Slide 1Ch. 3: Accrual Accounting Concepts - MatchingCh. 3: Accrual Accounting Concepts – MatchingCh. 3: Accrual Accounting Concepts – MatchingSlide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Ch. 3: Accrual Accounting ConceptsSlide 15Slide 16Slide 17Slide 18Depreciation: A deferred expense End-of-period AdjustmentSlide 20Ch. 3: Financial StatementsCh. 3: Financial StatementsCh. 3: Classified Balance SheetCh. 3: Classified Balance SheetFinancial Statement Analysis Ratios (Ch. 9, pp. 332)Financial Statement Analysis Ratios (Ch. 9, pp. 332-333)Ch. 3: Financial Statements1Accrual Accounting ConceptsChapter 3A200 - Survey of AccountingUniversity of TennesseeFall 20152Ch. 3: Accrual Accounting Concepts - Matching Revenue:1. Amounts earned by operating a business 2. Revenue is recognized (recorded) in the period it is earned, whether or not cash is received at the same time3. Revenue transactions increase equity through net incomeExpense: 1. The cost of assets used or liabilities created in the process of generating revenue 2. Expenses are recognized (recorded) in the period they are incurred, whether or not cash is paid at the same time3. Expense transactions decrease equity through net income3Ch. 3: Accrual Accounting Concepts – Matching 1. Revenue is recorded in the same period as the Expenses that helpedgenerate the revenue 2. When revenue is earned, increase a Revenue account and a. increase the asset Cash if cash is received at the same time revenue is earned.(no accrual, no deferral, no end-of-period adjustment needed) b. increase the asset Accounts Receivable if cash will be received in the future after revenue is earned.(this is an Accrued Revenue) c. decrease the liability Unearned Revenue if cash was received before revenue was earned. (this is a Deferred Revenue)4Ch. 3: Accrual Accounting Concepts – Matching1. Expenses are recorded in the same period as the Revenue they helpedgenerate2. When expense is incurred, increase an Expense account and:a. decrease the asset Cash if cash is paid at the same time the expense is incurred.(no accrual, no deferral, no end-of-period adjustment needed) b. increase the liability Accounts Payable if cash will be paid in the future, after the expense is incurred.(this is an Accrued Expense)c. decrease an asset (Prepaid) if cash was paid before the expense was incurred.(this is a Deferred Expense)Ch. 3: Recording TransactionsTransaction #1: Sperry Corporation began business on September 1, 2015 by issuing capital stock to investors for $50,000 cashSTATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Capital Stock50,000 Cash in Financing 50,000 = 50,0005Ch. 3: Recording Transactions Transaction #2: During September, Sperry Corporation purchased land for $20,000by issuing a note payable to the sellerSTATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityLand Note Payable20,000 = 20,0006Ch. 3: Recording Transactions Transaction #3: During September, Sperry Corporation rendered servicesto clients for $12,000 cashSTATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Retained Earnings12,000 Cash in Operating12,000 = 12,00012,000 Fees Revenue7Revenue earned at the same time cash is received: no accrual or deferralCh. 3: Recording TransactionsTransaction #4: During September, Sperry Corporation rendered services to clients and billed them for $3,000 STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityAccounts ReceivableRetained Earnings3,000 = 3,0003,000 Fees Revenue8Revenue earned before cash is received: Accrued RevenueCh. 3: Recording TransactionsTransaction #5: During September, Sperry received $4,500 cash in advance from Zone Company for six months’ rent on a vacant office in Sperry’s building STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Unearned Rent Revenue4,500 Cash in Operating4,500 = 4,5009Revenue earned after cash is received: Deferred RevenueCh. 3: Recording Transactions Transaction #6: During September, Sperry Corporation paid a $1,700 utility bill for the month STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Retained Earnings(1,700) Cash out Operating(1,700) = (1,700)(1,700)Utilities Expense10Cash paid at the same time expense is incurred: no accrual or deferralCh. 3: Recording TransactionsTransaction #7: During September, Sperry Corporation hired a cleaning company to clean its offices for the month, but has not yet paid the invoice of $600 STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityAccounts PayableRetained Earnings600 (600)(600) Cleaning Expense11 Expense incurred before cash is paid: Accrued ExpenseCh. 3: Recording TransactionsTransaction #8: Sperry paid a $2,400 premium on a 1-year general business insurance policy STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCashPrepaid Insurance(2,400) Cash outOperating(2,400) 2,40012Expense will be incurred after cash is paid: Deferred Expense (Prepaid Expense)Summarize account balancesat the end of September (before adjustments) STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENT AND STATEMENT OF RETAINED EARNINGS