Intermediate accounting 19th by stice stice chapter 02

Preparing a Trial Balance• After all transactions for the period have been posted to the ledger accounts, the balance for each account... • At the end of each accounting period, in ord

Intermediate

Accounting

A Review of the Accounting

Cycle

Chapter 2

19 th

Edition

The Accounting Process

1 Business documents are analyzed.

2 Transactions are recorded.

3 Transactions are posted.

The Recording Phase

The Recording Phase

7 Nominal accounts are closed.

8 A post-closing trial balance may be

The Accounting Process

4 A trial balance of the accounts in the

general ledger is prepared.

5 Adjusting entries are recorded.

6 Financial statements are prepared.

The Reporting Phase

The Reporting Phase

• Transactions are events that transfer or change goods or services between or

among two or more entities

• Business documents, such as invoices, provide evidence that transactions have

occurred as well as the data required to

record the transactions in the accounting records

Accounting Terminology

• Double-entry accounting is an old and universally accepted system for recording accounting data.

• Each transaction is recorded in a way that maintains the equality of the basic

accounting equation:

Assets = Liabilities + Owners’ Equity

Accounting Terminology

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

• Assets, expenses, and dividends are

increased by debits and decreased by

Three-Step Journal Entry Process

event or transaction.

2 Determine whether each account

increased or decreased (this information, coupled with the answer to step 1, will tell you if the account was debited or

credited).

3 Determine the amount by which each

Analyzing Business Documents

• The business document provides support for the data to be recorded

in the journals.

• Documents underlying each recorded transaction provide a means of verifying the accounting records and thus form a vital part of the

information and control systems.

document, is the first record of each

transaction

Journalizing Transactions

• The general journal is used to record all

transactions for which a special journal is not

• A special journal is used to record a

particular type of frequently recurring

transaction

documents has been analyzed, transactions are recorded in chronological order in the

• An account is used to summarize the effects of transactions on each

element of the expanded accounting equation.

maintained by a business

• The transfer of information from the

journal to the appropriate accounts in the ledger is referred to as posting

Posting to the Ledger Accounts

• The general ledger includes all accounts

appearing on the financial statements, and

additional detail in support of certain

general ledger accounts

summarizes the detailed information in a

Establishing Separate Ledgers

Preparing a Trial Balance

• After all transactions for the period

have been posted to the ledger

accounts, the balance for each account

Preparing Adjusting Entries

• Although the majority of accounts are up to date at the end of the accounting period and their balances can be included in the financial statements, some accounts require adjustment to reflect current

circumstances.

• At the end of each accounting period, in order to report all asset, liability, and owners’ equity amounts properly and to recognize all revenues and expenses for the period on an accrual basis, accountants are required to make adjusting entries prior to preparing financial statements.

Steps to Analyze Circumstances

1 Determine whether the amounts

recorded for all asset and liabilities is

correct.

2 Determine what revenue or expense

adjustments are required as a result of the changes in recorded amounts of

assets and liabilities indicated in step 1.

1 Unrecorded assets —Assets and revenues that have been earned but not yet recorded.

2 Unrecorded liabilities —Expenses and liabilities that have been incurred but not yet recorded.

Areas Most Commonly Requiring Analysis

Transactions where cash will be exchanged in

a future period:

3 Prepaid expenses —Expenses that have

been recorded but not yet incurred

4 Unearned revenues —Revenues that

have been recorded but not yet earned

Areas Most Commonly Requiring Analysis

• Revenues should be recorded when

earned, regardless of when cash is

received

properly reported on the balance sheet in

the correct amounts

• The unrecorded receivables are earned and represent amounts that are receivable

in the future

Unrecorded Assets

(a) If revenue is earned but not yet collected

in cash, a receivable exists Rosi, Inc.,

has interest on a note receivable of $250

• Liabilities can be created by expenses

being incurred prior to being paid or

recorded

the accounting period to recognize any

unrecorded liabilities

Unrecorded Liabilities

(b) Rosi, Inc., had unrecorded salaries and

wages amounting to $2,150 at the end of

Unrecorded Liabilities

Salaries and Wages Expense 2,150

Salaries and Wages Payable 2,150

To record accrued salaries and wages.

