Chapter 3 Textbook PDF

WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 3, pg94 Adjusting the Accounts Prepared by:...

WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 3, pg94 Adjusting the Accounts Prepared by: Debbie Musil Kwantlen Polytechnic University 1  Learning Goals Let’s turn the following curriculum expectation into student friendly learning goals: demonstrate the relationship between Generally Accepted Accounting principles and accounting practices record adjusting and closing entries Copyright John Wiley & Sons Canada, Ltd. 2 Copyright John Wiley & Sons Canada, Ltd. 3 OPEN “QUESTIONS – CHAPTER 3” ON GOOGLE CLASSROOM. ANSWER AS WE GO THROUGH THE PRESENTATION. Copyright John Wiley & Sons Canada, Ltd. 4  Chapter 3: Success Criteria I will be successful when I can…….. 1. Explain accrual basis accounting, and when to recognize revenues and expenses. Pg96- 101 2. Prepare adjusting entries for prepayments. 3. Prepare adjusting entries for accruals. Copyright John Wiley & Sons Canada, Ltd. 5  Time Periods The economic life of a business can be divided into time periods – Generally a month, quarter, or year Periods of less than one year are called interim periods Period of one year is called a fiscal year Copyright John Wiley & Sons Canada, Ltd. 6  Accrual Versus Cash Basis Accounting Accrual basis: – Events are recorded in the period when they occur – Not when the cash is paid or received Cash basis: – Revenue recorded when cash is received – Expenses recorded when cash is paid Copyright John Wiley & Sons Canada, Ltd. 7  Revenue Recognition Revenue is recognized when there is an increase in assets or a decrease in liabilities as a result of business activities with customers Revenue recognition criteria provides guidance: – Generally when the service is performed or when goods are sold and delivered Copyright John Wiley & Sons Canada, Ltd. 8  Textbook Questions As a class let’s work on E3-1, E3-2, p130 Copyright John Wiley & Sons Canada, Ltd. 9  Expense Recognition Expenses are decreases in assets or increases in liabilities from business activities Represent a decrease in owner’s equity Expense recognition criteria provides guidance: – Tied to revenue recognition when a direct association exists between costs incurred and earning of revenue – For long-lived assets, expenses are recognized over the life of the asset – Otherwise expenses are reported in period incurred Copyright John Wiley & Sons 10 Canada, Ltd. The Accounting Cycle Copyright John Wiley & Sons Canada, Ltd. 11  Adjusting Entries- Basics Required for the preparation of financial statements – To ensure that revenue and expense recognition criteria are followed – Make it possible to accurately report assets, liabilities and owner’s equity Part of the accounting cycle Classified as prepayments or accruals Copyright John Wiley & Sons Canada, Ltd. 12  Textbook Questions Use textbook pages 101 – 109 to work on E3-2 (journal entry only) Copyright John Wiley & Sons Canada, Ltd. 13  Chapter 3: Success Criteria I will be successful when I can…. 1. Explain accrual basis accounting, and when to recognize revenues and expenses. 2. Prepare adjusting entries for prepayments. Pg101-106 3. Prepare adjusting entries for accruals. Copyright John Wiley & Sons Canada, Ltd. 14  Adjusting Entries- Prepayments Prepaid Expenses: – Expenses paid in cash and recorded as assets before they are used or consumed Unearned Revenues: – Cash received and recorded as a liability before revenue earned Copyright John Wiley & Sons Canada, Ltd. 15  Prepaid Expenses Expire through the passage of time or as an asset is used up – Portion used up is an expense of the period Prior to adjustment, assets are overstated and expenses are understated Adjusting entry: Dr. An expense account (to increase) Cr. An asset account (to decrease) Examples: supplies, rent, insurance Copyright John Wiley & Sons Canada, Ltd. 16  Textbook Questions As a class let’s work on BE3-4, p128 Copyright John Wiley & Sons Canada, Ltd. 17  Depreciation The allocation of the cost of long-lived assets to expense over its expected useful life – The portion of the asset that is used up (or expires) in each period is reported as an expense Straight-line depreciation: Annual depreciation expense = Cost ÷ Estimated useful life Copyright John Wiley & Sons Canada, Ltd. 18  Depreciation- Recording Adjusting entry: Dr. Depreciation expense (to increase) Cr. Accumulated depreciation (to increase) Contra asset account: An account with the opposite balance (credit) compared to its related asset account – Deducted from its related asset on the balance sheet Copyright John Wiley & Sons Canada, Ltd. 19  Depreciation- Presentation Accumulated depreciation is deducted from the cost of the asset on the balance sheet This difference is called the Carrying Amount Copyright John Wiley & Sons Canada, Ltd. 20  Textbook Questions As a class let’s work on BE3-5, p129 Copyright John Wiley & Sons Canada, Ltd. 21  Unearned Revenues Cash received before revenue is earned is recorded as a liability Subsequently earned by performing a service or providing a good Prior to adjustment, liabilities are overstated and revenues are understated Adjusting entry: Dr. A liability account (to decrease) Cr. A revenue account (to increase) Examples: subscriptions, tickets for sporting and entertainment events, customer deposits Copyright John Wiley & Sons Canada, Ltd. 22  Textbook Questions As a class let’s work on BE3-6, pg128 Copyright John Wiley & Sons Canada, Ltd. 23 Adjusting Entries for Prepayments Copyright John Wiley & Sons Canada, Ltd. 24  Textbook Questions Work on E3-3a), 4 (additional practice if needed) Pg130-131 Copyright John Wiley & Sons Canada, Ltd. 25  Chapter 3: Accounting Principles Study Objectives I will be successful when I can…. 1. Explain accrual basis accounting, and when to recognize revenues and expenses. 2. Prepare adjusting entries for prepayments. 3. Prepare adjusting entries for accruals. Pg106-116 Copyright John Wiley & Sons Canada, Ltd. 26  Adjusting Entries- Accruals Required where items are not yet recorded in the accounts Accrued Revenues: – Revenues earned but not yet received in cash or recorded Accrued Expenses: – Expenses incurred but not yet paid in cash or recorded Copyright John Wiley & Sons Canada, Ltd. 27  Accrued Revenues Accrue with the passage of time or result from services performed but not billed or collected Prior to adjustment, assets and revenues are understated Adjusting entry: Dr. An asset account (to increase) Cr. A revenue account (to increase) Examples: accounts receivable, rent receivable, and interest receivable Copyright John Wiley & Sons Canada, Ltd. 28  Accrued Expenses Expenses incurred but not yet paid or recorded Prior to adjustment, liabilities and expenses are understated Adjusting entry: Dr. An expense account (to increase) Cr. A liability account (to increase) Examples: accounts payable, rent payable, salaries payable, and interest payable Copyright John Wiley & Sons Canada, Ltd. 29 Adjusting Entries for Accruals Copyright John Wiley & Sons Canada, Ltd. 30 Work on E3-5, pg131 Textbook Questions Copyright John Wiley & Sons Canada, Ltd. 31 Copyright John Wiley & Sons Canada, Ltd. 32 Kahoot – Adjusting Entries Copyright John Wiley & Sons Canada, Ltd. 33  Textbook Questions Work on P3-2A, p134, E3-7 E3-8 E3-9 Copyright John Wiley & Sons Canada, Ltd. 34  Copyright Copyright © 2014 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the Copyrightpublisher John Wiley & Sons Canada, assume Ltd. no 35  Group Work Questions In groups you will work on: Group 1 – BE3-7 and BE3-8 Group 2 – BE3-9 Group 3 – BE3-10 Group 4 – BE3-11 Copyright John Wiley & Sons Canada, Ltd. 36