Intermediate accounting 17e stice skousen cengage chapter 02

The difference between total revenues and total expenses for a period is net income loss, which increases decreases owners’ equity through the retained earnings account...  To make bala

A Review of the Accounting Cycle

Intermediate Accounting,17E

Stice | Stice | Skousen

Recording Phase

1 Business documents are analyzed.

2 Transactions are recorded

3 Transactions are posted

Reporting Phase

4 A trial balance of the accounts in the general ledger is prepared.

5 Adjusting entries are recorded

6 Financial statements are prepared.

7 Nominal accounts are closed

8 A post-closing trial balance may be prepared.

• A debit is an entry on the left side of an

account.

Double-Entry Accounting

• Assets, expenses, and dividends are

increased by debits and decreased

3-Step Journal Entry Process

or transaction.

increased or decreased

each account was affected

1 Assets are increased by debits and decreased by credits.

2 Liability and owners’ equity accounts are increased by credits and decreased by debits.

3 Owners’ equity for a corporation includes capital stock accounts and the retained earnings account.

4 Revenues, expenses, and dividends relate to owners’ equity

Summarizing

5 Expenses and dividends are increased by debits and decreased

by credits.

6 Revenues are increased by credits and decreased by debits.

7 The difference between total revenues and total expenses for a period is net income (loss), which increases (decreases) owners’ equity through the retained earnings account.

Journalizing Transactions

• The general journal is used to record all

transactions for which a special journal is not maintained.

particular type of frequently

recurring transaction

• sales, purchases, cash disbursements,

cash receipts

the effects of transactions on each element of the expanded

Posting to the Ledger Accounts

• The general ledger includes all

accounts appearing on the financial

statements, and separate subsidiary

ledgers afford additional detail in

support of certain general ledger

accounts.

• The general ledger account that

summarizes the detailed information in a subsidiary ledger is known as a control

Preparing a Trial Balance

accounts and their balances

• It provides a means to assure

that debits equal credits

Adjusting Entries

• Adjusting entries are required at the

end of each accounting period prior to

preparing the financial statements

 To make balance sheet accounts

current

 To reflect proper amounts of revenues

and expenses on the income statement

• The purpose of adjusting entries:

5 Transactions involving estimates also require analysis.

Areas Most Commonly

Requiring Analysis

1 Identify the original entries that were

made, if any

 Original entries are only made for

unearned revenues and prepaid expenses.

2 Determine what the correct balances

should be at this point in time.

3 Make the adjustments needed to bring

the balances to the desired amounts.

3-Step Process for Adjusting Entries

Rosi, Inc.

If revenue is earned but not yet

collected in cash, a receivable

exists The illustrative entry

recognizing a receivable for Rosi,

Inc., is as follows:

Unrecorded Assets

Liabilities can be created by

expenses being incurred prior to

being paid or recorded Rosi, Inc.,

had unrecorded liabilities at the

end of the accounting period

Unrecorded Liabilities

Accrued Salaries

Unrecorded Liabilities

Accrued Interest

Liabilities can be created by

expenses being incurred prior to

being paid or recorded Rosi, Inc.,

had unrecorded liabilities at the

end of the accounting period

Unrecorded Liabilities

Accrued Taxes

Liabilities can be created by

expenses being incurred prior to

being paid or recorded Rosi, Inc.,

had unrecorded liabilities at the

end of the accounting period

Prepaid Expenses

Payments that a company makes in advance for items normally charged

to expense are known as prepaid

for prepaid expenses depends on

how the expenditure was originally entered in the accounts

Original Debit to an

Asset Account (concl.)

The following T-accounts illustrate

how this adjusting entry, when

posted, would affect the accounts

Original Debit to an

Expense Account

The following T-accounts illustrate

the effect that this adjusting entry

would have on the relevant

accounts:

Original Credit to a Revenue Account

If the revenue account was credited when cash was received, the

revenue account remains with a

credit balance, representing the

earnings applicable to the current

period For Rosi, Inc., the unearned revenue at the end of 2011 is $475 and is recorded as shown next

(continues)

Original Credit to a Revenue Account

The T-accounts below illustrate the

effect that the adjusting entry would have on the related accounts

If a liability account was originally

credited when cash was received,

the adjusting entries require that the liability be debited and the revenue

account be credited for the amount

applicable to the current period If

Rosi, Inc., had originally credited

Unearned Rent Revenue for $2,550,

the adjusting entry shown next

would be made

Original Credit to a Liability Account

(continues)

The T-accounts below illustrate the

effect that the adjusting entry would have on the related accounts

Original Credit to a Liability Account

Transactions Involving

Estimates

In recording asset depreciation,

operations are charged with a

portion of the asset’s cost, and the carrying value of the asset is

reduced using accumulated

depreciation (a contra account)

Asset Depreciation

Transactions Involving

Estimates

Under the accrual concept, an

adjustment should be made for

estimated bad debts in the current period rather than when specific

accounts become uncollectible

Bad Debts

Transactions Involving

Estimates

Using this concept, Rosi, Inc.,

needs to increase the allowance

account by $1,100 The entry

would be as follows:

balance sheet account and an income

statement account.

Adjusting Entries Summary

• Adjusting entries do not involve

cash

Preparing Financial Statements

1 Identify all revenues and expenses—

these account balances are used to

prepare the income statement.

2 Compute the net income.

3 Compute the ending retained earnings

balance.

4 Prepare a balance sheet using the

balance sheet accounts from the trial

Using a Spreadsheet

An optional step in the accounting

process is to use a spreadsheet (also

called a work sheet) to facilitate the

preparation of adjusting entries and

financial statements The availability of spreadsheet software makes the

preparation of a spreadsheet quite

easy A spreadsheet for Rosi, Inc, is

shown next.

2-38

• Real accounts

 Not closed to a zero balance at the end of the accounting period.

 Carried forward to the next period.

• Nominal (or temporary) accounts

 Closed to a zero balance at the end of each accounting period.

 All income statement accounts and the

dividend account.

Closing the Nominal Accounts

Since the revenue account is a

nominal account, it is closed at

the end of the period to

Retained Earnings.

Since the revenue account is a

nominal account, it is closed at

the end of the period to

Retained Earnings.

The Closing Process

Revenues

The Closing Process

Each expense account Each expense account

Expenses

Retained Earnings

Beg Bal xxx

Revenues

Dividends Bal xxx

out the balance.

The Closing Process

Expenses

Retained Earnings

Beg Bal xxx

Revenues Dividends

xx

Dividends

balances at the end of the closing process.

• The post-closing trial balance is

prepared to verify the equality of debits

and credits for all real accounts.

Post-Closing Trial Balance

Accrual Accounting

• Accrual accounting recognizes

revenues as they are earned, not

necessarily when cash is received.

incurred, not necessarily when cash is

paid.

reporting, according to the FASB.

Cash-Basis Accounting

cash receipts and cash disbursements.

such as CPAs, dentists, and engineers.

small service companies.

Computers and Accounting

performed using computers.

generating reports and computational

analysis.

accountant!

Computers and Accounting

• A recent development in the use of

computers in financial reporting is the

spread of XBRI

 Stands for eXtensible Business Reporting

Language

 Is a method of embedding computer-readable

tags in financial report documents

 Allows a company to download its financial

statements into spreadsheets where they can be compared to the financial statements of other

companies that have also been downloaded.