473428854-Kieso-Intermediate-Ch03-IFRS-ppt.ppt

Accounting

1. Slide
3-1

2. Slide
3-2
C H A P T E R C H A P T E R 33
THE ACCOUNTING THE ACCOUNTING
INFORMATION SYSTEMINFORMATION SYSTEM
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

3. Slide
3-3
1.Understand basic accounting terminology.
2.Explain double-entry rules.
3.Identify steps in the accounting cycle.
4.Record transactions in journals, post to ledger accounts,
and prepare a trial balance.
5.Explain the reasons for preparing adjusting entries.
6.Prepare financial statement from the adjusted trial balance.
7.Prepare closing entries.
Learning ObjectivesLearning Objectives

4. Slide
3-4
Identifying and recordingIdentifying and recording
JournalizingJournalizing
PostingPosting
Trial balanceTrial balance
Adjusting entriesAdjusting entries
Adjusted trial balanceAdjusted trial balance
Preparing financial Preparing financial
statementsstatements
ClosingClosing
Post-closing trial balancePost-closing trial balance
Reversing entriesReversing entries
SummarySummary
Accounting Accounting
Information SystemInformation System
The Accounting The Accounting
CycleCycle
Financial Financial
Statements For Statements For
MerchandisersMerchandisers
Basic terminologyBasic terminology
Debits and creditsDebits and credits
Accounting equationAccounting equation
Financial statements Financial statements
and ownership and ownership
structurestructure
Income statementIncome statement
Statement of retained Statement of retained
earningsearnings
Statement of financial Statement of financial
positionposition
Closing entriesClosing entries
The Accounting Information SystemThe Accounting Information System

5. Slide
3-5
Collects and processes transaction data.
Disseminates the information to interested parties.
Accounting Information SystemAccounting Information System
Accounting Information System (AIS)

6. Slide
3-6
How much and what kind of debt is outstanding?
Were sales higher this period than last?
What assets do we have?
What were our cash inflows and outflows?
Did we make a profit last period?
Are any of our product lines or divisions operating at a loss?
Can we safely increase our dividends to shareholders?
Is our rate of return on net assets increasing?
Accounting Information SystemAccounting Information System
Helps management answer such questions as:

7. Slide
3-7
Basic TerminologyBasic Terminology
LO 1 Understand basic accounting terminology.LO 1 Understand basic accounting terminology.
Event
Transaction
Account
Real Account
Nominal Account
Ledger
Journal
Posting
Trial Balance
Adjusting Entries
Financial Statements
Closing Entries

8. Slide
3-8
Debits and CreditsDebits and Credits
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
An AccountAccount shows the effect of transactions on a
given asset, liability, equity, revenue, or expense
account.
Double-entry Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account and
crediting another.
DEBITS must equalmust equal CREDITS.

9. Slide
3-9
Account Name
Debit / Dr. Credit / Cr.
Debits and CreditsDebits and Credits
An arrangement that shows the
effect of transactions on an
account.
Debit = “Left”
Credit = “Right”
AccountAccount
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
An Account can An Account can
be illustrated in a be illustrated in a
T-Account form.T-Account form.

10. Slide
3-10
Account Name
Debit / Dr. Credit / Cr.
Debits and CreditsDebits and Credits
If Debit entries are greater thangreater than Credit entries, the
account will have a debit balance.
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
$10,000 Transaction #2$3,000
$15,000$15,000
8,000Transaction #3
Balance
Transaction #1

11. Slide
3-11
Account Name
Debit / Dr. Credit / Cr.
Debits and CreditsDebits and Credits
If Credit entries are greater thangreater than Debit entries, the
account will have a credit balance.
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
$10,000 Transaction #2$3,000
$1,000$1,000
8,000 Transaction #3
Balance
Transaction #1

12. Slide
3-12
Chapter
3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter
3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
EquityEquity
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Normal
Balance
Credit
Normal
Balance
Debit
Debits and Credits SummaryDebits and Credits Summary
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.

13. Slide
3-13
Statement of Financial PositionStatement of Financial Position Income StatementIncome Statement
= + =-Asset LiabilityEquityRevenueExpense
Debit
Credit
Debits and Credits SummaryDebits and Credits Summary
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.

