In addition, he was actively involved with the American Institute of Certified Public Accountants and was a member of the Accounting Standards Executive Committee (AcSEC) of that organization. He is the recipient of the Outstanding Accounting Educator Award from the Illinois CPA Society, the FSA's Joseph A.
Assumptions 1-9
Liabilities 1-11 Owner’s Equity 1-12
Posting 2-12
Preparing a post-closing trial balance 4-16 The accounting cycle and correcting entries 4-19 Summary of the accounting cycle 4-19. QuickBooks® helps this retailer sell guitars: Intuit 7-1 Overview of Accounting Information Systems 7-2 Computerized Accounting Systems 7-3.
Fraud 8-3
Analysis 9-20 A Look at IFRS 9-41
Depletion 10-17 Intangible Assets 10-18
Analysis 10-22
Accounting for Partnership Formation 12-6 Computation of Net Income or Net Loss 12-8 Distribution of Net Income or Net Loss 12-8 Partnership Financial Statements 12-11 Partnership Liquidation 12-12 No Capital Deficiency 12-13 Capital Deficit 12- 15. Accounting for stock transactions 13-10 Accounting for common stock 13-10 Accounting for preferred stock 13-12 Accounting for treasury stock 13-14 Presentation of shareholder statements.
Operating Activities 17-9
Organizational Structure 19-5 Managerial Cost Concepts 19-7 Manufacturing Costs 19-7 Product Versus Period Costs 19-8 Illustration of Cost Concepts 19-9. Default Expense Rates 20-12 Entries for Work in Progress and Sold 20-15 Assigning Costs to Finished Goods 20-15 Assigning Costs to Cost of Goods Sold 20-16 Summary of Work Order Cost Flows 20-17 for service order companies 18 Advantages and disadvantages of Job.
Investing and Financing Activities 17-13 Step 3: Net Change in Cash 17-14
Operating Activities 17-19
Investing and Financing Activities 17-24 Step 3: Net Change in Cash 17-26
Budgeting and Accounting 24-3 Advantages of Budgeting 24-3 Basics of Effective Budgeting 24-3 Master Budget 24-6.
Merchandisers 24-22 Service Companies 24-23
Using Financial Calculators G-15 Present Value of a Lump Sum G-16 Present Value of an Annuity G-17 Future Value of a Lump Sum G-17 Future Value of an Annuity G-17 Internal Rate of Return G-18. Mary's University for their extensive efforts in preparing the homework materials related to current designs.
Feature Story
Knowing the Numbers
CHAPTER 1
Chapter Preview
Gert still leads the Board of Directors and Tim is the President and CEO of the company. In addition, the company monitors all independent factories that produce its products to ensure they comply with the company's Standards of Manufacturing Practices.
Chapter Outline
Explain the building blocks of accounting: ethics, principles, and
The company was in the midst of an aggressive expansion that had taken its sales above $1 million for the first time, but had also left the company financially stressed. Employers like Columbia Sportswear generally assume that managers in all areas of the business are "financially savvy." To help you prepare for it, in this textbook you will learn how to read and prepare financial statements and how to use basic tools to evaluate financial performance.
GAAP
State the accounting equation, and define its components
Gert took over the small, struggling company with the help of her son Tim, who was then a senior at the University of Oregon. Columbia was also a founding member of the Sustainable Apparel Coalition, which is a group that strives to reduce the environmental and social impact of the apparel industry.
Analyze the eff ects of business transactions on the accounting
Describe the four financial statements and how they are
Accounting Activities and Users
Three Activities
Who Uses Accounting Data
Internal Users
External Users
External users are individuals and organizations outside a company who want fi nancial in- formation about the company. The two most common types of external users are investors and
Accounting Across the Organization Clif Bar & Company
Owning a Piece of the Bar
The three steps in the accounting process are identifi cation, recording, and communication
Bookkeeping encompasses all steps in the accounting process
Accountants prepare, but do not interpret, fi nancial reports
Managerial accounting activities focus on reports for internal users
The Building Blocks of Accounting
Ethics in Financial Reporting
A number of the Feature Stories and other parts of the textbook discuss the central impor- tance of ethical behavior to fi nancial reporting
Ethics Insight boxes and marginal ethics notes highlight ethical situations and issues in actual business settings. Many of the People, Planet, and Profi t Insight boxes focus on ethical issues companies face when measuring and reporting social and environmental issues.
Many of the People, Planet, and Profi t Insight boxes focus on ethical issues that compa- nies face in measuring and reporting social and environmental issues
At the end of the chapter, an Ethics Case simulates a business situation and asks you to put yourself in the position of a decision-maker in that case
ALT #1 ALT #2
Identify and analyze the principal elements
Identify the alternatives, and weigh the impact of
Recognize an ethical situation and the ethical
Ethics Insight Dewey & LeBoeuf LLP
I Felt the Pressure—Would You?
Generally Accepted Accounting Principles
The Korean Discount
Measurement Principles
Historical Cost Principle
International Insight
Fair Value Principle
Assumptions
Monetary Unit Assumption
Economic Entity Assumption
Like a proprietorship, the partnership transactions must be kept separate from the personal activities of the partners for accounting purposes. The holders of the shares (the shareholders) have limited liability; that is, they are not personally liable for the company's debts.
Accounting Across the Organization
Although the total number of sole proprietorships and partnerships in the United States is more than five times the number of corporations, the revenues produced by corporations are eight times greater. Most of the largest companies in the United States—for example, Exxon-Mobil, Ford, Wal-Mart Stores, Inc., Citigroup, and Apple—are corporations.
Spinning the Career Wheel
The ease with which ownership can change adds to the appeal of investing in a corporation. Since ownership can be transferred without dissolving the company, the company has an unlimited life.
Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likeli- hood of future corporate scandals
The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB)
Relevance means that fi nancial information matches what really happened; the information is factual
A business owner’s personal expenses must be separated from expenses of the business to comply with accounting’s economic entity assumption
The Accounting Equation
Assets
Liabilities
Campus Pizza also has a promissory note payable to First National Bank for the money borrowed to purchase the delivery truck. Campus Pizza may also have employee wages and sales and property taxes paid to the local government.
Owner’s Equity
All such persons or entities to whom Campus Pizza owes money are its creditors.
Increases in Owner’s Equity
Decreases in Owner’s Equity
Analyzing Business Transactions
In order to emphasize the underlying concepts and principles, we focus in this textbook on a manual accounting system.
Accounting Transactions
Transaction Analysis
The company previously recorded the invoice [in Transaction (5)] as an increase in accounts payable and a decrease in equity. The Cash asset decreases by $1,700, and Owner's Equity decreases by $1,700 due to the specific expense categories (rental expenses, salaries and wages, and utility expenses).
Summary of Transactions
Each transaction is analyzed in terms of its eff ect on
Analysis of Business Transactions 1-19 Note that the effect of a cash withdrawal by the owner is the opposite of the effect of a.
The two sides of the equation must always be equal
The Owner’s Capital, Owner’s Drawings, Revenues, and Expenses columns indicate the causes of each change in the owner’s claim on assets
The owner invested $25,000 cash in the business
The company received $8,000 cash in exchange for services performed
The company paid $850 for this month’s rent
The owner withdrew $1,000 cash for personal use
The Four Financial Statements
An income statement presents the revenues and expenses and resulting net income or net loss for a specifi c period of time
An owner’s equity statement summarizes the changes in owner’s equity for a specifi c period of time
A balance sheet reports the assets, liabilities, and owner’s equity at a specifi c date
A statement of cash fl ows summarizes information about the cash infl ows (receipts) and outfl ows (payments) for a specifi c period of time
Net income of $2,750 on the income statement is added to the beginning balance of owner’s capital in the owner’s equity statement
Owner’s capital of $16,450 at the end of the reporting period shown in the owner’s equity statement is reported on the balance sheet
Cash of $8,050 on the balance sheet is reported on the statement of cash fl ows
Income Statement
Net income is computed fi rst and is needed to deter-
The ending balance in owner’s equity is needed in
The cash shown on the balance sheet is needed in
Soft byte
Note that the income statement does not include investment and withdrawal transactions between the owner and the business in the measurement of net income.
Owner’s Equity Statement
Balance Sheet
Statement of Cash Flows
Where did cash come from during the period?
What was cash used for during the period?
What was the change in the cash balance during the period?
People, Planet, and Profit Insight
Beyond Financial Statements
By rewriting the accounting equation, we can calculate owner's equity as assets minus liabilities, as follows. Note that it is not possible to determine the company's equity in any other way because the starting total for equity is not provided.
Appendix 1A Career Opportunities in Accounting
Public Accounting
Private Accounting
Governmental Accounting
Show Me the Money”
Review and Practice
Learning Objectives Review
Glossary Review
Practice Multiple-Choice Questions
Practice Brief Exercises
If total assets increased $50,000 during the year and owner's equity increased $60,000 during the year, what is the amount of total liabilities at the end of the year. LO 4) Three business transactions are shown below. For each column, indicate whether the transactions increased (+), decreased (−), or had no effect (NE) on assets, liabilities, and owner's equity.
Practice Exercises
Made cash investment to start business
Purchased equipment on account
Paid salaries
Billed customers for services performed
Received cash from customers billed in (4)
Withdrew cash for owner’s personal use
Incurred advertising expense on account
Purchased additional equipment for cash
Received cash from customers when service was performed
Increase in assets and increase in liabilities
Decrease in assets and decrease in owner’s equity
Increase in assets and increase in owner’s equity
Increase in assets and decrease in assets
Decrease in assets and decrease in owner’s equity
Increase in liabilities and decrease in owner’s equity
Increase in assets and decrease in assets
Increase in assets and increase in owner’s equity
Purchased computers for $15,000 from Bytes of Data on account
Paid $3,000 cash for May rent on storage space
Received $12,000 cash from customers for contracts billed in April
Performed payroll services for Magic Construction Company for $2,500 cash
Alma invested an additional $25,000 in the business
Paid Bytes of Data for the computers purchased in (1) above
Incurred advertising expense for May of $900 on account
Practice Problem
Joan invested $11,000 in cash in the law practice
Purchased equipment on account $3,000
Performed legal services for clients for cash $1,500
Borrowed $700 cash from a bank on a note payable
Performed legal services for client on account $2,000
Paid monthly expenses: salaries and wages $500, utilities $300, and advertising $100
Joan withdrew $1,000 cash for personal use
Joan Robinson, Attorney
Indicate how the following business transactions aff ect the basic accounting equation
Listed below are some items found in the fi nancial statements of Tony Gruber Co. Indicate in which fi nancial statement(s) the follow-
In February 2020, Ola Gott invested an additional $12,000 in her business, Gott’s Pharmacy, which is organized as a proprietorship
Questions
Identify and describe the steps in the accounting process
What uses of fi nancial accounting information are made by (a) investors and (b) creditors?
What is the monetary unit assumption?
What is the economic entity assumption?
What are the three basic forms of business organizations for profi t- oriented enterprises?
Which of the following items are liabilities of Siebers Jewelry Stores?
