Kế toán, kiểm toán - Chapter 2: Review of the accounting process

Review of the Accounting ProcessChapter 2The Accounting EquationA = L + OE- Owner Withdrawals+ Owner Investments- Expenses- Losses+ Revenues+ Gains Accounting Equation for a CorporationA = L + SE+ Retained Earnings+ Paid-in Capital- Expenses- Losses+ Revenues+ Gains- DividendsAccounting Equation, Debits and Credits, Increases and DecreasesPermanent Accounts—assets, liabilities, paid-in capital, retained earningsTemporary Accounts-revenues, gains, expenses, lossesThe Accounting Processing CycleSource DocumentsRecord in JournalTransaction AnalysisPost to LedgerDuring the Accounting PeriodFinancial StatementsUnadjusted Trial BalanceAdjusted Trial BalanceAt the End of the Accounting PeriodRecord & Post Adjusting EntriesClose Temporary AccountsPost-Closing Trial BalanceAt the End of the Year2-5The Accounting Processing CycleOn July 1, two individuals each invested $30,000 in a new business, Dress Right Clothing Corporation. Each investor was issued 3,000 shares of common stock. Two accounts are affected:Cash (an asset) increases by $60,000.Common stock (a shareholders’ equity) increases by $60,000.July 1Cash 60,000 Common stock 60,000General LedgerThe “T” account is a shorthand format of an account used by accountants to analyze transactions. It is not part of the bookkeeping system.Posting Journal EntriesAfter recording all entries for the period, Dress Right Clothing’s Unadjusted Trial Balance would be as follows:Debits = CreditsA Trial Balance is a list of all accounts and their balances at a particular date.2-9Transactions where cash is paid or received before a related expense or revenue is recognized.Transactions where cash is paid or received after a related expense or revenue is recognized.Adjusting EntriesPrepaymentsAccrualsEstimatesAccountants must often make estimates in order to comply with the accrual accounting model.At the end of the period, adjusting entries are required to satisfy the realization principle and the matching principle.AssetExpenseUnadjustedBalanceCreditAdjustmentDebitAdjustmentPrepaid ExpensesToday, I will payfor my first6 months’ rent.Prepaid ExpensesItems paid for in advance of receiving their benefitsDepreciation Depreciation is the process of allocating the cost of plant and equipment over their expected useful lives.Straight-LineDepreciation= Asset Cost - Salvage Value Useful LifeDepreciationAfter posting, the accounts look like this:LiabilityRevenueUnadjustedBalanceCreditAdjustmentDebitAdjustmentUnearned Revenues“Go Big Red” Buy your season tickets forall home basketball games NOW!Unearned RevenueCash received in advance of performing servicesExpenseLiabilityCreditAdjustmentDebitAdjustmentAccrued LiabilitiesI won’t pay youuntil the job is done!Accrued LiabilitiesLiabilities recorded when an expense has been incurred prior to cash payment.AssetRevenueCreditAdjustmentDebitAdjustmentAccrued ReceivablesYes, you can pay mein May for your April 15 tax return.Accrued ReceivablesRevenue earned in a period prior to the cash receipt.EstimatesExamplesDepreciation Uncollectible accounts$Accountants often must make estimates of future events to comply with the accrual accounting model.The income statement summarizes the results of profit-generating activities of the company.The Income StatementThe Statement of Comprehensive IncomeWe will discuss comprehensive income in more depth in Chapter 4.A few types of gains and losses, called other comprehensive income (OCI) or loss items, are excluded from the determination of net income and the income statement, but are included in the broader concept of comprehensive income. In the single statement approach, net income is a subtotal within the statement followed by these OCI items, culminating in a final total of comprehensive income. In the two statement approach, a company presents an income statement followed by a statement of comprehensive income. The balance sheet presents the financial position of the company on a particular date. The Balance SheetNotice that assets of $143,500 equals total liabilities plus shareholders’ equity of $143,500. The Balance SheetThe Statement of Cash FlowsThe statement of cash flows discloses the changes in cash during a period.The statement of shareholders’ equity presents the changes in permanent shareholder accounts. The Statement of Shareholders’ EquityTemporary AccountsRevenuesIncome SummaryExpensesDividendsPermanent AccountsAssetsLiabilitiesShareholders’ EquityThe closing process applies only to temporary accounts.The Closing ProcessPost-Closing Trial BalanceLists permanent accounts and their balances.Total debits equal total credits.Conversion From Cash Basis to Accrual BasisIncreasesDecreasesAssetsAddDeductLiabilitiesDeductAddAppendix 2A: Use of a WorksheetA worksheet can be used as a tool to facilitate the preparation of adjusting and closing entries and the financial statements.Steps to Follow for Worksheet Completion:Enter account titles in column A and the unadjusted account balances in columns B and C.Determine end-of-period adjusting entries and enter them in columns E and G.Add or deduct the effects of the adjusting entries on the account balances and enter in columns H and I.Transfer the temporary retained earnings account balances to columns J and K.Transfer the balances in the permanent accounts to columns L and M.WorksheetAppendix 2B: Reversing EntriesReversing entries remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period. Reversing entries are optional and are used most often with accruals.Appendix 2C: Subsidiary LedgersSubsidiary ledgers contain a group of subsidiary accounts associated with particular general ledger control accounts. Subsidiary ledgers are commonly used for accounts receivable, accounts payable, plant and equipment, and investments. For example, there will be a subsidiary ledger for accounts receivable that keeps track of the increases and decreases in the accounts receivable balance for each of the company’s customers purchasing goods and services on credit.After all of the postings are made from the appropriate journals, the balance in the accounts receivable control account should equal the sum of the balances in the accounts receivable subsidiary ledger accounts.Appendix 2C: Special JournalsSpecial journals are used to capture the dual effect of repetitive types of transactions in debit/credit form.Special journals simplify the recording process in the following ways:Journalizing the effects of a particular transaction is made more efficient through the use of specifically designed formats.Individual transactions are not posted to the general ledger accounts but are accumulated in the special journals and a summary posting is made on a periodic basis.The responsibility for recording journal entries for the repetitive types of transactions is placed on individuals who have specialized training in handling them.End of Chapter 2