14. Slide
3-14
The Accounting EquationThe Accounting Equation
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
Relationship among the assets, liabilities and equity of a Relationship among the assets, liabilities and equity of a
business: business:
The equation must be in balance after every transaction. The equation must be in balance after every transaction.
For every For every DebitDebit there must be a there must be a CreditCredit..
Illustration 3-3

15. Slide
3-15
Double-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities EquityEquity= +
1.1.Owners invest $40,000 in exchange for share capitalOwners invest $40,000 in exchange for share capital
+ 40,000 + 40,000
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.

16. Slide
3-16
AssetsAssets LiabilitiesLiabilities= +
2. 2. Disburse $600 cash for secretarial wages.Disburse $600 cash for secretarial wages.
- 600 - 600
(expense)
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
Double-Entry System IllustrationDouble-Entry System Illustration
EquityEquity

17. Slide
3-17
Double-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
3.3.Purchase office equipment priced at $5,200, giving a Purchase office equipment priced at $5,200, giving a
10 percent promissory note in exchange.10 percent promissory note in exchange.
+ 5,200 + 5,200
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
EquityEquity

18. Slide
3-18
Double-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
4. 4. Received $4,000 cash for services rendered.Received $4,000 cash for services rendered.
+ 4,000 + 4,000
(revenue)
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
EquityEquity

19. Slide
3-19
Double-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
5. 5. Pay off a short-term liability of $7,000.Pay off a short-term liability of $7,000.
- 7,000 - 7,000
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
EquityEquity

20. Slide
3-20
AssetsAssets LiabilitiesLiabilities= +
6. 6. Declared a cash dividend of $5,000.Declared a cash dividend of $5,000.
+ 5,000 - 5,000
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
Double-Entry System IllustrationDouble-Entry System Illustration
EquityEquity

21. Slide
3-21
Double-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
7. 7. Convert a long-term liability of $80,000 into ordinary Convert a long-term liability of $80,000 into ordinary
shares.shares.
- 80,000 + 80,000
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
EquityEquity

22. Slide
3-22
Double-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
8. 8. Pay cash of $16,000 for a delivery van.Pay cash of $16,000 for a delivery van.
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
- 16,000
+ 16,000
Note that the accounting equation equality is
maintained after recording each transaction.
EquityEquity

23. Slide
3-23
Ownership structure dictates the types of accounts that
are part of the equity section.
Proprietorship or Proprietorship or
Partnership Partnership
CorporationCorporation
Share capital
Share premium
Dividends
Retained Earnings
Financial Statements and Ownership StructureFinancial Statements and Ownership Structure
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
Capital account
Drawing account

24. Slide
3-24
Financial Statements and Ownership StructureFinancial Statements and Ownership Structure
LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.
Equity
Statement of Financial Position
Retained Earnings Statement
Net income or Net loss
(Revenues less expenses)(Revenues less expenses)
Income StatementIncome Statement
Dividends
Retained Earnings Retained Earnings
(Net income retained in business)(Net income retained in business)
Share Capital Share Capital
(Investment by shareholders)(Investment by shareholders)
Illustration 3-4

25. Slide
3-25
The Accounting CycleThe Accounting Cycle
LO 3 Identify steps in the accounting cycle.LO 3 Identify steps in the accounting cycle.
Transactions
1. Journalization
6. Financial Statements
7. Closing entries
8. Post-closing trial balance
9. Reversing entries
3. Trial balance
2. Posting
5. Adjusted trial balance
4. Adjustments
Work
Sheet
Illustration 3-6

26. Slide
3-26
Identify and Recording TransactionsIdentify and Recording Transactions
What to Record?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.LO 3 Identify steps in the accounting cycle.

27. Slide
3-27
General JournalGeneral Journal – a chronological record of transactions.
Journal Entries are recorded in the journal.
1. Journalizing1. Journalizing
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
September 1: Shareholders invested $15,000 cash in the
corporation in exchange for ordinary shares.
Illustration 3-7

28. Slide
3-28
Posting Posting – the process of transferring amounts from the journal
to the ledger accounts.
2. Posting2. Posting
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-7
Illustration 3-8

29. Slide
3-29
Posting Posting – Transferring amounts from journal to ledger.
2. Posting2. Posting
LO 4 LO 4
Illustration 3-8

30. Slide
3-30
Expanded ExampleExpanded Example
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
2. Posting2. Posting
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.