Can a business enter into a transaction in which only the left side of the basic accounting equation is aff ected? If so, give an example
Are the following events recorded in the accounting records? Ex- plain your answer in each case
Brief Exercises
DO IT! Exercises
The three steps in the accounting process are identifi cation, recording, and examination
The accounting process includes the bookkeeping function
Managerial accounting provides reports to help investors and creditors evaluate a company
The two most common types of external users are investors and creditors
Internal users include human resources managers
Congress passed the Sarbanes-Oxley Act to ensure that investors invest only in companies that will be profi table
The standards of conduct by which actions are judged as loyal or disloyal are ethics
The primary accounting standard-setting body in the United States is the Securities and Exchange Commission (SEC)
The historical cost principle dictates that companies record assets at their cost and continue to report them at their cost over the time the assets are held
The monetary unit assumption requires that companies record only transactions that can be mea- sured in money
The company performed $20,000 of services for customers, on credit
The company received $20,000 in cash from customers who had been billed for services (in transaction 1)
The company received a bill for $3,200 of advertising but will not pay it until a later date
Exercises
- Sosa Company owns buildings that are worth substantially more than they originally cost. In an eff ort to provide more relevant information, Sosa reports the buildings at fair value in its accounting
- Mays Company includes in its accounting records only transaction data that can be expressed in terms of money
- Curt Russell, owner of Curt’s Photography, records his personal living costs as expenses of the business
- Paid monthly rent
- Purchased equipment on account
- Withdrew cash for owner’s personal use
- Received cash from customers billed in (4)
- Purchased computers for $20,000 from Digital Equipment on account
- Paid $4,000 cash for May rent on storage space
- Received $17,000 cash from customers for contracts billed in April
- Performed computer services for Viking Construction Company for $4,000 cash
- Falske invested an additional $29,000 in the business
- Paid Digital Equipment for the computers purchased in (1) above
- Incurred advertising expense for May of $1,200 on account
- Total Assets Total Liabilities
- Owner invested $20,000 cash
- Issued note payable for $12,000 cash
- Received $15,000 cash for services performed
- Paid $1,000 cash for rent
- Paid $600 cash drawings to owner
- Paid $5,700 cash for salaries
Prepare an income statement and an equity statement for August and a balance sheet as of August 31, 2020. After analyzing the data, prepare an income statement and a statement of stockholders' equity for the year ending December 31, 2020.
Problems: Set A
- Invested $15,000 cash to start the agency
- Purchased equipment for $3,000 cash
- Incurred $700 of advertising costs in the Chicago Tribune, on account
- Performed services worth $10,000: $3,000 cash is received from customers, and the balance of
- Withdrew $600 cash for personal use
- Paid employees’ salaries $2,500
- Received $4,000 in cash from customers who have previously been billed in transaction (6)
- Collected $1,200 of accounts receivable
- Paid $2,800 cash on accounts payable
- Recognized revenue of $7,500 of which $4,000 is collected in cash and the balance is due in September
- Purchased additional equipment for $2,000, paying $400 in cash and the balance on account
- Paid salaries $2,800, rent for August $900, and advertising expenses $400
- Withdrew $700 in cash for personal use
- Received $2,000 from Standard Federal Bank—money borrowed on a note payable
- Incurred utility expenses for month on account $270
Prepare an income statement and owner's equity statement for the month of June and a balance sheet on June 30, 2020. Write a memorandum explaining the sequence for preparing financial statements and the interrelationship between the owner's equity statement and the income statement and balance sheet.
Expand Your Critical Thinking
Financial Reporting Problem: Apple Inc
Continuing Case
Cookie Creations
Ethics Case
- Net revenues for year ended in 2015
- Net income for year ended in 2015
- Total assets at December 31, 2015, for Amazon and for Wal-Mart at January 31, 2016
- Receivables (net) at December 31, 2015, for Amazon and for Wal-Mart at January 31, 2016
- Net sales (product only) for year ended in 2015 (2016 for Wal-Mart)
- Net income for the year ended in 2015 (2016 for Wal-Mart)
The full annual reports of PepsiCo and Coca-Cola, including the notes to the financial statements, are available on each company's respective website. The full annual reports of Amazon and Wal-Mart, including the notes to the financial statements, are available at each company's respective website.
Real-World Focus
Based on the information in these financial statements, determine the following for each company.
Decision-Making Across the Organization
Comparative Analysis Problem: PepsiCo, Inc. CT1.2 The financial statements of PepsiCo, Inc. are presented in Appendix B. The financial statements of The Coca-Cola Company are presented in Appendix C. Comparative Analysis Problem: Amazon.com, Inc. CT1.3 The financial statements of Amazon.com, Inc. are presented in Appendix D. Financial statements of Wal-Mart Stores, Inc.
Communication Activity
In the first month, advertising expenses were $750, of which $100 was unpaid on March 31, and $400 was paid to members of the high school golf team to retrieve golf balls.
New Hampshire Company
All About You
Spend the student’s assets and income fi rst, before spending parents’ assets and income
State that a truly fi nancially dependent child is independent
Have a parent take an unpaid leave of absence for long enough to get below the “threshold” level of income
Considering People, Planet, and Profit
FASB Codification Activity
Key Points
IFRS Exercises
International Financial Reporting Problem: Louis Vuitton
Looking to the Future
IFRS Self-Test Questions
IFRS Practice
Accidents Happen
CHAPTER 2
Unfortunately, that's almost exactly what happened to MF Global's clients shortly before it filed for bankruptcy. It now appears that MF Global did not properly separate customer accounts from company accounts.
Indicate how a journal is used in the recording process
And because of sloppy record keeping, customers weren't protected when the company was in financial trouble.
Explain how a ledger and posting help in the recording
Accounts, Debits, and Credits
The Account
In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T account.
Debits and Credits
Debit and Credit Procedure
When an owner invests cash in the business, the business debits (increases) cash and credits (increases) the owner's capital. Withdrawals could be debited directly from Equity to indicate a decrease in equity.
Investor Insight Chicago Cubs
Keeping Score
Summary of Debit/Credit Rules
The Journal
The Recording Process
- Analyze each transaction in terms of its eff ect on the accounts
- Enter the transaction information in a journal
- Transfer the journal information to the appropriate accounts in the ledger
- It discloses in one place the complete eff ects of a transaction
- It provides a chronological record of transactions
- It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared
For each transaction, the journal shows the debit and credit effects on specific accounts. Whenever we use the term "log" in this textbook, we mean a general log unless otherwise specified.
