Welcome Back Atef Abuelaish 1 Welcome Back Time
Welcome Back Atef Abuelaish 1
Welcome Back Time for Any Question Atef Abuelaish 2
Atef Abuelaish 3
Chapter 12 review Atef Abuelaish 4
Chapter 12 Accruals, Atef Abuelaish 5
Chapter 12 Accruals, Deferrals, and Atef Abuelaish 6
Chapter 12 Accruals, Deferrals, and the Worksheet Atef Abuelaish 7
Chapter Accruals, Deferrals, and the Worksheet 12 Section 1: Calculating and Recording Adjustments Section Objectives 12 -1 Determine the adjustment for merchandise inventory, and enter the adjustment on the worksheet. 12 -2 Compute adjustments for accrued and prepaid expense items, and enter the adjustments on the worksheet. 12 -3 Compute adjustments for accrued and deferred income items, and enter the adjustments on the worksheet. 12 -8
Accrual Basis of Accounting Revenue is recognized when earned, not necessarily when the cash is received l Revenue is recognized when the sale is complete. l A sale is complete when title to the goods passes to the customer or when the service is provided. l For sales on account, revenue is recognized when the sale occurs even though the cash is not collected immediately. 12 -9
Expenses are recognized when incurred or used, not necessarily when cash is paid l Each expense is assigned to the accounting period in which it helped to earn revenue for the business, even if cash is not paid at that time. l This is often referred to as matching revenues and expenses. 12 -10
Determine the adjustment for Merchandise Inventory. l An asset account for merchandise inventory is maintained in the general ledger. Inventory l All purchases of merchandise are debited to the Purchases account. Purchases l All sales of merchandise are credited to the revenue account Sales 12 -11
Notice that no entries are made directly to the Merchandise Inventory account during the accounting period. Consequently, when the trial balance is prepared at the end of the period, the Merchandise Inventory account still shows the beginning inventory for the period. Merchandise Inventory Purchases Sales 12 -12
Based on a physical count taken on December 31, merchandise inventory for Whiteside Antiques totaled $47, 000. Whiteside Antiques needs to adjust the Merchandise Inventory account to reflect the balance at the end of the year. The adjustment is made in two steps. Each step needs two general ledger accounts: Merchandise Inventory l Income Summary l 12 -13
The first step is to remove beginning inventory from the books. Whiteside Antiques began the year with $52, 000 in inventory. QUESTION: What is the amount of the first inventory adjustment? Beginning Inventory ANSWER: $52, 000 12 -14
Adjustment for Beginning Inventory Income Summary 52, 000 Merchandise Inventory Bal. 52, 000 12 -15
The next step is to place ending inventory on the books. Whiteside Antiques ended the year with $47, 000 in inventory. QUESTION: What is the amount of the next inventory adjustment? Ending Inventory ANSWER: $47, 000 12 -16
Adjustment for Ending Inventory Merchandise Inventory 47, 000 Income Summary 47, 000 12 -17
Objective 12 -2 Compute adjustments for accrued and prepaid expense Items and enter the adjustments on the worksheet. 12 -18
Losses from Uncollectible Accounts l Under accrual accounting, the expense for uncollectible accounts is recorded in the same period as the related sale. l The expense is estimated because the actual amount of uncollectible accounts is not known until later periods. l The estimated expense is debited to an account named Uncollectible Accounts Expense. 12 -19
Several methods exist for estimating the expense for uncollectible accounts. Whiteside Antiques uses the percentage of net credit sales method. The rate used is based on the company's past experience with uncollectible accounts and management's assessment of current business conditions. 12 -20
Whiteside Antiques estimates that 0. 80 percent of net credit sales will be uncollectible. Net credit sales for the year were $100, 000. The estimated expense for uncollectible accounts is $800 ($100, 000 x 0. 0080). 12 -21
Adjustment for Uncollectible Accounts Expense 800 Allowance for Doubtful Accounts 250 Beg Bal 800 12 -22
The entry to record the expense for uncollectible accounts includes a credit to a contra asset account, Allowance for Doubtful Accounts. This account appears on the balance sheet as follows. Accounts Receivable Allowance for Doubtful Accounts Net Accounts Receivable $32, 000 (1, 050) $30, 950 12 -23
Adjustment for Depreciation QUESTION: What is Property, Plant, and Equipment? ANSWER: Property, plant, and equipment are long-term assets that are used in the operation of a business and that are subject to depreciation. 12 -24
Accrued Expenses Whiteside Antiques makes adjustments for three types of accrued expenses: l l l Accrued salaries Accrued payroll taxes Accrued interest on notes payable Because accrued expenses involve amounts that must be paid in the future, the adjustment for each item is a debit to an expense account and a credit to a liability account. 12 -25
Adjustment for Accrued Salaries Expense – Sales 1, 200 Salaries Payable 1, 200 12 -26
Accrued Payroll Taxes The accrued employer's payroll taxes are: Social security tax Medicare tax $1, 200 x 0. 0620 = $ 74. 40 1, 200 x 0. 0145 = Total accrued payroll taxes 17. 40 $91. 80 12 -27
