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Accounting Week 3 Notes

by: Janey Wensel

Accounting Week 3 Notes ACT222

Marketplace > Chatham University > Accounting (ACCT) > ACT222 > Accounting Week 3 Notes
Janey Wensel

GPA 3.7

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About this Document

These notes cover all of chapter 3.
Financial Accounting Principles I
James Pierson
Class Notes
trial balance, financial accounting, adjusting entries, revenue recognition
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This 5 page Class Notes was uploaded by Janey Wensel on Thursday September 15, 2016. The Class Notes belongs to ACT222 at Chatham University taught by James Pierson in Fall 2016. Since its upload, it has received 7 views. For similar materials see Financial Accounting Principles I in Accounting (ACCT) at Chatham University.


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Date Created: 09/15/16
Accounting Chapter 3 Periodic Reporting and Adjusting Accounts, Financial Statements & Closing Process, Classified Balance Sheet and Analysis ACCRUAL BASIS VS CASH BASIS ACCRUAL BASIS ACCOUNTING are expenses that are reported when the expense occurs not when the cash is paid [income statement that measures the profitability during a specific time] CASH BASIS ACCOUNTING is a method of recording transactions only when cash is received or payments are made Major goal is to have revenue recognized at the time services and products are delivered EXPENSE RECOGNITION PRINCIPLE aims to record expenses in the same period as the revenues that are a result of those expenses Matching expenses and revenues requires us to predict events ADJUSTMENTS 3 Step Process 1. Determine what the current account balance equals 2. Determine what the current account balance should equal 3. Record an adjusting entry to get from step 1 to 2 Adjustments are separated by two different expenses and revenues Prepaid expenses and unearned revenues (Deferrals) Accrued expenses and revenues, cash has been paid and received ADJUSTING ENTRIES are made at the end of a period to reflect transactions that have not yet been recorded Prepaid expenses have been paid for in advance, they are assets when used they become expenses (prepaid insurance, prepaid rent) Jan 01 Debit Credit Prepaid insurance 3,000 Cash 3,000 [Paid 3 months insurance in advance] Adjustment Entry – they used up one month of their insurance [You do this to show the usage/effect of one month’s insurance] This asset has turned into an expense Jan 31 Insurance expense 1,000 Prepaid Insurance 1,000 Depreciation- spreading out the cost over their expected lives Formula: Asset Cost – Salvage Depreciation Expense = Useful life Useful life- Period of time that an asset is expected to help revenues Salvage Value- the selling price of an asset at the end of its useful like Accumulated Depreciation is kept in a separate account, a contra account. -It’s associated with assets, like buildings, machinery, equipments, vehicles. -It’s used to determine an assets book value, net A contra account is amount an account linked with another account, it has an opposite normal balance and reported as a subtraction from Prepaid Expenses ––Beginning it’s an ASSET Ending it turns into EXPENSE Unearned (deferred) Revenues –– Receiving money for a job you haven’t done yet Unearned become earned, decrease the unearned and increased the earned Unadjusted Adjusted Cash 10,000 Unearned Revenue 10,000 Unearned Revenue 10,000 Fees Earned 10,000 Accrued Expenses- cost incurred that are both unpaid and unrecorded Increase the expense and increase a liability EX: salaries, interest, rent, taxes EXPENSE LIABILITY Debit Credit Adjustme Adjustme nt nt Accrued Revenue- revenues earned in a period that are unrecorded and have not received cash Increase and revenue and increase an asset PREPARING FINANCIAL STATEMENTS Income Statement- prepared using revenue & expense accounts Statement of Retained Earnings-prepared by retained earnings and dividends Balance Sheet- using assets, liabilities, and common stock Statement of Cash Flows- prepared from changes in cash flow CLOSING PROCESS The closing process is to ready the accounts for the next period. 1. Identify accounts for closing 2. Record and post the closing entries 3. Prepare a post-closing trail balance The closing process resets revenues, expenses, and dividends to zero, so that these accounts can properly measure for the next period. Temporary Accounts (nominal)- data related to one period. Include: Revenues, Expenses, Dividends, and income summary Permanent Accounts (real)- report on activities related to one or more periods, so they carry on into the next period. Includes: Assets, Liabilities, Common stock, Retained Earnings Closing Entries- entries recorded at the end of the period to the bigger account Income summary is a temporary account that contains a credit of all the revenues, and debit for all the expenses. Dividends account balance is transferred to retained earnings. FOUR-STEP CLOSING PROCESS 1. Close income statement credit balances 2. Close income statement debit balances 3. Close income summary account 4. Close dividends account 1. Close credit balances in revenue accounts to income summary –– transfer credit balances in revenue to the income summary account, accounts with credit balances are zero’d by debiting them. This closes revenue accounts and leaves them with zero balances 2. Close debit balances in expense accounts to income summary –– transfers debit balances in expense accounts to the income summary, accounts with debit balances are zero’d by crediting them. 3. Close income summary to retained earnings –– transfers the balance of the income summary account to retained earnings. Debit the income summary and credit retained earnings 4. Close dividends account to retained earnings –– transfers any debit balance in the dividends account to retained earnings. Retained earnings are debited and Dividends are credited. Post-Closing Trail Balance- list of permanent accounts and their balances from the ledger after closing entries are posted. List balances of accounts that are not closed, the assets, liabilities, and equity. The aim is to verify the total debits equaling total credits for permanent accounts, all temporary has zero balances.


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