Journalizing
Typically, a general journal has spaces for dates, account headings and explanations, references, and two columns of amounts. Account headings used in the journal should not contain explanations such as Cash Paid or Cash Received.
Simple and Compound Entries
The main criterion is that each title should appropriately describe the content of the account. When account titles are not given, you can select account titles that identify the nature and contents of each account.
Accounting Across the Organization Hain Celestial Group
Once a company chooses the specific title to use, it must record all subsequent transactions involving the account under that account title.
It Starts with the Transaction
The Ledger and Posting
Opened a bank account in the name of Hair It Is and deposited $20,000 of her own money in this account as her initial investment
Purchased equipment on account (to be paid in 30 days) for a total cost of $4,800
Interviewed three people for the position of hair stylist
The Ledger
The General Ledger and Posting 2-11 Companies arrange the general ledger in the order in which they present the accounts in the general ledger. For example, the Cash Account shows the amount of cash available to meet current obligations.
Ethics Insight Credit Suisse Group
Asset accounts are the first in order, followed by liability accounts, equity, equity withdrawals, income and expenses.
A Convenient Overstatement
Standard Form of Account
Posting
In the ledger, in the appropriate columns of the account(s) debited, enter the date, journal page, and debit amount shown in the journal
In the reference column of the journal, write the account number to which the debit amount was posted
In the ledger, in the appropriate columns of the account(s) credited, enter the date, jour- nal page, and credit amount shown in the journal
In the reference column of the journal, write the account number to which the credit amount was posted
Chart of Accounts
The Recording Process Illustrated
Pioneer Advertising
Determine what type of account is involved
Determine what items increased or decreased
Translate the increases and decreases into debits
Paying Wages Transaction On October 26, Pioneer owes employees $4,000 in wages and pays them in cash (see the October 9 event). Transaction On October 31, Pioneer receives $10,000 in cash from Copa Company for advertising services performed in October.
Summary Illustration of Journalizing and Posting
The Trial Balance
List the account titles and their balances in the appropriate debit or credit column
Total the debit and credit columns
Verify the equality of the two columns
For example, if only the debit portion of the journal entry was posted, the trial balance would reveal this error.
Limitations of a Trial Balance
A transaction is not journalized
A correct journal entry is not posted
A journal entry is posted twice
Incorrect accounts are used in journalizing or posting
Off setting errors are made in recording the amount of a transaction
Locating Errors
If the error is divisible by 2, scan the trial balance to see whether a balance equal to half the error has been entered in the wrong column
Dollar Signs and Underlining
Investor Insight Fannie Mae
Why Accuracy Matters
SnowGo Company
An account is a record of increases and decreases in specific assets, liabilities and equity items. An account is an individual accounting record of increases and decreases in specific assets, liabilities and equity items.
Bundy Company
Depot Company
10 Received a bill from the Daily News for online advertising of the opening of the laundromat $200. The chart of accounts for the company is the same as Pioneer Advertising plus No.
Campus Laundromat
- a. Should business transaction debits and credits be recorded directly in the ledger accounts?
- The account number is entered as the last step in posting the amounts from the journal to the ledger. What is the advantage of this
- a. What is a ledger?
- Victor Grimm is confused about how accounting information fl ows through the accounting system. He believes the fl ow of infor-
- Describe the parts of a T-account
- State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the owner’s equity accounts (revenue,
- What is the normal balance for each of the following accounts?
- Indicate whether each of the following accounts is an asset, a liability, or an owner’s equity account and whether it has a normal
- For the following transactions, indicate the account debited and the account credited
- Indicate whether the following accounts generally will have (a) debit entries only, (b) credit entries only, or (c) both debit and
- What are the basic steps in the recording process?
- What are the advantages of using a journal in the recording process?
- Obtained estimates on the cost of photography equipment from three diff erent manufacturers
- An account is an accounting record of either a specifi c asset or a specifi c liability
- An account shows only increases, not decreases, in the item it relates to
- Some items, such as Cash and Accounts Receivable, are combined into one account
- An account has a left, or credit side, and a right, or debit side
- Borrowed $5,000 from the bank by signing a note
- Paid $3,900 cash for a computer
- Purchased $650 of supplies on account
- Bo Halladay invested $4,000 cash in the business
- Performed consulting services and billed a client $5,200
- Bo Halladay withdrew $750 cash for personal use
- Owner invested $24,000 in the business
- Obtained a bank loan for $7,000 by issuing a note payable
- Paid $11,000 cash to buy equipment
- Paid $1,450 for supplies
- Purchased $600 of advertising in the Daily Herald, on account
- Performed services for $18,000: cash of $2,000 was received from customers, and the balance of
- Cash withdrawal of $400 by owner for personal use
- Paid the utility bill for the month, $2,000
- The accounts in the general ledger are arranged in alphabetical order
- Each account in the general ledger is numbered for easier identifi cation
- The general ledger is a book of original entry
- A credit posting of $525 to Accounts Receivable was omitted
- A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense
- A collection from a customer of $100 in payment of its account owed was journalized and posted as a debit to Cash $100 and a credit to Service Revenue $100
- A credit posting of $415 to Property Taxes Payable was made twice
- A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $2
- A debit of $625 to Advertising Expense was posted as $652
- Jay Bradford invested $40,000 cash in the company, as its sole owner
- Signed a 2-year rental agreement on a warehouse; paid $24,000 cash in advance for the fi rst year
- Paid $1,800 cash for a one-year insurance policy on the furniture and equipment
- The purchase of a computer on account for $710 was recorded as a debit to Supplies for $710 and a credit to Accounts Payable for $710
- Services were performed on account for a client for $980. Accounts Receivable was debited for
- A debit posting to Salaries and Wages Expense of $900 was omitted
- A payment of a balance due for $306 was credited to Cash for $306 and credited to Accounts Payable for $360
- The withdrawal of $600 cash for Sergei’s personal use was debited to Salaries and Wages Expense for $600 and credited to Cash for $600
BE2.1 (LO 1) For each of the following accounts, indicate the consequences of (a) a debit and (b) a credit on the accounts and (c) the normal balance of the account. During her first month of operation, the following events and transactions occurred.
