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Chapter
3
Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield
Chapter 3-1
Learning Objectives
1. 2. 3. 4. 5. Understand basic accounting terminology. Explain double-entry rules. Identify steps in the accounting cycle. Record transactions in journals, post to ledger accounts, and prepare a trial balance. Explain the reasons for preparing adjusting entries.
6.
7.
8.
Chapter 3-2
Basic equation
Financial statements and ownership structure
Chapter 3-3
Chapter 3-4
Chapter 3-5
LO 1 Identify the major financial statements and other means of financial reporting..
Basic Terminology
Event Transaction Account Real Account Nominal Account Ledger Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries
Chapter 3-6
Chapter 3-7
Account Name
Debit / Dr. Credit / Cr.
Chapter 3-8
Transaction #1
Transaction #3 Balance
$10,000
8,000 $15,000
$3,000
Transaction #2
Chapter 3-9
Transaction #1
$10,000
$3,000
8,000
Transaction #2
Transaction #3
Balance
$1,000
Chapter 3-10
Debit / Dr.
Credit / Cr.
Normal Balance
Credit / Cr.
Expense
Debit / Dr. Credit / Cr.
Chapter 3-25
Revenue
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter 3-27
Chapter 3-26
Chapter 3-11
Revenue - Expense =
Credit
Chapter 3-12
The equation must be in balance after every transaction. For every Debit there must be a Credit.
Chapter 3-13
Stockholders Equity
+ 32,000 + 14,000
+ 46,000
Chapter 3-14
Assets
Liabilities
Stockholders Equity
- 600
(expense)
- 600
Chapter 3-15
Stockholders Equity
+ 3,200
+ 3,200
Chapter 3-16
Stockholders Equity
+ 2,300
+ 2,300
(revenue)
Chapter 3-17
Assets
Liabilities
Stockholders Equity
+ 6,100 - 6,100
Chapter 3-18
Assets
Liabilities
Stockholders Equity
- 7,000
- 7,000
Chapter 3-19
Assets
Liabilities
Stockholders Equity
+ 10,000
- 10,000
Note that the accounting equation equality is maintained after recording each transaction.
Chapter 3-20
Ownership Structure
Ownership structure dictates the types of accounts that are part of the equity section.
Proprietorship or Partnership
Corporation
Common Stock Additional Paid-in Capital
Dividends Declared
Retained Earnings
Chapter 3-21
Retained Earnings
Dividends
Income Statement
Chapter 3-24
External
External Not Recorded External Internal Not Recorded Internal
2. A customer pays its open account. 3. A new chief executive officer is hired. 4. The biweekly payroll is paid. 5. Raw materials are entered into production. 6. A new advertising agency is hired. 7. The accountant determines the federal income taxes owed based on the income earned.
Chapter 3-25
1. Journalizing
General Journal a chronological record of transactions. Journal Entries are recorded in the journal.
General Journal
Date Jan. 3 Account Title Cash Common stock 10 Building Note payable Ref. 100 300 130 220 150,000 150,000 Debit 100,000 100,000 Credit
Chapter 3-26
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
2. Posting
Posting the process of transferring amounts from the journal to the ledger accounts.
General Journal
Date Jan. 3 Account Title Cash Common stock Ref. Debit 100,000 100,000
GJ1
Credit
100
GJ1
100,000
100,000
Chapter 3-27
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3. Trial Balance
Trial Balance a list of each account and its balance; used to prove equality of debit and credit balances.
Acct. No. 100 105 110 130 200 220 300 330 400 500 Account Cash Accounts receivable Inventory Building Accounts payable Note payable Common stock Retained earnings Sales Cost of goods sold Debit $ 140,000 35,000 30,000 150,000 $ 60,000 150,000 100,000 75,000 30,000 $ 385,000 $ 385,000 Credit
Chapter 3-28
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
4. Adjusting Entries
Revenues - recorded in the period in which they are earned. Expenses - recognized in the period in which they are incurred.
Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed.
Chapter 3-29
LO 5
Accruals
Illustration 3-20
3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.
Chapter 3-30
LO 5
Expense Recorded
Chapter 3-31
LO 5
Cash
Prepaid Insurance Debit Credit Debit Cash
12,000
Credit
12,000
12,000
Chapter 3-32
LO 5
Prepaid insurance
Prepaid Insurance Debit Credit
1,000
Insurance expense Debit Credit
12,000
11,000
Chapter 3-33
1,000
1,000
LO 5
Revenue Recorded
Chapter 3-34
LO 5
24,000
24,000
24,000
Chapter 3-35
LO 5
Rent revenue
Rent Revenue Debit Credit
8,000
Unearned Rent Revenue Debit Credit
8,000
8,000
24,000
16,000
Chapter 3-36
LO 5
Revenue Recorded
BEFORE
Cash Receipt
LO 5
Cash
Investments Debit Credit Debit Cash
300,000
Credit
300,000
300,000
Chapter 3-38
LO 5
Interest revenue
Interest Receivable Debit Credit
1,250
Interest Revenue Debit Credit
1,250
1,250
Chapter 3-39
LO 5
Expense Recorded
BEFORE
LO 5
Notes payable
Cash Debit Credit
200,000
Notes Payable Debit Credit
200,000
200,000
Chapter 3-41
LO 5
Interest payable
Interest Expense Debit Credit
1,500
Interest Payable Debit Credit
1,500
1,500
Chapter 3-42
LO 5
Chapter 3-43
LO 5
Balance Sheet
Income Statement
Chapter 3-44
Balance Sheet
Balance Sheet Assets Cash Accounts receivable Building Total assets Liabilities Note payable Stockholders' equity Common stock Retained earnings Total liab. & equity $ 140,000 35,000 190,000 $ 365,000 150,000 100,000 115,000 $ 365,000
$ 490,000
Chapter 3-45
Income Statement
Income Statement Revenues: Sales Interest income Total revenue Expenses: Cost of goods sold Salary expense Depreciation expense Total expenses Net income $ 185,000 17,000 202,000 47,000 25,000 43,000 115,000 $ 87,000
$ 490,000
Chapter 3-46
$ 490,000
Chapter 3-47
7. Closing Entries
To reduce the balance of the income statement (revenue and expense) accounts to zero. To transfer net income or net loss to owners equity. Balance sheet (asset, liability, and equity) accounts are not closed. Dividends are closed directly to the Retained Earnings account.
Chapter 3-48
7. Closing Entries
Example: Assume the following Adjusted Trial Balance
Acct. No. 100 105 130 220 300 330 380 400 430 500 520 550 Account Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense Debit $ 140,000 35,000 190,000 $ 150,000 100,000 38,000 10,000 185,000 17,000 47,000 25,000 43,000 $ 490,000 Credit
$ 490,000
Chapter 3-49
7. Closing Entries
Example: Prepare the Closing journal entry from the
adjusted trial balance on the previous slide.
Sales Interest income Income summary Income summary Cost of goods sold Salary expense Depreciation expense Income summary Retained earnings Retained earnings Dividends declared
Chapter 3-50
87,000 10,000
$ 365,000
Chapter 3-51
9. Reversing Entries
Reversing entries is an optional step that a company may perform at the beginning of the next accounting period.
Chapter 3-52
Chapter 3-53
Chapter 3-54
Copyright
Copyright 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Chapter 3-55