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Introduction To Accounting

This document outlines the course description, objectives, units, assessment scheme, and textbooks for a Financial and Managerial Accounting course. The course covers topics such as financial reporting, accounting principles, management accounting, decision making, and more over 3 units. Students will be assessed through presentations, a term paper, and a final exam.

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EYOB AHMED
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0% found this document useful (0 votes)
16 views

Introduction To Accounting

This document outlines the course description, objectives, units, assessment scheme, and textbooks for a Financial and Managerial Accounting course. The course covers topics such as financial reporting, accounting principles, management accounting, decision making, and more over 3 units. Students will be assessed through presentations, a term paper, and a final exam.

Uploaded by

EYOB AHMED
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Financial and Managerial

Accounting
Credit Hours: 2
Pre-requisite: None

Silicon Valley College


School of Post Graduate Studies

03/31/24 1
Course Description
• Accounting for Managers emphasizes the interpretation
rather than the construction of accounting information
and encourages a critical, rather than unthinking
acceptance of the underlying assumptions behind
accounting. It links theory with practical examples and
case studies drawn from real-life business situations
across a range of industries.

03/31/24 2
Course Objectives
By the end of this course, students will be able to:
•Familiarize students with the use of accounting
information in decision making.
•Acquaint learners with the skills of financial reports
analysis.
•Understand how to use accounting information in
planning and control.
03/31/24 3
UNIT 1: Context of Accounting.
– Introduction to Accounting: Accounting, accountability and
the account.
– A short history of accounting.
– The role of management accounting.
– Recent developments in management accounting.
– Accounting and its Relationship to Shareholder Value and
Corporate Governance.
– Capital and product markets.
03/31/24 4
UNIT 1: Context of Accounting.
– Value-based management.
– Shareholder value, strategy, and accounting.
– Company regulation and corporate governance
– Recording Financial Transactions and the Principles of
Accounting.
– Business events, transactions, and the accounting system.
– The double entry: recording transactions.

03/31/24 5
UNIT 1: Context of Accounting.
– Extracting financial information from the accounting
system.
– Basic principles of accounting.
– Cost terms and concepts: the limitations of financial
accounting.
– Management Control, Management Accounting, and its
Rational-Economic Assumptions.

03/31/24 6
UNIT 1: Context of Accounting.
– Management control systems.
– Management planning and control systems and
management accounting.
– Non-financial performance measurement

03/31/24 7
UNIT 2: The Use of Financial Reports for
Decision-Making
• Constructing Financial Reports:
• International Financial Reporting Standards (IFRSs)
True and fair view.
• Framework for the Preparation and Presentation of
Financial Statements.
• Reporting profitability: The Income Statement.

03/31/24 8
UNIT 2: The Use of Financial Reports for
Decision-Making
– Reporting financial position:
• The Balance Sheet.
• Accruals accounting.
• Depreciation.
– Reporting cash flow: The Cash Flow Statement.

03/31/24 9
UNIT 2: The Use of Financial Reports for
Decision-Making
Interpreting Financial Reports • Activity/efficiency
and Alternative Perspectives: • Working capital
• Annual Reports • Managing receivables
• Operating and Financial • Managing inventory
Review • Managing payables
• Ratio analysis • Shareholder return
• Profitability • Interpreting financial
• Liquidity information using ratios
• Gearing

03/31/24 10
UNIT 2: The Use of Financial Reports for
Decision-Making
– Accounting for Inventory:
• Introduction to Inventory
• Methods of costing inventory in manufacturing
• Job costing illustration
• Process costing illustration
• Long term contract costing
• Management accounting statements

03/31/24 11
UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
• Accounting and Information Systems
– Introduction to accounting and information
systems
– Internal controls for information systems

03/31/24 12
UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
• Cost behavior
• Cost-volume-profit analysis
• Alternative approaches to pricing
• Cost-plus pricing
• Target rate of return pricing
• Optimum selling price
• Special pricing decisions
• Transfer pricing
• Segmental profitability
• Cost classification
03/31/24 13
UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
– Calculating product/service costs
– Shifts in management accounting thinking
– Alternative methods of overhead allocation
– Activity-based costing
– Behavioral implications of management
accounting

03/31/24 14
UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
– Strategic Investment Decisions
• Investment appraisal
• Accounting rate of return.
• Payback.
• Discounted cash flow.
• Comparison of techniques.