Ethics Cases
- What is the increase and decrease side for each account?
- What is the normal balance for each account?
- Accounts Receivable is decreased
- Accounts Payable is decreased
- Inventories are increased
- Research and Development Expense is increased
- Property, Plant, and Equipment is increased
- Accounts Receivable is increased
- Salaries and Wages Payable is decreased
- Property, Plant, and Equipment is increased
- Interest Expense is increased
- Interest Expense is increased
- Salaries and Wages Payable is decreased
- Service Revenue is increased
- Which statement is correct regarding IFRS?
- The expanded accounting equation under IFRS is as follows
- A trial balance
- One diff erence between IFRS and GAAP is that
Based on the information in the financial statements, determine the normal balance of the listed accounts for each company. Describe in which statement each of the following items is reported and the position in the statement (eg current asset).
Keeping Track of Groupons
- CHAPTER 3
- Prepare adjusting entries for deferrals
- Prepare adjusting entries for accruals
- Describe the nature and pur- pose of an adjusted trial
L E A R N I N G O BJ E CT I V E S LO 1 Explain the accrual basis of accounting and the reasons for adjusting entries. Go to the Review and Practice section at the end of the chapter for an overview of key concepts and practice applications with solutions.
Accrual-Basis Accounting and Adjusting Entries
It recognizes revenue once “the number of customers purchasing the daily deal exceeds the predetermined threshold, the Groupon has been electronically delivered to the purchaser, and a list of Groupons sold has been made available to the merchant.” These groupons must be used for future purchases, but the company must record the charge at the time the customer receives it.
Fiscal and Calendar Years
Accrual- versus Cash-Basis Accounting
Recognizing Revenues and Expenses
Revenue Recognition Principle
Expense Recognition Principle
Investor Insight Apple Inc
Reporting Revenue Accurately
The Need for Adjusting Entries
Some events are not recorded daily because it is not effi cient to do so. Examples are the use of supplies and the earning of wages by employees
Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples are
Some items may be unrecorded. An example is a utility service bill that will not be received until the next accounting period
Adjusting entries are required every time a company prepares fi nancial statements
Types of Adjusting Entries
Prepaid expenses: Expenses paid in cash before they are used or consumed
Unearned revenues: Cash received before services are performed
Accrued revenues: Revenues for services performed but not yet received in cash or recorded
Accrued expenses: Expenses incurred but not yet paid in cash or recorded
Adjusting Entries for Deferrals
Prepaid Expenses
Prepaid expenses are costs that expire either over time (eg, rent and insurance) or through use (eg, supplies). Expiration of these costs does not require daily insurance) or through use (eg, supplies). Therefore, as shown in Illustration 3.4, an adjusting entry for prepaid expenses results in an increase (a debit) to an expense account and a decrease (a credit) to an asset account.
Supplies
The expiration of these costs does not require daily postings, which would be impractical and unnecessary. If Pioneer does not make the adjustment, October expenses are understated and net income is overstated by $1,500.
Insurance
After adjustment, the asset account Supplies shows a balance of $1,000, which is equal to the cost of supplies on hand at the statement date. In addition, Supplies Expense shows a balance of $1,500, which equals the cost of supplies used in October.
Depreciation
As shown in Illustration 3.7, instead of reducing (crediting) the asset account directly, Pioneer instead credits Accumulated Depreciation—Equipment. Thus, on the balance sheet, Pioneer subtracts Accumulated Depreciation—Equipment from the corresponding asset account, as shown in Illustration 3.8.
Accounting for Prepaid Expenses
Book value is the difference between the cost of a depreciable asset and the associated accumulated depreciation (see Alternative Terminology). The book value and the fair value of the asset are usually two different values.
Unearned Revenues
The accounting equation shows that without this adjusting entry, total assets, total owners' equity, and net income are overstated by $40 and depreciation expense is understated by $40. Then the company makes an adjusting entry to record the revenue for services rendered during the period and to show the liability remaining at the end of the accounting period.
Accounting for Unearned Revenues
Adjusting Entries for Accruals 3-11 It is not practical to make daily entries as a business during the accounting period. Therefore, the liability (unearned service revenue) decreases and the equity (service revenue) increases.
Accounting Across the Organization Best Buy
Turning Gift Cards into Revenue
Insurance expires at the rate of $100 per month
Supplies on hand total $800
The equipment depreciates $200 a month
During March, services were performed for $4,000 of the unearned service revenue reported
Adjusting Entries for Accruals
Accrued Revenues
Without an adjusting entry, assets and equity on the balance sheet and revenue and net income on the income statement are understated. The company registers the collection of receivables as a debit (increase) in cash and as a credit (decrease) in receivables.
Accounting for Accrued Revenues
On November 10, Pioneer receives cash of $200 for the services performed in October and makes the following entry. Equation analyzes summarize the effect of transactions on the three elements of the accounting equation, as well as the effect on cash flows.
Accrued Expenses
Accrued Interest
Pioneer will not pay the interest until the note is due at the end of three months. Companies use the Interest Payable account, instead of crediting Notes Payable, to disclose the two different types of obligations—interest and principal—in the accounts and statements.
Accrued Salaries and Wages
The balance in Salaries and Wages Payable of $1,200 is the amount of the wages and salaries liability that Pioneer owes on October 31. The payment consists of $1,200 of wages and salaries payable on October 31 plus $2,800 of wages and salary expenses for November (7 business days, as shown on the November calendar × $400).
