Accrual Accounting And Financial Statements

Slide 1: 

4 Accrual Accounting and Financial Statements

The Accounting Period : 

The Accounting Period Exh. 4.1

Transactions and Events : 

External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Transactions and Events Exchanges of economic consideration between two parties.

Recognizing Revenues and Expenses : 

We have delivered the product to our customer, so I think we should record the revenue earned. Recognizing Revenues and Expenses Revenue Recognition

Recognizing Revenues and Expenses : 

Recognizing Revenues and Expenses Revenue Recognition Matching Now that we have recognized the revenue, let’s see what expenses we incurred to generate that revenue.

Accrual Basis Vs. Cash Basis : 

Accrual Basis Vs. Cash Basis Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.

Adjusting Accounts : 

An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. Transactions where cash is paid or received before a related expense or revenue is recognized. Adjusting Accounts Transactions where cash is paid or received after a related expense or revenue is recognized. Exh. 4.4

Adjusting Prepaid Expenses : 

Here is the check for my first 6 months’ rent. Adjusting Prepaid Expenses Resources paid for prior to receiving the actual benefits.

Adjusting Prepaid Expenses : 

Adjusting Prepaid Expenses On December 1, 2001, Scott Company paid $12,000 to cover rent for December 2001 through May 2002. Let’s look at the adjusting journal entry needed on December 31, 2001.

Adjusting Prepaid Expenses : 

Adjusting Prepaid Expenses After posting, the accounts involved look like this:

Adjusting for Depreciation : 

Adjusting for Depreciation Depreciation is the process of computing expense from allocating the cost of plant and equipment over their expected useful lives.

Adjusting for Depreciation : 

Adjusting for Depreciation On January 1, 2002, Monroe, Inc. purchased oil pumping equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Monroe expects to sell the equipment at the end of its life for $2,000 cash. Let’s record depreciation expense for the year ended December 31, 2002.

Adjusting for Depreciation : 

On January 1, 2002, Monroe, Inc. purchased oil pumping equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Monroe expects to sell the equipment at the end of its life for $2,000 cash. Adjusting for Depreciation Prepare the Journal Entry Accumulated depreciation is a contra asset account.

Adjusting for Depreciation : 

Adjusting for Depreciation After posting, the accounts involved look like this:

Adjusting for Depreciation : 

The equipment account is shown on the balance sheet like this. Adjusting for Depreciation

Adjusting Unearned Revenue : 

Adjusting Unearned Revenue Cash received in advance of providing products or services.

Adjusting Unearned Revenue : 

Adjusting Unearned Revenue On October 1, 2002, Ox University sold 1,000 season tickets to its 20 home basketball games for $100 each. OxU makes the following entry:

Adjusting Unearned Revenue : 

Adjusting Unearned Revenue On December 31, OxU has played 10 of its regular home games, winning 2 and losing 8.

Adjusting Unearned Revenue : 

Adjusting Unearned Revenue On December 31, OxU has played 10 of its regular home games, winning 2 and losing 8.

Adjusting Unearned Revenue : 

After posting, the accounts involvedwill look like this . . . Adjusting Unearned Revenue

Adjusting for Accrued Expenses : 

We’re about one-half done with this job and want to be paid! Costs incurred in a period that are both unpaid and unrecorded. Adjusting for Accrued Expenses

Adjusting for Accrued Expenses : 

Record adjusting journal entry. Adjusting for Accrued Expenses Denton, Inc. pays its employees every Friday. Year-end, 12/31/02, falls on a Wednesday. As of 12/31/02, the employees have earned salaries of $47,250 for Monday through Wednesday of the week ended 1/02/03.

Adjusting for Accrued Expenses : 

Adjusting for Accrued Expenses Denton, Inc. pays its employees every Friday. Year-end, 12/31/02, falls on a Wednesday. As of 12/31/02, the employees have earned salaries of $47,250 for Monday through Wednesday of the week ended 1/02/03.

Adjusting for Accrued Expenses : 

Adjusting for Accrued Expenses Denton, Inc. pays its employees every Friday. Year-end, 12/31/02, falls on a Wednesday. As of 12/31/02, the employees have earned salaries of $47,250 for Monday through Wednesday of the week ended 1/02/03.

Adjusting for Accrued Expenses : 

After posting, the accounts involvedwill look like this . . . Adjusting for Accrued Expenses

Adjusting for Accrued Revenues : 

Yes, you can pay me for your tax return when I finish the work. Adjusting for Accrued Revenues Revenues earned in a period that are both unrecorded and not yet received.

Adjusting for Accrued Revenues : 

Adjusting for Accrued Revenues Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry necessary on December 31, 2002, the end of the company’s fiscal year.

Adjusting for Accrued Revenues : 

Adjusting for Accrued Revenues Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry necessary on December 31, 2002, the end of the company’s fiscal year.

Adjusting for Accrued Revenues : 

Adjusting for Accrued Revenues

Adjustments and Financial Statements : 

Four major types of transactions requiring adjustment. Adjustments and Financial Statements Exh. 4.18

Slide 31: 

FastForwardTrial Balance December 31, 2001 Exh. 4.20 First, the initial unadjusted amounts are added to the worksheet.

Slide 32: 

Next, FastForward’s adjustments are added. FastForwardTrial Balance December 31, 2001 Exh. 4.20

Slide 33: 

FastForwardTrial Balance December 31, 2001 Finally, the totals are determined. Exh. 4.20

Preparing Financial Statements : 

Preparing Financial Statements Let’s use FastForward’s adjusted trial balance to prepare the company’s financial statements.

Slide 35: 

Step One: Prepare the Income Statement. Exh. 4.21

Slide 36: 

Step Two: Prepare the Statement of Changes in Owner’s Equity. Note that the Net Income from the Income Statement carries to the Statement of Changes in Owner’s Equity. Exh. 4.21

Slide 37: 

Step Three: Prepare the Balance Sheet. Exh. 4.22

Accrual Adjustments in Later Periods : 

Here is the money I owe you for completing my tax return. Make sure your books show that I paid you. Accrual Adjustments in Later Periods Accrued revenues at the end of one accounting period often result in cash receipts from customers in the next period.

Accrual Adjustments in Later Periods : 

Here is the 2002 adjusting entry we made for Smith & Jones, CPAs, to record revenue earned by not yet received. In 2003, we collect the cash from our customers. Accrual Adjustments in Later Periods

Using the InformationProfit Margin : 

The profit margin ratio measures the company’s net income to sales. Using the InformationProfit Margin

End of Chapter 4 : 

End of Chapter 4