Kế toán tài chính 1 - Chapter 2: Review of the accounting process

REVIEW OF THE ACCOUNTING PROCESSChapter 2© 2013 The McGraw-Hill Companies, Inc.The Accounting EquationA = L + OE- Owner Withdrawals+ Owner Investments- Expenses- Losses+ Revenue+ Gains Accounting Equation for a CorporationA = L + SE+ Retained Earnings+ Issued Capital- Expenses- Losses+ Revenues+ Gains- DividendsAccount RelationshipsDebits and credits affect the Statement of Financial Position Model as follows:A = L + PIC + REAssetsDr.+Cr.-LiabilitiesDr.-Cr.+IssuedCapitalDr.-Cr.+Retained EarningsDr.-Cr.+Revenues and GainsDr.-Cr.+Expenses and LossesDr.+Cr.-Permanent AccountsTemporary AccountsSource documentsRecord in JournalFinancial StatementsTransaction AnalysisPost to LedgerUnadjusted Trial BalanceRecord & Post Adjusting EntriesAdjusted Trial BalanceClose Temporary AccountsPost-Closing Trial BalanceThe Accounting Processing CycleDuring the Accounting PeriodAt the End of the Accounting PeriodAt the End of the YearAccounting Processing CycleOn January 1, $40,000 was borrowed from a bank and a note payable was signed.Prepare the journal entry.Two accounts are affected:Cash (an asset) increases by $40,000.Notes Payable (a liability) increases by $40,000.General 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 EntriesOn July 1, the owners invest $60,000 in a new business, Dress Right Clothing Corporation. Post the debit portion of the entry to the Cash ledger account.Posting Journal EntriesPosting Journal EntriesWe follow the same procedure to post the credit portion of the entry to the Ordinary Share Capital account. After recording all entries for the period, Dress Right’s Unadjusted Trial Balance would be as follows:Debits = CreditsA Trial Balance is a listing of all accounts and their balances at a point in time.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.AssetExpenseUnadjustedBalanceCreditAdjustmentDebitAdjustmentPrepaid ExpensesToday, I will payfor my first6 months’ rent.Prepaid ExpensesItems paid for in advance of receiving their benefits Depreciation is the process of computing expense by allocating the cost of plant and equipment over their expected useful lives.Straight-LineDepreciationExpense= Asset Cost - Salvage Value Useful LifeDepreciationDepreciationRecall 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, 2013.JulyDepreciationExpense= $12,000 - $0 60 months=$200 per monthRecall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance. DepreciationAfter posting, the accounts look like this:DepreciationLiabilityRevenueUnadjustedBalanceCreditAdjustmentDebitAdjustmentUnearned Revenues“Go Big Blue” Buy your season tickets forall home basketball games NOW!Unearned RevenueCash received in advance of performing servicesAlternative Approach to Record PrepaymentsUnearned RevenueRecord initial cash receipts as follows:Cash $$$ Revenue $$$Adjusting EntryRecord the amount for the unearned liability as follows:Revenue $$$ Unearned revenue $$$Prepaid ExpensesRecord initial cash payments as follows:Expense $$$ Cash $$$Adjusting EntryRecord the amount for the prepaid expense as follows:Prepaid expense $$$ Expense $$$ExpenseLiabilityCreditAdjustmentDebitAdjustmentAccrued 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.EstimatesUncollectible accounts and depreciation of fixed assets are estimated. An estimated item is a function of future events and developments.$EstimatesThe estimate of bad debt expense at the end of the period is an example of an adjusting entry that requires an estimate.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.This is the Adjusted Trial Balance for Dress Right after all adjusting entries have been recorded and posted.Dress Right will use these balances to prepare the financial statements.The income statement summarizes the results of operating activities of the company.© 2008 The McGraw-Hill Companies, Inc.The statement of comprehensive income reports the changes in shareholders’ equity during the period that were not a result of transactions with ownersComprehensive income can be reported in:A single, continuous statement of comprehensive incomeIn two, separate, but consecutive statementsThe Statement of Financial Position presents the financial position of the company on a particular date. Notice that assets of $143,000 equal total liabilities plus shareholders’ equity of $143,000. The statement of cash flows discloses the changes in cash during a period.The statement of changes in equity presents the changes in permanent shareholder accounts. Temporary AccountsRevenuesIncome SummaryExpensesDividendsPermanent AccountsAssetsLiabilitiesShareholders’ EquityThe closing process applies only to temporary accounts.Temporary and Permanent AccountsPost-Closing Trial BalanceLists permanent accounts and their balances.Total debits equal total credits.Conversion From Cash Basis to Accrual Basis Jeter, Inc. paid $20,000 cash for insurance during the current period. On Jan. 1, Prepaid Insurance was $5,000, and on Dec. 31, the account balance was $3,000.Appendix 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 1 and the unadjusted account balances in columns 2 and 3.Determine end-of-period adjusting entries and enter them in columns 4 and 5.Add or deduct the effects of the adjusting entries on the account balances and enter in columns 6 and 7.Transfer the temporary retained earnings account balances to columns 8 and 9.Transfer the balances in the permanent accounts to columns 10 and 11.Let’s look at the completed worksheet for Dress Right.Appendix 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.Let’s look at some special journals.Sales JournalSales 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 JournalCash 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© 2008 The McGraw-Hill Companies, Inc.