03/31/24 15
UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
– Budgeting and Budgetary Control.
• What is budgeting?
• The budgeting process
• What is budgetary control?
• Flexible budgeting

03/31/24 16
UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
– Variance analysis.
• Cost variances.
• Materials variance.
• Labor variance.
• Overhead variances.
• Reconciling the variances.
• Criticism of variance analysis.

03/31/24 17
ASSESSMENT SCHEME
Presentations (group and individual) 25%
Term paper 25%
Final examination 50%
Total 100%

03/31/24 18
Textbook
Ross S, Wester field. R., and Jaffe, J., and
Kakani, RK. (2014). Corporate Finance. 10th ed.
India: McGraw Hill

03/31/24 19
• Ross S, Wester field. R., and Jordan, BD. (2000). Corporate Finance. 5th
ed. USA: McGraw Hill.
• Ross S, Wester field. R., and Jaffe, J., and Kakani, RK. Corporate
Finance. 10th ed. USA: McGraw Hill.
• Brealey, Myers, and Allen. (2008). Corporate Finance. 9th ed. USA:
McGraw Hill.
• Brealey, Myers, and Marcus. (2001). Corporate Finance. 3rd ed. USA:
McGraw Hill.
• Brealey, Myers, and Marcus. (2012). Fundamentals of Corporate
Finance. 7th ed. USA: McGraw Hill.
• Brealey, Myers, and Marcus. (2001). Corporate Finance. 3rd ed. USA:
McGraw Hill.
03/31/24 20
Nature of Accounting
An information system whose purpose is to . . .

Identify Measure

Collect Communicate

• Information about an economic entity to


those with an interest in the financial
affairs of the entity.
03/31/24 21
n g D efi n ed:
Ac c o un ti
Accounting is the process of measuring, interpreting,
and communicating financial information to support
internal and external business decision making.
-Measuring?
-Interpreting? and
-Communicating?

03/31/24 22
Nature of Accounting . . .
• All organizations . . .
– Large or small;
– Manufacturing, merchandising or service;
– Profit or nonprofit . . .
have a need for accounting information

03/31/24 23
Nature of Financial
• Thus, Accounting
the primary role of ... .
accounting is to
provide useful information for the decision
making needs of:
• investors, lenders, owners, mangers, and
others both inside and outside the
company.
• However, the need of internal and external
users often differ.
03/31/24 24
Accounting as an Aid to Decision Making
• Accounting information is useful to anyone who makes
decisions that have economic results.
• Managers want to know if a new product will be
profitable.
• Owners want to know which employees are productive.
• Investors want to know if a company is a good
investment.
• Creditors want to know if they should extend credit,
how much to extend, and for how long.
• Government regulators want to know if financial
statements conform to requirements.
03/31/24 25
Who are the

03/31/24 26
Accounting Environment
External Accounting Information . . .

For those who lack


direct access to the
information generated
by the internal Concepts, principles, and
operations of a procedures known as
company. Generally Accepted Accounting
Principles (GAAP) were
developed to meet the
IFR
S needs of external users.

03/31/24 Financial Accounting . 27


. .
Accounting Environment . . .cntd
Internal Accounting Information

Developed to Information that


meet the needs aids planning and
of management. control.

