The Accounting Cycle Continued

1
The Accounting Cycle Continued Preparing
Worksheetsand Financial Statements

• Chapter 4

2
Following GAAP

• GAAP is Generally Accepted Accounting Principles.
• Accrual based accounting is used.
• Revenue is recognized when earned.
• Expenses are recorded in order to be matched
  against the generated revenue.

3
Following GAAP

• What are adjusting entries?
• Adjusting entries are made to bring accounts to
  correct balances before preparing financial
  statements.
• Worksheets assist in this process.

4
The Accounting Cycle
1
3 Ledger
2 Journal
Book of Final Entry
Business Transactions
Book of Original Entry
4
5
Trial Balance
Worksheet
5
The Accounting Cycle
Worksheet
Adjusted
Trial Adjustments Trial
Income Balance Balance
Balance Statement Sheet
6 Financial Statements
Statement of Owners Equity
Balance Sheet
Income Statement
6
Learning Objective 1

• Adjustments prepaid rent,
• office supplies, depreciation on
• equipment, and accrued salaries.

7
Learning Unit 4-1

• Preparing a worksheet
• A worksheet is used to facilitate the preparation
  of adjusting entries and financial statements.
• The worksheet is not a formal report.
• Correct heading information is used.

8
Learning Unit 4-1

• Adjusting entries
• Assets must be adjusted to show amounts used or
  allocated to periods and are recorded as
  expenses.
• supplies used
• prepaid rent expired over time
• equipment depreciated

9
Learning Unit 4-1

• Expenses incurred must be recorded in the correct
  period before the period closes.
• What is an example?
• accrued salaries which have not been previously
  recorded

10
Learning Unit 4-1

• Depreciation is a unique adjustment.
• Equipment and other long-lived assets help
  produce revenue over long periods of time.
• Original cost (amount paid) is also known as
  historical cost.

11
Learning Unit 4-1

• Historical cost of the asset remains in the
  financial statements.
• This cost remains in the records as a balance in
  the asset account.
• This cost is allocated to expense over the life
  of the asset.
• What is the accompanying account?

12
Learning Unit 4-1

• The accompanying (contra-asset) account is called
  Accumulated Depreciation.
• This account is used for the yearly credited
  amounts.
• The normal balance is a credit balance.

13
Learning Unit 4-1

• Worksheet Sections
• The Trial Balance
• The Adjustments
• The Adjusted Trial Balance

Income Statement
Balance Sheet
14
Learning Unit 4-1
Income Statement List Revenues
Expenses Only Balances with the net income/loss.
Balance Sheet Balances with the
net income/loss. A L OE
15
Learning Objective 2

• Preparation of adjusted trial
• balance on the worksheet.

16
Adjustments Example

• What are the adjusting entries for supplies?
• Journal Debit
  Credit Supplies Expense x
  Supplies (record correct amounts) x
• The balance in the supplies account after
  adjusting entries will be equal to the dollar
  amount of the supplies on hand at the end of the
  accounting period.

17
Adjustments Example

• Adjusting entries for depreciation.
• Journal Debit
  Credit Depreciation Expense x
  Accum. Depr. Equip.
  x To record the proper amounts for all
  relevant asset accounts

18
Adjustments Example

• What are the adjusting entries for accrued
  service revenue?
• Journal Debit
  Credit Accounts Receivable x
  Revenue
  x To record the proper amounts for relevant
  asset and revenue accounts

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Adjustments Example
Adjusted Trial
Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr.
Cr. Dr. Cr. Cash Accounts
receivable Supplies Equipment Accum.
depreciation Accounts payable Capital Revenue Vari
ous expenses Supplies expense Depreciation
expense Totals
4,065 850 300 1,200 1,205 7,620
170 5,000 2,450 7,620
20
Adjustments Example

• The business has earned revenue of 1,000 that
  will be collected next month.
• Inventory of supplies at month end totaled 100.
• Depreciation for the period was calculated as 50.

21
Adjustments Example
Adjusted Trial
Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr.
Cr. Dr. Cr. Cash Accounts
receivable Supplies Equipment Accum.
depreciation Accounts payable Capital Revenue Vari
ous expenses Supplies expense Depreciation
expense Totals
4,065 850 300 1,200 1,205 7,620
a) 1,000 b) 200 c) 50 1,250
b) 200 c) 50 a) 1,000 1,250
170 5,000 2,450 7,620
22
Adjustments Example
Adjusted Trial
Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr.
Cr. Dr. Cr. Cash Accounts
receivable Supplies Equipment Accum.
depreciation Accounts payable Capital Revenue Vari
ous expenses Supplies expense Depreciation
expense Totals
4,065 850 300 1,200 1,205 7,620
4,065 1,850 100 1,200 1,205 200 50 8,670
a) 1,000 b) 200 c) 50 1,250
b) 200 c) 50 a) 1,000 1,250
170 5,000 2,450 7,620
50 170 5,000 3,450 8,670
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Learning Objective 3

• The income statement and
• balance sheet sections
• of the worksheet.

24
Adjustments Example
Adjusted Income
Balance Trial Balance Statement
Sheet Account Title Dr.
Cr. Dr. Cr. Dr.
Cr. Cash Accounts receivable Supplies Equipment Ac
cum. depreciation Accounts payable Capital Revenue
Various expenses Supplies expense Depreciation
expense Totals
4,065 1,850 100 1,200 1,205 200 50 8,670
1,205 200 50 1,455
4,065 1,850 100 1,200 7,215
3,450 3,450
50 170 5,000 3,450 8,670
50 170 5,000 5,220
1,995
1,995
25
Learning Objective 4

• Preparing financial statements
• from the worksheet.

26
Learning Unit 4-2

• Preparing the financial statements
  from the worksheet
• The Income Statement
• Revenue and expenses are reported on the income
  statement.

27
Learning Unit 4-2

• The Statement of Owners Equity
• It uses the beginning capital balance from the
  balance sheet columns.
• Subtract withdrawals amount and net loss and then
  add net income.

28
Learning Unit 4-2

• The Balance Sheet
• Use the asset and liability balances from the
  balance sheet columns.
• Use the corrected owners equity amounts from the
  Statement of Owners Equity.

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End of Chapter 4