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BUS 2101 PowerPoint Presentation

BUS 2101

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BUS 2101

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Presentation Transcript

  1. BUS 2101 The Big Picture…

  2. Accrual Accounting Concepts • Cash basis accounting • Accrual basis accounting • Matching principle • Adjusting entries • Prepayments • Accruals • Adjusted trial balance • Closing entries • Accounting cycle

  3. Cash basis accounting • Revenue recorded when cash is received • No revenue if customer doesn’t pay at time of transaction • Expenses recorded when they are paid • No expense unless payment made in period • Advantage • Simple • Disadvantage • Useful information??? • Often used by small businesses • Used by individuals for income tax purposes

  4. Accrual basis accounting • Revenue recognition principle: Revenue is recorded when service is performed or goods are delivered • May not be in the same period cash is received • Matching principle: Expenses are recorded in the period they help generate revenue • May not be in the same period payment is made • Adjusting entries: Needed based on revenue recognition and matching principles

  5. Adjusting entries • Prepayments • Prepaid expenses • Purchased supplies on 1/10/10 of $680 • As of 1/31/10, only $100 of supplies in closet

  6. Adjusting entries • Prepayments • Prepaid expenses • Paid $4,800 for 2010 insurance policy on 1/5/10 • As of 1/31/10, used one month of insurance coverage

  7. Adjusting entries • Prepayments • Depreciation • Paid $480,000 on 1/2/10 for building expected to last 20 years • $480,000 / 20 years = $24,000 depreciation expense • As of 1/31/10, need to record one month’s depreciation expense

  8. Adjusting entries • Unearned revenue • Received $600 on 1/2/10 to fly customer to L.A. on 2/16/10 • As of 2/16/10, need to record revenue

  9. Adjusting entries • Accrued revenue: revenue earned but no cash received • On 2/12/10, performed surgery on patient. Sent patient bill for $73 on 2/17/10. • As of 2/28/10 no payment has been received

  10. Adjusting entries • Accrued expenses: expense incurred but not paid • On 1/01/10, borrowed $100,000 at 6%. Interest is payable on 2/1/10. • As of 1/31/10, no interest has been paid

  11. Adjusting entries • Never an entry to cash • Either • Dr. Expense or • Cr. Revenue • Other side of entry is to an asset or liability account

  12. Adjusted Trial Balance • See page 177

  13. Closing Entries • Must reset income and expenses to zero before next accounting period • Income summary is the basket used to do this

  14. Closing Entries • Debit Revenue, dump into Income Summary (Credit) • Revenue • Income Summary • Credit Expenses, dump into Income Summary (Debit) • Income Summary • Expenses

  15. Closing Entries • Dump Net Income into Retained Earnings • Income Summary (if revenue > expenses) • Retained earnings • Dump Dividends into Retained Earnings • Retained Earnings • Dividends

  16. Accounting Cycle

  17. BUS 2101 The Big Picture…