Accounting for Accrued Expenses
Adjustment of entries for accruals 3-17 After this adjustment, the balance in Salaries and Wages Expenses of days × . $400) is the actual salary and wages expense for October. As a result, the next payday is November 9, when the company will again pay total salaries and wages of $4,000.
Got Junk?
Without the $1,200 adjustment for wages and salaries, Pioneer's expenses are understated by $1,200 and its liabilities are understated by $1,200. This entry removes the liability for wages and salaries payable that Pioneer recorded in the October 31 adjusting entry and records the correct amount for wages and salaries expense for the period between November 1 and November 9.
Summary of Basic Relationships
Illustrations 3.23 and 3.24 show the journalizing and posting of adjusting entries for Pioneer Advertising on October 31. The company may insert a center caption "Adjusting Entries" between the last transaction entry and the first adjusting entry in the journal.
Adjusted Trial Balance and Financial Statements
At August 31, the company owed its employees $800 in salaries and wages that will be paid on September
Revenue for services performed but unrecorded for August totaled $1,100
Preparing Financial Statements
Companies can prepare fi nancial statements directly from the adjusted trial balance
Preparing the Adjusted Trial Balance
As Illustration 3.27 shows, companies then prepare the balance sheet from the asset and liability accounts and the ultimate owner's capital balance as reported in the owner's equity statement. Owner's capital, 31 October To balance sheet ILLUSTRATION 3.26 Preparation of the income statement and owner's equity statement from the adjusted trial balance.
Appendix 3A Alternative Treatment of Deferrals
Pioneer expects to perform the services before October 31.1 In such a case, the company credits the service revenue. Note that the account balances are the same in the two alternatives: Unearned Service Revenue $800 and Service Revenue $400.
Summary of Additional Adjustment Relationships
Enhancing Qualities
Assumptions in Financial Reporting
Appendix 3B Financial Reporting Concepts
Qualities of Useful Information
Principles in Financial Reporting
The principle of revenue recognition requires companies to recognize revenue in the accounting period in which the performance obligation is met. The expense recognition principle (discussed earlier in the chapter) dictates that companies recognize costs in the period in which they make an effort to generate revenue.
Full Disclosure Principle
As discussed earlier in the chapter, revenue in a service company is recognized at the time the service is rendered. In a commercial enterprise, the performance obligation is generally fulfilled when the goods are transferred from the seller to the buyer (discussed in Chapter 5).
Cost Constraint
- a. The expense recognition principle dictates that companies rec- ognize expense in the period in which they make eff orts to generate
- c. Debiting Supplies Expense for $750 and crediting Supplies for
- a. Adjustments for unearned revenues will consist of a debit (decrease) to unearned revenues (a liability) and a credit (increase)
- a. Supplies: to recognize supplies used during the period
- Services performed but not recorded are $4,200
- Utility expenses incurred but not paid are $660
- Salaries and wages earned by employees of $3,000 are unpaid
- Utility expenses incurred but not paid prior to January 31 totaled $400
- Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a
- Purchased a one-year malpractice insurance policy on January 1 for $12,000
- Insurance expired during July of $700 was omitted
- Supplies expense includes $250 of supplies that are still on hand at July 31
- Depreciation on equipment of $300 was omitted
- Accrued but unpaid wages at July 31 of $400 were not included
- Services performed but unrecorded totaled $650
Revenue must be recognized in the accounting period in which a performance obligation is fulfilled. The other choices are incorrect because (b) there is no cost assumption, but the historical cost principle states that assets must be recorded at their cost price; (c) the period assumption states that the economic life of a business can be divided into artificial periods; and (d) the revenue recognition principle indicates that revenue should be recognized in the accounting period in which a performance obligation is fulfilled.
Venden Co
Prepaid insurance is the cost of a 2-year insurance policy, eff ective April
Depreciation on the equipment is $500 per month
Lawn services performed for other customers but not recorded at April 30 totaled $1,500
On January 9, a company pays $5,000 for salaries and wages, of which $2,000 was reported as salaries and wages payable on December.
On January 9, a company pays $5,000 for salaries and wages of which $2,000 was reported as Salaries and Wages Payable on Decem-
For each of the following items before adjustment, indicate the type of adjusting entry (prepaid expense, unearned revenue, accrued
One-half of the adjusting entry is given below. Indicate the account title for the other half of the entry
Why is it possible to prepare fi nancial statements directly from an adjusted trial balance?
Defi ne two generally accepted accounting principles that relate to adjusting the accounts
Why do accrual-basis fi nancial statements provide more useful information than cash-basis statements?
Why may a trial balance not contain up-to-date and complete fi nan- cial information?
Distinguish between the two categories of adjusting entries, and identify the types of adjustments applicable to each category
What is the debit/credit eff ect of a prepaid expense adjusting entry?
Explain the diff erences between depreciation expense and accu- mulated depreciation
What is the debit/credit eff ect of an unearned revenue adjusting entry?
Whistler Corp. performed services for a customer but has not yet recorded payment, nor has it recorded any entry related to the work
A company fails to recognize an expense incurred but not paid. In- dicate which of the following accounts is debited and which is credited
Supplies of $150 are on hand
Services performed but not recorded total $900
Interest of $200 has accumulated on a note payable
Rent collected in advance totaling $850 has been earned
Interest on notes payable of $400 is accrued
Services performed but not recorded total $2,300
Salaries earned by employees of $900 have not been recorded
BE3.13 (LO 6) Given the characteristics of useful accounting information, complete each of the following statements. 3.1 (LO 1) Below is a list of concepts in the left column, with a description of the concept in the right column.
Insurance expires at the rate of $400 per month
Companies record revenue when they receive cash and record expenses when they pay out cash.
Supplies on hand total $1,600
The equipment depreciates $480 per month
During March, services were performed for two-fi fths of the unearned service revenue
At July 31, the company owed employees $1,300 in salaries that the company will pay in August
Service revenue unrecorded in July totaled $2,400
E3.1 (LO 1) Chloe Davis has prepared the following list of statements regarding the time period assumption. Adjusting accounting entries would not be necessary if a company's life were not divided into artificial time periods.
