Review of the Accounting Process 2 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

The Accounting Equation A = L + OE - Owner Withdrawals + Owner Investments - Expenses - Losses + Revenues + Gains

Accounting Equation for a Corporation A = L + SE + Retained Earnings + Paid-in Capital - Expenses - Losses + Revenues + Gains - Dividends

Accounting Equation, Debits and Credits, Increases and Decreases Permanent Accounts —assets, liabilities, paid-in capital, retained earnings Temporary Accounts -revenues, gains, expenses, losses

The Accounting Processing Cycle Source documents Record in Journal Transaction Analysis Post to Ledger During the Accounting Period Financial Statements Unadjusted Trial Balance Adjusted Trial Balance At the End of the Accounting Period Record & Post Adjusting Entries Close Temporary Accounts Post-Closing Trial Balance At the End of the Year

Adjusting Entries Prepayments Accruals Estimates At the end of the period, adjusting entries are required to satisfy the realization principle and the matching principle. Transactions where cash is paid or received before a related expense or revenue is recognized. Transactions where cash is paid or received after a related expense or revenue is recognized. Accountants must often make estimates in order to comply with the accrual accounting model.

Prepaid Expenses Asset Expense Unadjusted Balance Credit Adjustment Debit Adjustment Today, I will pay for my first 6 months’ rent. Prepaid Expenses Items paid for in advance of receiving their benefits

Depreciation Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance. Assume the following: Let’s calculate the depreciation expense for the month ended July 31, 2011.

Depreciation July Depreciation Expense = $12,000 - $0 60 months = $200 per month Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance. July 31 Depreciation expense 200 Accumulated depreciation- furniture and fixtures 200

Unearned Revenues Liability Revenue Unadjusted Balance Credit Adjustment Debit Adjustment “ Go Big Red” Buy your season tickets for all home basketball games NOW! Unearned Revenue Cash received in advance of performing services

Estimates Assume that Dress Right’s management determines that of the $2,000 of accounts receivable recorded at July 31, only $1,500 will ultimately be collected. Prepare the adjusting entry for July 31. July 31 Bad debt expense 500 Allowance for uncollectible accounts 500

The Income Statement The income statement summarizes the results of profit-generating activities of the company.

The Balance Sheet The balance sheet presents the financial position of the company on a particular date.

The Balance Sheet Notice that assets of $143,000 equals total liabilities plus shareholders’ equity of $143,000.

The Statement of Shareholders’ Equity The statement of shareholders’ equity presents the changes in permanent shareholder accounts.

The Closing Process Temporary Accounts Revenues Income Summary Expenses Dividends Permanent Accounts Assets Liabilities Shareholders’ Equity The closing process applies only to temporary accounts.

Post-Closing Trial Balance Lists permanent accounts and their balances. Total debits equal total credits.

Sales Journal Sales journals record all credit sales. Every entry in the sales journal has the same effect on the accounts; the sales revenue account is credited and the accounts receivable control account is debited. Other columns capture information needed for updating the accounts receivable subsidiary ledger.

Cash Receipts Journal Cash receipts journals record all cash receipts, regardless of the source. Every entry in the cash receipts journal produces a debit to the cash account with the credit to various other accounts.

End of Chapter 2