Module 3 Exhibits and Key Terms. Table of Contents. 1 Principles of Accounting Adjustments for Financial Reporting

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Berenice Rice
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1 Table of Contents Exhibit 14: Cash basis and accrual basis of accounting compared... 2 Exhibit 15: Summary fiscal year ending by Month... 2 Exhibit 16: Two classes and four types of adjusting entries... 3 Exhibit 17: Trial balance... 3 MicroTrain Chart of Accounts... 4 List of New accounts... 5 Exhibit 18: Trial balance... 5 Key terms Principles of Accounting Adjustments for Financial Reporting

2 Exhibit 14: Cash basis and accrual basis of accounting compared Exhibit 14: Cash basis and accrual basis of accounting compared Cash Basis Accrual Basis Revenues are recognized As cash is received As earned (goods are delivered or services are performed) Expenses are recognized As cash is paid As incurred to produce revenues Exhibit 15: Summary fiscal year ending by Month January 30 February 9 March 16 April 8 May 18 June 49 July 8 August 14 September 42 October 17 November 13 Subtotal 224 December 376 Total Companies 600 Source:- American Institute of Certified Public Accountants Accounting Trends & Techniques (New York' AICPA, 2004) p39 2 Principles of Accounting Adjustments for Financial Reporting

3 Exhibit 16: Two classes and four types of adjusting entries Exhibit 17: Trial balance MICROTRAIN COMPANY Trial Balance 2010 December 31 Acct. No. Account Title Debits $ Credits $ 100 Cash 8, Accounts Receivable 5, Supplies on Hand 1, Prepaid Insurance 2, Prepaid Rent 1, Trucks 40, Accounts Payable Unearned Service Fees 4, Capital Stock 50, Dividends 3, Service Revenue 10, Advertising Expense Gas and Oil Expense Salaries Expense 3, Utilities Expense 150 Total 65,930 65,930 3 Principles of Accounting Adjustments for Financial Reporting

4 MicroTrain Chart of Accounts Acct. no Account Title Description Assets 100 Cash Bank deposits and cash on hand. 103 Accounts Receivable Amounts owed to the company by customers. 107 Supplies on Hand Items such as paper, envelopes, writing materials, and other materials used in performing training services for customers in doing administrative and clerical office work. 108 Prepaid Insurance Insurance policy premiums paid in advance of the periods which the insurance coverage applies. 112 Prepaid Rent Rent paid in advance of the periods for which the rent payment applies. 150 Trucks Trucks used to transport personnel and training supplies to clients' locations. Liabilities Stockholders' Equity & Dividends Revenues Expenses 200 Accounts Payable Amounts owed to creditors for items purchased from them. 216 Unearned Service Fees Amounts received from customers before the training services have been performed for them. 300 Capital Stock The stockholders' investment in the business. Retained 310 Earnings The earnings retained in the business. 320 Dividends The amount of dividends declared to stockholders. 400 Service Revenue Amounts earned by performing training services for customers. 505 Advertising Expense The cost of advertising incurred in the current period. 506 Gas and Oil Expense The cost of gas and oil used in trucks in the current period. 507 Salaries Expense The amount of salaries incurred in the current period. 511 Utilities Expense The cost of utilities incurred in the current period. 4 Principles of Accounting Adjustments for Financial Reporting

5 List of New accounts Type of Account Acct. No. Account Title Description Asset 121 Interest Receivable Accumulated The amount of interest earned but not yet received Contra asset* 151 Deprecation Trucks The total depreciation expense taken on trucks since the acquisition date. The balance of this account is deducted from that of Trucks on the balance sheet. Liability 206 Salaries Payable The amount of salaries earned by employees but not yet paid by the company Revenue 418 Interest Revenue The amount of interest earned in the current period. Expenses 512 Insurance Expense The cost of insurance incurred in the current period. 515 Rent Expense The cost of rent incurred in the current period. 518 Supplies Expense The cost of supplies used in the current period. 521 Depreciation Expense Trucks The portion of the cost of the trucks assigned to expense during the current period. Exhibit 18: Trial balance Year Dollar Amount of Net Income (millions) Percentage of 1991 Net Income % 2001 $1, , , , , , , , , , , Principles of Accounting Adjustments for Financial Reporting

6 Key terms Accounting period A time period normally of one month, one quarter, or one year into which an entity s life is arbitrarily divided for financial reporting purposes. Accounting year An accounting period of one year. The accounting year may or may not coincide with the calendar year. Accrual basis of accounting Recognizes revenues when sales are made or services are performed, regardless of when cash is received. Recognizes expenses as incurred, whether or not cash has been paid out. Accrued assets and liabilities Assets and liabilities that exist at the end of an accounting period but have not yet been recorded; they represent rights to receive, or obligations to make, payments that are not legally due at the balance sheet date. Examples are accrued fees receivable and salaries payable. Accrued items Adjusting entries relating to activity on which no data have been previously recorded in the accounts. Also, see accrued assets and liabilities. Accrued revenues and expenses Other names for accrued assets and liabilities. Accumulated depreciation account A contra asset account that shows the total of all depreciation recorded on the asset up through the balance sheet date. Adjusting entries Journal entries made at the end of an accounting period to bring about a proper matching of revenues and expenses; they reflect economic activity that has taken place but has not yet been recorded. Adjusting entries are made to bring the accounts to their proper balances before financial statements are prepared. Book value For depreciable assets, book value equals cost less accumulated depreciation. Calendar year The normal year, which ends on December 31. Cash basis of accounting Recognizes revenues when cash is received and recognizes expenses when cash is paid out. Contra asset account An account shown as a deduction from the asset to which it relates in the balance sheet; used to reduce the original cost of the asset down to its remaining undepreciated cost or book value. Deferred items Adjusting entries involving data previously recorded in the accounts. Data are transferred from asset and liability accounts to expense and revenue accounts. Examples are prepaid expenses, depreciation, and unearned revenues. Depreciable amount The difference between an asset s cost and its estimated residual value. Depreciable asset A manufactured asset such as a building, machine, vehicle, or equipment on which depreciation expense is recorded. Depreciation accounting The process of recording depreciation expense. Depreciation expense The amount of asset cost assigned as an expense to a particular time period. Depreciation formula (straight-line): Estimated residual value (scrap value) The amount that the company can probably sell the asset for at the end of its estimated useful life. Estimated useful life The estimated time periods that a company can make use of the asset. Fiscal year An accounting year of any 12 consecutive months that may or may not coincide with the calendar year. For example, a company may have an accounting, or fiscal, year that runs from April 1 of one year to March 31 of the next. Matching principle An accounting principle requiring that expenses incurred in producing revenues be deducted from the revenues they generated during the accounting period. Prepaid expense An asset awaiting assignment to expense. An example is prepaid insurance. Assets such as cash and accounts receivable are not prepaid expenses. Service potential The benefits that can be obtained from assets. The future services that assets can render make assets things of value to a business. Trend percentages Calculated by dividing the amount of an item for each year by the amount of that item for the base year. Unearned revenue Assets received from customers before services are performed for them. Since the revenue has not been earned, it is a liability, often called revenue received in advance or advances by customers. 6 Principles of Accounting Adjustments for Financial Reporting

4 Adjustments for financial reporting

4 Adjustments for financial reporting 4.1 Learning objectives Describe the basic characteristics of the cash basis and the accrual basis of accounting. Identify the reasons why adjusting entries must be