Adjusting entries would not be necessary if a company’s life were not divided into artifi cial time periods
The IRS requires companies to fi le annual tax returns
Accountants divide the economic life of a business into artifi cial time periods, but each transaction aff ects only one of these periods
Accounting time periods are generally a month, a quarter, or a year
A time period lasting one year is called an interim period
All fi scal years are calendar years, but not all calendar years are fi scal years
Luong collects $1,300 from a customer in 2020 for services to be performed in 202
Luong incurs utility expense which is not yet paid in cash or recorded
Luong’s employees worked 3 days in 2020 but will not be paid until 2021
Luong performs services for customers but has not yet received cash or recorded the transaction
Luong paid $2,800 rent on December 1 for the 4 months starting December 1
Luong received cash for future services and recorded a liability until the service was performed
Luong paid cash for an expense and recorded an asset until the item was used up
Luong purchased $900 of supplies in 2020; at year-end, $400 of supplies remain unused
Luong purchased equipment on January 1, 2020; the equipment will be used for 5 years
Luong borrowed $12,000 on October 1, 2020, signing an 8% one-year note payable
Devin Wolf Company borrowed $10,000 by signing a 9%, one-year note on September 1, 2020
A count of supplies on December 31, 2020, indicates that supplies of $900 are on hand
Depreciation on the equipment for 2020 is $1,000
Devin Wolf Company paid $2,100 for 12 months of insurance coverage on June 1, 2020
Devin Wolf performed consulting services for a client in December 2020. The client will be billed
Services performed but unbilled total $3,000
Supplies of $300 have been used
Utility expenses of $552 are unpaid
Services performed of $260 collected in advance
Salaries of $800 are unpaid
Prepaid insurance totaling $350 has expired
E3.7 (LO 2, 3) The ledger of Passehl Rental Agency at 31 March of the current year includes the selected accounts, shown below, before adjusting entries have been prepared.
The equipment depreciates $400 per month
One-third of the unearned rent revenue was earned during the quarter
Interest of $500 is accrued on the notes payable
Supplies on hand total $750
Insurance expires at the rate of $300 per month
Utility expenses incurred but not paid prior to January 31 totaled $650
Purchased a one-year malpractice insurance policy on January 1 for $24,000
Supplies on hand at October 31 total $500
Expired insurance for the month is $120
Depreciation for the month is $50
Services related to unearned service revenue in October worth $600 were performed
Services performed but not recorded at October 31 are $360
Interest accrued at October 31 is $95
Accrued salaries at October 31 are $1,625
Insurance expired during July of $500 was omitted
Depreciation on equipment of $150 was omitted
Accrued but unpaid salaries and wages at July 31 of $400 were not included
The notes payable pays interest at a rate of 6% per year
Supplies on hand at the end of the month totaled $18,600
The balance in Prepaid Rent represents 4 months of rent costs
Employees were owed $3,100 related to unpaid salaries and wages
Depreciation on buildings is $6,000 per year
During the month, the company satisfi ed obligations worth $4,700 related to the Unearned Services Revenue
Unpaid maintenance and repairs costs were $2,300
Depreciation expense for 2020 is $9,000
Purchased a 1-year insurance policy on June 1 for $1,800 cash
Paid $6,500 on August 31 for 5 months’ rent in advance
On September 4, received $3,600 cash in advance from a company to sponsor a game each month for a total of 9 months for the most improved students at a local school
For each of the above transactions, prepare a journal entry to record the initial transaction. E3.16 (LO 3) Greenock Company has the following information available for accruals for the year ended 31 December 2020.
The December utility bill for $425 was unrecorded on December 3 Greenock paid the bill on January 1
E3.19 (LO 2, 3) The following information is taken from the comparative balance sheets of Bundies Billiards Club, which prepares its financial statements on the accrual basis of accounting. The club's 2020 income statement showed that $161,000 in service revenue was earned during the year.
Gift certifi cates outstanding at the end of 2019 were all redeemed
Prepare the statement of profit and loss and equity for the year and the balance sheet as at 31 August. Unearned service revenue comes from the sale of gift certificates that members can use for future use of club facilities.
Services performed for members for 2020 were billed to members
Accounts receivable for 2020 (i.e., those billed in item [4] above) were partially collected
Bob Zeller Company paid $2,400 for 12 months of insurance coverage on June 1, 2020
A count of supplies on December 31, 2020, indicates that supplies of $600 are on hand
In your answer, include an assessment of the relevance of the information reported on Speyeware's financial statements. Mindy tells you that the owners of the business are trying to obtain new sources of financing necessary for the company to continue developing a new health care product.
Utilities expense incurred but not paid on May 31, 2020, $250
The insurance policy is for 2 years
Invoices representing $1,700 of services performed during the month have not been recorded as of May 31
Prepaid insurance is a 1-year policy starting May 1, 2020
A count of supplies shows $750 of unused supplies on May 31
Annual depreciation is $3,600 on the buildings and $1,500 on equipment
Salaries of $750 are accrued and unpaid at May 31
Prepare an income statement and an equity statement for the month of May and a balance sheet per 31 May. P3.4A (LO 2, 3) A review of the general ledger for Gina Company as of 31 December 2020 provides the following data regarding for preparing annual adjustment items.
Supplies on hand $1,400
Five employees receive a salary of $700 each for the week and three employees for the current week. Five employees receive a salary of $700 each per week and three employees earn $500 each per week.
Accrued salaries payable $350
Depreciation for the month is $200
Services related to unearned service revenue of $1,220 were performed
The balance in Insurance Expense is the premium on a one-year policy, dated April 1, 2020
Revenue for services performed but unrecorded at June 30 totals $2,000
Depreciation is $2,250 per year
A count reveals that $35 of baking supplies were used during November
Natalie estimates that all of her baking equipment will have a useful life of 5 years or 60 months
The entire annual report, including explanations to the financial statements, is available on the company's website. Using the consolidated financial statements and related information, determine the items that may cause adjusting entries for prepayments.
