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Chapter 4 Accounting

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					                  Chapter 4
•   The Accounting Cycle
•   Adjusting Entries
•   Closing Process
•   Net Profit Margin Ratio
        The Accounting Cycle
• Accounting cycle process
  – Records individual transactions
  – Produces the four basic financial statements
  – Gets the general ledger ready for the next
    accounting period
  – Made up of eight steps
          Accounting Cycle Steps
•   Record journal entries from transactions
•   Post journal entries to the general ledger
•   Prepare unadjusted trial balance
•   Adjust the accounts
•   Prepare an adjusted trial balance
•   Prepare the financial statements
•   Close the temporary accounts
•   Prepare a post-closing trial balance
       Unadjusted Trial Balance
• A listing of individual
  accounts, usually in financial
  statement order.
• Ending debit or credit
  balances are listed in two
  separate columns.
• Total debit account balances
  should equal total credit
  account balances.
    Unadjusted Trial Balance Example
                              Matrix, Inc.
                        Unadjusted Trial Balance
                         At December 31, 2006
Description                                        Debit          Credit
Cash                                        $         3,900
Accounts receivable                                   4,985
Inventory                                             3,300
Equipment                                             4,800
Accumulated depreciation - Equip.                             $      1,440
Furniture and fixtures                                6,600
Accumulated depreciation - furn. & fix.                              2,200
Accounts payable                                                     2,985
Notes payable                                                        4,000
Common stock                                                        10,000
Retained earnings, 12/31/05                                          1,760
Sales revenue                                                       35,000
Cost of goods sold                                   27,500
Operating expenses                                    6,300
   Totals                                   $        57,385   $     57,385
                                                            Problem
      Following unadjusted account balances for Delilah’s Deluxe Doggie Dayspa:
                                                  Delilah's Deluxe Doggie Dayspa
                                                    Unadjusted Trial Balance
                                                        December 31, 2005


                                       Cash                                         13,500
                                       Accounts Receivable                          14,000
                                       Supplies                                      3,500
                                       Prepaid Rent                                 24,000
                                       Prepaid Insurance                            12,000
                                       Notes Receivable (due 3/31/04)               30,000
                                       Equipment                                   245,000
                                       Accounts Payable                             12,500
                                       Unearned Service Revenue                     20,000
                                       Notes Payable (due 5/1/07)                  100,000
                                       Common Stock                                 50,000
                                       Dividends                                    12,000
                                       Service Revenue                             367,500
                                       Salary Expense                              165,000
                                       Rent Expense                                 20,000
                                       Income Tax Expense                           11,000

Required: Prepare a trial balance in good form.
The Unadjusted Trial Balance
If total debits do not equal total credits on the
      trial balance, errors have occurred . . .

      in preparing balanced
          journal entries,

          in posting the correct dollar
            effects of a transaction,
                or in copying ending balances
                     from the ledger to the
                         trial balance.
         Adjusting Entries
    There are two types of adjusting
                entries.
 ACCRUALS                  DEFERRALS
  Revenues                  Receipts of
  earned or                  assets or
  expenses                  payments of
incurred that             cash in advance
have not been              of revenue or
 previously                   expense
  recorded.                 recognition.
   Deferred Revenue
            End of
       accounting period.



Cash received.     Revenues earned.

Example includes rent received in
 advance (an unearned revenue).
      Accrued Revenue
              End of
         accounting period.



Revenues earned        Cash received


  Example includes interest earned
 during the period (accrued revenue).
        Deferred Expense
                 End of
            accounting period.



      Cash paid.     Expense incurred.


Examples include prepaid rent, advertising,
             and insurance.
     Accrued Expense
              End of
         accounting period.



Expense incurred.   Cash paid.


Examples include salaries and wages
    incurred but not recorded.
      Adjustments Involving
            Estimates
• Certain circumstances require
  adjusting entries to record
  accounting estimates.
• Examples include . . .
 –Depreciation
 –Bad debts             $$$
 –Income taxes
     Depreciation Adjustment
   The accounting
      concept of            This is a “cost
depreciation involves    allocation” concept,
 the systematic and        not a “valuation”
rational allocation of         concept.
  the cost of a long-
   lived asset over
 multiple accounting
 periods it is used to
  generate revenue.
    Prepare the Adjusted Trial
             Balance
• After we’ve completed and posted the
  adjusting entries to the general ledger
  accounts, we prepare another trial balance
• We confirm again that the debit balances equal
  the credit balances
• Basis for preparing the financial statements
                                              Problem

