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finance

Recording business transactions. Accounting

1.

Ho rn gren ’s
Ac co u ntin g
Lecture Six
Lisa, Li
1

Review
• Define and apply Revenue recognition and matching principle
• Record transactions into journals
• and post journal entries to the Ledger Accounts
• Prepare a trial balance
• Discover errors in recording transactions and correct them.
Accounting
2

3.

Homework: recording business transactions
1. April 1, Abdul(owner) starts business as a
trader by paying $10,000 into bank account.
7. April 10, Abdul buys another motor vehicle for
the business and pay $4,000.
2. April 2, Abdul buys a motor vehicle for the
business, and pay$2,000.
8. April 11, Tania lends the business
$5,000,Abdul put the money into the bank
account.
3. April 3,Abdul buy goods which he will re-sell in
9. April 12, Abdul pays rent on a warehouse by
the normal course of trade for $3,000.
cheque, $1,000.
4. April 4, Abdul sells a quantity of the goods for
10. April 14, Abdul subsets part of the
$800,and pay the money into the bank.
warehouse and receives a cheque for $300 for
5. April 7, a customer returns some goods and
the rent .this is paid into the bank.
receives a refund of $40.
11. April 15, Abdul pays wages by cheque,$1,200.
6. April 8, Abdul return some goods costing $100
to a supplier and receives a refund.
Identifying 11 transactions and Classifying different accounts
Recording the transaction into journals
Posting into the Ledger accounts
Accounting
3

4.

Homework: recording business transactions
Accounting
4
4

5.

Solutions: recording business transactions
Accounting
5

6.

Solutions: recording business transactions
Accounting
6

7.

Multiple Choices
2mins
The posting of purchase of office supplies on account for
$1,500 will be shown as:
Office Supplies
1,500
A
Cash
1,500
B
Office Supplies
1,500
Accounts Payable
1,500
C
Office Supplies
1,500
Accounts Receivable
1,500
D
Office Supplies
1,500
Accounts Payable
1,500
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8.

Multiple Choices
2mins
The detailed record of all increases and decreases that
have occurred in an individual asset, liability, or equity
during a specific period is called a(n):
A. balance sheet.
B. journal.
C. account.
D. trial balance.
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9.

Multiple Choices
2mins
8. Kevin Copies recorded a cash collection on account by
debiting Cash and crediting Accounts Payable. How will
this error affect the trial balance?
A. Assets will be understated
B. Liabilities will be overstated
C. Profits will be overstated
D. Equity will be understated
© 2015 Pearson Education, Limited.

10.

Learning Objectives – Chapter 3
1.
2.
3.
4.
5.
6.
Cash Basis vs Accrual Basis Accounting
Apply the time period concept, revenue recognition, and matching principles
Explain the purpose of and journalize and post adjusting entries
Prepare an adjusted trial balance
Identify the impact of adjusting entries on the financial statements
use a worksheet to prepare the adjusted trial balance
Accounting
10

11.

Learning Objective 1
Differentiate between cash
basis accounting and accrual
basis accounting
11

12.

What is the Difference between Cash Basis
Accounting & Accrual Basis Accounting?
CASH BASIS
ACCRUAL BASIS
• Revenue is recorded when Cash • Revenue is recorded when it is
is received
earned
• Expenses are recorded when
• Expenses are recorded when
Cash is paid
incurred
• Not allowed under GAAP
• Generally used by larger
businesses
An Accrual Basis approach recognizes that the recognition of revenues
and expenses should not be affected by the timing of cash collections
and disbursements. Rather revenues and expenses should be recognized
when the underlying economic activities actually take place.

13.

Learning Objective 2
Define and apply the time
period concept, revenue
recognition, and matching
principles
13

14.

Review The Time Period Concept
• Assumes that a business’s activities can be sliced
into small
OCTOBER 2012
segments and that
Su Mo Tu We Th Fr Sa
financial statements
1
2
3
4
5
6
can be prepared for
7
8
9 10 11 12 13
14 15 16 17 18 19 20
specific time periods,
21 22 23 24 25 26 27
such as a month,
28 29 30 31
quarter, or year.
• Any twelve month period is referred to as a fiscal
year.
Accounting
14

15.

