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OU ACCT 2113 - Financial Reporting Progress

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ACCT 2113 1st Edition Lecture 3 Outline of Previous Lecture II. The Accounting Information SystemA. RolesIII. Measuring External TransactionsA. ClassificationB. Six Steps in measuringC. Ask three questionsIV. 10 Transaction ExamplesV. Debits and CreditsA. Ask three questionsVI. Recording TransactionsA. Define general ledger, posting, and T-accountVII. Prepare a Trial Balance A. Define and preparationOutline of Current Lecture II. ReviewA. Debits and creditsB. Account MenusIII. Accrual-Basis AccountingIV. Revenue Recognition PrincipleA. ExamplesV. Matching PrincipleA. DefinitionB. ExampleVI. Accrual vs. Cash-Basis AccountingA. DefinitionB. ExamplesVII. The Measurement ProcessA. Accounting CycleB. Adjusting EntriesC. DefinitionsVIII. Prepaid ExpensesA. ExamplesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.IX. Unearned RevenuesA. ExamplesX. Accrued ExpensesA. ExamplesXI. Accrued RevenuesA. ExamplesXII. The Reporting ProcessA. Preparing the Financial StatementsXIII. The Closing ProcessA. 4 stepsB. Closing Entries and Post-Cost Trial BalanceCurrent Lecture Chapter 3: the financial reporting process(most on test)Debits and CreditsAccount Menu: Assets- Accounts receivable- Accumulated depreciation equipment (contra)- Boxing equipment- Cash- Equipment- Interest receivable- Land- Prepaid advertising- Prepaid insurance- Prepaid rent- SuppliesAccount Menu: Liabilities- Accounts payable- Interest payable- Notes payable- Salaries payable- Income tax payable- Unearned revenue- Utilities payableAccount Menu: Owners’ Equity- Common stock- Retained earnings- Stockholders’ equity (composite of CS and RE)Account Menu: Revenues- Interest revenue- Membership revenue- Service revenueAccount Menu: Expenses- Advertising expense- Depreciation expense- Research and development expense- Salaries expense- Service expense- Supplies expense- Utilities expenseAccount Menu: One offs- DividendsAccrual-Basis AccountingNet income is an essential aspect of good investment decisions. Proper computation of net income requires considerable attention to be paid to the proper measurement of the two primary components of net income – revenues and expenses.- Accounting information – necessary for decision-making.- To be useful in decision-making – accountants must report revenues and expenses in a way that reflects the ability of the company to create value for its owners. - Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle). Revenue Recognition PrincipleRecognize revenue when it is EARNED.EX. Calvin books a cruise with Carnival Cruise Lines, the world’s largest cruise line. He makes reservations and pays for the cruise in November 2012, but the cruise is not scheduled to sail until April 2013. When does Carnival report revenue from the ticket sale?1. In November 2012???No. Because it has not substantially fulfilled its obligation to Calvin. 2. In April 2013???Yes. Because it is in April 2013 that the cruise occurs.EX. Suppose that, anticipating the cruise, Calvin buys a Jimmy Buffet CD from Best Buy. Rather than paying cash, Calvin uses his Best Buy card to buy the CD on account. When does Best Buy recognize revenue?Even though Best Buy doesn’t receive cash immediately from Calvin, it still records the revenue at the time it sells the CD. Matching PrincipleThere is a cause-and-effect relationship between revenue and expense recognition implicit in this principle. In a given period, we report revenue as it’s earned, according to the revenue recognition principle. It’s logical, then, that in the same period we should also record all expenses incurredto generate that revenue.The result is a measure – net income – that matches current period accomplishments (revenues) and sacrifices (expenses). Expenses are reported with the revenues they help to generate.The matching principle states that we recognize expenses in the same period as the revenues they help to generate. Expenses include those directly and indirectly related to producing revenues.Accrual-Basis compared with Cash-Basis accountingUnder accrual-basis accounting, we record revenue and expense transactions at the time the earnings-related activities occur. Under cash-basis accounting, we record revenues at the time we receive cash and expenses at the time we pay cash.(The timing between the accrual-basis and cash-basis accounting in recognizing expenses.)The Measurement ProcessThe accounting cycle starts with recording of external transactions. We discussed external transactions in chapter 2. In this chapter, we complete the accounting cycle by recording adjusting entries (internal transactions), preparing financial statements, and recording closing entries. Adjusting Entries:Purpose of Adjusting Entries: To record events that have occurred but which have not been recorded. To record revenues in the period earned.To record expenses in the period they are incurred in the generation of those revenues. To correctly state assets and liabilities in the balance sheet.Grouping Adjusting Entries: Prepayments- 1. Prepaid expenses – we paid cash (or had an obligation to pay cash) for the purchase of an asset before we incurred the expense.2. Unearned revenues – we received cash and recorded a liability before we earned the revenue.Accruals- 3. Accrued expenses – we paid cash after we incurred the expense and recorded a liability.4. Accrued revenues – we received cash after we earned the revenue and recorded an asset.Prepaid Expenses- Costs of assets acquired in one period that will be expensed in a future period.- Examples: Purchase of equipment or supplies, payment of rent in advance, payment of insurance in advance.Adjusting entry always includes: debit expense account (increase an expense)Credit asset account (decrease an asset)EX. Prepaid rentthe balance in prepaid rent account on Jan.1 is $6,000. The rent expense for the month of January is $500. As such the balance in prepaid rent account is reduced to $5,500 on Jan. 31. (Adjusting entry)The adjusting entry is recorded on Jan. 31, debiting the rent expense account and crediting the prepaid rent account. Notice that the adjusting entry includes a $500 expense (+E), which reduces net income and


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OU ACCT 2113 - Financial Reporting Progress

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