31. Slide
3-31
1. October 1: Shareholders invest $100,000 cash in an
advertising venture to be known as Pioneer Advertising
Agency Inc.
Share capital - ordinary 100,000
Cash 100,000Oct. 1
Debit Credit
Cash
100,000100,000 100,000100,000
Debit Credit
Share Capital - Ordinary
2. Posting2. Posting
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-9

32. Slide
3-32
2. October 1: Pioneer Advertising purchases office equipment
costing $50,000 by signing a 3-month, 12%, $50,000 note
payable.
Notes payable 50,000
Office equipment 50,000Oct. 1
Debit Credit
Office Equipment
50,00050,000 50,00050,000
Debit Credit
Notes Payable
2. Posting2. Posting
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-10

33. Slide
3-33
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.
Unearned service revenue 12,000
Cash 12,000Oct. 2
Debit Credit
Cash
100,000100,000 12,00012,000
Debit Credit
Unearned Service Revenue
2. Posting2. Posting
12,00012,000
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-11

34. Slide
3-34
4. October 3: Pioneer Advertising pays $9,000 office rent, in
cash, for October.
Cash 9,000
Rent expense 9,000Oct. 3
Debit Credit
Cash
100,000100,000 9,0009,000
Debit Credit
Rent Expense
2. Posting2. Posting
12,00012,000
9,0009,000
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-12

35. Slide
3-35
5. October 4: Pioneer Advertising pays $6,000 for a one-year
insurance policy that will expire next year on September 30.
Cash 6,000
Prepaid insurance 6,000Oct. 4
Debit Credit
Cash
100,000100,000 6,0006,000
Debit Credit
Prepaid Insurance
2. Posting2. Posting
12,00012,000
9,0009,000
6,0006,000
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-13

36. Slide
3-36
6. October 5: Pioneer Advertising purchases, for $25,000 on
account, an estimated 3-month supply of advertising
materials from Aero Supply.
Accounts payable 25,000
Advertising supplies 25,000Oct. 5
Debit Credit
Advertising Supplies
25,00025,000 25,00025,000
Debit Credit
Accounts Payable
2. Posting2. Posting
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-14

37. Slide
3-37
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 papers
containing the flyers.
2. Posting2. Posting
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-15

38. Slide
3-38
8. October 20: Pioneer Advertising’s board of directors
declares and pays a $5,000 cash dividend to shareholders.
Cash 5,000
Dividends 5,000Oct. 20
Debit Credit
Cash
100,000100,000 5,0005,000
Debit Credit
Dividends
2. Posting2. Posting
12,00012,000
9,0009,000
6,0006,000
5,0005,000
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-16

39. Slide
3-39
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.
Cash 40,000
Salaries expense 40,000Oct. 26
Debit Credit
Cash
100,000100,000 40,00040,000
Debit Credit
Salaries Expense
2. Posting2. Posting
12,00012,000
9,0009,000
6,0006,000
5,0005,000
40,00040,000
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-17

40. Slide
3-40
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.
Accounts receivable 72,000
Cash 28,000Oct. 31
Debit Credit
Cash
100,000100,000 72,00072,000
DebitCredit
Accounts Receivable
2. Posting2. Posting
12,00012,000
9,0009,000
6,0006,000
5,0005,000
40,00040,000
Service revenue 100,000
100,000100,000
DebitCredit
Service Revenue
28,00028,000
80,00080,000
Illustration 3-18

41. Slide
3-41
Trial BalanceTrial Balance –
A list of each
account and its
balance; used
to prove
equality of debit
and credit
balances.
3. Trial Balance3. Trial Balance
LO 4 LO 4 Record transactions in journals, post to Record transactions in journals, post to
ledger accounts, and prepare a trial balance.ledger accounts, and prepare a trial balance.
Illustration 3-19

42. Slide
3-42
4. Adjusting Entries4. Adjusting Entries
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.
Makes it possible to:Makes it possible to:
Report on the statement of financial position the Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement appropriate assets, liabilities, and equity at the statement
date. date.
Report on the income statement the proper revenues and Report on the income statement the proper revenues and
expenses for the period.expenses for the period.
Revenues Revenues are recorded in the period in which they are are recorded in the period in which they are
earnedearned.
Expenses Expenses are recognized in the period in which they are are recognized in the period in which they are
incurredincurred.

