Kế toán, kiểm toán - Chapter 2: The adjusting process

International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 1 MA. Nguyen Quoc Nhat Chapter 2: The adjusting process 1 Accounting cycle 2 Quick check- overview chapter 1 What is the accounting term of these definitions? 1. A list of all a company’s accounts with their account numbers. 2. A system of accounting where every transaction affects at least two accounts. 3. Summary device that is shaped like a capital “T” with debits posted on the left side of the vertical line and credits on the right side of the vertical line. A “shorthand” version of a ledger. 4. A list of all the ledger accounts with their balances at a point in time. 3 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 2 Quick check- overview chapter 1 Answer: 1. A list of all a company’s accounts with their account numbers.  Chart of accounts 2. A system of accounting where every transaction affects at least two accounts.  Double – entry system 3. Summary device that is shaped like a capital “T” with debits posted on the left side of the vertical line and credits on the right side of the vertical line. A “shorthand” version of a ledger.  T - account 4. A list of all the ledger accounts with their balances at a point in time.  The trial balance 4 Learning objective  Differentiate between accrual and cash-basis accounting.  Define and apply the accounting period concept, revenue recognition and matching principles, and time period concept.  Explain why adjusting entries are needed  Journalize and post adjusting entries  Explain the purpose of and prepare an adjusted trial balance  Prepare the financial statements from the adjusted trial balance 5 Chapter’s contents 2.1 Accrual Accounting Versus Cash-Basis Accounting 2.2 Other Accounting Principles 2.3 Why We Adjust the Accounts 2.4 Two Categories of Adjusting Entries 2.5 The Adjusted Trial Balance 2.6 The Financial Statements 2.7 Ethical Issues in Accrual Accounting 6 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 3 2.1 Accrual Accounting Versus Cash- Basis Accounting Look at the picture, explain the difference between the accrual basis and the cash basis: 7 2.1 Accrual Accounting Versus Cash- Basis Accounting Accrual basis Cash basis Records the effect of each transaction as it occurs, that is: • Revenues are recorded when earned • Expenses are recorded when incurred. Records only cash receipts and cash payments, that is: • Revenues are recorded when cash is received • Expenses are recorded when cash is paid 8 2.1 Accrual Accounting Versus Cash- Basis Accounting Example 1: Smart Touch purchased $200 of office supplies on account on May 15, 2013, and paid the account in full on June 3, 2013. On the accrual basis, the business records this transaction as follows:  Under the cash basis, the company would only recognize expense on June 3, 2013. 9 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 4 2.1 Accrual Accounting Versus Cash- Basis Accounting  Example 2: Smart Touch performed service and earned revenue on May 20,2013, but did not collect cash until June 5, 2013. Under the accrual basis, the business records:  Under the cash basis, the business would record no revenue until the cash receipt, which in this case would be on June 5. 10 2.1 Accrual Accounting Versus Cash- Basis Accounting Quick check: Which system of accounting is used in each of these case? 1. A business sold goods to Roy on 7th December on credit. The business recognizes this sale on 7th December. 2. A dentist receives fees from patient, 100$ on giving services. The dentist accounts for his fee only when cash received. 3. A internet service provider receives advance of $400 this month for services that he will provide in next month. He recognizes the income in the next month, when he provides service for it. (but records it as an advance immediately). 11 2.1 Accrual Accounting Versus Cash- Basis Accounting Answer: 12 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 5 2.2 Other Accounting Principles 2.2.1 The Accounting Period Concept 2.2.2 The Revenue Recognition Principle 2.2.3 The Matching Principle 2.2.4 The Time-Period Concept 13 The Accounting Period Concept and The Time-Period Concept  The time period (or periodicity) concept assumes that the economic life of a business can be divided into artificial time periods — generally a month, a quarter, or a year.  The basic accounting period is one year, and most businesses prepare annual financial statements.  Calendar year: from January 1 through December 31.  Fiscal year: which ends on a date other than December 31. 