Prepare adjusting entries from the following information:

a) An inventory of supplies reveals that $1,300 of supplies are on hand. (deferred expense/ asset)

b) Delilah’s has a 6 day work week, Monday through Saturday. (accrued expense/ liability)
Employees are paid every Friday. 12/31 is on a Tuesday. Delilah’s weekly payroll is $3,600.

c) The equipment was purchased 1/1/05. (deferred expense/ asset)
It has an expected life of 10 years and no salvage value.

d) The note receivable was issued by a client on 10/31/05. (accrued revenue/ asset)
The annual interest rate is 7%.

e) The note payable was issued 4/1/05. The annual interest rate is 5%. (accrued expense/ liability)

f) Unearned service revenue represents gift certificates purchased. (Deferred revenue/ liability)
At year end, $8,000 of the certificates have been used.

g) Prepaid insurance represents a payment of $12,000 for 2 years coverage. (deferred expense/ asset)
The payment was made 7/1/05.

h) Prepaid rent represents a payment of $24,000 for 12 months rent. (deferred expense/ asset)
The payment was made 9/1/05.
                                   Problem



Post these journal entries to the t-accounts and prepare an adjusted trial balance.
Prepare the Financial Statements
• Goal of the whole process
• Financial statements that reflect the financial
  condition and transactions of the company
  –   Income Statement
  –   Statement of Changes of Owners’ Equity
  –   Balance Sheet
  –   Statement of Cash Flows
                                                 Problem


From the adjusted trial balance for Delilah’s, prepare an income statement,
statement of stockholders’ equity, & classified balance sheet.

For computing the EPS, assume 10,000 shares are outstanding.
         Closing the Books
                  Closing entries:
 Even though the
  balance sheet   1. Transfer net income
account balances     (or loss) to Retained
   carry forward     Earnings.
  from period to  2. Establish a zero
    period, the      balance in each of the
income statement     temporary accounts to
 accounts do not.    start the next
                     accounting period.
      Closing the Books
The following accounts are called
temporary or nominal accounts and
are closed at the end of the period .
 • Revenues.     ..
• Expenses.
• Gains.
• Losses.
• Dividends declared.
      Closing the Books
Assets, liabilities, and stockholders’
   equity are permanent, or real
 accounts, and are never closed.

• Assets.
• Liabilities.
• Stockholders’
  Equity.
         Closing the Books

Two steps are used in
 the closing process .
           ..
 1. Close revenues and
    gains to Retained
    Earnings.
 2. Close expenses and
    losses to Retained
    Earnings.
     Post-Closing Trial Balance
• Prepared after the temporary accounts are
  closed
• Serves as a final check that debits = credits
• Confirms that we start the next accounting
  period with only permanent accounts
              Post-Closing Trial Balance
                      Matrix, Inc.
                 Adjusted Trial Balance
                 At December 31, 2004
Description                               Debit   Credit
Cash                                    $ 3,900
Accounts receivable                        4,985
Inventory                                  3,300
Equipment                                  4,800
Accumulated depreciation - Equip.                $ 1,440
Furniture and fixtures                     6,600
Accumulated depreciation - furn. & fix.             2,200
Accounts payable                                    2,985
Notes payable                                       4,000
Common stock                                       10,000
Retained earnings, 1/1/04                           1,760
Sales revenue                                      35,000
Cost of goods sold                        27,500
Operating expenses                         6,300
   Totals                             $ 57,385 $ 57,385
              Post-Closing Trial Balance
                        Matrix, Inc.
                Post-Closing Trial Balance
                  At December 31, 2004
Description                                 Debit           Credit
Cash                                    $    3,900
Accounts receivable                          4,985
Inventory                                    3,300
Equipment                                    4,800
Accumulated depreciation - Equip.                       $     1,440
Furniture and fixtures                       6,600
Accumulated depreciation - furn. & fix.                      2,200
Accounts payable                                             2,985
Notes payable                                                4,000
Common stock                                                10,000
Retained earnings, 12/31/04                                  2,960
Sales revenue                                                  -
Cost of goods sold                                  -
Operating expenses                                  -
   Totals                              $ 23,585 $ 23,585
        Key Ratio Analysis
 Net Profit Margin indicates how effective
management is at generating profit on every
              dollar of sales.

       Net Profit     Net Income
                  =
        Margin        Net Sales
                                    Problem


Prepare closing entries and post-closing trial balance for Delilah’s.

Prepare net profit margin for Delilah’s.

				
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