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Accrual Basis Accounting and the Accounting Cycle

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Accrual Basis Accounting and the Accounting Cycle Powered By Docstoc
					 Accrual      accounting
   Revenue
      Earned when     company delivers a product or performs
       a service
   Expenses
      Incurred when  company uses resources or services to
       help generate revenue
   Receiptor payment of cash does not affect
    revenue or expense recognition
 Time period        assumption
   Business     activities evaluated using specific time
    periods
      E.g.,   months, quarters, years
 Differencebetween when item is recognized
 and actual cash flow
   Cash received/paid before revenue/expense
    recognized
      Recognition   deferred (postponed)
   Cash received/paid after revenue/expense
    recognized
      Recognition   accrued
   No timing difference when cash received/paid at
    same time revenue/expense is recognized
 The accounting cycle
 Adjusting entries
 Financial statements
            Adjusting Entries
 Accrued  revenues – revenue earned but not
  yet received in cash or previously recorded
 Accrued expenses – expense incurred but not
  yet paid in cash or previously recorded
 Deferred revenues – a liability resulting from
  the receipt of cash before the recognition of
  revenue; unearned revenue – liability that
  company owes customers
 Deferred expenses – an asset resulting from
  the payment of cash before the actual
  incurrence of the expense, ‘an asset is just an
  expense waiting to happen’
               Accrued Revenues
 Types   of accrued revenue adjustments
   Interest Revenue - Income earned from letting
    someone else use your money
   Time passing is the action related to interest
    income
   Interest = Principal x Rate x Time
      Principal- amount loaned
      Rate - annual interest rate
      Time - portion of year loan outstanding

   Receivableswith interest
   Other accrued revenue
                Accrued Expenses
 Expenses incurred      but not yet
   Paid in cash
   Previously recorded
 Types    of accrued expense adjustments
   Interest   Expense
  Other    accrued expenses
 Some expenses are recorded at the end of
  the year because the accounting period ends
  after the expense was incurred and before it
  has been paid
 Salary expense is one of the most common
  year-end accrued expenses
              Deferred Revenues
 Deferred revenues
   Dollars have been received in a prior transaction
   Adjustment made for revenue earned related to
    cash previously received
   Often called unearned revenue

 Deferred expenses
   Dollars were paid in a prior transaction
   Adjustment made for expense incurred in current
    accounting period related to cash previously
    received
   Often called prepaid expenses
 Purchase  of supplies is an asset exchange
 Supplies Expense should reflect only supplies
  used up during the period
 Supplies on hand at the end of the period
  should be recorded as an asset
   Aresupplies a current or non-current asset?
   Supplies Expense computation
   Beginning Balance
 + Purchases
 - Ending Balance         _
   Supplies Used (expense)
                          Depreciation
 Equipment that lasts longer than one year
 should be treated like any other prepaid
 expense
   We   should allocate the cost of the asset to the
     periods that benefit from the use of the asset
       This   is called depreciation
               has NOTHING to do with the FAIR
   Depreciation
     MARKET VALUE of an asset
A separate account is used to accumulate all
 depreciation related to an asset
   Accumulated     Depreciation is a contra-asset because
     it reduces the value of the asset on the books
       Bookvalue is the cost of an asset less Accumulated
       Depreciation
                       Depreciation
       Straight-line depreciation
         Allocates an equal amount of the cost of the asset to
          each accounting period.
    Annual depreciation formula
                  Asset cost     _
           useful life (in years)
     Accumulate depreciation – the total amount of
       depreciation that has been recorded during an
       asset’s life – contra-asset
     Residual value – the estimated value of an asset
       at the end of its useful life, deducted in the
       calculation of depreciation expense
     Book value – the cost of an asset minus the
       total accumulated depreciation recorded for
       the asset
        Preparing Financial Statements
   Prior to preparing financial statements, the
    steps below in the accounting cycle are
    performed
        1.   Record transactions
        2.   Posting transactions to the general ledger
        3.   Prepare an unadjusted trial balance
        4.   Prepare and post adjusting entries
        5.   Prepare an adjusted trial balance
   Adjusting entries – 5 basic types
        Prepaid expense
        Depreciation expense
        Accrued expense
        Accrued receivable
        Unearned revenue
Closing Revenue and Expense Accounts
       Revenue and expense, and dividend accounts –
        temporary accounts
       Permanent or real accounts – balances carry over
       After preparing the financial statements, revenues
        and expenses as well as dividends have to be
        transferred from those temporary accounts to
        retained earnings.
       After this process, the income stmt. and dividend.
        accounts are reset to zero.
       Revenue accounts are reset to zero.
         Since they have credit balances, we use a DEBIT to
          decrease the accounts to zero (a zero balance).
         The retained earnings account is CREDITED because
          revenues increase retained earnings.
Closing Revenue and Expense Accounts
       Expense accounts are reset to zero.
         Since they have DEBIT balances, we use a CREDIT to
          decrease the accounts to zero (a zero balance).
         The retained earnings account is DEBITED because
          expenses decrease retained earnings.
       Dividends account is reset to zero.
         Since it has a DEBIT balance, we use a CREDIT to
          decrease the account to zero (a zero balance).
         The retained earnings account is DEBITED because
          dividends decrease retained earnings.
       A post-closing trial balance is prepared, showing
        only permanent accounts
    Closing Revenue and Expense
              Accounts

 Prepareclosing entries for the following
 accounts.
   Service Revenue   Wage Expense
      Dr.   Cr.        Dr.   Cr.
              100       40          Retained Earnings
                                        Dr.   Cr.
                                              500 beg bal
    Rent Expense       Dividends
      Dr.   Cr.        Dr.   Cr.
       20               10
   Financial Statement Analysis
 Debt-to-assets     ratio
   Measure    of long-term liquidity
      What   are two measures of short-term liquidity?
   Also   called a solvency ratio
                      Total Liabilities
                       Total Assets
Business Risk, Control, and Ethics
 Controls that help a firm make sure all of
 its transactions are recorded
  Pre-numbered documents
  Segregation of   duties
    The  person who does the record-keeping for an
     asset does not have control of the asset
    How can the segregation of duties control be
     circumvented?
 Assign #7, pg. 200, E4-3A, E4-6A, E4-
  7A (due 2/12)
 Assign #8, pg. 210, P4-10A (due 2/12)

				
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