Much of the
information is
confidential.
03/31/24 Management Accounting28???
Management Accounting Vs Financial Accounting
Internal Users
External Users

Managerial accounting
provides information needs Financial accounting provides
for internal decision external users with financial
makers. statements.
03/31/24 29
Managerial vs Financial Accounting
Issue Managerial Financial

Primary Users Internal External

Purpose of Plan, Direct, Users make


Information Control, Decide investing and
lending, etc
decisions

03/31/24 1-30
Managerial vs Financial Accounting
Issue Managerial Financial

Primary Accounting Internal Reports General Purpose


Product useful to Financial
Management Statements

What is included? Defined by Determined by


Management IFRS

03/31/24 1-31
Managerial vs Financial Accounting
Issue Managerial Financial

Underlying Basis of Internal and Based on historical


Information External transactions with
Transactions, focus external parties
on future

Emphasis Data must be Data must be


relevant reliable and
objective

03/31/24 1-32
Managerial vs Financial Accounting
Issue Managerial Financial
Business Unit Segments of the Company as a whole
business
Preparation Depends on Annually and
management needs Quarterly

Verification Internal audit External audit

03/31/24 1-33
Ac c o unt ing IFR
un datio n o f S
The Fo
Systems
• Generally accepted accounting principles (GAAP) encompass the
conventions, rules, and procedures for determining acceptable
accounting practices at a particular time.
• They are pronouncements by designated authoritative bodies that
must be followed in all applicable cases.
• Accounting practices developed by respected bodies and
industries or that have evolved over time.
• International Accounting Standard Board (IASB) is primarily
responsible for evaluating, setting, or modifying IFRS.
03/31/24 34
Type of Business Organizations
We can classify business organizations in
various types based on:
a.Ownership
b.Activities

03/31/24 35
a. Based on Ownership

Sole
Sole Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation

03/31/24 36
b. Activity performed

(1) Service businesses


 Ethiopian Air Lines (transportation services)
 Ethio-telecom (Telecommunication services)
 Rift valley University (Educational Services) etc
(2) Merchandising businesses
 Shewa Super Market
 KAKI General Trading etc
(3) Manufacturing businesses
 Debra Cement Factory
 Kombolcha Textile Factory etc. . .
03/31/24 37
Business Goals and Activities
Business Goals
1.Profit Maximization .. . Wealth Maximization
Profit maximization means increasing profit as much as
possible or producing a level of output which brings the
most profit for the business. . . for private sector
. . . . short term Vs long term profit maximization
2. Liquidity
A business must have enough funds available to pay
debts when they are due. . . . so as to satisfy the
equities of creditors.
03/31/24 38
Business Goals, Activities . . .

Business Goals Business Activities

Profitability Financing operating

Liquidity Investing

03/31/24 39
The three Business Activities . . .
1) Financing Activities:
 Obtaining capital from owners and creditors
 Repaying creditors and a return to owners.
2) Investing Activities:
 Spending the capital it receives in ways that are productive
and will help the business achieve its objectives.
 Buying and selling long-term assets to be used in the business.
3) Operating Activities:
 Selling of goods and services to customers.
 Employing managers and workers, buying and producing goods
and services, and paying taxes.
03/31/24 40
Business Goals, Activities Cont’d)
Performance Measures:
Indicate whether or not managers are achieving the business
goals and if they are managing business activities well.
Performance measures include:
 Earned income or profit
 Cash flow
 Ratio of expenses to revenues
 Ratio of money owed to total resources controlled.
Note: Managers should understand these measures.
03/31/24 41
ACCOUNTING PROCESS
The
The Accounting
Accounting Cycle
Cycle
Illustration
Transactions

9. Reversing entries 1. Journalization

8. Post-closing trail balance 2. Posting

7. Closing entries 3. Trial balance

6. Financial Statements Work


Sheet
4. Adjustments

5. Adjusted trial balance

LO 3 Identify steps in the accounting cycle.


Identify
Identify and
and Recording
Recording
Transactions
Transactions
What to Record?

An item should be recognized in the financial statements if it is an


element, is measurable,
and is relevant and a
faithful representation.

LO 3 Identify steps in the accounting cycle.