Review Revenue Recognition Principle
Revenue should be
recorded when it is
EARNED.
A good has been
delivered or a
service has been
performed.
The amount of
revenues must
represent the
actually selling
price.
The earnings
process is
complete.
(warehouse?)
Accounting
If a $200 item is
discounted to
$100, then the
revenue is $100.
15

16.

Review The Matching Principle
• All expenses are recorded when they
Eg. Cash sales of $1,000, and
are incurred during the period
suppose these good sold by
• Expenses are matched against the
the company cost $700.
revenues for that period.
Accounting
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17.

Learning Objective 3
Explain the purpose of and
journalize and post
adjusting entries
17

18.

Part of the Accounting Process
Start with
beginning
account balances
Analyze &
journalize
transactions
Post journal
entries to ledger
accounts
Prepare the
worksheet
(optional)
4-18
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Prepare
unadjusted
trial balance
Journalize and
post adjusting
entries

19.

Smart Touch Learning
Trial Balance
December 31, 2014
Debit
Cash
$
Accounts Receivable
Credit
The initial trial balance that
comes from the General
Ledger is referred to as an
Unadjusted Trial Balance.
12,200
1,000
Office Supplies
500
Prepaid Rent
3,000
Furniture
18,000
Building
60,000
Land
20,000
Accounts Payable
200
Utilities Payable
100
Unearned Revenue
600
Notes Payable
60,000
Bright, Capital
48,000
Bright, Withdrawals
5,000
-
Service Revenue
16,500
Rent Expense
2,000
Salaries Expense
3,600
Utilities Expense
100
$
3-19
125,400
$
125,400
Because of the Time Period
Concept, Revenue
Recognition Principle, and
Matching Principle some
adjustments are needed.

20.

Smart Touch Learning
Trial Balance
December 31, 2014
Debit
Cash
$
Accounts Receivable
Credit
For example, the Office
Supplies account shows
$500 at the end of
December.
12,200
1,000
Office Supplies
500
Prepaid Rent
3,000
Furniture
18,000
Building
60,000
Land
20,000
Accounts Payable
200
Utilities Payable
100
Unearned Revenue
600
Notes Payable
60,000
Bright, Capital
48,000
Bright, Withdrawals
5,000
-
Service Revenue
16,500
Rent Expense
2,000
Salaries Expense
3,600
Utilities Expense
100
$
3-20
125,400
$
If a count of the actual
supplies on hand shows
that some supplies have
been used, we will need to
adjust the account.
125,400
Accounting

21.

Adjusting Journal Entries
• Each Adjusting Journal Entry will adjust a
balance sheet account and an income
statement account.
P162-163
Date
Accounts and Explanation
Dec. 31 Supplies Expense
Office Supplies
To record office supplies used.
Debit
400
Credit
400

22.

Adjusting Entry
An adjusting entry is the entry made at the end of accounting
period that is used to record revenues to the period in which they
are earned and expenses to the period in which they occur.
Adjusting entry also update the asset and liability accounts.
Adjustments
Paid (or received) cash before
expense (or revenue) recognized
Prepaid (Deferred)
expenses*
Unearned
(Deferred) revenues
*including depreciation
Paid (or received) cash after
expense (or revenue) recognized
Accrued
expense
Accounting
Accrued
revenues
22

23.

Journalizing and Posting
Accounting
23

24.

Prepaid Rent Example
In Transaction #10 (see Chapter 2), on December 1, Smart Touch
Learning prepaid 3 months rent of $3,000 ($1,000 x 3 months). Paying
rent in advance gives us the right to use the property for 3 months (in
this case). By the end of December, 1/3 of that right has been used.
Date
Accounts and Explanation
Dec. 1 Prepaid Rent
Cash
Paid rent in advance.
Prepaid Rent
Dec. 1
3-24
3,000
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Debit
3,000
Credit
3,000

25.

Prepaid Rent Example
To adjust the Prepaid Rent account, we need to
reduce it by 1/3, and we need to show the rent
expense related to the December revenues.
Date
Accounts and Explanation
Dec. 31 Rent Expense
Prepaid Rent
To record rent expense.
Debit
1,000
Prepaid Rent
Dec. 1
3-25
3,000
1,000 Dec. 31
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Credit
1,000

26.

27.

