Cash, Short-term Investments and Accounts Receivable

Cash, Short-term Investmentsand Accounts Receivable • Chapter 4 Chapter 4

Chapter 3 The Mechanics Of Double-Entry Accounting Chapter 3

Chapter 3Learning Objectives • Analyze business transactions to determine account effects. • Understand the rules of debit and credit. • Prepare general journal entries. • Post general journal entries to a general ledger. • Prepare a trial balance. • Develop end-of-period adjustments to general ledger account balances. • Prepare an income statement, a statement of stockholders’ equity, and a balance sheet. • Perform the closing process. • Prepare a postclosing trial balance. Chapter 3

Assets = Liabilities + Equity Every transaction of a business must be recorded in such a way... that the accounting equation for that business remains in balance. Chapter 3

Source Documents • Invoices • Sales slips • Legal contracts • Checks • Purchase orders Chapter 3

Rules for Double Entry Accounting • Debits are on the left • Credits are on the right • Debits always equal Credits • The Normal Balance is whichever action increases the account • All financial transactions can be recorded using this method Chapter 3

Rules of Debit and Credit Chapter 3

Review Which of the following sets of accounts have normal debit balances? • liabilities and assets • assets and expenses • assets and revenues • revenues and dividends Chapter 3

Review Which sets of accounts are increased with credits? • liabilities and assets • assets and expenses • liabilities and revenues • revenues and dividends Chapter 3

Some other types of accounts fall into the categories Dividends, Revenues, and Expenses. Chapter 3

Snow Mountain Transactions Chapter 3

Review The general journal entry to record a cash investment by stockholders into the business includes a: • debit to Common Stock and a credit to Cash • debit to Cash and a credit to Accounts Receivable • debit to Cash and a credit to Common Stock • debit to Accounts Receivable and a credit to Cash Chapter 3

Review The general journal entry to record a purchase of supplies on account includes a: • debit to Cash and a credit to Supplies • debit to Accounts Payable and a credit to Supplies • debit to Supplies and a credit to Accounts Receivable • debit to Supplies and a credit to Accounts Payable Chapter 3

Posting to the General Ledger • For each account listed in a general journal transaction, determine the appropriate general ledger account number in the chart of accounts. Find that account in the general ledger. • In the general ledger account, record the transaction date and a brief description of the transaction as provided in the general journal. • In the posting reference (PR) column of each affected account, indicate the journal and page number from which the amount was posted. Chapter 3

Posting to the General Ledger continued • Enter the transaction amount in the appropriate debit or credit column in the account. • Compute the new balance of each account and enter that amount in the balance column. • After posting each transaction element to the general ledger, return to the general journal and record the general ledger account number to which the debit or credit amount was posted in the PR column. Chapter 3

Review The general journal entry to record a purchase of supplies on account is posted to the general ledger. This transaction will: • decrease the balance in the Supplies account • increase the balance in the Accounts Payable account • increase the balance in the Cash account • decrease the balance in the Accounts Payable account Chapter 3

Review The general journal entry to record the payment of a year’s rent in advance is posted to the general ledger. This transaction will: • increase the balance in the Prepaid Rent account • increase the balance in the Cash account • decrease the balance in the Prepaid Rent account • decrease the balance in the Rent Expense account Chapter 3

Cash Account from Snow Mountain Retreat General Ledger Chapter 3

TRIAL BALANCE Chapter 3

Trial Balance • A trial balance is a 2 column listing of the general ledger accounts and their balances. • A trial balance’s purpose is to ensure that the accounting system is “in balance”. • If a trial balance does not balance, there are one or more errors in the accounting records which must be corrected. Chapter 3

Trial Balance Illustrated Chapter 3

Adjusting Entries • Adjusting entries are prepared to ensure that the revenue and expense recognition rules, discussed in Chapter 2, are properly applied each accounting period. • Before developing period-ending adjustments, the concepts of deferrals and accruals must be defined and understood. • A deferred item is one for which the cash has been paid or received, but the expense or revenue has not been recognized. • An accrued item is one for which the cash has not yet been paid or received, but the expense or revenue has already been recognized. • End-of-period adjusting entries may create or affect deferred and accrued items. Chapter 3