Debits
Debits and
and Credits
Credits
An Account shows the effect of transactions on a given asset, liability,
equity, revenue, or expense account.

Double-entry accounting system (two-sided effect).

Recording done by debiting at least one account and crediting another.

DEBITS must equal CREDITS.

LO 2 Explain double-entry rules.


Debits
Debits and
and Credits
Credits
Account An arrangement that shows the
effect of transactions on an
account.
Debit = “Left”
An Account can be Credit = “Right”
Account Name
illustrated in a T- Debit / Dr. Credit / Cr.
Account form.

LO 2 Explain double-entry rules.


Debits
Debits and
and Credits
Credits
If Debit entries are greater than Credit entries, the account will have
a debit balance.

Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000

Balance $15,000

LO 2 Explain double-entry rules.


Debits
Debits and
and Credits
Credits
If Credit entries are greater than Debit entries, the account will have
a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2


8,000 Transaction #3

Balance $1,000

LO 2 Explain double-entry rules.


Debits
Debits and
and Credits
Credits Summary
Summary
Liabilities
Normal
Normal Normal
Normal
Debit / Dr. Credit / Cr.

Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance

Assets Chapter

Equity
3-24

Debit / Dr. Credit / Cr.


Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter

Expense
3-23

Revenue
Chapter
3-25

Debit / Dr. Credit / Cr.


Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

LO 2 Explain double-entry rules.


Debits
Debits and
and Credits
Credits Summary
Summary
Statement of Financial Position Income Statement

Asset = Liability + Equity Revenue - Expense =

Debit

Credit

LO 2 Explain double-entry rules.


The
The Accounting
Accounting Equation
Equation
Relationship among the assets, liabilities and equity of a business:

Illustration 3-3

The equation must be in balance after every transaction. For every Debit
there must be a Credit.

LO 2 Explain double-entry rules.


1.
1. Journalizing
Journalizing
General Journal – a chronological record of transactions.
Journal Entries are recorded in the journal.
September 1: Shareholders invested $15,000 cash in the
corporation in exchange for ordinary shares.
Illustration 2-1

LO 4 Record transactions in journals, post to ledger accounts, and prepare a


trial balance.
2.
2. Posting
Posting
Posting – the process of transferring amounts from the journal
to the ledger accounts. Illustration 3-7

Illustration 3-8

LO 4 Record transactions in journals, post to


ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
Posting – Transferring amounts from journal to ledger.
Illustration 3-8

LO 4
2.
2. Posting
Posting
Expanded Example
The purpose of transaction analysis is

(1) to identify the type of account involved, and

(2) to determine whether a debit or a credit is required.


Keep in mind that every journal entry affects one or more of the
following items: assets, liabilities, equity, revenues, or expense.

LO 4 Record transactions in journals, post to


ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
1. October 1: Shareholders invest $100,000 cash in an
advertising venture to be known as Pioneer Advertising
Agency Inc. Illustration 3-9

Oct. 1 Cash 100,000


Share capital - ordinary 100,000

Cash Share Capital - Ordinary


Debit Credit Debit Credit
100,000 100,000

LO 4 Record transactions in journals, post to


ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
2. October 1: Pioneer Advertising purchases office equipment
costing $50,000 by signing a 3-month, 12%, $50,000 note
payable. Illustration 3-10

Oct. 1 Office equipment 50,000


Notes payable 50,000

Office Equipment Notes Payable


Debit Credit Debit Credit
50,000 50,000

LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial


balance.
2.
2. Posting
Posting
3. October 2: Pioneer Advertising receives a $12,000 cash
advance from KC, a client, for advertising services that are
expected to be completed by December 31. Illustration 3-11

Oct. 2 Cash 12,000


Unearned service revenue 12,000

Cash Unearned Service Revenue


Debit Credit Debit Credit
100,000 12,000
12,000

LO 4 Record transactions in journals, post to


ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
4. October 3: Pioneer Advertising pays $9,000 office rent, in
cash, for October. Illustration 3-12

