Financial Accounting Chapter 3 Notes
Financial Accounting Chapter 3 Notes ACC-142
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This 4 page Class Notes was uploaded by bauer47 Notetaker on Wednesday March 2, 2016. The Class Notes belongs to ACC-142 at Iowa Central Community College taught by DawnA. Humburg in Fall 2015. Since its upload, it has received 28 views. For similar materials see Financial Accounting in Accounting at Iowa Central Community College.
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Date Created: 03/02/16
Chapter 3 The Adjusting Process Before we start Ch. 3, let’s review the accounting cycle as of the end of Ch. 2 (list the steps): 1 > Analyze Transaction 2 > Journal 3 > Post 4 > Unadjusted Trial Balance 1) What is the adjusting process? When we adjust our accounting records, we are really update our accounts before we complete the adjusted trial balance (DRs=CRs) 2) Cash basis vs. accrual basis accounting: a. Cash basis > revenues are recorded when they are received; expenses are recorded when they are paid; this basis of accounting is permitted for the following types of business entities > small business, partnership, proprietorship, limited liability corporation, but not for the corporate entity because it sells its stock to the public; this basis does not conform with GAAP (act. Standards) b. Accrual basis > this is required for the corporate entity; revenues are recorded when they are earned regardless of when we receive the cash; expenses are recorded when they are incurred regardless of when we pay the cash; we have already been using this basis!!! 3) Concepts and principles inherent in accrual basis accounting: a. Time period > we must split our time into equal intervals so we can compare from period to period b. A fiscal is any 12 month time period used for accounting i. What factors determine (b) above? Highest revenue, lowest revenue, past results/ history c. Revenue recognition principle > dictates both when and at what amount we record revenue i. When do we record revenue? earned d. Matching principle > dictates when expenses are recorded; we must match revenues with expenses during the same accounting period i. When do we record expenses? incurred 4) Adjusting entries: defined as journal entries that update our accounts before we complete the adjusted trial balance a. What is the step immediately preceding the adjusting entries? Unadjusted trial balance b. What is the order of (a) above? ALSHERE c. When are these recorded? End of the business period d. The accounts used to adjust are also listed on two of the financial statements. What are these statements? Balance sheet and income statement 5) Types of adjusting entries: a. PE (Prepaid expenses) > these must be adjusted to record the fact that a portion of the asset is still available and a portion of the asset has been used i. For example: Paid for 12 months of rent on July 1, $24,000. 1. Initial journal entry: DR Prepaid Rent 24,000 CR Cash 24,000 2. December 31, record the adjusting entry: (income statement) DR Rent Expense 12000 (balance sheet) CR Prepaid Rent 12000 (to record the rent that has been used/ expensed/ expired/ incurred) What is the balance in the DR for #1 above after it is adjusted? $12000; which financial statement will the balance be shown on? Balance sheet b. UR (unearned revenue) > these must be updated to record the fact that a portion of the liability is earned and the other portion of the liability is still owed i. For example: we sold $10,000 in gift cards. All but $2,500 of these were redeemed. 1. Initial journal entry: DR Cash 10,000 CR Unearned Revenue 10,000 2. December 31 adjusting entry: (balance sheet) DR Unearned Revenue 7500 (income statement) CR Service Revenue 7500 What is the balance for the CR account from #1 above after the Dec. 31 entry? $2500; which financial statement will the balance be shown on? Balance sheet c. AE > (Accrued Expenses); these have been incurred, have not been paid, and have not been recorded yet in our accounting records i. For example: received the utility bill in the mail on Dec. 31, $2,500 1. Initial journal entry: THERE IS NO ORIGINAL JOURNAL ENTRY FOR ANY accrual 2. December 31 adjusting entry: (income statement) DR Utilities Expense 2500 (balance sheet) CR Accounts Payable 2500 d. AR > (accrued revenue); these have been earned; have not been received, and have not been recorded yet in our accounting records i. for example: discovered at Dec. 31 that we still needed to bill some of our customers, $15,000 1. Initial journal entry: THERE IS NO ORIGINAL JOURNAL ENTRY FOR ANY accrual 2. December 31 adjusting entry: (BS) DR Accounts Receivable $15000 (IS) CR Service Revenue $15000 6) Depreciation defined > we record depreciation when we use a fixed asset at the end of the period; we leave the fixed asset on our accounting records at its original (historical) cost a. This is what type of adjusting entry? (PE, UR, AE, or AR) b. Formula for the method of depreciation (easiest): i. SL (straight line); (cost – residual(salvaged) value)/ useful life; this method yields the same amount every year ii. December 31 adjusting entry: Record depreciation on our Equipment, cost of $10,000; residual value of $2,000; 4 year life > (10000 2000)/4 = $2000 per year 1. Initial journal entry: DR Equipment 10000 CR Cash 10000 2. December 31 adjusting entry: (IS) DR Depr. Expense 2000 (BS) CR Accumulated Depr. 2000 3. All of the fixed assets like Equipment are disclosed at their original cost on the balance sheet; Book Value= Cost – Accumulated Depr. 7) Next step in the accounting cycle after adjusting is the Adjusted Trial Balance; order is ALSHERE 8) Worksheet > a spreadsheet used internally to assist in the adjusting process; optional for businesses 9) Alternative treatment of PE and UR a. PE > Prepaid Expense i. Initial journal entry, paid for rent for 12 months in advance on July 1st, $24,000 DR Rent Expense 24000 CR Cash 24000 st ii. December 31 adjusting entry: DR Prepaid Rent 12000 CR Rent Expense 12000 What is the balance of Prepaid Rent after ii above? 12000 b. UR > Unearned Revenue i. Initial journal entry, we sold $10,000 in gift cards. All but $2,500 of these were redeemed. 1. Initial journal entry: DR Cash 10000 CR Revenue 10000 2. December 31 adjusting entry: (IS) DR Revenue 2500 (BS) CR Unearned Revenue 2500 What is the balance in Unearned Revenue after 2 above? 2500
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