Appendixaccounting cycle notes W14 1intermediate accounting fifth edtion.docx
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Appendixaccounting cycle notes W14 1intermediate accounting fifth edtion.docx
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AppendixaccountingcyclenotesW141intermediateaccountingfifthedtion
ReviewoftheAccountingCycle-Supplementarynotes
Thebestwaytolearnthestepsintheaccountingcycleistoworkthroughanexampleusingacase.BelowyouwillfindtheLarryOwensRealEstateLimitedcase.AssumethatLarryOwenshasstartedanewcompanyintherealestateindustry;heplanstosellrealestateandalsotomanagepropertiesonbehalfofclients.HestartsthebusinessonJuly1,2011.
Onthefollowingpages,youwillbegivenaseriesoftransactionforLarryOwensRealEstateLimitedandwillrecordthetransactionsandpreparethefinancialstatementsforthebusiness’firstmonthofoperation.
Case:
LarryOwensRealEstate
ConsiderthefollowingtransactionswhichoccurinthemonthofJuly,2011:
(1)LarryOwensinvests$50,000ofhisownmoneyinOwensRealEstateLimited(OREL)bypurchasingsharecapital.
(2)ORELpurchaseda$30,000businessautomobileoncredit(a36monthcarloan).
(3)ORELpaidthreemonthsofficerentinadvance,$3,000.
(4)Purchasedofficeequipmentforcash,$10,000
(5)PurchasedoncreditfromStandardSupplyCompanyofficesupplies,$600,
andfromOfficeDepotofficeequipment,$3,500.
(6)SoldunneededofficeequipmenttoDaleHall,$1,000cashand$500tobepaid
atalaterdate.
(7)Collected$500fromDaleHall.
(8)PaidOfficeDepot$1,750oftheamountowedforequipment.
(9)Soldahouseandcollectedan$8,500commission.
(10)Paidthesecretary'ssalaryforthefirsttwoweeksofthemonth,$1,000.
(11)Signedacontracttomanageanapartmentbuildingfor$500permonth.CollectedthemanagementfeeforthelasthalfofJulyandthemonthofAugust,amonthandahalf,$750
(12)Paidthesecretary'ssalaryforthesecondtwoweeksofJuly,$1,000.
(13)Paida$200dividendtohimselfasthesoleshareholder.
(14)Paidthemonthlytelephonebill,$200.
(15)Paidforgasandoilusedintheagencycar,$250.
(16)Paidfornewspaperadvertisingthathadappeared,$600.
Notethatthenumbershownwitheachaccountentrycorrespondstothetransactionnumber.Eachaccounthasbothalefthand(debit)sideandrighthand(credit)side.Adebitrepresentsanincreaseinassetsoradecreaseinliabilitiesorowners'equity.Acreditrepresentsanincreaseinliabilitiesorowners'equityandadecreaseinassets.Thetermsdebitandcreditthereforetakeonoppositesignsaswechangesidesintheaccountingequation.
Wefirstrecordtransactionsinjournalentries.Thejournalentriesarethenenteredin(postedto)theaccounts.Journalentriesfortheabove16transactionsareshownbelow.Thedebitsideoftheentryisshownfirst,andthecreditsideonthelinebelow,slightlyindented.
(1)Cash50,000
CommonStock50,000
(2)Automobile30,000
CarLoan30,000
(3)PrepaidRent3,000
Cash3,000
(4)OfficeEquipment10,000
Cash10,000
(5)OfficeSupplies600
OfficeEquipment3,500
AccountsPayable4,100
(6)Cash1,000
AccountsReceivable500
OfficeEquipment1,500
(7)Cash500
AccountsReceivable500
(8)AccountsPayable1,750
Cash1,750
(9)Cash8,500
CommissionsEarned8,500
(10)OfficeSalariesExpense1,000
Cash1,000
(11)Cash750
UnearnedManagementFees750
(12)OfficeSalariesExpense1,000
Cash1,000
(13)Dividends200
Cash200
(14)TelephoneExpense200
Cash200
(15)Gas,Oil,andRepairs250
Cash250
(16)AdvertisingExpense600
Cash600
SeeTaccountsonnextpage.
