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Title: Accrual Accounting Process: Part I
Description: An accountant’s functions include Classifying and summarizing, made easier by the repetitive nature of business transactions All repetitive transactions of the same nature are recorded and summarized in one account
Description: An accountant’s functions include Classifying and summarizing, made easier by the repetitive nature of business transactions All repetitive transactions of the same nature are recorded and summarized in one account
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Accrual Accounting Process:
Part I
15
...
7
Components of stockholders’ equity
Common Stock
Additional
Capital
Retained Earnings
Expenses
Dividends
Revenue
8
Why record expenses and revenues
separately in various T-accounts?
Retained Earnings
Rent exp
...
450
Salaries
1,000
Rent exp
...
350
1,000
1,100
3,000
200
4,500
Sales revenue
Interest Income
Sales Revenue
Interest Income
Sales Revenue
Sales Revenue (1,000 + 3,000 + 4,500)
Interest Income (1,100 + 200)
Rent expense (800 + 400)
Salaries expense (650 + 1,000)
Interest expense (450 + 350)
Net Income
8,500
1,300
(1,200)
(1,650)
(800)
6,150
9
Why record expenses and revenues
separately in various T-accounts?
Retained Earnings
Rent exp
...
450
Salaries
1,000
Rent exp
...
350
1,000
1,100
3,000
200
4,500
Interest Expense
450
350
Dividends
2,000
Sales revenue
Interest Income
Sales Revenue
Interest Income
Sales Revenue
Sales Revenue
1,000
3,000
4,500
Interest Revenue
1,100
200
Rent Expense
800
400
Salaries Expense
650
1,000
10
Why record expenses and revenues
separately in various T-accounts?
Retained Earnings
Sales Revenue
1,000
3,000
4,500
Rent Exp
...
1,650 1,300 Interest Revenue
Interest Exp
...
Decreases in retained earnings are recorded
on the left side
Expenses are recorded on the left side
13
Recording Revenues: A Summary
Revenues increase retained earnings
...
Revenues have credit balance because
they increase retained earnings
Expenses and dividends have debit balance because
they decrease retained earnings
Can retained earnings have a debit balance?
Yes, when cumulative earnings are less than cumulative
dividends
16
Recap: T-Account
Has two sides
Debit means Left
Credit means Right
17
Recap: Summary of
T-account Rules
Assets (cash, receivables, equipment)
Increases
Decreases
Liabilities (loans payable)
Decreases
Increases
Owners’ equity (contributed capital, retained earnings)
Decreases
Increases
18
The Ledger
Accounts are collectively referred to as the ledger
Types of accounts
Balance Sheet accounts or real accounts or
permanent accounts
Income statement accounts or nominal
accounts or temporary accounts,
i
...
, revenue, expenses, and dividends - all these
are subdivisions of retained earnings
19
The Recording Process
Journal entries
Posting to T-accounts
Trial Balance
Adjusting entries (Next class)
Financial statement preparation
20
The Journal
Journal contains a chronological record of the
transactions of a business
21
Emily’s Bakery
Emily contributes $10,000 in cash
Assets
Cash
+$10,000
=
Liabilities
+
Owners’ Equity
Contributed Capital
+$10,000
Journal Entry
Dr Cash (+A)
Cr Contributed Capital (+CC)
10,000
10,000
22
The company borrows $3,000 from the
bank
Assets
Cash
Loans Payable
+$3,000
+$3,000
=
Liabilities
Journal Entry
Dr Cash (+A)
Cr Loans Payable (+L)
+
Owners’ Equity
3,000
3,000
23
Company purchases equipment for
$5,000 cash
Assets
Cash
-$5,000
=
L
+ OE
Equipment
+$5,000
Journal Entry
Dr Equipment (+A)
Cr Cash (-A)
5,000
5,000
24
Company performs service for $12,000
...
Assets
Cash
+$8,000
=
L + Owners’ Equity
Receivables
Retained Earnings
+$4,000
+$12,000
Journal Entry
Dr Cash (+A)
Dr Receivables (+A)
Cr Service Revenue (+RE)
8,000
4,000
12,000
25
Company pays $9,000 for expenses (wages,
interest, and maintenance)
Assets
Cash
-$9,000
=
Liabilities
+
Journal Entry
Dr Expenses (-RE)
Cr Cash (-A)
Owners’ Equity
Retained Earnings
-$9,000
9,000
9,000
26
Company pays a dividend of $1,000
Assets
=
Liabilities
+
Cash
-$1,000
Journal Entry
Dr Dividends (-RE)
Cr Cash (-A)
Owners’ Equity
Retained Earnings
-$1,000
1,000
1,000
27
Posting
Transactions from the journal are posted to the
ledger (we will ignore this step)
28
Trial Balance
Trial balance is a listing of all the accounts and their
balances in this order:
Assets
Liabilities
shareholders’ equity
Revenues
Expenses
Prepared prior to the preparation of financial statements
Duality is an important check of arithmetic accuracy
However, equality of debits and credits in a trial balance does
not mean that accounting is error free
Complete omission of a transaction
Recording an entry in the wrong account
Compensating errors
29
Emily’s Bakery
Trial Balance
Cash
Accounts Receivable
Equipment
Loans Payable
Contributed Capital
Retained Earnings
Service Revenue
Expenses
Dividend
Total
Debit
6,000
4,000
5,000
Credit
3,000
10,000
0
12,000
9,000
1,000
25,000
25,000
30
Prepare Income Statement
For the year ended December 31, 1997
Revenues: Fees earned for service
$12,000
Expenses: Wages, interest, maintenance
$ 9,000
Net income
$ 3,000
31
Statement of Retained Earnings
For the year ended December 31, 1997
Beginning retained earnings balance
0
Plus: Net income
3,000
Less: Dividend to stockholder
1,000
Ending retained earnings balance
$ 2,000
32
Summary
T-accounts
Debit is Left
Credit is Right
Increases in Assets – Debits
Increases in liabilities – Credits
Increases in shareholders’ equity – Credits
Expenses are Debits
Revenues are Credits
Use balances from T-accounts to prepare
financial statements at the end of a fiscal period
33
Title: Accrual Accounting Process: Part I
Description: An accountant’s functions include Classifying and summarizing, made easier by the repetitive nature of business transactions All repetitive transactions of the same nature are recorded and summarized in one account
Description: An accountant’s functions include Classifying and summarizing, made easier by the repetitive nature of business transactions All repetitive transactions of the same nature are recorded and summarized in one account