4 Record transactions in journals, post to ledger

accounts, and prepare a trial balance.

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2 October 1: Pioneer Advertising purchases office equipment

costing $50,000 by signing a 3-month, 12%, $50,000 note payable

Posting

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3 October 2: Pioneer Advertising receives a $12,000 cash

advance from KC, a client, for advertising services that are expected to be completed by December 31

Posting

12,000

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4 October 3: Pioneer Advertising pays $9,000 office rent, in

cash, for October

Posting

9,000

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5 October 4: Pioneer Advertising pays $6,000 for a one-year

insurance policy that will expire next year on September 30

Posting

12,000

9,000

6,000

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6 October 5: Pioneer Advertising purchases, for $25,000 on

account, an estimated 3-month supply of advertising materials from Aero Supply

Posting

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7 October 9: Pioneer Advertising signs a contract with a local

newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November Pioneer will start work

on the content of the flyers in November Payment of $7,000 is due following delivery of the Sunday papers containing the

flyers

Posting

A business transaction has not occurred There is only an agreement between Pioneer Advertising and the newspaper for the services to be performed in November Therefore, no journal entry is necessary in October.

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8 October 20: Pioneer Advertising’s board of directors declares

and pays a $5,000 cash dividend to stockholders

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3-40 LO 4

9 October 26: Employees are paid every four weeks The total

payroll is $2,000 per day The pay period ended on Friday, October 26, with salaries and wages of $40,000 being paid

Posting

12,000

9,0006,0005,000

40,000

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10 October 31: Pioneer Advertising receives $28,000 in cash and

bills Copa Company $72,000 for advertising services of

12,000

9,0006,000

100,000

Debit CreditService Revenue

Posting

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terminology.

3

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Adjusting Entries

LO 5 Explain the reasons for preparing adjusting entries

and identify major types of adjusting entries.

Makes it possible to:

liabilities, and owner’s equity at the statement date

and expenses for the period.

► Revenues are recorded in the period in which services

are performed

► Expenses are recognized in the period in which they are

incurred

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Types of Adjusting Entries

1 Prepaid Expenses.

Expenses paid in cash

before they are used or

4 Accrued Expenses.

Expenses incurred but not yet paid in cash or

2 Unearned Revenues.

Cash received before

services are performed

Accruals

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Prepaid Expenses Assets paid for and recorded before a

company uses them.

Adjusting Entries for Prepaid Expenses

Cash Payment BEFORE Expense Recorded

 rent

Prepayments often occur in regard to:

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Supplies Pioneer Advertising purchased advertising supplies

costing $25,000 on October 5 Prepare the journal entry to

record the purchase of the supplies.

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Supplies. An inventory count at the close of business on

October 31 reveals that $10,000 of the advertising supplies are still on hand.

15,000

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Supplies identifies that

portion of the asset’s

cost that will provide

future economic benefit.

PIONEER ADVERTISING AGENCY INC.

Balance Sheet October 31, 2014

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Statement

Presentation:

Supplies expense

identifies that portion of

the asset’s cost that

expired in October.

Income Statement For the Month Ended October 31, 2014

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Insurance. On Oct 4th, Pioneer Advertising paid $6,000 for a

one-year fire insurance policy, coverage beginning October 1 Prepare the entry to record the purchase of the insurance

Oct 4

Debit CreditPrepaid Insurance

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Insurance. An analysis of the policy reveals that $500

($6,000 ÷ 12) of insurance expires each month Prepare the

entry to record the insurance cost expired in October.

Oct 31

Debit CreditPrepaid Insurance

Debit CreditInsurance Expense

500

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the asset’s cost that will

provide future economic

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Statement

Presentation:

Insurance expense

expired in October.

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Debit CreditAccumulated Depreciation

LO 5

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Adjusting Entries for

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Statement

Presentation:

Depreciation expense

expired in October.

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Receipt of cash before the services are performed is

recorded as a liability called unearned revenues

Unearned revenues often occur in regard to:

Adjusting Entries for Unearned Revenues

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3-60 LO 5

Unearned Revenue Pioneer Advertising received $12,000 on October 2nd from KC for advertising services expected to be

completed by December 31 Prepare the journal entry to

record the receipt on October 2nd

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Debit Credit

Service Revenue

Debit CreditUnearned Service Revenue

Unearned Revenues. Analysis reveals that Pioneer

Advertising earned $4,000 of the advertising services in

October Prepare the entry to record the revenue for services

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Statement

Presentation:

Unearned service

revenue identifies that

portion of the liability for

which services have not

for Unearned

Revenues

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Revenues recorded for services performed but cash has yet

to be received at the statement date are accrued revenues

Adjusting Entries for Accrued Revenues

Adjusting entry results in:

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3-66 LO 5

Accrued Revenues. In October Pioneer Advertising performed services worth $2,000 that were not billed clients before Oct 31 Prepare the entry to revenues for services performed.

Oct 31

Debit CreditAccounts Receivable

72,000

Debit CreditService Revenue

100,0004,000

2,000 106,000

2,000 74,000

Adjusting Entries for Accrued Revenues

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Adjusting entry results in:

Adjusting Entries for Accrued Expenses

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Accrued Interest. Pioneer Advertising signed a three-month

note payable in the amount of $50,000 on October 1 The note

requires interest at an annual rate of 12 percent Three factors

determine the amount of the interest accumulation:

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Debit CreditInterest Payable

Accrued Interest. Pioneer signed a three-month, 12%, note

payable in the amount of $50,000 on October 1 Prepare the

adjusting entry on Oct 31 to record the accrual of interest.

LO 5

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for Accrued

Expenses

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Accrued Salaries and Wages. At October 31, the salaries and wages for these days represent an accrued expense and a

related liability to Pioneer The employees receive total salaries of

$10,000 for a five-day work week, or $2,000 per day.

LO 5

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Salaries and Wages Payable 6,000

Oct 31

Debit CreditSalaries and Wages Expense

Debit CreditSalaries and Wages Payable

Accrued Salaries. Employees receive total salaries and wages

of $10,000 for a five-day work week, or $2,000 per day Prepare the adjusting entry on Oct 31 to record accrual for salaries.

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Salaries and Wages Expense Salaries and Wages Payable

Accrued Salaries. On November 23, Pioneer will again pay

total salaries and wages of $40,000 Prepare the entry to

record the payment of salaries on November 23.

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