(c) Rosi, Inc., firm accrued interest of $5,000

(d) Rosi, Inc., owed federal and state

income taxes totaling $8,000

Unrecorded Liabilities

Income Tax Expense 8,000

Income Taxes Payable 8,000

To record income taxes.

• Payments that a company makes in

advance for items normally charged to

consumption of an asset

Prepaid Expenses

Prepaid Expenses Originally

Debited to an Asset Account

If the asset account was originally debited, the adjusting entry requires that an

expense account be debited for the

amount applicable to the current period

and the asset account credited.

(e) The expired portion of Rosi Inc.’s prepaid

insurance is $4,200 The following

adjusting entry is required:

Prepaid Expenses Originally

Debited to an Asset Account

Insurance Expense 4,200

To record expired insurance ($8,000 – $3,800 = $4,200).

If an expense account was originally debited, the adjusting entry requires that an asset

account be debited for the amount applicable

to future periods and the expense account be credited

Prepaid Expenses Originally

Debited to an Asset Account

If Rosi’ Inc., had originally debited Insurance Expense for $8,000, the expense account

shows $8,000, but $3,800 is applicable to

future periods The adjusting entry would be

as follows:

Prepaid Expenses Originally

Debited to an Asset Account

Prepaid Insurance 3,800

To record prepaid insurance ($8,000 – $4,200 = $3,800).

Unearned Revenues

revenues

but not yet given the customer the

purchased goods or services, the unearned revenues are in fact liabilities

Unearned Revenues Originally

Credited to a Revenue Account

(f) As indicated in the trial balance for Rosi,

Inc., rent receipts are recorded originally in the rent revenue account Unearned

revenue at the end of 2013 is $475, and is recorded as follows:

Unearned Rent Revenue 475

To record unearned rent revenue.

Unearned Revenues Originally

Credited to a Liability Account

If a liability account was originally credited, this account is debited and a revenue

account is credited for the amount applicable

to the current period

Unearned Rent Revenue 2,075

To record rent revenue ($2,550 – $475).

The following T-accounts illustrate the effect that this adjusting entry would have on the

relevant accounts:

Unearned Revenues Originally

Credited to a Liability Account

• Operations are charged with a portion of the asset’s cost, and the carrying value of the asset is reduced by that amount.

account, which is set up to record

Transactions Involving Estimates

Asset Depreciation

Asset Depreciation

(g) Rosi Inc., estimated depreciation at the

end of the year to be five percent for

buildings and ten percent for furniture and equipment

Transactions Involving Estimates

10% per year.

Asset Depreciation

Asset Depreciation

Bad Debts

customers to purchase goods and services

on credit, some of the accounts receivable will not be collected

should be made for estimated expense in the current period rather than when

specific accounts become uncollectible

(i) Rosi Inc.’s estimated Allowance for Bad

Debts is to be increased by $1,100

Bad Debts

Bad Debt Expense 1,100

Allowance for Bad Debts 1,100

To adjust for estimated bad debt expense.

Adjusting Entry Summary

• Adjusting entries do not involve cash.

• Adjusting entries always involve a

balance sheet account and an income statement account.

Preparing Financial Statements

1 Identify all revenues and expenses—these

account balances are used to prepare the

4 Prepare a balance sheet using the balance

sheet accounts from the trial balance and the

• Nominal (or temporary ) accounts:

each accounting period

dividend account are closed

• Real (or permanent ) accounts:

of the accounting period

Using a Spreadsheet

Bal xxx

Retained Earnings

Beg Bal xxx xx

Since the revenue account is a nominal account, it is closed at the end of the period to

Revenues

The Closing Process

Bal xxx

Each expense account

is credited in order to close the account at

The Closing Process

The Closing Process

• Provides a listing of all real account

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 recognizes

revenues as they are earned, not

necessarily when cash is received.

incurred, not necessarily when cash is paid.

reporting, according to the FASB.

Accrual Accounting

• Cash-basis accounting is focused on

cash receipts and cash disbursements.

such as CPAs, dentists, and engineers.

small service companies.

Cash-Basis Accounting

• Many steps of the accounting cycle are performed using computers.

generating reports and computational

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

Computers and Accounting