Oct. 3 Rent expense 9,000


Cash 9,000

Cash Rent Expense


Debit Credit Debit Credit
100,000 9,000 9,000
12,000

LO 4 Record transactions in journals, post to


ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
5. October 4: Pioneer Advertising pays $6,000 for a one-year
insurance policy that will expire next year on September 30.
Illustration 3-13
Oct. 4 Prepaid insurance 6,000
Cash 6,000

Cash Prepaid Insurance


Debit Credit Debit Credit
100,000 9,000 6,000
12,000 6,000

LO 4 Record transactions in journals, post to


ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
6. October 5: Pioneer Advertising purchases, for $25,000 on
account, an estimated 3-month supply of advertising
materials from Aero Supply. Illustration 3-14

Oct. 5 Advertising supplies 25,000


Accounts payable 25,000

Advertising Supplies Accounts Payable


Debit Credit Debit Credit
25,000 25,000

LO 4 Record transactions in journals, post to


ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
7. October 9: Pioneer Advertising signs a contract with a local
newspaper for advertising inserts (flyers) to be distributed
starting the last Sunday in November. Pioneer will start
work on the content of the flyers in November. Payment of
$7,000 is due following delivery of the Sunday papersIllustration 3-15
containing the flyers.

LO 4 Record transactions in journals, post to


ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
8. October 20: Pioneer Advertising’s board of directors
declares and pays a $5,000 cash dividend to shareholders.
Illustration 3-16
Oct. 20 Dividends 5,000
Cash 5,000

Cash Dividends
Debit Credit Debit Credit
100,000 9,000 5,000
12,000 6,000
5,000
LO 4 Record transactions in journals, post to
ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
9. October 26: Employees are paid every four weeks. The
total payroll is $2,000 per day. The pay period ended on
Friday, October 26, with salaries of $40,000 being paid.
Illustration 3-17
Oct. 26 Salaries expense 40,000
Cash 40,000
Cash Salaries Expense
Debit Credit Debit Credit
100,000 9,000 40,000
12,000 6,000
5,000
40,000
LO 4 Record transactions in journals, post to
ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
10. October 31: Pioneer Advertising receives $28,000 in cash
and bills Copa Company $72,000 for advertising services
of $100,000 provided in October. Illustration 3-18

Oct. 31 Cash 28,000


Accounts receivable 72,000
Service revenue 100,000
Cash Accounts Receivable Service Revenue
Debit Credit Debit Credit Debit Credit
100,000 9,000 72,000 100,000
12,000 6,000
28,000 5,000
40,000
80,000
3.
3. Trial
Trial Balance
Balance Illustration 3-19

Trial Balance –
A list of each
account and its
balance; used
to prove
equality of debit
and credit
balances.
LO 4 Record transactions in journals, post to
ledger accounts, and prepare a trial balance.
4.
4. Adjusting
Adjusting Entries
Entries
Makes it possible to:

Report on the statement of financial position the


appropriate assets, liabilities, and equity at the statement
date.

Report on the income statement the proper revenues and


expenses for the period.
 Revenues are recorded in the period in which they are
earned.
 Expenses are recognized in the period in which they are
incurred. LO 5 Explain the reasons for preparing adjusting entries.
Types
Types of
of Adjusting
Adjusting Entries
Entries Illustration 3-20

Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not yet
recorded as assets before received in cash or recorded.
they are used or consumed.
2. Unearned Revenues. Revenues 4. Accrued Expenses.
received in cash and recorded as Expenses incurred but not
liabilities before they are earned. yet paid in cash or recorded.

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals Illustration 3-21
Deferrals are either
 prepaid
expenses or
 unearned
revenues.

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Payment of cash that is recorded as an asset because service or benefit will


be received in the future.

