Kế toán, kiểm toán - Chapter 2: Review of the accounting process

Review of the Accounting Process2 Insert Book Cover PictureThe Basic ModelEconomic events cause changes in the financial position of a company.External events involve an exchange between the company and another entity.Internal events do not involve an exchange transaction but do affect the company’s financial position.Learning ObjectivesAnalyze routine economic events—transactions—and record their effects on a company’s financial position using the accounting equation format.LO1The Accounting EquationA = L + OE- Owner Withdrawals+ Owner Investments- Expenses- Losses+ Revenue+ Gains Accounting Equation for a CorporationA = L + SE+ Retained Earnings+ Paid-in Capital- Expenses- Losses+ Revenues+ Gains- DividendsAccount RelationshipsDebits and credits affect the Balance Sheet Model as follows:A = L + PIC + REAssetsDr.+Cr.-LiabilitiesDr.-Cr.+Paid-inCapitalDr.-Cr.+Retained EarningsDr.-Cr.+Revenues and GainsDr.-Cr.+Expenses and LossesDr.+Cr.-Account RelationshipsA = L + PIC + RE + R + G- E - LPermanent accounts represent the basic financial position elements of the accounting equation.Temporary accounts keep track of the changes in the retained earnings component of shareholders’ equity.Debits and credits affect the Balance Sheet Model as follows:Source documentsRecord in JournalFinancial StatementsTransaction AnalysisPost to LedgerUnadjusted Trial BalanceRecord & Post Adjusting EntriesAdjusted Trial BalanceClose Temporary AccountsPost-Closing Trial BalanceThe Accounting Processing CycleLearning ObjectivesRecord transactions using the general journal format.LO2Accounting Processing CycleOn January 1, 2007, $40,000 was borrowed from a bank and a note payable was signed.Prepare the journal entry.Two accounts are affected:Cash (an asset) increases by $40,000.Notes Payable (a liability) increases by $40,000.Account numbers are references for posting to the General Ledger. General LedgerThe “T” account is a shorthand used byaccountants to analyze transactions. Itis not part of the bookkeeping system.Learning ObjectivesPost the effects of journal entries to T-accounts and prepare an unadjusted trial balance. LO3Posting Journal EntriesOn July 1, 2006, the owners invest $60,000 in a new business, Dress Right Clothing Corporation. Post the debit portion of the entry to the Cash ledger account.Posting Journal Entries1Posting Journal Entries23Posting Journal Entries456Posting Journal EntriesPosting Journal EntriesPost the credit portion of the entry to the Common Stock ledger account.1Posting Journal Entries23Posting Journal Entries456Posting Journal EntriesAfter recording all entries for the period, Dress Right’s Trial Balance would be as follows:Debits = CreditsA Trial Balance is a listing of all accounts and their balances at a point in time.Additional ConsiderationPerpetual Inventory SystemInventory account is continually updated to reflect purchases and sales.Cost of goods sold account is continually updated to reflect sales.Periodic Inventory SystemPurchases account reflects purchases of inventory.Cost of goods sold and inventory are adjusted at period end.Discussed in more depth in Chapters 8 & 9.Adjusting Entries At the end of the period, some transactions or events remain unrecorded. Because of this, several accounts in the ledger need adjustments before their balances appear in the financial statements.Learning ObjectivesIdentify and describe the different types of adjusting journal entries. LO4Determine the required adjustments, record adjusting journal entries in general journal format, and prepare an adjusted trial balance.LO5Transactions where cash is paid or received before a related expense or revenue is recognized.Transactions where cash is paid or received after a related expense or revenue is recognized.AssetExpenseUnadjustedBalanceCreditAdjustmentDebitAdjustmentPrepaid ExpensesToday, I will payfor my first6 months’ rent.Prepaid ExpensesItems paid for in advance of receiving their benefitsPrepaid ExpensesAssume that on July 31, 2006, Dress Right determines that at the end of July $1,200 of supplies remains. Let’s look at the adjusting journal entry needed on July 31, 2006.Prepare the adjusting entry.