ACCT 209 1nd Edition Lecture 4 Outline of Last Lecture I What is accounting II What is a Business A Classifications B Forms C Organization III Generally accepted accounting principles IV Objectives and characteristics of accounting V Recognition and measurement criteria VI Financial statements VII Other elements of 10 k Annual reports VIII Analyzing Financial statements IX How Transactions affect the accounting equation X Filling in a transaction grid XI Transaction Analysis XII Rules of Debit Credit XIII Steps in the Recording Process Outline of Current Lecture XIV Creating T Accounts XV Preparing a Trial Balance XVI Adjusting Entries XVII Preparing an adjusted Trial Balance Current Lecture Example on Analyzing transactions and the Financial Statements Example 4 Lane 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 75 000 Liabilities Stockholder equity 25 000 X Solve for X X 49 500 These 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 6 900 88 500 32 400 X Solve for X X 56 100 Statement of Stock holder equity Beginning Balance 49 500 Stock Issues 3 600 Net Income X Dividends 1 500 End Balance 56 100 49 500 3 600 X 1500 56 100 Solve for X X 4 500 Net income for the year 2013 is 4 500 Recording Business Transactions and Adjusting Entries Continued Example 1 Rick 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 this time 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 Pics Trial Balance June 30 XX Debit Cash 2 499 Accounts receivable 200 Prepaid insurance 240 Supplies 55 Equipment 648 Accounts payable Credit 0 Notes payable 1 500 Unearned revenue 600 Common stock 1 000 Dividends 100 Revenue 825 Expense 185 Total 3 925 3 925 How does the trial balance differ from the balance sheet Balance Sheet shows assets liabilities Stockholder Equity Trial balance shows all accounts in debit credit format Why is there no Retained earnings account in the above trial balance It is the 1st month of operation so beginning retained earnings is 0 ADJUSTING ENTRIES Accrual basis accounting Transactions are recorded based on Revenue recognition Goal is to record revenue when earned regardless of when cash is received Matching 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 cash When 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 entries The 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 month ash Required Use the transactions grid to record the adjusting entries and prepare an adjusted trial balance for Rick s Pics On next page Accts Rec Supplies Ppd Ins Equip Accumulated Depreciation AP NP Un Rev Cap Stock Div Revenue 1000 1000 240 240 55 55 648 648 1500 1500 375 375 450 450 600 600 140 55 55 43 250 250 100 100 2499 99 200 55 240 648 0 1500 600 1000 100 825 37 40 200 200 5 18 200 19 200 648 18 0 1505 400 1000 100 1025 Rick s Pics Adjusted Trial Balance June 30 XX Debit Cash 2 499 Accounts receivable 200 Prepaid insurance 200 Supplies 18