# Accrual Accounting And The Financial.ppt

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## Presentation Description

Accrual Accounting And The Financial.ppt

## Presentation Transcript

### Slide 1:

3 - 1 Accrual Accounting and the Financial Statements

### Learning Objective 1 :

3 - 2 Learning Objective 1 Relate accrual accounting and cash flows.

3 - 3 1 Entity has cash The Business Cycle

### Accrual Accountingand Cash Flows :

3 - 4 Suppose that on September 30, 2005, Vodafone receives £24 for a one-year connection to wireless phone service. Accrual Accountingand Cash Flows By December 31, Vodafone has earned the revenue for three months.

### Accrual Accountingand Cash Flows :

3 - 5 Accrual Accountingand Cash Flows Income statement reports for year ended: Service revenue (when earned); £24 × 3/12 £ 6 Balance sheet reports: Liabilities: Unearned service revenue (company still owes £24 × 9/12) £18 Statement of cash flows reports for year ended: Collections from customers (when cash was received) £24 December 31, 2005

### The Time-Period Concept :

3 - 6 The Time-Period Concept Businesses need regular progress reports, so accountants prepare financial statements for specific periods and at regular intervals. Monthly Quarterly

### Learning Objective 2 :

3 - 7 Learning Objective 2 Apply the revenue and matching principles.

### Revenue Principle :

3 - 8 Revenue Principle The revenue principle governs two things: When to record revenue and… the amount of revenue to record.

### Revenue Principle :

3 - 9 Revenue Principle Air & Sea Travel, Inc. Situation 1 No transaction has occurred. – Do Not Record Revenue March 12 I plan to have you make my travel arrangements.

### The Matching Principle :

3 - 10 The Matching Principle It is the basis for recording expenses and includes two steps: Identify all the expenses incurred during the accounting period. Measure the expenses and match expenses against revenues earned.

### The Matching Principle :

3 - 11 The Matching Principle Revenue

### The Matching Principle :

3 - 12 The Matching Principle Revenue

### Learning Objective 3 :

3 - 13 Learning Objective 3 Update the financial statements by adjusting the accounts.

### Updating the Accounts:The Adjustment Process :

3 - 14 Updating the Accounts:The Adjustment Process The adjustment process begins with the trial balance. The unadjusted trial balance lists the accounts and their balances after the period’s transactions have been recorded.

### Air & Sea Unadjusted Trial Balance April 30, 20x3 :

3 - 15 Air & Sea Unadjusted Trial Balance April 30, 20x3

3 - 16 Deferrals Accruals Categories ofAccounting Adjustments Depreciation

### Prepaid Expenses: Rent :

3 - 17 Prepaid Expenses: Rent On April 1, 20x3, Air & Sea Travel prepays three months office rent.

### Prepaid Expenses: Rent :

3 - 18 Prepaid Expenses: Rent What is the adjusting entry on April 30? April 30 Rent Expense (\$3,000 × /3) 1,000 Prepaid Rent 1,000 To record rent expense

### Prepaid Expenses: Supplies :

3 - 19 Prepaid Expenses: Supplies On April 2, 20x3, Air & Sea Travel paid cash of \$700 for office supplies.

### Prepaid Expenses: Supplies :

3 - 20 Prepaid Expenses: Supplies An inventory at month end indicated that \$400 in office supplies remained.

### Depreciation of Plant Assets :

3 - 21 Depreciation of Plant Assets On April 3, the business purchased furniture on account for \$16,500. The furniture is expected to last 5 years.

### Depreciation of Plant Assets :

3 - 22 Depreciation of Plant Assets The straight-line method of depreciation gives an annual depreciation expense of \$3,300. \$16,000 ÷ 5 years = \$3,300 per year \$3,300 ÷12 months = \$275 per month

### Depreciation of Plant Assets :

3 - 23 Depreciation of Plant Assets What is the adjusting entry on April 30? April 30 Depreciation Expense – Furniture 275 Accumulated Depreciation – Furniture 275 To record depreciation on furniture

### Book Value :

3 - 24 Book Value The net amount of a plant asset (cost minus accumulated depreciation) is the book value.

### Accrued Expenses :

3 - 25 Accrued Expenses The term accrued expense refers to a liability that arises from an expense that has not yet been paid. Suppose Air & Sea Travel pays its employees a monthly salary of \$1,900, half on the 15th and half on the last day of the month.

### Accrued Expenses :

3 - 26 April 15 30 Accrued Expenses Assume that if a payday falls on the weekend, Air & Sea pays the employee on the following Monday. 1

### Accrued Expenses :

3 - 27 Accrued Expenses Salary Expense 4/15 950 Cash 4/15 950

### Accrued Revenues :

3 - 28 Accrued Revenues An accrued revenue is a revenue that has been earned but not received in cash. Bank One hires Air & Sea Travel on April 15 to arrange travel services on a monthly basis. Bank One will pay the travel agency \$500 monthly, with the first payment on May 15.

### Accrued Revenues :

3 - 29 Accrued Revenues April 30 Accounts Receivable (\$500 × ½) 250 Service Revenue 250 To accrue service revenue

### Unearned Revenues :

3 - 30 Unearned Revenues An unearned revenue is an obligation arising from receiving cash before providing a service. Plantation Foods engages Air & Sea Travel agreeing to pay the agency \$450 monthly, beginning immediately. Air & Sea Travel collects the first amount on April 20 and earns one-third the last 10 days.