$2,000 - $1,200 = $800 supplies usedAfter posting, the accounts look like this:Prepaid Expenses Depreciation is the process of computing expense by allocating the cost of plant and equipment over their expected useful lives.Straight-LineDepreciationExpense= Asset Cost - Salvage Value Useful LifeDepreciationDepreciationRecall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance. Assume the following:Let’s calculate the depreciation expense for the month ended July 31, 2006.2006DepreciationExpense= $12,000 - $0 60 months=$200Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance. Assume the following:DepreciationNow, prepare the adjusting entry for July 31, 2006.Contra AssetDepreciationLet’s see how the accounts would look after posting!After posting, the accounts look like this:DepreciationLiabilityRevenueUnadjustedBalanceCreditAdjustmentDebitAdjustmentUnearned Revenues“Go Big Blue” Buy your season tickets forall home basketball games NOW!Unearned RevenueCash received in advance of performing servicesFor Dress Right Corporation, the only unearned revenue in the trial balance is unearned rent revenue. On July 16 Dress Right received $1,000 in advance for the first two months’ rent. First, let’s prepare the entry for July 16. Unearned RevenuesLiability AccountUnearned RevenuesFor Dress Right Corporation, the only unearned revenue in the trial balance is unearned rent revenue. On July 16 Dress Right received $1,000 in advance for the first two months’ rent. Now, let’s prepare the adjusting entry for July 31. Unearned RevenuesAfter posting, the accounts look like this:Alternative Approach to Record PrepaymentsUnearned RevenueRecord initial cash receipts as follows:Cash $$$ Revenue $$$Adjusting EntryRecord the amount for the unearned liability as follows:Revenue $$ Unearned revenue $$Prepaid ExpensesRecord initial cash payments as follows:Expense $$$ Cash $$$Adjusting EntryRecord the amount for the prepaid expense as follows:Prepaid expense $$ Expense $$ExpenseLiabilityCreditAdjustmentDebitAdjustmentAccrued LiabilitiesI won’t pay youuntil the job is done!Accrued LiabilitiesCosts incurred in a period that are both unpaid and unrecorded7/1/067/31/06Month endLast paydate7/20/06Next paydate8/2/06Record adjustingjournal entry.Accrued LiabilitiesOn July 31, 2006, the employees have earned salaries of $5,500.Accrued LiabilitiesAfter posting, the accounts look like this:AssetRevenueCreditAdjustmentDebitAdjustmentAccrued ReceivablesYes, you can pay mein May for your April 15 tax return.Accrued ReceivablesRevenues earned in a period that are both unrecorded and not yet receivedAssume that Dress Right loaned another corporation $30,000 at the beginning of August. Terms of the note call for the payment of principal, $30,000, and interest at 8% in three months.First, let’s determine the amount of interest to accrue at August 31, 2006.Accrued ReceivablesP × R × T $30,000 .08 1/12 Interest = $200Assume that Dress Right loaned another corporation $30,000 at the beginning of August. Terms of the note call for the payment of principal, $30,000, and interest at 8% in three months.Now, let’s prepare the adjusting entry for August 31, 2006.Accrued ReceivablesAccrued ReceivablesAfter posting, the accounts look like this:EstimatesUncollectible accounts and depreciation of fixed assets are estimated. An estimated item is a function of future events and developments.$EstimatesThe estimate of bad debt expense at the end of the period is an example of an adjusting entry that requires an estimate.Assume that Dress Right’s management determines that of the $2,000 of accounts receivable recorded at July 31, 2006, only $1,500 will ultimately be collected. Prepare the adjusting entry for July 31, 2006.This is the Adjusted Trial Balance for Dress Right after all adjusting entries have been recorded and posted.Dress Right will use these balances to prepare the financial statements.Learning ObjectivesDescribe the four basic financial statements.LO6The income statement summarizes the results of operating activities of the company.The balance sheet presents the financial position of the company on a particular date. The balance sheet presents the financial position of the company on a particular date. The statement of cash flows discloses the changes in cash during a period.The statement of shareholders’ equity presents the changes in permanent shareholder accounts. Learning ObjectivesExplain the closing process.LO7The Closing ProcessResets revenue, expense and dividend account balances to zero at the end of the period.Helps summarize a period’s revenues and expenses in the Income Summary account.Identify accounts for closing.Record and post closing entries. Prepare post-closing trial balance.Temporary AccountsRevenuesIncome SummaryExpensesDividendsPermanent AccountsAssetsLiabilitiesShareholders’ EquityThe closing process applies only to temporary accounts.Temporary and Permanent AccountsClose Revenue accounts to Income Summary.Close Expense accounts to Income Summary.Close Income Summary account to Retained Earnings.Let’s prepare the closing entries for Dress Right.Closing EntriesClose Revenue accounts to Income Summary.Now, let’s look at the ledger accounts after posting this closing entry. Close Revenue Accounts to Income Summary Close Revenue Accounts to Income Summary Close Expense accounts to Income