14 The Revenue Recognition Principle  Record revenue when it has been earned 15 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 6 The Revenue Recognition Principle  The amount of revenue to record. Record revenue for the actual value of the item or service transferred to the customer. 16 The Matching Principle  measures all the expenses incurred during the period, and  matches the expenses against the revenues of the period. Revenues earned this month are offset against.... expenses incurred in earning the revenue 17 Self check 1. Applying the revenue recognition principle Northwest Magazine sells subscriptions for $36 for 12 issues. The company collects cash in advance and then mails out the magazines to subscribers each month. Requirement: Apply the revenue recognition principle to determine a. when Northwest Magazine should record revenue for this situation. b. the amount of revenue Northwest Magazine should record for three issues. 18 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 7 Self check 2. Applying the matching principle Suppose on January 1 you prepaid apartment rent of $5,700 for the full year. Requirement: At July 31, what are your two account balances for this situation? 19 2.3 Why We Adjust the Accounts? 20 2.3 Why We Adjust the Accounts?  The trial balance omit various revenue and expense transactions. Ex: Unearned revenues, accrued expenses, prepaid expenses,  So accrual accounting requires adjusting entries at the end of the period. 21 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 8 2.4 Two Categories of Adjusting Entries Prepaid/deferrals Accrual • The cash payment occurs before an expense is recorded • Or the cash receipt occurs before the revenue is earned • Three types: Prepaid expenses Depreciation Unearned revenues • Records an expense before the cash payment. • Or it records the revenue before the cash is received. • Two types:  Accrued expenses  Accrued revenues 22 Practice in group a) Dr Rent expense Cr Prepaid rent b) Dr Interest expense Cr Interest payable c) Dr Unearned service revenue Cr Service revenue d) Dr Salary expense Cr Salary payable e) Dr Supplies expense Cr Supplies 23 Classify these adjusting entries which are prepaid or accrual: f) Dr Accounts receivable Cr Service revenue g) Dr Depreciation expense Cr Accumulated depreciation Answer 24 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 9 2.4 Two Categories of Adjusting Entries Adjusting Entries Prepaid Expenses Asset (prepaid) Unadjusted Balance Credit Adjusting Entry (-) Expense Debit Adjusting Entry (+) Ex: Smart Touch prepays three months’ office rent of $3,000 ($1,000 per month three months) on May 1, 2013. Prepare the journal entry on May 1, 2013 and the adjusting entries on May 31, 2013. 25 2.4 Two Categories of Adjusting Entries Prepaid Expenses Answer : • On May 1, 2013, the journal entry: • On May 31, 2013, the adjusting entries: 26 2.4 Two Categories of Adjusting Entries Adjusting Entries Depreciation Accumulated depreciation Credit Adjusting Entry (-) Depreciation expense Debit Adjusting Entry (+) Contra asset Ex: On May 3, Smart Touch purchased furniture for $18,000, the depreciation for each month is $300. Prepare the journal entry on May 3, 2013 and the adjusting entries on May 31, 2013. 27 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 10 2.4 Two Categories of Adjusting Entries Depreciation Answer: 28 2.4 Two Categories of Adjusting Entries Accrued expenses Liability Credit Adjusting Entry (-) Expense Debit Adjusting Entry (+) Ex 1: Smart Touch pays its employee a monthly salary of $1,800—half on the 15th and half on the first day of the next month. Prepare the journal entry on May 15, 2013 and the adjusting entries on May 31, 2013. 29 2.4 Two Categories of Adjusting Entries Accrued expenses Answer: 30 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 11 2.4 Two Categories of Adjusting Entries Adjusting Entries Accrued revenues Revenues Credit Adjusting Entry (-) Assets (Accounts Receivable) Debit Adjusting Entry (+) Ex: Smart Touch is hired on May 15 to perform e-learning services. Under this agreement, Smart Touch will earn $800 monthly. During May, Smart Touch will earn half a month’s fee, $400. Prepare the adjusting entries on May 31, 2013. 31 2.4 Two Categories of Adjusting Entries The adjusting entries on May 31, 2013. Accrued revenues 32 2.4 Two Categories of Adjusting Entries Adjusting Entries Unearned revenues Revenues Credit Adjusting Entry (-) Assets (Accounts Receivable) Debit Adjusting Entry (+) Ex: A law firm engages Smart Touch to provide e-learning services, agreeing to pay $600 in advance monthly. Smart Touch collects the first amount on May 21. Prepare the journal entry on May 21, 2013 and the adjusting entries on May 31, 2013. 