Deferrals and Accruals • A deferred expense is an asset that represents a prepayment of an expense item. A deferred expense is originally recorded as an asset, but will eventually be recognized, or written off, as an expense. • A deferred revenue is a liability that represents an amount received by a business for a service or product that will be provided or delivered in the future. A deferred revenue is originally recorded as a liability, but will eventually be recognized as revenue. • An accrued asset is a receivable resulting from revenue that has been earned but has not yet been received in cash. • An accrued liability is an expense that has been incurred but has not yet been paid in cash. Chapter 3

Deferrals and Accruals Chapter 3

Adjusting Deferrals and Accruals Chapter 3

Steps in the Adjusting Process • Adjusting entries must be prepared for all deferrals and accruals at the end of the accounting period. • Adjusting entries are then posted to the general ledger. • A new trial balance is then prepared, referred to as an Adjusted Trial Balance. Chapter 3

Snow Mountain Retreat Adjusting Entries Chapter 3

Review A company pays $3,000 for 6 months rent on November 1, 2010. The adjusting entry on December 31, 2010 will include a: • debit to Rent Expense and a credit for Prepaid Rent for $3,000. • debit to Prepaid Rent and a credit to Rent Expense for $2,000. • debit to Rent Expense and a credit to Prepaid Rent for $1,000. • debit to Rent Expense and a credit to Prepaid Rent for $2,000. Chapter 3

Review A company pays $3,000 for 6 months rent on November 1, 2010. The adjusting entry on December 31, 2010 will include a: a. debit to Rent Expense and a credit for Prepaid Rent for $3,000. b. debit to Prepaid Rent and a credit to Rent Expense for $2,000. c. debit to Rent Expense and a credit to Prepaid Rent for $1,000. d. debit to Rent Expense and a credit to Prepaid Rent for $2,000. Chapter 3

Review A company received $2,400 for 4 months rent on October 1, 2010. The adjusting entry on December 31, 2010 will include a: • debit to Rental Revenue and a credit for Unearned Rental Revenue for $1,800. • debit to Rental Revenue and a credit to Unearned Rental Revenue for $1,200. • debit to Unearned Rental Revenue and a credit to Rental Revenue for $1,800. • debit to Unearned Rental Revenue and a credit to Rental Revenue for $1,200. Chapter 3

Review A company received $2,400 for 4 months rent on October 1, 2010. The adjusting entry on December 31, 2010 will include a: • debit to Rental Revenue and a credit for Unearned Rental Revenue for $1,800. b. debit to Rental Revenue and a credit to Unearned Rental Revenue for $1,200. c. debit to Unearned Rental Revenue and a credit to Rental Revenue for $1,800. d. debit to Unearned Rental Revenue and a credit to Rental Revenue for $1,200. Chapter 3

Review A company computes depreciation for the year on equipment to be $2,500. The adjusting entry required on December 31 includes a: • debit to Accumulated Depreciation-Equipment and a credit to Equipment for $2,500. • debit to Depreciation Expense and a credit to Equipment for $2,500. • debit to Depreciation Expense and a credit to Accumulated Depreciation-Equipment for $2,500. • debit to Accumulated Depreciation-Equipment and a credit to Depreciation Expense for $2,500. Chapter 3

Review A company computes depreciation for the year on equipment to be $2,500. The adjusting entry required on December 31 includes a: • debit to Accumulated Depreciation-Equipment and a credit to Equipment for $2,500. • debit to Depreciation Expense and a credit to Equipment for $2,500. c. debit to Depreciation Expense and a credit to Accumulated Depreciation-Equipment for $2,500. d. debit to Accumulated Depreciation-Equipment and a credit to Depreciation Expense for $2,500. Chapter 3

Problem Review Prepare Dec. 31 adjusting entries based on the following information: • Depreciation expense on equipment for the year is $2,500. • $3,000 of prepaid rent has expired. • $6,000 of unearned rent has been earned by Dec. 31. • Wages incurred by not yet paid on Dec. 31 amount to $1,500. Chapter 3

Problem Review Solution Chapter 3

Snow Mountain Retreat Adjusted Trial Balance Chapter 3

Preparation of Financial Statements • After the adjusted trial balance is prepared, the financial statements can be prepared. • Based on Snow Mountain Retreat’s adjusted trial balance, we can prepare: • An income statement • A statement of stockholders’ equity, and • A balance sheet Chapter 3

Income Statement Illustrated Chapter 3

Statement of Stockholders’ Equity Illustrated Chapter 3

Balance Sheet Illustrated Chapter 3

Balance Sheet Illustrated Continued Chapter 3

Cash, Short-term Investments and Accounts Receivable