Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Review of the Accounting Process 2 Insert Book Cover Picture 2-2 The Basic Model Economic events cause changes in the financial position of a company. External events involve an exchange between the company and another entity. Internal events do not involve an exchange transaction but do affect the company’s financial position. 2-3 Learning Objectives Analyze routine economic events— transactions—and record their effects on a company’s financial position using the accounting equation format. 2-4 The Accounting Equation A = L + OE - Owner Withdrawals+ Owner Investments - Expenses - Losses + Revenue + Gains 2-5 Accounting Equation for a Corporation A = L + SE + Retained Earnings+ Paid-in Capital - Expenses - Losses + Revenues + Gains - Dividends 2-6 Account Relationships Debits and credits affect the Balance Sheet Model as follows: Debits and credits affect the Balance Sheet Model as follows: A = L + PIC + RE Assets Dr. + Cr. - Liabilities Dr. - Cr. + Paid-in Capital Dr. - Cr. + Retained Earnings Dr. - Cr. + Revenues and Gains Dr. - Cr. + Expenses and Losses Dr. + Cr. - 2-7 Account Relationships A = L + PIC + RE + R + G- E - L Permanent accounts represent the basic financial position elements of the accounting equation. Temporary accounts keep track of the changes in the retained earnings component of shareholders’ equity. Debits and credits affect the Balance Sheet Model as follows: Debits and credits affect the Balance Sheet Model as follows: 2-8 Source documents Record in Journal Financial Statements Transaction Analysis Post to Ledger Unadjusted Trial Balance Record & Post Adjusting Entries Adjusted Trial Balance Close Temporary Accounts Post-Closing Trial Balance The Accounting Processing Cycle 2-9 Learning Objectives Record transactions using the general journal format. 2-10 Accounting Processing Cycle On January 1, 2007, $40,000 was borrowed from a bank and a note payable was signed. Prepare the journal entry. Two accounts are affected:  Cash (an asset) increases by $40,000.  Notes Payable (a liability) increases by $40,000. Account numbers are references for posting to the General Ledger. [...]... ledger account  2-1 4 Posting Journal Entries 1 2-1 5 Posting Journal Entries 2 3 2-1 6 Posting Journal Entries 4 5 2-1 7 Posting Journal Entries 6 2-1 8 Posting Journal Entries Post the credit portion of the entry to the Common Stock ledger Post the credit portion of the entry to the Common Stock ledger account account 1 2-1 9 Posting Journal Entries 2 3 2-2 0 Posting Journal Entries 4 5 2-2 1 Posting Journal... 2-1 1 General Ledger The “T” account is a shorthand used by accountants to analyze transactions It is not part of the bookkeeping system  2-1 2 Learning Objectives Post the effects of journal entries to T-accounts and prepare an unadjusted trial balance  2-1 3 Posting Journal Entries On July 1, 2006, the owners invest $60,000 in... benefits 2-2 8 Prepaid Expenses Assume that on July 31, 2006, Dress Right determines that at the end of July $1,200 of supplies remains Let’s look at the adjusting journal entry needed on July 31, 2006 Prepare the adjusting entry $2,000 - $1,200 = $800 supplies used 2-2 9 Prepaid Expenses After posting, the accounts look like this: Beg bal Bal Supplies 2,000 800 1,200 Supplies Expense Beg bal 800 Bal 800 2-3 0... their expected useful lives Straight-Line Depreciation Expense Asset Cost - Salvage Value = Useful Life 2-3 1 Depreciation Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance Assume the following: Asset Cost $ 12,000 Salvage Value Useful Life 60 months Let’s calculate the depreciation expense for the month ended July 31, 2006  2-3 2 Depreciation Recall the Furniture... months 2006 Depreciation Expense $12,000 - $0 = = $200 60 months Now, prepare the adjusting entry for July 31, 2006  2-3 3 Depreciation GENERAL JOURNAL Date Description July 31 Depreciation Expense Accumulated Depr Furniture & Fixtures To record depreci a ti on Page 2 PR Debit Credit 200 200 Contra Asset Let’s see how the accounts would look after posting! 2-3 4 Depreciation After posting, the accounts... for the period, Dress Right’s Trial Balance would be as follows: Right’s Trial Balance would be as follows: 2-2 2 A Trial A Trial Balance is a Balance is a listing of all listing of all accounts accounts and their and their balances at balances at a point in a point in time time Debits = Credits 2-2 3 Additional Consideration Perpetual Inventory System Discussed in more depth in Chapters 8 & 9 Periodic... continually updated to reflect sales Cost of goods sold and inventory are adjusted at period end  2-2 4 Adjusting Entries At the end of the period, some transactions or events remain unrecorded Because of this, several accounts in the ledger need adjustments before their balances appear in the financial statements  2-2 5 Learning Objectives Identify and describe the different types of adjusting journal entries... journal format, and prepare an adjusted trial balance  2-2 6 A d ju s tin g E n tr ie s P r e p a y m e n ts (D e fe r r a ls ) A c c r u a ls Transactions where cash is paid or received before a related expense or revenue is recognized Transactions where cash is paid or received after a related expense or revenue is recognized E s tim a te s 2-2 7 Prepaid Expenses Expense Asset Unadjusted Balance Credit... Depreciation Expense Beg bal 200 Bal 200 Accumulated Depreciation Beg bal 200 200 Bal  2-3 5 Unearned Revenues Liability Debit Adjustment Unadjusted Balance Buy your season tickets for all home basketball games NOW! “Go Big Blue” Revenue Credit Adjustment Unearned Revenue Cash received in advance of performing services 2-3 6 Unearned Revenues For Dress Right Corporation, the only unearned revenue in the . equation format. 2-4 The Accounting Equation A = L + OE - Owner Withdrawals+ Owner Investments - Expenses - Losses + Revenue + Gains 2-5 Accounting Equation. RE Assets Dr. + Cr. - Liabilities Dr. - Cr. + Paid-in Capital Dr. - Cr. + Retained Earnings Dr. - Cr. + Revenues and Gains Dr. - Cr. + Expenses and Losses Dr. + Cr. - 2-7 Account