43. Slide
3-43
Types of Adjusting EntriesTypes of Adjusting Entries
1.Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.
Deferrals
3. Accrued Revenues.
Revenues earned but not
yet received in cash or
recorded.
4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or
recorded.
2. Unearned Revenues.
Revenues received in cash
and recorded as liabilities
before they are earned.
Accruals
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.
Illustration 3-20

44. Slide
3-44
Deferrals are
either
prepaid
expenses
or
unearned
revenues.
Adjusting Entries for DeferralsAdjusting Entries for Deferrals
Illustration 3-21
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

45. Slide
3-45
Payment of cash that is recorded as an asset because Payment of cash that is recorded as an asset because
service or benefit will be received in the future.service or benefit will be received in the future.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
insuranceinsurance
suppliessupplies
advertisingadvertising
Cash Payment Expense RecordedBEFORE
rentrent
purchasing buildings and purchasing buildings and
equipmentequipment
Prepayments often occur in regard to:Prepayments often occur in regard to:
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

46. Slide
3-46
Supplies.Supplies. Pioneer purchased advertising supplies costing
$25,000 on October 5. Prepare the journal entry to record the
purchase of the supplies.
Cash 25,000
Advertising supplies 25,000Oct. 5
Debit Credit
Advertising Supplies
25,00025,000 25,00025,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

47. Slide
3-47
Supplies. An inventory count at the close of business on
October 31 reveals that $10,000 of the advertising supplies are
still on hand.
Advertising supplies 15,000
Advertising supplies expense15,000Oct. 31
Debit Credit
Advertising Supplies
25,00025,000 15,00015,000
Debit Credit
Advertising Supplies
Expense
15,00015,000
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
10,00010,000
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

48. Slide
3-48
Statement
Presentation:
Advertising
supplies identifies
that portion of the
asset’s cost that
will provide future
economic benefit.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
Illustration 3-35
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

49. Slide
3-49
Statement
Presentation:
Advertising
expense identifies
that portion of the
asset’s cost that
expired in
October.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
Illustration 3-34
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

50. Slide
3-50
Insurance. On Oct. 4
th
, Pioneer paid $6,000 for a one-year fire
insurance policy, beginning October 1. Show the entry to
record the purchase of the insurance.
Cash 6,000
Prepaid insurance 6,000Oct. 4
Debit Credit
Prepaid Insurance
6,0006,000 6,0006,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

51. Slide
3-51
Insurance. An analysis of the policy reveals that $500 ($6,000 /
12) of insurance expires each month. Thus, Pioneer makes the
following adjusting entry.
Prepaid insurance 500
Insurance expense 500Oct. 31
Debit Credit
Prepaid Insurance
6,0006,000 500500
Debit Credit
Insurance Expense
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
500500
5,5005,500
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

52. Slide
3-52
Statement
Presentation:
Prepaid Insurance
identifies that
portion of the
asset’s cost that
will provide future
economic benefit.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
Illustration 3-35
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

53. Slide
3-53
Statement
Presentation:
Insurance
expense identifies
that portion of the
asset’s cost that
expired in
October.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
Illustration 3-34
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

54. Slide
3-54
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.
Accumulated depreciation 400
Depreciation expense 400Oct. 31
Debit Credit
Depreciation Expense
400400 400400
Debit Credit
Accumulated Depreciation
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

55. Slide
3-55
Statement
Presentation:
Accumulated
Depreciation—is a
contra asset
account.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
Illustration 3-35
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

56. Slide
3-56
Statement
Presentation:
Depreciation
expense identifies
that portion of the
asset’s cost that
expired in
October.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
Illustration 3-34
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

57. Slide
3-57
Receipt of cash that is recorded as a liability because the Receipt of cash that is recorded as a liability because the
revenue has not been earned.revenue has not been earned.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
rentrent
airline ticketsairline tickets
school tuitionschool tuition
Cash Receipt Revenue RecordedBEFORE
magazine subscriptionsmagazine subscriptions
customer depositscustomer deposits
Unearned revenues often occur in regard to:Unearned revenues often occur in regard to:
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