Cash Payment BEFORE Expense Recorded


Prepayments often occur in regard to:
insurance rent
supplies purchasing buildings and
advertising equipment

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Supplies. Pioneer purchased advertising supplies costing


$25,000 on October 5. Prepare the journal entry to record the
purchase of the supplies.
Oct. 5 Advertising supplies 25,000
Cash 25,000
Advertising Supplies Cash
Debit Credit Debit Credit
25,000 25,000

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Supplies. An inventory count at the close of business on
October 31 reveals that $10,000 of the advertising supplies are
still on hand.
Oct. 31 Advertising supplies expense 15,000
Advertising supplies 15,000
Advertising Supplies
Advertising Supplies Expense
Debit Credit Debit Credit
25,000 15,000 15,000

10,000
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-35

Statement
Presentation:
Advertising
supplies identifies
that portion of the
asset’s cost that
will provide future
economic benefit.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-34

Statement
Presentation:
Advertising
expense identifies
that portion of the
asset’s cost that
expired in
October.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire
insurance policy, beginning October 1. Show the entry to
record the purchase of the insurance.
Oct. 4 Prepaid insurance 6,000
Cash 6,000

Prepaid Insurance Cash


Debit Credit Debit Credit
6,000 6,000

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Insurance. An analysis of the policy reveals that $500 ($6,000 /
12) of insurance expires each month. Thus, Pioneer makes the
following adjusting entry.
Oct. 31 Insurance expense 500
Prepaid insurance 500

Prepaid Insurance Insurance Expense


Debit Credit Debit Credit
6,000 500 500

5,500
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-35

Statement
Presentation:
Prepaid Insurance
identifies that
portion of the
asset’s cost that
will provide future
economic benefit.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-34

Statement
Presentation:
Insurance
expense identifies
that portion of the
asset’s cost that
expired in
October.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Depreciation. Pioneer Advertising estimates depreciation on its
office equipment to be $400 per month. Accordingly, Pioneer
recognizes depreciation for October by the following adjusting
entry.
Oct. 31 Depreciation expense 400
Accumulated depreciation 400
Depreciation Expense Accumulated Depreciation
Debit Credit Debit Credit
400 400

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-35

Statement
Presentation:
Accumulated
Depreciation—is a
contra asset
account.

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-34

Statement
Presentation:
Depreciation
expense identifies
that portion of the
asset’s cost that
expired in
October.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Unearned Revenues””
“Unearned Revenues
Receipt of cash that is recorded as a liability because the revenue has not
been earned.

Cash Receipt BEFORE Revenue Recorded


Unearned revenues often occur in regard to:
rent magazine subscriptions
airline tickets customer deposits
school tuition

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Unearned Revenue. Pioneer Advertising received $12,000 on
October 2 from KC for advertising services expected to be
completed by December 31. Show the journal entry to record
the receipt on Oct. 2nd.
Oct. 2 Cash 12,000
Unearned service revenue 12,000
Cash Unearned Service Revenue
Debit Credit Debit Credit
12,000 12,000

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Unearned Revenues. Analysis reveals that Pioneer earned
$4,000 of the advertising services in October. Thus, Pioneer
makes the following adjusting entry.
Oct. 31 Unearned service revenue 4,000
Service revenue 4,000

Service Revenue Unearned Service Revenue


Debit Credit Debit Credit
100,000 4,000 12,000
4,000
8,000
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Illustration 3-35

Statement
Presentation:
Unearned service
revenue identifies
that portion of the
liability that has
not been earned.

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Illustration 3-34

Statement
Presentation:
Service revenue
represents that
portion of the
liability that was
earned in October.

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for Accruals
Accruals
Illustration 3-27
Accruals are either
 accrued
revenues or
 accrued
expenses.

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Revenues earned but not yet received in cash or recorded.