Summary.Now, let’s look at the ledger accounts after posting this closing entry. Close Expense Accounts to Income Summary Close Expense Accounts to Income SummaryNet IncomeClose Income Summary to Retained Earnings.Now, let’s look at the ledger accounts after posting this closing entry. Close Income Summary to Retained Earnings Close Income Summary to Retained EarningsPost-Closing Trial BalanceLists permanent accounts and their balances.Total debits equal total credits.Learning ObjectivesConvert from cash basis net income to accrual basis net income.LO8Conversion From Cash Basis to Accrual BasisAdjusting entries, for the most part, are conversions from cash to accrual.Let’s look at an example.Conversion From Cash Basis to Accrual Basis Jeter, Inc. paid $20,000 cash for insurance during the current period. On Jan. 1, Prepaid Insurance was $5,000, and on Dec. 31, the account balance was $3,000.Determine Insurance Expense for the period.Conversion From Cash Basis to Accrual Basis Jeter, Inc. paid $20,000 cash for insurance during the current period. On Jan. 1, Prepaid Insurance was $5,000, and on Dec. 31, the account balance was $3,000. Appendix 2AUse of a WorksheetUse of a WorksheetA worksheet can be used as a tool to facilitate the preparation of adjusting and closing entries and the financial statements.Steps to Follow for Worksheet Completion:Enter account titles in column 1 and the unadjusted trial balances in columns 2 and 3.Determine end-of-period adjusting entries and enter them in columns 4 and 5.Add or deduct the effects of the adjusting entries on the account balances and enter in columns 6 and 7.Transfer the temporary retained earnings account balances to columns 8 and 9.Transfer the balances in the permanent accounts to columns 10 and 11.Let’s look at the completed worksheet for Dress Right. Appendix 2BReversing EntriesReversing EntriesReversing entries remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period. Reversing entries are optional and are used most often with accruals.Let’s consider the following accrual adjusting entry made by Dress Right.Reversing EntriesIf reversing entries are not used, when salaries actually are paid in August, the accountant needs to remember to debit salaries payable and not salaries expense.Reversing EntriesIf reversing entries are used, the following reversing entry is made on August 1, 2006. This entry reduces the salaries payable account to zero and reduces the salaries expense account by $5,500.Reversing EntriesWhen salaries actually are paid in August, the debit is to salaries expense, thus increasing the account by $5,500. We can see that the ending balances in the accounts are identical whether or not reversing entries are used. Appendix 2CSubsidiary Ledgers and Special JournalsSubsidiary LedgersSubsidiary ledgers contain a group of subsidiary accounts associated with particular general ledger control accounts. Subsidiary ledgers are commonly used for accounts receivable, accounts payable, plant and equipment, and investments. For example, there will be a subsidiary ledger for accounts receivable that keeps track of the increases and decreases in the accounts receivable balance for each of the company’s customers purchasing goods and services on credit.After all of the postings are made from the appropriate journals, the balance in the accounts receivable control account should equal the sum of the balances in the accounts receivable subsidiary ledger accounts.Special JournalsSpecial journals are used to capture the dual effect of repetitive types of transactions in debit/credit form.Special journals simplify the recording process in the following ways:Journalizing the effects of a particular transaction is made more efficient through the use of specifically designed formats.Individual transactions are not posted to the general ledger accounts but are accumulated in the special journals and a summary posting is made on a periodic basis.The responsibility for recording journal entries for the repetitive types of transactions is placed on individuals who have specialized training in handling them.Let’s look at some special journals.Sales JournalSales journals record all credit sales. Every entry in the sales journal has the same effect on the accounts; the sales revenue account is credited and the accounts receivable control account is debited.Other columns capture information needed for updating the accounts receivable subsidiary ledger.Sales JournalAccounts Receivable Subsidiary LedgerCash Receipts JournalCash receipts journals record all cash receipts, regardless of the source. Every entry in the cash receipts journal produces a debit to the cash account with the credit to various other accounts.Cash Receipts JournalAccounts Receivable Subsidiary LedgerEnd of Chapter 2