58. Slide
3-58
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. 2
nd
.
Unearned service revenue 12,000
Cash 12,000Oct. 2
Debit Credit
Cash
12,00012,000 12,00012,000
Debit Credit
Unearned Service Revenue
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

59. Slide
3-59
Debit Credit
Service Revenue
100,000100,000 12,00012,000
Debit Credit
Unearned Service Revenue
4,0004,000
8,0008,000
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
Unearned Revenues. Analysis reveals that Pioneer earned
$4,000 of the advertising services in October. Thus, Pioneer
makes the following adjusting entry.
Service revenue 4,000
Unearned service revenue 4,000Oct. 31
4,0004,000
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

60. Slide
3-60
Statement
Presentation:
Unearned service
revenue identifies
that portion of the
liability that has
not been earned.
Illustration 3-35
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”

61. Slide
3-61
Statement
Presentation:
Service revenue
represents that
portion of the
liability that was
earned in October.
Illustration 3-34
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”

62. Slide
3-62
Accruals are
either
accrued
revenues or
accrued
expenses.
Adjusting Entries for AccrualsAdjusting Entries for Accruals
Illustration 3-27
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

63. Slide
3-63
Revenues earned but not yet received in cash or Revenues earned but not yet received in cash or
recorded.recorded.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
rentrent
interestinterest
services performedservices performed
BEFORE
Accrued revenues often occur in regard to:Accrued revenues often occur in regard to:
Cash ReceiptRevenue Recorded
Adjusting entry results in:Adjusting entry results in:
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

64. Slide
3-64
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.
Service revenue 2,000
Accounts receivable 2,000Oct. 31
Debit Credit
Accounts Receivable
72,00072,000
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
Debit Credit
Service Revenue
100,000100,000
4,0004,000
2,0002,000
106,000106,000
2,0002,000
74,00074,000

65. Slide
3-65
LO 5 LO 5
Illustration 3-34
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
Statement
Presentation
Illustration 3-35

66. Slide
3-66
Expenses incurred but not yet paid in cash or recorded.Expenses incurred but not yet paid in cash or recorded.
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
rentrent
interestinterest
BEFORE
Accrued expenses often occur in regard to:Accrued expenses often occur in regard to:
Cash PaymentExpense Recorded
salariessalaries
taxestaxes
Adjusting entry results in:Adjusting entry results in:
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

67. Slide
3-67
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “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.LO 5 Explain the reasons for preparing adjusting entries.

68. Slide
3-68
Interest payable 500
Interest expense 500Oct. 31
Debit Credit
Interest Expense
500500 500500
Debit Credit
Interest Payable
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued 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.
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

69. Slide
3-69
LO 5 LO 5
Illustration 3-34
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Statement
Presentation
Illustration 3-35

70. Slide
3-70
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Accrued Salaries. At October 31, the salaries for these days
represent an accrued expense and a related liability to Pioneer.
The employees receive total salaries of $10,000 for a five-day
work week, or $2,000 per day.
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

71. Slide
3-71
Salaries payable 6,000
Salaries expense 6,000Oct. 31
Debit Credit
Salaries Expense
40,00040,000 6,0006,000
Debit Credit
Salaries Payable
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Accrued Salaries. Employees receive total salaries of $10,000
for a five-day work week, or $2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.
6,0006,000
46,00046,000
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

72. Slide
3-72
LO 5 LO 5
Illustration 3-34
Statement
Presentation
Illustration 3-35
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”

73. Slide
3-73
Salaries expense 34,000
Salaries payable 6,000Nov. 23
Debit Credit
Salaries Expense
34,00034,000 6,0006,000
Debit Credit
Salaries Payable
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Accrued Salaries. On November 23, Pioneer will again pay total
salaries of $40,000. Prepare the entry to record the payment of
salaries on November 23.
Cash 40,000
6,0006,000
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

74. Slide
3-74
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Bad Debts. Assume Pioneer reasonably estimates a bad debt
expense for the month of $1,600. It makes the adjusting entry for
bad debts as follows.
Illustration 3-32
LO 5 Explain the reasons for preparing adjusting entries.LO 5 Explain the reasons for preparing adjusting entries.