Prepaid Insurance
On 12/1/2019, FastForward paid $2,400 for insurance
for 2-years (24-months, December 2019 through
November 2021). FastForward recorded the expenditure
as Prepaid Insurance on 12/31/2019.
What adjustment is required?
Dec. 31 Insurance Expense
Prepaid Insurance
100
100
To record first month's expired insurance
Prepaid Insurance
Dec. 1
2,400 Dec. 31
Bal.
2,300
637
100
Insurance Expense
Dec. 31
100
Accounting
128
27

28.

Depreciation (plant Assets)
• plant assets are long-lived, tangible assets used in the
operation of a business. As a business uses these assets,
their value and usefulness decline.
• Plant Assets need to depreciates, such as buildings
equipment, furniture, and automobiles. The contra asset
account used is Accumulated Depreciation—(asset’s name)
• Land has an infinite life; Under Generally Accepted
Accounting Principles, we never depreciate Land. (p163)
Plant assets, with the exception of land, are depreciated
over their useful lives.
Accounting
28

29.

Depreciation(plant Assets)
• Depreciation is usually defined as
the periodic, systematic allocation
of the cost of a long-lived tangible
asset to expense over its
estimated useful life.
• The accounts used are:
• Depreciation Expense(E)-I/S
• Accumulated Depreciation
(-A, contra-asset account )-B/S
3-29
Accumulated
Depreciation is a
contra-asset.
- Has a credit balance
- Appears in the Asset
section of the Balance
Sheet
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30.

Depreciation (plant Assets)
Depreciation is the process of allocating the cost of a plant
asset over its useful life in a systematic and rational
manner.
Straight-line Method: a depreciation method that allocates
an equal amount of depreciation each year.
Straight-Line
Depreciation
Expense
Asset Cost - Residual Value
=
Useful Life
Residual Value (salvage value) is the amount we expect to
receive for the asset when we dispose of it at the end of
its useful life.
Accounting
30

31.

Depreciation Example
Assume that, on December 2, Smart Touch Learning
received a contribution of furniture with a market value
of $18,000 from Sheena Bright.
Date
Accounts and Explanation
Dec. 2 Furniture
Bright, Capital
Owner contribution of furniture.
Debit
18,000
Credit
18,000
At the end of December, Smart Touch Learning will
need to record depreciation for the use of the
furniture, assuming it has a 5 year useful life.
3-31
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32.

Depreciation Example
Using the straight-line method of computing
depreciation, Smart Touch Learning will need to record
$300 of depreciation for December.
Straight-Line Depreciation = ( Cost
- Residual Value ) ÷ Useful Life
= ( $18,000 $0
) ÷ 5 Years
=
$3,600 per year
Monthly Amount =
=
3-32
$3,600 ÷
$300
12 months
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33.

Depreciation Example
Recording the entry requires the use of two accounts:
Depreciation Expense and Accumulated Depreciation.
Date
Accounts and Explanation
Dec. 31 Depreciation Expense—Furniture
Accumulated Depreciation—Furniture
To record depreciation on furniture.
3-33
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Debit
300
Credit
300

34.

Prepaids: common Prepaid Expenses
Prepaid
Insurance
Office supplies
used
Prepaid
rent
Depreciation
(plant Assets)

35.

NetSolutions estimates the depreciation on its
office equipment to be $50 for the month of
December.
16
17 Dec. 31 Depreciation Expense
18
19
53
50 00
Accumulated Depreciation—
19
Office Equipment
Accumulated Depreciation—
Office Equipment
19
Dec. 31
50
50 00
Depreciation Expense 53
Dec. 31
50
Accounting
35

36.

NetSolutions’ balance sheet
would show the office
equipment at cost, less the
accumulated depreciation.
Office equipment
Less accumulated
depreciation
$1,800
50 $1,750
Book
value
Accounting
36

37.

Multiple Choices
2mins
Fitness First has a new client who prepays $600 for a package
of six training sessions. Fitness First had provided four training
sessions as of year end. Which of the following amounts
should Fitness First report on its income statement?
A. Service Revenue of $400
B. Service Revenue of $600
C. Unearned service revenue of $400
D. Unearned service revenue of $600
© 2015 Pearson Education, Limited.

38.