33 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 12 2.4 Two Categories of Adjusting Entries Unearned revenues Ex: Answer: 34 2.4 Two Categories of Adjusting Entries  Smart Touch at May 31  Information for adjustments at May 31, 2013: a) Prepaid rent expired, $1,000. b) Supplies used, $100. c) Depreciation on furniture, $300. d) Depreciation on building, $200. e) Accrued salary expense, $900. f) Accrued interest on note, $100. g) Accrued service revenue, $400. h) Service revenue that was collected in advance and now has been earned, $200. 35 2.4 Two Categories of Adjusting Entries  Adjusting entry a 36 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 13 2.4 Two Categories of Adjusting Entries  Adjusting entry 37 2.4 Two Categories of Adjusting Entries  Ledger Accounts in T-account form ASSETS LIABILITIES Cash Accounts payable Bal 4,800 Bal 18,200 Accounts receivable Salary payable 2,200 (g) 400 (e) 900 Bal 2,600 Bal 900 Supplies Interest payable 700 (b) 100 (f) 100 Bal 600 Bal 100 Prepaid rent Unearned service revenue 3,000 (a) 1,000 (h) 200 600 Bal 2,000 Bal 400 Furniture Notes payable Bal 18,000 Bal 20,000 38 2.4 Two Categories of Adjusting Entries  Ledger Accounts in T-account form Building Bal 48,000 Accumulated depreciation - furniture (c) 300 Bal 300 Accumulated depreciation - building (d) 200 Bal 200 39 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 14 2.4 Two Categories of Adjusting Entries  Ledger Accounts in T-account form OWNER’S EQUITY REVENUES Bright, capital Service Revenue Bal 33, 200 7,000 (g) 400 (h) 200 Bal 7,600 Bright, drawing Bal 1,000 EXPENSES Rent expense Salary expense (a)1,000 900 (e) 900 Bal 1,000 Bal 1,800 40 2.4 Two Categories of Adjusting Entries  Ledger Accounts in T-account form Supplies expense Depreciation expense - furniture (b) 100 (c) 300 Bal 100 Bal 300 Depreciation expense - building Interest expense (d) 200 (f) 100 Bal 200 Bal 100 Utilities expense Bal 400 41 2.5 The Adjusted Trial Balance 42 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 15 2.6 The Financial Statements SMART TOUCH LEARNING Income Statement Month Ended May 31, 2013 Revenue: Service Revenue 7,600 Expenses: Salary expense 1,800 Rent expense 1,000 Utilities expense 400 Depreciation expense - furniture 300 Depreciation expense - building 200 Interest expense 100 Supplies expense 100 Total expense 3,900 Net income 3,700 43 2.6 The Financial Statements SMART TOUCH LEARNING Statement of Owner's Equity Month Ended May 31, 2013 Bright, capital , May 1, 2013 33,200 Net income 3,700 36,900 Drawing (1,000) Bright, capital , May 31, 2013 35,900 44 2.6 The Financial Statements SMART TOUCH LEARNING Balance Sheet May 31, 2013 Assets Liabilities Cash 4,800 Accounts payable 18,200 Accounts receivable 2,600 Salary payable 900 Supplies 600 Interest payable 100 Prepaid rent 2,000 Unearned service revenue 400 Furniture 18,000 Notes payable 20,000 Less: Accumulated depreciation - furniture 300 17,700 Total Liabilities 39,600 Building 48,000 Owner's equity Less: Accumulated depreciation - Building 200 47,800 Bright, capital 35,900 Total assets 75,500 Total Liabilities and owner's equity 75,500 45 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 16 2.7 Ethical Issues in Accrual Accounting  Self - study 46 Quick check - end chapter 2 1. Adjusting the accounts is the process of a. subtracting expenses from revenues to measure net income. b. recording transactions as they occur during the period. c. updating the accounts at the end of the period. d. zeroing out account balances to prepare for the next period. 47 Quick check - end chapter 2 2. Which types of adjusting entries are natural opposites? a. Net income and net loss b. Expenses and revenues c. Prepaids and accruals d. Prepaids and depreciation 48 International Accounting Chapter 2: The Adjusting process MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com 17 Quick check - end chapter 2 2. Which types of adjusting entries are natural opposites? a. Net income and net loss b. Expenses and revenues c. Prepaids and accruals d. Prepaids and depreciation 49 Quick check - end chapter 2 3. Get Fit Now gains a client who prepays $540 for a package of six physical training ses- sions. Get Fit Now collects the $540 in advance and will provide the training later. After four training sessions, what should Get Fit Now report on its income statement? a. Service revenue of $360 b. Service revenue of $540 c. Unearned service revenue of $360 d. Cash of $180 50 Try your best – No pain No gain 51