### Unearned Revenues :

3 - 31 Unearned Revenues April 20 Cash 450 Unearned Revenue 450 Received cash for revenue in advance April 30 Unearned Revenue (\$450 × 1/3) 150 Revenue 150 To record unearned revenue earned

### Air & Sea Adjusted Trial Balance April 30, 20x3 :

3 - 33 Air & Sea Adjusted Trial Balance April 30, 20x3

### Air & Sea Adjusted Trial Balance April 30, 20x3 :

3 - 34 Air & Sea Adjusted Trial Balance April 30, 20x3 1,000 1,900 300 275 400 540 4,415 7,400 7,400 Service revenue Rent expense Salary expense Supplies expense Depreciation expense Utilities expense Income tax expense Totals Account Title Adjusted Trial Balance Debit Credit Total credits: 46,415 + 7,400 = 53,815 Total debits: 49,400 + 4,415 = 53,815

### Learning Objective 4 :

3 - 35 Learning Objective 4 Prepare the financial statements.

### Air & Sea Travel, Inc.Income Statement :

3 - 36 Air & Sea Travel, Inc.Income Statement

### Air & Sea Travel, Inc.Statement of Retained Earnings :

3 - 37 Retained earnings, April 1, 20x3 \$11,250 Add: Net income 2,958 \$14,235 Less: Dividends – 3,200 Retained earnings, April 30, 20x3 \$11,035 Air & Sea Travel, Inc.Statement of Retained Earnings Month Ended April 30, 20x3

### Air & Sea Travel, Inc.Balance Sheet :

3 - 38 Air & Sea Travel, Inc.Balance Sheet Assets Cash \$24,800 Accounts receivable 2,500 Supplies 400 Prepaid rent 2,000 Furniture \$16,500 Less: Accumulated depreciation – 275 16,225 Total assets \$45,925 Liabilities Accounts payable \$13,100 Salary payable 950 Unearned revenue 300 Income tax payable 540 Total liabilities \$14,890 Stockholders’ Equity Common stock \$20,000 Retained earnings 11,035 Total \$31,031 Total liabilities and stockholders’ equity \$45,925 April 30, 20x3

### Ethical Issues inAccrual Accounting :

3 - 39 Ethical Issues inAccrual Accounting “Managing” earnings to meet established goals or budgets. Misrepresenting company assets, liabilities, revenues, and expenses to financial statement users. Ethical issues include:

### Learning Objective 5 :

3 - 40 Learning Objective 5 Close the books.

### Which AccountsNeed To Be Closed? :

3 - 41 Which AccountsNeed To Be Closed? Closing the books means to prepare the accounts for the next period’s transactions. Temporary accounts (revenue, expense, and dividends) are closed at the end of the accounting period.

### Which AccountsNeed To Be Closed? :

3 - 42 Which AccountsNeed To Be Closed? Permanent accounts (assets, liabilities, and stockholders’ equity) are not closed at the end of the period because their balances are not used to measure income. Closing entries transfer the revenue, expense, and dividends balances to Retained Earnings.

### Journalizing the Closing Entries :

3 - 43 Journalizing the Closing Entries April 30 Service Revenue 7,400 Retained Earnings 7,400 April 30 Retained Earnings 4,415 Rent Expense 1,000 Salary Expense 1,900 Supplies Expense 300 Depreciation Expense 275 Utilities Expense 400 Income Tax Expense 540 April 30 Retained Earnings 3,200 Dividends 3,200

### Posting the Closing Entries :

3 - 44 Posting the Closing Entries Retained Earnings 4,415 3,200 11,250 7,400 11,035 Service Revenue 7,400 7,000 250 150 7,400

### Classifying Assets and Liabilities :

3 - 45 Classifying Assets and Liabilities Liquidity measures how quickly an item can be converted to cash. A balance sheet lists assets and liabilities in the order of their relative liquidity.

### Classifying Assets and Liabilities :

3 - 46 Classifying Assets and Liabilities Current assets Long-term assets Current liabilities Long-term liabilities

### Balance Sheet Format :

3 - 47 Balance Sheet Format

### Income Statement Format :

3 - 48 Income Statement Format Single-Step Income Statement

### Income Statement Format :

3 - 49 Multi-Step Income Statement Income Statement Format

### Income Statement Format :

3 - 50 Income Statement Format Earnings before taxes Net earnings – = Income taxes Multi-Step Income Statement

### Learning Objective 6 :

3 - 51 Learning Objective 6 Use the current ratio and the debt ratio to evaluate a business.

### Current Ratio :

3 - 52 Current ratio = Total current assets ÷ Total current liabilities The current ratio measures the company’s ability to pay current liabilities with current assets. Current Ratio Rule of thumb: A strong current ratio is 2.00.

### Debt Ratio :

3 - 53 Debt ratio = Total liabilities ÷ Total assets Debt Ratio The debt ratio indicates the proportion of assets that is financed with debt. This ratio measures a business’s ability to pay total liabilities A low debt ratio is safer than a high debt ratio.

### End of Chapter 3 :

3 - 54 End of Chapter 3