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1、Accounting English 2017Accounting English 20171 1Chapter 2-2Accounting Cycle (Cont.)Accounting English 20172Before financial statements can be prepared, the accounts must be reviewed to ensure they reflect the correct balances; adjustments will be needed to adjust prepayments and unearned amounts, a
2、nd to record amortization and accruals. The adjusted trial balance is used to prepare the statements. Closing entries are journalized and posted in preparation for the next accounting period.Accounting English 20173Need for adjustmentsnThe life of a business is divided into accounting periods so tha
3、t periodic financial reports can be prepared and used. nAdjustments at the end of each period are necessary to update some of the asset, liability, expense, and revenue accounts and to show the effects of previously unrecorded internal economic events of the business.Accounting English 20174Revenue
4、= Cash receivedExpense = Cash paidRevenue Cash receivedExpense Cash paidAccounting English 20175Accrual and cash basis accountingnAccrual accounting requires adjustments for prepaid, unearned, and accrued items; therefore, it reports revenues when earned and expenses when the expiration of benefit i
5、s incurred.nCash basis accounting does not make adjustments; revenues are recorded when cash is received and expenses are recorded when cash is paid. nThe cash basis of accounting is not generally accepted.Accounting English 20176Adjusting the accounts ( step 5)nAdjusting entries are journalized in
6、the general journal and then posted into the general ledger.nAdjusting entries are used to:ncharge the expired portion of prepaid expenses to Expensencharge the expired portion of fixed assets cost to Amortization/Depreciation expensenaccrue expenses and record the related liabilitiesnrecognize as r
7、evenues the earned portion of unearned revenue liabilitiesnaccrue revenues and record the related assetsAccounting English 20177 Prepaid Expenses Accrued ExpensesUnearned RevenueAccrued RevenueTypes of Adjusting Entries DepreciationAccounting English 20178Entries to prepaid expensesPrior PeriodsCurr
8、ent PeriodFuture PeriodsTransactionPaid future expenses in advance (creates an asset).End of Current PeriodAdjusting Entry Recognize portion of asset consumed as expense, andReduce balance of asset account.Entries to prepaid expensesAccounting English 20179Examples Include:DepreciationSuppliesExpiri
9、ng Insurance PoliciesEntries to prepaid expensesAccounting English 201710Jan. 1Dec. 31$2,400 Insurance Policy Coverage for 12 Months$200 Monthly Insurance ExpenseOn January 1, Webb, Co. purchased a one-year insurance policy for $2,400.Accounting English 201711Entries to prepaid expensesInitially, co
10、sts that benefit more than one accounting period are recorded as assets. Accounting English 201712Entries to prepaid expensesThe costs are expensed as they are used to generate revenue.Accounting English 201713Entries to prepaid expensesSOCICost of assets used this period to generate revenue.SOFPCos
11、t of assets that benefit future periods.Accounting English 201714The Concept of DepreciationDepreciation is the systematic allocation of the cost of a depreciable asset to expense.Depreciable assets are physical objects that retain their size and shape but lose their economic usefulness over time.Ac
12、counting English 201715The Concept of DepreciationThe portion of an assets utility that is used up must be expensed in the period used.Cash (credit)Fixed Asset (debit)On date when initial payment is made . . .The assets usefulness is partially consumed during the period.At end of period . . .Accumul
13、ated Depreciation (credit)Depreciation Expense (debit)Accounting English 201716Depreciation Is Only an EstimateDuring May of 20x7, Barones repair shop purchased an equipment with a useful life of 50 months for $5,000 cash. Using the straight-line method, calculate the monthly depreciation expense.$5
14、,00050=$100Depreciationexpense (perperiod)=Cost of the assetEstimated useful lifeAccounting English 201717Depreciation Is Only an EstimateBarones repair shop would make the following adjusting entry.Contra-asset Accounting English 201718Accumulated depreciation would appear on the SOFP as follows: E
15、quipment $5,000Less: accumulated depreciation 100 4,900Accounting English 201719Entries to Unearned RevenuePrior PeriodsCurrent PeriodFuture PeriodsTransactionCollected from customers in advance (creates a liability).End of Current PeriodAdjusting Entry Recognize portion earned as revenue, andReduce
16、 balance of liability account.Accounting English 201720Entries to Unearned RevenueExamples Include:Airline Ticket SalesSports Teams Sales of Season TicketsAccounting English 201721Entries to Unearned Revenue.Jan. 1Dec. 31$6,000 Rental Contract Coverage for 12 Months$500 Monthly Rental RevenueOn Janu