Adjustment for Accrued Payroll Taxes Expense 91. 80 Social Security Tax Payable 74. 40 Medicare Tax Payable 17. 40 12 -28
Accrued Unemployment Taxes The entire $1, 200 is also subject to unemployment taxes. The accrued unemployment taxes are: Federal unemployment tax $1, 200 x 0. 006 State unemployment tax Total accrued taxes $1, 200 x 0. 054 = $ 7. 20 = 64. 80 $ 72. 00 12 -29
Adjustment for Accrued Payroll Taxes Expense 72. 00 Federal Unemp. Tax Payable 7. 20 State Unemp. Tax Payable 64. 80 12 -30
Accrued Interest on Notes Payable On December 1, 2016, Whiteside Antiques issued a two-month note for $2, 000, with annual interest of 12 percent. Whiteside Antiques will pay the interest when the note matures on February 1, 2017. However, the interest expense is incurred day by day and should be allocated to each fiscal period involved in order to obtain a complete and accurate picture of expenses. 12 -31
The accrued interest expense amount is determined by using the interest formula: Principal x Rate x Time $2, 000 x 0. 12 x 1/12 = $20 The fraction 1/12 represents one month, which is 1/12 of a year. Date of note: December 1, 2016 Expense for 2016 = 1 month (Dec. 1 - 31) 12 -32
Adjustment for Accrued Interest on Notes Payable Interest Expense 20 Interest Payable 20 12 -33
Prepaid Expenses Whiteside Antiques makes adjustments for three types of prepaid expenses: l Prepaid supplies l Prepaid insurance l Prepaid interest on notes payable 12 -34
Compute adjustments for accrued and deferred income items. QUESTION: What is accrued income? ANSWER: Accrued income is income that has been earned but not yet received and recorded. 12 -35
Accrued Interest on Notes Receivable On November 1, 2016, Whiteside Antiques accepted from a customer a four-month, 15 percent note for $1, 200. The interest income is recorded when it is received, which is normally when the note matures. However, interest income is earned day by day. At the end of the period, an adjustment is made to recognize interest income earned but not yet received or recorded. 12 -36
The amount of earned interest income is determined by using the interest formula: Principal x Rate x Time $1, 200 x 0. 15 x 2/12 = $30 The fraction 1/12 represents one month, which is 1/12 of a year. 2/12 is used for two months. Date of note: November 1, 2016 Income for 2016 = 2 months (Nov. 1 – Dec. 31) 12 -37
Adjustment for Accrued Interest on Notes Receivable Which account is debited? For what amount? Which account is credited? For what amount? 12 -38
Adjustment for Accrued Interest on Notes Receivable Interest Receivable 30 Interest Income Bal. 136 30 12 -39
Adjustment for unearned or deferred income Unearned or deferred income exists when cash is received before income is earned and would include such items as : l Subscription income l Management fees l Rental income l Legal fees l Architectural fees l Construction fees l Advertising income 12 -40
Chapter Accruals, Deferrals, and the Worksheet 12 Section 2: Completing the Worksheet Section Objectives 12 -4 Complete a 10 -column worksheet. 12 -41
Complete a ten-column worksheet. The Adjusted Trial Balance section of the worksheet is completed as follows. 1. Combine the amount in the Trial Balance section and the Adjustments section for each account. 2. Enter the results in the Adjusted Trial Balance section. (The accounts that do not have adjustments are simply extended from the Trial Balance section to the Adjusted Trial Balance section. ) 3. The accounts that are affected by adjustments are recomputed. Follow these rules to combine amounts on the worksheet. 12 -42
Partial Worksheet Notice that the debit and credit amounts in Income Summary are not combined in the Adjusted Trial Balance section. Refer to page 410 -412 in your text for a larger view. 12 -43
Balance Sheet Columns Identify the accounts that appear on the balance sheet (assets, assets liability, liability owner’s capital). capital Also include the owner’s drawing account in the Balance Sheet section. 12 -44
Income Statement Columns For accounts that appear on the income statement, Sales through Interest Expense, enter the amounts in the appropriate Debit or Credit column of the Income Statement section. 12 -45
Chapter 13 Financial Statements and Atef Abuelaish 46
Chapter 13 Financial Statements and Closing Procedures Atef Abuelaish 47
Chapter 13 Financial Statements and Closing Procedures Section 1: Preparing the Financial Statements Section Objectives 13 -1 Prepare a classified income statement from the worksheet. 13 -2 Prepare a statement of owner’s equity from the worksheet. 13 -3 Prepare a classified balance sheet from the worksheet. 13 -48 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Prepare a classified income statement from the worksheet. The Classified Income Statement § A classified income statement is sometimes called a multiple-step income statement. Items are divided into groups of similar accounts. § There are subtotals within groups. § The classification and order of information depends on the type of business and the expected use of the statement. 13 -49 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