Adjusting entry results in:

Revenue Recorded BEFORE Cash Receipt


Accrued revenues often occur in regard to:
rent
interest
services performed
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Accrued Revenues. In October Pioneer earned $2,000 for
advertising services that it did not bill to clients before October
31. Thus, Pioneer makes the following adjusting entry.
Oct. 31 Accounts receivable 2,000
Service revenue 2,000
Accounts Receivable Service Revenue
Debit Credit Debit Credit
72,000 100,000
2,000 4,000
2,000
74,000 106,000
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”

Illustration 3-34

Statement
Presentation
Illustration 3-35 LO 5
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Expenses incurred but not yet paid in cash or recorded.
Adjusting entry results in:

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:


rent salaries
interest taxes

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Accrued Expenses””
“Accrued Expenses
Accrued Interest. Pioneer signed a three-month, 12%, note
payable in the amount of $50,000 on October 1. The note
requires interest at an annual rate of 12 percent. Three factors
determine the amount of the interest accumulation:
1 2 3 Illustration 3-29

LO 5 Explain the reasons for preparing adjusting entries.


Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Interest. Pioneer signed a three-month, 12%, note
payable in the amount of $50,000 on October 1. Prepare the
adjusting entry on Oct. 31 to record the accrual of interest.
Oct. 31 Interest expense 500
Interest payable 500
Interest Expense Interest Payable
Debit Credit Debit Credit
500 500

LO 5 Explain the reasons for preparing adjusting entries.


6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
fromthe
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.

Retained Statement
Income
Earnings of Financial
Statement
Statement Position

LO 6 Prepare financial statement from the adjusted trial balance.


6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Illustration 3-34

LO 6
6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Illustration 3-35

LO 6
7.
7. Closing
Closing Entries
Entries
To reduce the balance of the income statement (revenue and expense)
accounts to zero.

To transfer net income or net loss to equity.

Statement of financial position (asset, liability, and equity) accounts


are not closed.

Dividends are closed directly to the Retained Earnings account.

LO 7 Prepare closing entries.


7.
7. Closing
Closing Entries
Entries
Illustration 3-36

LO 7
7.
7. Closing
Closing
Entries
Entries
Illustration 3-37

LO 7
8.
8. Post-Closing
Post-Closing Trial
Trial Balance
Balance
Illustration 3-38

LO 7 Prepare closing entries.


9.
9. Reversing
Reversing Entries
Entries
After preparing the financial statements and
closing the books, a company may reverse
some of the adjusting entries before
recording the regular transactions of the next
period.

LO 7 Prepare closing entries.


Accounting
Accounting Cycle
Cycle Summarized
Summarized
1. Enter the transactions of the period in appropriate journals.
2. Post from the journals to the ledger (or ledgers).
3. Take an unadjusted trial balance (trial balance).
4. Prepare adjusting journal entries and post to the ledger(s).
5. Take a trial balance after adjusting (adjusted trial balance).
6. Prepare the financial statements from the second trial balance.
7. Prepare closing journal entries and post to the ledger(s).
8. Take a trial balance after closing (post-closing trial balance).
9. Prepare reversing entries (optional) and post to the ledger(s).
LO 7 Prepare closing entries.
Most companies use accrual-basis accounting
 recognize revenue when it is earned and
 expenses in the period incurred,
without regard to the time of receipt or payment of cash.
Under the strict cash basis, companies
 record revenue only when they receive cash, and
 record expenses only when they disperse cash.
Cash basis financial statements are not in conformity with IFRS.

LO 8 Differentiate the cash basis of accounting


Illustration: Quality Contractor signs an agreement to construct a
garage for $22,000. In January, Quality begins construction, incurs
costs of $18,000 on credit, and by the end of January delivers a
finished garage to the buyer. In February, Quality collects $22,000
cash from the customer. In March, Quality pays the $18,000 due the
Illustration 3A-1
creditors.

LO 8 Differentiate the cash basis of accounting


Illustration: Quality Contractor signs an agreement to construct a
garage for $22,000. In January, Quality begins construction, incurs
costs of $18,000 on credit, and by the end of January delivers a
finished garage to the buyer. In February, Quality collects $22,000
cash from the customer. In March, Quality pays the $18,000 due the
Illustration 3A-2
creditors.

LO 8 Differentiate the cash basis of accounting


End of Part I

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