17、ary 1, Webb, Co. received $6,000 in advance for a one-year rental contract.Accounting English 201722Entries to Unearned Revenue.Initially, revenues that benefit more than one accounting period are recorded as liabilities. Accounting English 201723Entries to Unearned Revenue.Over time, the revenue is
18、 recognized as it is earned.Accounting English 201724Entries to Unearned RevenueSOCIRevenue earned this period.SOFPLiability for future periods.Accounting English 201725Entries to Accrued Expenses.Prior PeriodsCurrent PeriodFuture PeriodsTransactionLiability will be paid.End of Current PeriodAdjusti
19、ng Entry Recognize expense incurred, andRecord liability for future payment.Accounting English 201726Entries to Accrued Expenses.Examples Include:InterestWages and SalariesProperty TaxesHey, when do we get paid?Accounting English 201727Entries to Accrued Expenses.Monday,May 29Friday, June 2$3,000 Wa
20、ges ExpenseOn May 31, Webb, Co. owes wages of $3,000. Pay day is Friday, June 2.Wednesday,May 31Accounting English 201728Entries to Accrued Expenses.Initially, an expense and a liability are recorded.Accounting English 201729Entries to Accrued Expenses.SOCICost incurred this period to generate reven
21、ue.SOFPLiability to be paid in a future period.Accounting English 201730Entries to Accrued ExpensesMonday,May 29Friday, June 2$5,000 Weekly WagesLets look at the entry for June 2.Wednesday,May 31$2,000 Wages Expense$3,000 Wages ExpenseAccounting English 201731Entries to Accrued ExpensesThe liability
22、 is extinguished when the debt is paid.Accounting English 201732Entries to Accrued RevenuePrior PeriodsCurrent PeriodFuture PeriodsTransactionReceivable will be collected.End of Current PeriodAdjusting Entry Recognize revenue earned but not yet recorded, andRecord receivable.Accounting English 20173
23、3Entries to Accrued RevenueExamples Include:Interest EarnedWork Completed But Not Yet Billed to CustomerAccounting English 201734Entries to Accrued RevenueSaturday,Jan. 15Tuesday, Feb. 15$170 Interest RevenueOn Jan. 31, the bank owes Webb, Co. interest of $170. Interest is paid on the 15th day of ea
24、ch month.Monday,Jan. 31Accounting English 201735Entries to Accrued RevenueInitially, the revenue is recognized and a receivable is created.Accounting English 201736Entries to Accrued Revenue.SOCIRevenue earned this period.SOFPReceivable to be collected in a future period.Accounting English 201737Ent
25、ries to Accrued RevenueSaturday,Jan. 15Tuesday, Feb. 15$320 Monthly Interest $170 Interest RevenueLets look at the entry for February 15. Monday,Jan. 31$150 Interest RevenueAccounting English 201738Entries to Accrued RevenueThe receivable is collected in a future period.Accounting English 201739Step
26、s 6 and 7: The adjusted trial balance and preparation of financial statementsnThe sixth step in the accounting cycle is the preparation of an adjusted trial balance to prove the equality of debits and credits upon completion of the adjustment process.nThe seventh step in the accounting cycle is prep
27、aring the financial statements using the adjusted account balances as summarized on the adjusted trial balance.SOCIAccountDebitCreditCash$ 15,200Accounts Receivable200Advertising Supplies1,000Prepaid Insurance550Office Equipment5,000Accumulated Depreciation-Off Equip$40Notes Payable5,000Accounts Pay
28、able2,500Unearned Revenue800Salaries Payable1,200Interest Payable50Common Stock10,000Retained Earnings0Dividends500Service Revenue10,600Salaries Expense5,200Advertising Supplies Expense1,500Rent Expense900Insurance Expense50Interest Expense50Depreciation Expense40 $ 30,190 $ 30,190PIONEER ADVERTISIN
29、G AGENCY INC.SOCIFor the Month Ended May 31, 20xxRevenuesService Revenue10,600ExpensesSalaries Expense5,200Advertising Supplies Expense1,500Rent Expense900Insurance Expense50Interest Expense50Depreciation Expense 40Total expenses7,740Net income$ 2,86040Accounting English 2017Retained Earnings Statem
30、entAccountDebitCreditCash$ 15,200Accounts Receivable200Advertising Supplies1,000Prepaid Insurance550Office Equipment5,000Accumulated Depreciation-Off Equip$40Notes Payable5,000Accounts Payable2,500Unearned Revenue800Salaries Payable1,200Interest Payable50Common Stock10,000Retained Earnings0Dividends
31、500Service Revenue10,600Salaries Expense5,200Advertising Supplies Expense1,500Rent Expense900Insurance Expense50Interest Expense50Depreciation Expense40 $ 30,190 $ 30,190PIONEER ADVERTISING AGENCY INC.Retained Earnings StatementFor the Month Ended May 31, 20xxRetained earnings, October 1 $ 0Add: Net
32、 income 2,8602,860Less: Dividends 500Retained Earnings, October 312,36041Accounting English 2017SOFPAccountDebitCreditCash$ 15,200Accounts Receivable200Advertising Supplies1,000Prepaid Insurance550Office Equipment5,000Accumulated Depreciation-Off Equip$40Notes Payable5,000Accounts Payable2,500Unearn
