ACCT 209 1nd Edition Lecture 4 Outline of Last Lecture I. What is accounting?II. What is a Business?A. ClassificationsB. FormsC. OrganizationIII. Generally accepted accounting principlesIV. Objectives and characteristics of accountingV. Recognition and measurement criteriaVI. Financial statementsVII. Other elements of 10-k (Annual reports)VIII. Analyzing Financial statementsIX. How Transactions affect the accounting equationX. Filling in a transaction gridXI. Transaction AnalysisXII. Rules of Debit/CreditXIII. Steps in the Recording ProcessOutline of Current Lecture XIV.Creating T AccountsXV. Preparing a Trial BalanceXVI. Adjusting EntriesXVII. Preparing an adjusted Trial BalanceCurrent LectureExample on Analyzing transactions and the Financial Statements Example #4Lane Company has been in business for five years. As of December 31, 2012, Lane had assets of$75,000 and liabilities of $25,500. After a successful year of business in 2013, the company’s assets had increased by $13,500, and liabilities had increased by $6,900. A new investment of $3,600 was made into the business during 2013, and a dividend of $1,500 was paid to the owners. Based on this information, determine Lane Company’s net income for the year 2013.Assets = Liabilities + Stockholder equity75,000 = 25,000 + X Solve for X, X = 49,500These 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.+ 13,500 + 6,90088,500 = 32,400 + X Solve for X, X = 56,100Statement of Stock holder equityBeginning Balance: 49,500Stock Issues: 3,600Net Income: XDividends: (1,500)End Balance: 56,10049,500 + 3,600 + X – 1500 = 56,100 Solve for XX = 4,500 Net income for the year 2013 is 4,500Recording Business Transactions and Adjusting Entries ContinuedExample #1Rick Eastman has enjoyed photography as a hobby for many years, and recently decided to start his own photography business. The following transactions pertain to the first month of Rick’s business. June 2 Rick incorporates the business, Rick’s Pics, by contributing $1,000 of his personal savings to the business in exchange for company stock and by filing the appropriate paper work with the Secretary of State.2 Rick’s Pics purchases liability insurance for the business; coverage for the 6-month period beginning June 1 costs $240.3 Rick’s Pics buys supplies on account, $55. “On account” means he does not pay cash at thistime, but will pay at a later date.3 Rick’s Pics buys photography equipment and pays cash, $648.5 Rick’s Pics borrows $1,500 from the bank by signing a note payable; the note will mature in one year and the amount borrowed plus interest will be paid at maturity.6 Rick’s Pics performs several small photography jobs and receives cash from the clients, $375.8 Rick’s Pics completes a photography job and bills the clients, $450.10 Rick’s Pics agrees to photograph engagement photos and also to photograph the wedding which is scheduled for August; he collects $600 cash in advance from the clients.10 Rick’s Pics pays $140 for newspaper advertising to be run the last two weeks in June.15 Rick’s Pics pays for the supplies purchased previously.25 Rick’s Pics pays his phone bill for the month of June, $43.28 Rick’s Pics receives cash from clients billed previously, $250.30 Rick’s Pics pays a dividend of $100 to owner Rick Eastman.Required: The above transactions have already been recorded on the transactions grid at the end of these notes.(1) Enter each of the above transactions directly into the T accounts provided below. (2) Prepare a trial balance as of June 30 for Rick’s Pics.A.B.Rick’s PicsTrial BalanceJune 30, XXDebit CreditCash 2,499Accounts receivable 200Prepaid insurance 240Supplies 55Equipment 648Accounts payable 0Notes payable 1,500Unearned revenue 600Common stock 1,000Dividends 100Revenue 825Expense 185 Total 3,925 3,925How does the trial balance differ from the balance sheet?Balance Sheet shows assets = liabilities + Stockholder Equity Trial balance shows all accounts in debit = credit formatWhy is there no Retained earnings account in the above trial balance?It is the 1st month of operation, so beginning retained earnings is 0ADJUSTING ENTRIESAccrual basis accounting- Transactions are recorded based on :Revenue recognition – Goal is to record revenue when earned, regardless of when cash is receivedMatching principle – Try to record expenses in the same period as the revenue the expense helped generate. If one can’t directly match with revenue then expense as incurred or in systematic manner.Accrual basis – requires adjusting entries to ensure that all revenues and expenses are correctly recorded (on Income Statement) and that all Assets and Liabilities are correctly stated (on Balance Sheet).Adjusting entries:- Dated at the end of the accounting period- Always affect 1 income statement account and 1 balance sheet account- Don’t affect cashWhen all adjusting entries have been recorded, the adjusted trial balance, or trial balance after adjustments, is prepared. The account balances from the adjusted trial balance, are used to prepare the financial statements.Adjusting entries fall into two major categories, deferrals and accruals. Deferrals – adjustments needed to update prepaid expenses and unearned revenues. Adjustments are needed to record the portion of the expense incurred or revenue earned in the current accounting period.Accruals – revenues earned or expenses incurred that have not yet been recorded. Adjustments are needed to record the revenue or expense so that it will be included in the current financial statements.Example #2 Adjusting entriesThe information below pertains to Rick’s Pics at the end of June, the company’s first month of operations.(a) Supplies on hand at June 30 cost $18(b) Prepaid insurance for the month of June has expired(c) Of the revenue collected in advance, 1/3 of the job has been completed(d) Interest accrued on the note payable totals $5(e) Depreciation on the photography equipment is $18 per monthRequired:Use the transactions grid to record the adjusting entries, and prepare an adjusted trial balance for Rick’s Pics.On next page.Cash Accts Rec Supplies Ppd Ins Equip AccumulatedDepreciationAP NP Un Rev Cap Stock