75. Slide
3-75
Shows the balance
of all accounts,
after adjusting
entries, at the end
of the accounting
period.
5. Adjusted Trial Balance5. Adjusted Trial Balance
LO 5 LO 5
Illustration 3-33

76. Slide
3-76
6. Preparing Financial Statements6. Preparing Financial Statements
LO 6 Prepare financial statement from the adjusted trial balance.LO 6 Prepare financial statement from the adjusted trial balance.
Financial Statements are prepared directly from the
Adjusted Trial Balance.
Statement
of Financial
Position
Income
Statement
Retained
Earnings
Statement

77. Slide
3-77
6. Preparing Financial Statements6. Preparing Financial Statements
LO 6LO 6
Illustration 3-34

78. Slide
3-78
6. Preparing Financial Statements6. Preparing Financial Statements
LO 6LO 6
Illustration 3-35

79. Slide
3-79
7. Closing Entries7. Closing Entries
LO 7 Prepare closing entries.LO 7 Prepare closing entries.
To reduce the balance of the income statement To reduce the balance of the income statement
((revenuerevenue and and expenseexpense) accounts to zero. ) accounts to zero.
To transfer net income or net loss to equity.To transfer net income or net loss to equity.
Statement of financial position (Statement of financial position (assetasset, , liabilityliability, and , and
equityequity) accounts are not closed.) accounts are not closed.
Dividends are closed directly to the Retained Dividends are closed directly to the Retained
Earnings account.Earnings account.

80. Slide
3-80
7. Closing Entries7. Closing Entries
LO 7LO 7
Illustration 3-36

81. Slide
3-81
7. Closing 7. Closing
EntriesEntries
Illustration 3-37
LO 7LO 7

82. Slide
3-82
8. Post-Closing Trial Balance8. Post-Closing Trial Balance
LO 7 Prepare closing entries.LO 7 Prepare closing entries.
Illustration 3-38

83. Slide
3-83
9. Reversing Entries9. Reversing Entries
LO 7 Prepare closing entries.LO 7 Prepare closing 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.

84. Slide
3-84
Accounting Cycle SummarizedAccounting Cycle Summarized
LO 7 Prepare closing entries.LO 7 Prepare closing entries.
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).

85. Slide
3-85
Financial Statements for a Merchandising CompanyFinancial Statements for a Merchandising Company
LO 7LO 7
Illustration 3-39

86. Slide
3-86
Financial Statements of a Merchandising CompanyFinancial Statements of a Merchandising Company
Illustration 3-40
LO 7 Prepare closing entries.LO 7 Prepare closing entries.

87. Slide
3-87
Financial Statements of a Merchandising CompanyFinancial Statements of a Merchandising Company
LO 7LO 7
Illustration 3-41

88. Slide
3-88
Internal controls are a system of checks and balances designed to
prevent and detect fraud and errors. Both of these actions are
required under SOX.
Companies find that internal control review is a costly process. One
study estimates the cost for U.S. companies at over $35 billion,
with audit fees doubling in the first year of compliance.
The enhanced internal control standards apply only to large public
companies listed on U.S. exchanges. There is continuing debate over
whether foreign issuers should have to comply.

89. Slide
3-89
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 LO 8 Differentiate the cash basis of accounting
from the accrual basis of accounting.from the accrual basis of accounting.

90. Slide
3-90
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
creditors.
Illustration 3A-1
LO 8 Differentiate the cash basis of accounting LO 8 Differentiate the cash basis of accounting
from the accrual basis of accounting.from the accrual basis of accounting.

91. Slide
3-91
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
creditors.
Illustration 3A-2
LO 8 Differentiate the cash basis of accounting LO 8 Differentiate the cash basis of accounting
from the accrual basis of accounting.from the accrual basis of accounting.

92. Slide
3-92
Conversion From Cash Basis To Accrual BasisConversion From Cash Basis To Accrual Basis
Illustration: Dr. Diane Windsor, like many small business owners,
keeps her accounting records on a cash basis. In the year 2010, Dr.
Windsor received $300,000 from her patients and paid $170,000 for
operating expenses, resulting in an excess of cash receipts over
disbursements of $130,000 ($300,000 - $170,000). At January 1 and
December 31, 2010, she has accounts receivable, unearned service
revenue, accrued liabilities, and prepaid expenses as shown in
Illustration 3A-5.
Illustration 3A-5
LO 8 Differentiate the cash basis of accounting LO 8 Differentiate the cash basis of accounting
from the accrual basis of accounting.from the accrual basis of accounting.