33、ed Revenue800Salaries Payable1,200Interest Payable50Common Stock10,000Retained Earnings0Dividends500Service Revenue10,600Salaries Expense5,200Advertising Supplies Expense1,500Rent Expense900Insurance Expense50Interest Expense50Depreciation Expense40 $ 30,190 $ 30,190PIONEER ADVERTISING AGENCY INC.SO
34、FPMay 31, 20xxAssetsCash $ 15,200Accounts Receivable200Advertising Supplies1,000Prepaid Insurance550Office Equipment$5,000Accumulated Depreciation-O Equip 40 4,960Total Assets $ 21,910Liabilities and Stockholders EquityLiabilitiesNotes Payable $ 5,000Accounts Payable2,500Unearned Revenue800Salaries
35、Payable1,200Interest Payable 50Total liabilities9,550Stockholders EquityCommon Stock10,000Retained Earnings 2,360Total liabilities and stockholders equity $ 21,91042Accounting English 2017Accounting English 201743The worksheetnA worksheet is a tool the accountant uses at the end of an accounting per
36、iod to show the effects of the adjustments and organize the data for use in preparing financial statements and recording the adjusting and closing entries.nThe worksheet is an internal working paper that incorporates steps 4 (unadjusted trial balance) through 7 (preparation of financial statements)
37、of the accounting cycle.Accounting English 201744Step 8: Closing entriesnClosing the temporary accounts at the end of each accounting period serves to transfer the effects of these accounts to the proper owners equity account that appears on the SOFP. nIt also gives the revenue, expense, and withdra
38、wals (or dividend for a corporation) accounts zero balances, preparing them for use in the following period.Accounting English 201745Step 8: Closing entries (cont.)nClosing involves the following steps:nRevenues are closed to the Income summary account.nExpenses are closed to the Income summary acco
39、unt.nThe balance in the Income summary account is closed to the Owners equity account.nThe Owners dividends/withdrawals account is closed to the Owners equity account.Accounting English 201746Closing Entries for Revenue AccountsSince Sales Revenue has a credit balance, the closing entry requires a d
40、ebit to the Service Revenue account.Accounting English 201747Closing Entries for Revenue AccountsAccounting English 201748Closing Entries for Expense AccountsSince expense accounts have a debit balance, the closing entry requires a credit to the expense accounts.Accounting English 201749Net IncomeCl
41、osing Entries for Expense Accounts.Accounting English 201750Closing the Income Summary AccountSince Income Summary has a $2860 credit balance, the closing entry requires a debit to Income Summary.Accounting English 201751Closing the Income Summary AccountThe balance in Income Summary is now zero.Acc
42、ounting English 201752Closing the Owners Dividend AccountSince the dividend account has a debit balance, the closing entry requires a credit to dividend.Accounting English 201753Closing the Owners Dividend AccountAccounting English 201754Step 9: Post-closing trial balancenThe two main goals of the p
43、ost-closing trial balance are to:ntest the equality of debits and credits in the general ledger after the closing entries have been postednconfirm that all temporary accounts have been closedAccounting English 201755After all closing entries are made, After-Closing Trial Balance looks like this. PIO
44、NEER ADVERTISING AGENCY INC.Post-closing Trial BalanceMay 31, 20xxCash $ 15,200Accounts Receivable 200Advertising Supplies1,000Prepaid Insurance550Office Equipment5,000Accumulated Depreciation-O Equip 40Notes Payable 5,000Accounts Payable 2,500Unearned Revenue 800Salaries Payable 1,200Interest Payab
45、le 50Common Stock 10,000Retained Earnings 2,360Total 21,950 21,950 Accounting English 201756The accounting cycle summarynThe nine steps in the accounting cycle are: nanalyzenjournalize in the general journalnpost from the general journal to the general ledgernprepare the unadjusted trial balancenjou
46、rnalize and post adjusting entriesnprepare the adjusted trial balancenprepare financial statementsnjournalize and post closing entriesnprepare post-closing trial balanceAccounting English 201757Classification of SOFP itemsA classified SOFP categorizes asset, liability, and equity accounts.n Assets a
47、re grouped into three main categories:ncurrent assetsnlong-term investmentsnfixed assetsn Liabilities are grouped into two categories:ncurrent liabilitiesnnon-current liabilitiesAccounting English 201758Classification of SOFP items (cont.)nThe equity of a sole proprietorship is reported on one line, while a separate capital account is reported for each partner in a partnership. nCorporations report the investments of their shareholders as contributed capital; the equity from net incomes less dividends is reported as retained earnings.Accounting English 201759End of Chapter 2
