Review of the Accounting

Process
Chapter 2

Intermediate Financial Accounting

The Accounting Equation

A = L + OE
+ Owner Investments

- Owner Withdrawals

Intermediate Financial Accounting

+ Revenues
+ Gains

- Expenses
- Losses

Accounting Equation for a

Corporation

A = L + SE
+ Paid-in Capital

+ Revenues
+ Gains

Intermediate Financial Accounting

+ Retained Earnings

- Expenses
- Losses

- Dividends

Accounting Equation, Debits and

Credits, Increases and Decreases

Permanent Accountsassets, liabilities, paid-in capital,

retained earnings
Intermediate Financial Accounting
Temporary Accounts-revenues, gains, expenses, losses

During the Accounting Period

Source
Documents

Transaction
Analysis

Record in
Journal

Post to
Ledger

At the End of the Accounting Period

Financial
Statements

Adjusted
Trial Balance

At the End
of the Year
Intermediate Financial
Accounting
Close
Temporary
Accounts

Record & Post

Adjusting
Entries

Post-Closing
Trial Balance

Unadjusted
Trial Balance

The
Accounting
Processing
Cycle

Adjusting Entries
At the end of the period, adjusting entries are
required to satisfy the realization principle and
the matching principle.

Prepayments

Accruals

Estimates

Transactions where
cash is paid or
received before a
related expense or
revenue is
recognized.

Transactions where
cash is paid or
received after a
related expense or
revenue is
recognized.

Accountants must
often make
estimates in order
to comply with the
accrual accounting
model.

Intermediate Financial Accounting

Prepaid Expenses
Asset
Unadjusted
Balance

Expense

Credit
Adjustment

Today, I will pay

for my first
6 months rent.

Intermediate Financial Accounting

Debit
Adjustment

Prepaid Expenses
Items paid for in advance
of receiving their benefits

Depreciation
Depreciation is the process of allocating
the cost of plant and equipment over
their expected useful lives.
Straight-Line
Depreciation

Intermediate Financial Accounting

Asset Cost - Salvage Value

Useful Life

Depreciation
Recall the furniture and fixtures for $12,000 listed on
Dress Right Clothings unadjusted trial balance.
Assume the following:

Lets calculate the depreciation expense for the month

ended July 31, 2013.
Intermediate Financial Accounting

Depreciation
Recall the furniture and fixtures for $12,000 listed on
Dress Right Clothings unadjusted trial balance.

July
Depreciation =
Expense

$12,000 - $0
60 months

July 31
Depreciation expense
200
Accumulated depreciationIntermediate Financial Accounting
furniture and fixtures
200

$200 per month

Depreciation
After posting, the accounts look like
this:
Furniture and Fixtures
Depreciation Expense
Beg. bal.
Bal.

12,000
12,000

Beg. bal.
Bal.

200
200

Accumulated Depreciation
Beg. bal.
200
200 Bal.

Intermediate Financial Accounting

Unearned Revenues
Liability
Debit
Unadjusted
Adjustment
Balance

Buy your season tickets for

all home basketball games NOW!

Go Pokes

Intermediate Financial Accounting

Revenue
Credit
Adjustment

Unearned Revenue
Cash received in
advance of performing
services

Accrued Liabilities
Expense
Debit
Adjustment

I wont pay you

until the job is done!

Intermediate Financial Accounting

Liability
Credit
Adjustment

Accrued Liabilities
Liabilities recorded when an
expense has been incurred
prior to cash payment.

Accrued Receivables
Asset
Debit
Adjustment

Yes, you can pay me

in May for your April
15 tax return.

Intermediate Financial Accounting

Revenue
Credit
Adjustment

Accrued Receivables
Revenue earned in a
period prior to the cash
receipt.

The Income Statement

The income statement summarizes the

Intermediate
Financial
Accounting
results
of profit-generating
activities of

The Balance Sheet

The balance sheet presents the

financial
Intermediate
Financialposition
Accounting of the company on a
particular date.

The Balance Sheet

Notice that assets of $143,500 equals

Intermediate Financial Accounting
total liabilities plus shareholders

The Statement of Cash

Flows

The statement of cash flows discloses

Intermediate Financial Accounting
the changes in cash during a period.

The Statement of Shareholders Equity

The statement of shareholders equity

presents the changes in permanent
shareholder
accounts.
Intermediate Financial
Accounting

The Closing Process

Income
Summary
Intermediate Financial Accounting

Permanent
Accounts

Shareholders
Equity

Liabilities

Expenses

Temporary
Accounts

Assets
Dividends

Revenues

The closing process applies

only to temporary accounts.

End of Chapter 2

Intermediate Financial Accounting