QUESTION: What is a single-step income statement? ANSWER: A single-step income statement is a format in which only one computation is needed to determine the net income. (Total Revenue – Total Expenses = Net Income) 13 -50 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Operating Revenue Net sales for Whiteside Antiques 13 -51 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Cost of Goods Sold The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Three elements are needed to compute the cost of goods sold: Beginning inventory l Net delivered cost of purchases l Ending inventory l 13 -52 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Net Delivered Cost of Purchases Freight In (Purchases Returns and Allowances) (Purchases Discounts) Net Delivered Cost of Purchases 13 -53 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Total Merchandise Available for Sale Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale 13 -54 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Cost of Goods Sold Beginning Merchandise Inventory Plus Net Delivered Cost of Purchases Cost of Goods Available for Sale Less Ending Inventory Cost of Goods Sold 13 -55 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Merchandise Inventory Account l Merchandise Inventory is the one account that appears on both the income statement and the balance sheet. l Beginning and ending merchandise inventory balances appear on the income statement. l Ending merchandise inventory also appears on the balance sheet in the Assets section. 13 -56 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Cost of Goods Sold Merchandise available for sale Cost of goods sold 13 -57 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Gross Profit on Sales l For Whiteside Antiques, net sales is the revenue earned from selling antique items. l Cost of goods sold is what Whiteside Antiques paid for the antiques that were sold during the fiscal period. l Gross profit is what is left to cover operating expenses and provide a profit. l Gross profit is the difference between the net sales and the cost of goods sold. 13 -58 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Gross profit on sales for Whiteside Antiques 13 -59 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Operating Expenses Salaries for salespersons and advertising are examples of selling expenses 13 -60 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Operating Expenses Rent, utilities, and salaries for office employees are examples of general and administrative expenses 13 -61 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Net income from operations 13 -62 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Other Income and Other Expenses 13 -63 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Net income from operations 13 -64 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Prepare a statement of owner’s equity from the worksheet. l The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period. l The ending capital balance for Bill Whiteside, $84, 576. 80, is used to prepare the balance sheet. 13 -65 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Prepare a classified balance sheet from the worksheet QUESTION: What are current assets? ANSWER: Current assets are assets consisting of cash, items that normally will be converted into cash within one year, and items that will be used up within one year. 13 -66 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Current Assets Current assets for Whiteside Antiques 13 -67 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Plant and Equipment l Noncurrent assets are called long-term assets. l An important category of long-term assets is plant and equipment. l For many businesses plant and equipment represents a sizable investment. 13 -68 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Current Liabilities Whiteside Antiques Partial Balance Sheet December 31, 2016 Assets Prepaid Interest Total Current Assets Total Plant and Equipment Total Assets Liabilities and Owner’s Equity Current Liabilities Notes Payable-Trade Notes Payable-Bank Accounts Payable Interest Payable Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Fed. Unemployment Tax Pay. State Unemployment Tax Pay. Salaries Payable Sales Tax Payable Total Current Liabilities 75. 00 Total current liabilities 6, 300. 00 98, 716. 00 31, 900. 00 130, 616. 00 2, 000. 00 9, 000. 00 24, 129. 00 20. 00 1, 158. 40 267. 40 990. 00 7. 20 64. 80 1, 200. 00 7, 200. 00 46, 036. 80 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -69
Long-Term Liabilities l Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly. l Long-term liabilities include mortgages, notes payable, and loans payable. 13 -70 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Owner's Equity The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet. 13 -71 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Chapter 13 Financial Statements and Closing Procedures Section 2: Completing the Accounting Cycle Section Objectives 13 -4 Journalize and post the adjusting entries. 13 -5 Journalize and post the closing entries. 13 -6 Prepare a postclosing trial balance. 13 -7 Journalize and post reversing entries. 13 -72 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Journalize and post the adjusting entries l All adjustments are shown on the worksheet. l After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. l They are recorded in the general journal as adjusting journal entries and are posted to the general ledger. 