Natalie receives a utilities bill for $4 The bill is for utilities consumed by Natalie’s business during November and is due December 1
Using the consolidated financial statements and related information, identify the items that could result in adjusting entries for accruals. The director says he will forward the invoice to head office and it will be paid sometime in December.
Cash fl ow from operations and net income for each company is diff erent. What are some possible reasons for these diff erences?
Knowing that you are an experienced accountant, she asks you to review the income statement and other data. In addition to the account balances reported above in the income statement, the ledger contains the following additional selected balances as of March 31, 2020.
Rent revenues include advanced rentals for summer occupancy $15,000
There were $1,700 of supplies on hand at March 31
Prepaid insurance resulted from the payment of a one-year policy on January 1, 2020
The mail on April 1, 2020, brought the following bills: advertising for week of March 24, $110;
The note payable is a 3-month, 10% note dated January 1, 2020
CT3.9 If your school subscribes to the FASB Codification, log in and prepare answers to the following. Companies that adopt IFRS also use accrual accounting to ensure that they record transactions that change a company's financial statements in the period in which events occur.
IFRS
Which of the following statements is false?
As a result of the revenue recognition project by the FASB and IASB
Which of the following is false?
Accrual-basis accounting
Visit the Louis Vuitton corporate website and answer the following questions from Louis Vuitton's 2015 annual report. Using the consolidated income statement, identify two items that could result in adjusting entries for accruals.
Everyone Likes to Win
- CHAPTER 4
- Prepare closing entries and a post-closing trial balance
- Explain the steps in the ac- counting cycle and how to prepare
- Identify the sections of a clas- sified balance sheet
Every day at noon, Ted posts the previous day's results at the entrance to the production room. And it's not just an academic exercise: At the end of each four-week "game" that meets profitability guidelines, there's a bonus check for every employee.
The Worksheet
How would you feel?” Ted opened his books and disclosed the financial statements to his employees. It enters the adjustments in the worksheet columns and then journalizes and posts the adjustments after it prepares the financial statements.
Steps in Preparing a Worksheet
- Prepare a Trial Balance on the Worksheet
- Enter the Adjustments in the Adjustments Columns
- Enter Adjusted Balances in the Adjusted Trial Balance Columns
- Extend Adjusted Trial Balance Amounts to Appropriate Financial Statement Columns
- Total the Statement Columns, Compute the Net Income (or Net Loss), and Complete the Worksheet
The balances in these columns are the same as those in the adjusted trial balance in Figure 3.25. The amount is then entered in the debit column of the profit and loss account and the credit column on the balance sheet.
Preparing Financial Statements from a Worksheet
The format of the data in the financial statement columns of the worksheet is not the same as the format of the financial statements. A worksheet is essentially an accountant's work tool; companies do not disclose it to management and other parties.
Preparing Adjusting Entries from a Worksheet
The amount shown for owner's equity on the worksheet is the account balance before taking into account drawings and net income (or loss). When the owner has made no further capital investments during the period, this statement amount for the owner's capital is the balance at the beginning of the period.
Closing the Books
Instead, the company carries over the balances of the permanent accounts to the next accounting period. Temporary accounts are sometimes called nominal accounts, while permanent accounts are sometimes called real accounts.
Preparing Closing Entries
- Debit each revenue account for its balance, and credit Income Summary for total revenues
- Debit Income Summary for total expenses, and credit each expense account for its balance
- Debit Income Summary and credit Owner’s Capital for the amount of net income
- Debit Owner’s Capital for the balance in the Owner’s Drawings account, and credit Owner’s Drawings for the same amount (see Helpful Hint)
Debit the owner's capital for the balance in the owner's subscription account and credit the owner's subscriptions for the same amount (see Helpful Hint). If there was a net loss (because expenses exceeded income), entry 3 in Illustration 4.9 would be reversed: there would be a credit to Income Statement and a debit to Owner's Equity.
Closing Entries Illustrated
Note that the amounts for Income Summary in entries (1) and (2) are the totals of the income statement credit and debit columns, respectively, in the worksheet. Owner drawings are not an expense, and they are not a factor in determining net income.
Posting Closing Entries
Accounting Across the Organization Cisco Systems
Performing the Virtual Close
Preparing a Post-Closing Trial Balance
A post-closing trial balance provides evidence that the company has correctly journalized and posted closing entries. For example, the post-closing trial balance will still balance even if a transaction is not journalized and posted, or if a transaction is journalized and posted twice.
The Accounting Cycle and Correcting Entries
Summary of the Accounting Cycle
Reversing Entries—An Optional Step
Correcting Entries—An Avoidable Step
ANALYZE BUSINESS TRANSACTIONS
PREPARE A POST-CLOSING TRIAL BALANCE
PREPARE A TRIAL BALANCE 3. POST TO THE LEDGER ACCOUNTS
PREPARE AN ADJUSTED TRIAL BALANCE7. PREPARE FINANCIAL STATEMENTS
JOURNALIZE AND POST ADJUSTING ENTRIES: DEFERRALS/ACCRUALS
THE ACCOUNTING CYCLE
The Accounting Cycle and Adjusting Entries 4-21 In contrast, adjusting entries can include any combination of accounts that need correction.
Correcting entries must be posted before closing entries
Accounting Across the Organization Yale Express
Lost in Transportation
A payment of Salaries and Wages Expense of $600 was debited to Supplies and credited to Cash, both for $600
A collection of $3,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200
The purchase of supplies on account for $860 was debited to Supplies $680 and credited to Ac- counts Payable $680
Classified Balance Sheet
Franklin Company
Current Assets
Southwest Airlines Co