Try it Question
• Journalizing and posting the adjusting entries of Smart Touch
Learning.
a. Prepaid rent expired, $1000
b. Supplies used, $400
c. Depreciation on furniture, $300
d. on July 1, purchased a building with $180,000. At the end of
December, record depreciation for the use of the building,
assuming it has a 60 years useful life, and no residual value at the
end of its life…
Accounting
38

39.

Answers
a. Prepaid rent expired, $1,000
Date
b. Dec. 31
Accounts and Explanation
Debit
Credit
1,000
Rent Expense
1,000
Prepaid Rent
To record rent expense.
Prepaid Rent
Rent Expense
a.
Prepaid rent 1,000
Bal.
1,200
Rent exp 1,000
3-39
a.

40.

Answers
b. Supplies used, $400
Date
Dec. 31
Accounts and Explanation
Debit
400
Supplies Expense
400
Office Supplies
To record office supplies used.
Supplies Expense
Office Supplies
Bal.
4,000
Supplies exp 400 b.
Credit
b.
Office supplies 400
3-40

41.

Answers
c. Depreciation on furniture, $300
Date
c. Dec. 31
Accounts and Explanation
Debit
Credit
300
Depreciation Expense—Furniture
300
Accumulated Depreciation—Furniture
To record depreciation on furniture.
Depreciation Expense—Furniture
c.
Accumulated depreciation
300
Accumulated Depreciation—Furniture
14,000
Bal.
depreciation Exp 300
c.
3-41

42.

Answers
d. On July 1, purchased a building with $180,000. At the end of this year,
record depreciation for the use of the building, assuming it has a 60
years useful life, and no residual value at the end of its life…
Straight-Line Depreciation = ( Cost - Residual Value ) ÷Useful Life
= ( $180,000 - $0 ) ÷ 60 Years = 3,000
this year depreciation exp = 3,000 ÷ 6/12 = 1,500
Date
c. Dec. 31
Accounts and Explanation
Debit
Credit
1500
Depreciation Expense—building
1500
Accumulated Depreciation—building
To record depreciation on building.
Depreciation Expense—Furniture
c.
1500
Depreciation Expense—Furniture
0
Bal.
1,500
c.

43.

Prepaid Expenses(A) or Expense ?
1. Other prepaid expenses, such as Prepaid Rent, are
accounted for exactly as Insurance and Supplies.
2. We should note that some prepaid expenses are both
paid for and fully used up within a single period.
3. For example, a company may pay monthly rent on the
first day of each month. This payment creates a prepaid
expense on the first day of the month that fully expires
by the end of the month.
4. In these special cases, we can record the cash paid with
a debit to the expense account instead of an asset
account.
Accounting
43

44.

Unearned Revenue Example
On December 21, a law firm engages Smart Touch
Learning to provide e-learning services for the next
30 days, paying $600 in advance.
Date
Accounts and Explanation
Dec. 21 Cash
Unearned Revenue
Collected cash for future services.
Debit
600
600
Unearned Revenue
600
3-44
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Credit
Dec. 21

45.

Unearned Revenue Example
Smart Touch Learning is obligated to perform the
services. During the last 10 days of the month, 1/3 of
the services are performed.
Date
Accounts and Explanation
Dec. 31 Unearned Revenue
Service Revenue
To record service revenue earned
that was collected in advance.
Debit
200
200
Unearned Revenue
Dec. 31
3-45
200
600
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Credit
Dec. 21

46.

47.

Unearned Revenues
On December 26, 2009, FastForward agrees to provide
consulting services to a client for a fixed fee of $3,000
for 60 days. On this date, the client pays the entire
consulting fee in advance. FastForward makes the
following entry:
Dr.
3,000
Dec. 26 Cash
Unearned Revenue
Cr.
3,000
Consulting fees received in advance
Unearned Revenue
Dec. 26 3,000
Accounting
47

48.

Unearned Revenues
On December 31, earns some of the 5-days of consulting fees.
Each day that passes results in consulting fees of $50
($3,000 ÷ 60).
Dec. 31 Unearned Revenue
Consulting Revenue
Dr.
250
Cr.
250
To recognize 5-days of consulting fees.
Unearned Revenue
Dec 31
250 Dec 26
3,000
Bal
2,750
Accounting
Consulting Revenue
Dec. 31
250
48