13 -73 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Adjusting Entries Type of Adjustment Worksheet Reference Purpose Inventory (a – b) Removes beginning inventory and adds ending inventory to the accounting records. Expense (c – e) Matches expense to revenue for the period; the credit is to a contra asset account. Accrued Expense (f – i) Matches expense to revenue for the period; the credit is to a liability account. Prepaid Expense (j –l) Matches expense to revenue for the period; the credit is to an asset account. Accrued Interest (m) Recognizes interest earned in the period. The debit is to an asset account, (interest receivable) and the credit is to a revenue account. 13 -74 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Journalize and Post the Closing Entries. l At the end of the period, the temporary accounts are closed. l The temporary accounts are: Revenue accounts l Cost of goods sold l Expense accounts l Drawing account l 13 -75 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
There are four steps in the closing process: 1. Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary 2. Close expense accounts, cost of goods sold accounts with debit balances, and any contra revenue accounts with debit balances to Income Summary 3. Close Income Summary, Summary which now reflects the net income or loss for the period, to owner's capital 4. Close the drawing account to owner's capital 13 -76 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Step 1: 1 Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances. GENERAL JOURNAL DATE DESCRIPTION 2016 Closing Entries Dec. 31 Sales Interest Income Miscellaneous Income Purchases Returns and Allowances Purchases Discounts Income Summary POST. REF. PAGE DEBIT 28 CREDIT 561, 650. 00 166. 00 3, 050. 00 3, 130. 00 568, 362. 00 When viewing the work sheet, debit each account, except Income Summary, for its balance. Credit Income Summary for the total. 13 -77 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Step 2: 2 When looking at the worksheet, close the expense accounts and the Cost of Goods Sold Accounts with debit Balances, as well as any contra revenue accounts with debit balances, to Income Summary. Credit each account, except Income Summary, for its balance. Debit Income Summary for the total. 13 -78 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Step 3: 3 Closing the Income Summary Account The third closing entry transfers the Income Summary balance to the owner's capital account. l This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year. l For Whiteside Antiques, the third closing entry is as follows: l Income Summary Adjusting Entries (a-b) Closing Entries 12/31 52, 000. 00 512, 403. 80 564, 406. 20 12/31 Bal. 47, 000. 00 568, 362. 00 615, 362. 00 50, 958. 20 GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Income Summary Bill Whiteside, Capital POST. REF. 28 PAGE DEBIT CREDIT 50, 958. 20 13 -79 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Step 4: 4 Closing the Drawing account This entry closes the drawing account and updates the capital account GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Bill Whiteside, Capital Bill Whiteside, Drawing POST. REF. 28 PAGE DEBIT CREDIT 27, 600. 00 13 -80 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Posting the Closing Entries l The closing entries are posted from the general journal to the general ledger. l This process brings the temporary account balances to zero. l The word Closing is entered in the Description column. 13 -81 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Preparing a Postclosing Trial Balance l Prepare a postclosing trial balance to confirm that the general ledger is in balance. l Only the accounts that have balances – the asset, liability and owner's capital accounts – appear on the postclosing trial balance. l The postclosing trial balance matches the amounts reported on the balance sheet. l To verify this, compare the postclosing trial balance with the balance sheet. 13 -82 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Only the accounts that have balances—the asset, liability and owner's capital accounts—appear on the postclosing trial balance Temporary accounts do not appear on the postclosing trial balance Revenue Cost of Goods Sold Expenses Withdrawals 13 -83 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Preparing a Postclosing Trial Balance 13 -84 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Journalize and post reversing entries QUESTION: What are reversing entries? ANSWER: Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses. 13 -85 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 7 Journalize and post closing entries Step 6 Journalize and post adjusting entries 13 -86 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Flow of Financial Data through an Accounting System 13 -87 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Homework assignment Ø Using Connect – 3 Questions for 50 Points for Chapter 13. 13 Ø Last day of the Homework for Chapters 7, 8, 9, 10. 11, 12, and 13 is 12/06 at 11: 59 PM. Ø Dec 5 th, general revision on the course. Ø Final Exam on Dec. 7 th at 9: 30 AM. Happiness is having all homework up to date Atef Abuelaish 88
END OF THE COURSE THANK YOU 89
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