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McGraw-Hill/Irwin
McGraw-Hill/Irwin
McGraw-Hill/Irwin
C1
Semiannually
1
Quarterly
1
Jan
Feb
Mar
Apr
10
Monthly
McGraw-Hill/Irwin
11
12
Nov Dec
C2
Cash Basis
Revenues are
recognized when
earned and expenses
are recognized when
incurred.
Revenues are
recognized when
cash is received and
expenses recorded
when cash is paid.
Accounting
McGraw-Hill/Irwin
Not GAAP
The McGraw-Hill Companies, Inc., 2010
C2
C2
McGraw-Hill/Irwin
Recognizing Revenues
C2
Revenue Recognition
We have delivered the
product to our customer,
so I think we should record
the revenue earned.
McGraw-Hill/Irwin
Recognizing Expenses
C2
Revenue Recognition
Matching
Now that we have
Summary
of Expenses
Rent
Gasoline
Advertising
Salaries
Utilities
and . . . .
McGraw-Hill/Irwin
$1,000
500
2,000
3,000
450
....
C3
Adjusting Accounts
An adjusting entry is recorded to bring an asset or
liability account balance to its proper amount.
Prepaid
Unearned
Prepaid
Unearned
(Deferred)
(Deferred)
(Deferred)
(Deferred)
expenses*
revenues
expenses*
revenues
*including depreciation
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Paid
Paid (or
(or received)
received) cash
cash after
after
expense
expense (or
(or revenue)
revenue) recognized
recognized
Accrued
Accrued
expense
expense
Accrued
Accrued
revenues
revenues
The McGraw-Hill Companies, Inc., 2010
P1
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Credit
Adjustment
Expense
Debit
Adjustment
P1
Prepaid Insurance
On December 1, 2009, Scott Company paid $12,000
to cover insurance for December 2009 through May
2010. Scott recorded the expenditure as Prepaid
Insurance on December 1.
What adjustment is required?
637
McGraw-Hill/Irwin
128
Supplies
P1
126
McGraw-Hill/Irwin
652
Depreciation
P1
McGraw-Hill/Irwin
Depreciation
P1
$12,000
Depreciation
P1
Accumulated
Accumulated depreciation
depreciation is
is
aa contra
contra asset
asset account.
account.
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Depreciation
P1
Equipment
1/1 62,000
Depreciation Expense
12/31 12,000
Accumulated Depreciation
12/31 12,000
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P1
Depreciation
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Equipment is
shown net of
accumulated
depreciation.
P1
Liability
Debit
Adjustment
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Unadjusted
Balance
Go Big Blue
Revenue
Credit
Adjustment
P1
McGraw-Hill/Irwin
P1
McGraw-Hill/Irwin
Accrued Expenses
P1
Costs
Costs incurred
incurred in
in aa
period
period that
that are
are
both
both unpaid
unpaid and
and
unrecorded.
unrecorded.
Expense
Debit
Adjustment
McGraw-Hill/Irwin
Liability
Credit
Adjustment
Accrued Expenses
P1
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
Last pay
date
12/26/09
12/1/09
McGraw-Hill/Irwin
Next pay
date
12/31/09
Year end
Record
Record adjusting
adjusting
journal
journal entry.
entry.
The McGraw-Hill Companies, Inc., 2010
Accrued Expenses
P1
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
McGraw-Hill/Irwin
Accrued Revenues
P1
Revenues earned
in a period that
are both
unrecorded and
not yet received.
Asset
Debit
Adjustment
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Revenue
Credit
Adjustment
Accrued Revenues
P1
Smith
Smith &
& Jones,
Jones, CPAs,
CPAs, had
had $31,200
$31,200 of
of work
work
completed
completed but
but not
not yet
yet billed
billed to
to clients.
clients. Lets
Lets make
make
the
the adjusting
adjusting entry
entry necessary
necessary on
on December
December 31,
31, 2009,
2009,
the
the end
end of
of the
the companys
companys fiscal
fiscal year.
year.
McGraw-Hill/Irwin
A1
McGraw-Hill/Irwin
P2
McGraw-Hill/Irwin
First, the
initial
unadjusted
amounts are
added to the
work sheet.
P2
Next,
FastForwards
adjustments
are added.
McGraw-Hill/Irwin
P2
Finally, the
totals are
determined.
McGraw-Hill/Irwin
P3
Preparing Financial
Statements
Lets use FastForwards adjusted trial
balance to prepare the companys
financial statements.
McGraw-Hill/Irwin
P3
McGraw-Hill/Irwin
P3
McGraw-Hill/Irwin
P3
McGraw-Hill/Irwin
C4
P4
McGraw-Hill/Irwin
P4
Consulting Revenues
Examine the
accounts
presented.
Income Summary
$ 25,000
Retained Earnings
$ 7,000
McGraw-Hill/Irwin
P4
$ 25,000
$ 18,100
Income Summary
$ 25,000
McGraw-Hill/Irwin
Consulting Revenues
$ 25,000
Close revenues
with a debit to the
revenue account
and a credit to
Income Summary.
The McGraw-Hill Companies, Inc., 2010
P4
$ 18,100
Income Summary
$ 18,100
McGraw-Hill/Irwin
$ 25,000
Consulting Revenues
$ 25,000
$ 25,000
Close expense
accounts with a
credit to expenses
and a debit to
Income Summary.
The McGraw-Hill Companies, Inc., 2010
P4
$ 18,100
Income Summary
$ 18,100
$ 25,000
$ 6,900
McGraw-Hill/Irwin
Consulting Revenues
$ 25,000
$ 25,000
Determine the
balance in the
Income Summary
account.
The McGraw-Hill Companies, Inc., 2010
P4
$ 18,100
Income Summary
$ 18,100
$ 6,900
McGraw-Hill/Irwin
$ 25,000
$ 6,900
P4
McGraw-Hill/Irwin
$ 2,000
Retained Earnings
$ 2,000
$ 7,000
6,900
P4
$ 2,000
Retained Earnings
$ 2,000
$ 7,000
6,900
$ 11,900
P5
McGraw-Hill/Irwin
C5
Start
Analyze
transactions
Reverse
(optional)
Prepare
post-closing
trial balance
Close
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
McGraw-Hill/Irwin
Adjust
C6
McGraw-Hill/Irwin
C6
Current Assets
1. Cash,
2. Short-term investments,
3. Accounts receivable,
4. Short-term notes receivable,
5. Inventory for sale, and
6. Prepaid expenses.
McGraw-Hill/Irwin
C6
Long-Term Investments
Notes receivable and investments in stocks and
bonds of other companies that will be held for
the longer of one year or the operating cycle.
Land held for future expansion is also a longterm investment.
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C6
McGraw-Hill/Irwin
C6
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Current Liabilities
C6
Long-Term Liabilities
C6
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Classified
Balance
Sheet
McGraw-Hill/Irwin
Profit Margin
A2
Profit
Net Income
=
Margin
Net Sales
McGraw-Hill/Irwin
A3
Current Ratio
McGraw-Hill/Irwin
End of Chapter 3
McGraw-Hill/Irwin