93. Slide
3-93
Conversion From Cash Basis To Accrual BasisConversion From Cash Basis To Accrual Basis
Illustration: Calculate service revenue on an accrual basis.
Illustration 3A-5
Illustration 3A-8
LO 8 Differentiate the cash basis of accounting LO 8 Differentiate the cash basis of accounting
from the accrual basis of accounting.from the accrual basis of accounting.

94. Slide
3-94
Conversion From Cash Basis To Accrual BasisConversion From Cash Basis To Accrual Basis
Illustration: Calculate operating expenses on an accrual basis.
Illustration 3A-5
Illustration 3A-11
LO 8 Differentiate the cash basis of accounting LO 8 Differentiate the cash basis of accounting
from the accrual basis of accounting.from the accrual basis of accounting.

95. Slide
3-95
Conversion From Cash Basis To Accrual BasisConversion From Cash Basis To Accrual Basis
Illustration 3A-12
LO 8 Differentiate the cash basis of accounting LO 8 Differentiate the cash basis of accounting
from the accrual basis of accounting.from the accrual basis of accounting.

96. Slide
3-96
Theoretical Weaknesses of the Cash BasisTheoretical Weaknesses of the Cash Basis
Today’s economy is considerably more lubricated by credit than
by cash.
The accrual basis, not the cash basis, recognizes all aspects of
the credit phenomenon.
Investors, creditors, and other decision makers seek timely
information about an enterprise’s future cash flows.
LO 8 Differentiate the cash basis of accounting LO 8 Differentiate the cash basis of accounting
from the accrual basis of accounting.from the accrual basis of accounting.

97. Slide
3-97
LO 9 Identifying adjusting entries that may be reversed.LO 9 Identifying adjusting entries that may be reversed.
Illustration of Reversing Entries—AccrualsIllustration of Reversing Entries—Accruals
Illustration 3B-1

98. Slide
3-98
LO 9 Identifying adjusting entries that may be reversed.LO 9 Identifying adjusting entries that may be reversed.
Illustration of Reversing Entries—DeferralsIllustration of Reversing Entries—Deferrals
Illustration 3B-2

99. Slide
3-99
LO 9 Identifying adjusting entries that may be reversed.LO 9 Identifying adjusting entries that may be reversed.
Summary of Reversing EntriesSummary of Reversing Entries
1.All accruals should be reversed.
2.All deferrals for which a company debited or credited the
original cash transaction to an expense or revenue
account should be reversed.
3.Adjusting entries for depreciation and bad debts are not
reversed.
Recognize that reversing entries do not have to be used.
Therefore, some accountants avoid them entirely.

100. Slide
3-100
LO 10 Prepare a 10-column worksheet.LO 10 Prepare a 10-column worksheet.
A company prepares a worksheet either on
columnar paper or
within an electronic spreadsheet.
A company uses the worksheet to adjust
account balances and
to prepare financial statements.

101. Slide
3-101
LO 10 Prepare a 10-column worksheet.LO 10 Prepare a 10-column worksheet.
A company prepares a worksheet either on
columnar paper or
within an electronic spreadsheet.
Worksheet ColumnsWorksheet Columns

102. Slide
3-102 LO 10 Prepare a 10-column worksheet.LO 10 Prepare a 10-column worksheet.
Adjusted Adjusted
Trial Trial
BalanceBalance
Illustration 3C-1

103. Slide
3-103
The Worksheet:
Provides information needed for preparation of the
financial statements.
Sorts data into appropriate columns, which facilitates
the preparation of the statements.
LO 10 Prepare a 10-column worksheet.LO 10 Prepare a 10-column worksheet.
Preparing Financial Statements from a WorksheetPreparing Financial Statements from a Worksheet

104. Slide
3-104
Illustration 3-39
LO 10LO 10

105. Slide
3-105
Illustration 3-40
LO 10 Prepare a 10-column worksheet.LO 10 Prepare a 10-column worksheet.

106. Slide
3-106
Illustration 3-41
LO 10LO 10

107. Slide
3-107
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