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Accounting 2101 Chapter 3 notes.

by: Jennifer Veliz

Accounting 2101 Chapter 3 notes. ACCT 2101

Marketplace > University of Georgia > Accounting > ACCT 2101 > Accounting 2101 Chapter 3 notes
Jennifer Veliz

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These notes cover chapter 3 (week 3)
Principles of Accounting 1
Swati Bhandakar
Class Notes
Account 2101, chapter 3, week 3
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This 4 page Class Notes was uploaded by Jennifer Veliz on Friday January 29, 2016. The Class Notes belongs to ACCT 2101 at University of Georgia taught by Swati Bhandakar in Summer 2015. Since its upload, it has received 18 views. For similar materials see Principles of Accounting 1 in Accounting at University of Georgia.


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Date Created: 01/29/16
Chapter  3   Adjusting Accounts for Financial Statements The  Accounting  Cycle:   1. Analyze  transactions   2. Journalize   3. Post   4. Prepare  unadjusted  trial  balance   5. Adjust   6. Prepare  adjusted  trial  balance   7. Prepare  statements   8. Close  accounts   9. Prepare  post-­‐closing  trial  balance   10.  Reverse  (optional)     The  Accounting  Period   • Valuable  information  must  reach  decision  makers  regularly,  which  is  why   accounting  system  must  make  reports  frequently.     • This  goes  back  to  the  time  period  assumption  (an  organization’s  events  can   be  divided  into  specific  time  periods).     • Most  organizations  use  a  year  as  their  accounting  period,  which  is  known  as   annual  financial  statements.     • Organizations  can  also  prepare  interim  financial  statements,  which  cover   between  one  and  six  months  of  events.     -­‐One  year:  annually   -­‐Every  6  months:  semiannually   -­‐Every  3  months:  quarterly   -­‐Every  month:  monthly   • Fiscal  year-­‐  A  period  that  starts  at  any  time  of  the  year  and  ends  12  months   later.     • Natural  business  year-­‐  12-­‐month  period  that  ends  when  a  company’s  sales   are  the  lowest.       Accrual  Basis  vs.  Cash  Basis   • Accrual  basis  accounting-­‐  uses  adjusting  process  to  record  revenues  when   earned  and  expenses  when  incurred   • Cash  basis  accounting-­‐  recording  revenues  when  cash  is  received  and   records  expenses  when  cash  is  paid.     -­‐Cash  basis  net  income  is  the  difference  between  cash  receipts  and  cash   payments.     -­‐Not  consistent  with  GAAP.     -­‐Does  not  match  the  cost  with  the  benefits  received  at  a  point  in  time.     For  example:  If  you  prepay  something,  the  benefit  you  get  for  it  in  the  future   is  not  recorded  in  the  amount  of  $,  because  that  amount  has  already  been   recorded  when  it  was  paid.       Recognizing  revenues  and  expenses   Revenue  recognition-­‐  Recording  revenue  when  it’s  earned  (when  products  or   services  are  provided).     Expense  recognition  (aka  matching  principle)-­‐  Recording  expenses  that  were   incurred  to  generate  revenues,  in  the  same  accounting  period.       v How  do  you  know  when  to  record  a  revenue/expense?   Ask:   • Revenue-­‐  Did  I  provide  the  benefit?  How  much?   • Expense-­‐  Did  I  receive  the  benefit?  How  much  of  it?     v After Journalizing and posting, unadjusted trial balance is prepared.   Adjusting  accounts:   • These  entries  are  done  at  the  end  of  the  accounting  period  to  bring  an  asset   or  liability  account  balance  to  its  proper  amount.     • You  adjust  accounts  by  making  an  entry  in  the  journal,  which  is  then   transferred  to  the  ledger.   • You  can’t  make  a  direct  adjust  on  the  ledger.       Adjusting  accounts  consists  of:   1. Determining  the  current  balance   2. Determining  what  the  current  balance  should  equal   3. Recording  an  adjusted  entry  to  get  form  step  1  to  step  2.       Framework  for  Adjustments   Adjustments  are  necessary  for  transactions  and  events  that  go  over  one  period.     v There  are  4  types  of  adjustments:       1. Prepaid  (deferred)  expenses   Paid  (or  received)  cash  BEFORE   2. Unearned  (deferred)  revenues   expense  (or  revenue)  recorded     3. Accrued  expenses   Paid  (or  received)  cash  AFTER   4. Accrued  revenues   expense  (or  revenue)  recorded       • #1  includes  depreciation  (Recording  expenses  by  allocating  the  cost  of  plant   assets  and  equipment  over  their  expected  useful  lives).   • #1  &  #2  are  called  deferrals  because  the  recognition  of  the  revenue  (or   expense)  is  deferred  (delayed)  until  after  the  cash  is  paid.     • An  adjusting  entry  is  made  at  the  end  of  an  accounting  period.     • These  entries  affect  at  least  one  income  statement  and  one  balance  sheet   accounts,  but  not  the  cash  account.     • Accrued  expenses  and  revenues  involve  a  subsequent  entry  to  show  what   happens  when  cash  is  paid  or  received.       Prepaid  (deferred)  expenses-­‐  items  paid  for  before  receiving  their  benefits.     • With  the  passage  of  time  the  asset  decreases,  and  the  item  becomes  an   expense,  which  is  why  adjustments  should  be  made  or  else  you’d  1.   Understate  expenses  and  overstate  net  income  and  2.  Overstate  both  the   prepaid  item  and  equity.     • Depreciation-­‐  Recording  expense  by  allocating  the  cost  of  plant  and   equipment  over  their  expected  useful  lives.    ([Asset  cost  –  Salvage  value]  ÷   useful  life)   • Plant  assets-­‐  long-­‐tem  tangible  assets  used  to  produce  and  sell  products  and   services.     • Book  value-­‐  Cost  of  asset  – accumulated  depreciation  (what  has  been  used   of  the  depreciation  through  out  the  period).     • Accumulated  depreciation  account-­‐  is  a  contra  asset  account.  It’s  linked  to   another  account,  has  an  opposite  balance,  and  it’s  subtracted  from  the  other   account’s  balance.     Unearned  (deferred)  revenues-­‐  cash  received  before  providing  products  or  services.     • These  are  liabilities.     • Adjusting  entries  consist  of  increasing  revenues  and  decreasing  unearned   revenues  as  products  or  services  are  provided.     • Not  making  an  adjustment  would  1.  Understate  revenues  and  net  income  and   2.  Overstates  unearned  revenue  and  understates  equity.       Accrued  Expenses-­‐  costs  that  are  incurred  in  a  period  but  are  unpaid  and   unrecorded.     • These  must  be  recorded  in  the  income  statement  for  the  period  when   incurred.     • Adjusting  entries  consists  of  increasing  expenses  and  liabilities.   • Examples  of  accrued  expenses  are  salaries  payable  and  taxes  payable.     • Not  making  adjustments  would  1.  Understates  expense  and  overstate  net   income  and  2.  Understates  payable  (liabilities)  and  overstates  equity.       Accrued  Revenues-­‐  revenues  earned  in  a  period  that  are  both  unrecorded  and  not   yet  received  in  cash.     • Adjusting  entries  increase  assets  and  revenues.     • Examples  are  interest  receivable  and  accounts  receivable.   • Not  making  adjustments  would  understate  revenues,  net  income,  equity,  and   assets.     v After adjusting these accounts, you prepare an adjusted trial balance. • Prepared  after  all  the  adjusting  entries  are  transferred  to  the  ledger.     • This  information  is  used  to  prepare  financial  statements.           Classified  Balance  Sheet-­‐  Reports  the  accounts  and  their  balance  in  the  order  of:   • Current  assets  (cash  and  other  resources  that  are  expected  to  be  sold,   collected,  or  used  within  one  year  or  the  company’s  accounting  period.   • Long-­‐term  investments  (aka  noncurrent-­‐  these  assets  are  expected  to  be  held   for  more  than  a  year  or  the  accounting  cycle).       • Plant  assets  (long-­‐tem  tangible  assets  used  to  produce  and  sell  products  and   services).   • Intangible  assets  (assets  without  physical  presence)   • Current  liabilities  (obligations  due  to  be  paid  within  one  period  or  the   operating  cycle).     • Long-­‐term  liabilities  (obligations  that  aren’t  due  to  be  paid  within  one  period   or  operating  cycle).     • Equity  (owner’s  claim  on  assets)         v After preparing financial statements, accounts need to be closed   (cleaning  up  accounts  so  that  information  from  one  period  doesn’t  carry  over   to  the  next).     v Temporary  (nominal)  accounts-­‐  Have  data  from  one  accounting  period,   and  are  closed  at  the  end  of  it.  These  include  all  income  statement  accounts,   dividends  account,  and  the  income  summary  account  (which  is  only  used  to   help  with  the  closing  of  accounts…it  is  thought  of  as  a  temporary  storage   space).     v Permanent  (real)  accounts-­‐  reports  activities  of  one  of  more  future   accounting  periods.  The  ending  balance  of  one  period  becomes  they   beginning  balance  of  the  next.  These  include  the  following  accounts:  asset,   liability,  common  stock,  and  retained  earnings.       Recording  closing  entries   1. Close  credit  balances  in  revenue  accounts  to  Income  summary   2. Close  debit  balances  in  expense  accounts  to  income  summary   3. Close  income  summary  to  retained  earnings   4. Close  dividends  account  to  retained  earnings.       v After closing accounts, post-closing trial balance are prepared. • This  process  is  to  make  sure  that  all  temporary  accounts  have  been  closed.     • The  only  accounts  on  this  balance  sheet  are  assets,  liabilities,  and  equity   accounts.     • Record  all  balances  for  the  accounts  above.        


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