Assets=Liabilities+Owner’sEquity
(1)50,000
(3)3,000
(6)1,000(4)10,000
(7)500(8)1,750
(9)8,500(10)1,000
(11)750(12)1,000
(13)200
(14)200
(15)250
(16)600
42,750
(8)1,750(5)4,100
2,350
(1)50,000
50,000
CashAccountsPayableCommonStock
UnearnedManagementFees
Dividends
(11)750
750
(13)200
200
Carloan
AccountsReceivable
CommissionsEarned
(9)8,500
8,500
(2)30,000
30,000
(6)500(7)500
0
PrepaidRent
OfficeSalariesExpense
(3)3,000
3,000
(10)1,000
(12)1,000
2,000
OfficeSupplies
TelephoneExpense
(5)600
600
(14)200
200
Gas,Oil,andRepairs
Automobile
(15)250
250
(2)30,000
30,000
OfficeEquipment
AdvertisingExpense
(4)10,000(6)1,500
(5)3,500
1,2000
(16)600
600
SubLedgers
Beforemovingon,considerthe$2,350balanceinAccountsPayable.
Itisimportanttoknownotjustthetotalinthisaccount,butalsothebalancesduetoindividualsupplierssothatchequescanbewrittentopaythecorrectsupplierandtoensurethatallsuppliersarepaidappropriately.
Formally,acompanykeepstrackofamountsduetoindividualsuppliersthroughthemaintenanceofanAccountsPayablesubledger.
EachtimeajournalentryismadetoAccountsPayable,anentryisalsomadetotheindividualsupplieraccountinthesubledger.Journalentries(5)and(8)involveAccountsPayable.TheywouldbereflectedintheAccountsPayablesubledgerasfollows:
StandardSupplyCompany
OfficeDepot
(8)1750(5)3500
1750
(5)600
600
ATrialbalanceoftheAccountsPayablesubledgerfollows:
StandardSupplyCompany$600
OfficeDepot1,750
$2,350
NotethatthisequalsthebalanceintheAccountsPayableaccount.Thisisasweexpect,sincetheAccountsPayablesubledgerisnothingmorethanabreakdownofthataccountbyindividualsupplier.
WhenOwensRealEstateLimiteddevelopsaclientbase,itwillalsoneedtosetupanAccountsReceivablesubledgerinordertomaintainabreakdownofamountsowingfromindividualclients.
Let’scontinuewiththenextstepsintheaccountingcycle.Ifweaddupthebalancesinthegeneralledgeraccounts,wecanentertheminatrialbalanceandcheckthatthesumofthedebitsequalsthesumofthecredits,asfollows:
OwensRealEstateLimited
TrialBalance
July31,2011
DebitCredit
Cash$42,750
PrepaidRent3,000
OfficeSupplies600
Automobile30,000
OfficeEquipment12,000
AccountsPayable$2,350
UnearnedManagementFees750
CarLoan30,000
CommonStock50,000
Dividends200
CommissionsEarned8,500
OfficeSalariesExpense2,000
TelephoneExpense200
Gas,Oil,andRepairs250
AdvertisingExpense600
Totals$91,600$91,600
NowassumethatLarrywouldliketopreparefinancialstatementsattheendofJuly.Wewillprepareanincomestatementtoshowrevenuesearnedduringtheperiod,andtheexpensesincurredinordertoearntheserevenues.Wewillalsoprepareastatementoffinancialpositioninordertoshowtheamountsofthevariousassetsandliabilitiesandtheclosingowner'sequityfortheperiod.
Thetrialbalanceasitnowstandsdoesnotshowproperaccountbalances.Thatisbecausethenatureofsomeoftheitemshaschangedwiththepassageoftimefromwhentheywereoriginallyrecorded.Considertransaction
(2),thepaymentofthreemonthsrentinadvance.AssumethispaymentwasmadeonJuly1.Werecordedthistransactionasadebittoprepaidrent.However,nowitistheendofJuly.Onemonthhaspassed.Therefore,one-thirdofthe$3,000originallypaidisnolongerprepaid.Assetsusedupinthecourseofdoingbusinessbecomeexpenses.Werecordthisinthefollowingadjustingentry(journalentriesarenumberedbeginningfromwheretheprevioussequenceofjournalentriesleftoff):
(17)RentExpense1,000
PrepaidRent1,000
Similarly,physicalassets(theautomobileandtheofficeequipment)willwearout.Wecallthewearandtearonsuchassetsdepreciation.Assumetheautomobilehasdepreciatedby1/10ofitsoriginalcost.Assumethedepreciationontheofficeequipmentis$1200.Werecordthisdepreciationasfollows:
(18)DepreciationExpense4,200
AccumulatedDepreciationAutomobile3,000*
AccumulatedDepreciationOfficeEquipment1,200
*1/10X$30,000=$3,000
TheAccumulatedDepreciationaccountsarecalledcontraassetaccounts.Inordertopreservetheoriginalcostofthefixedassetsintact,wedonotcredittheAutomobileandOfficeEquipmentaccountsdirectly.Instead,wecreditthecontraaccountswhosecreditbalancesaredeductedfromthedebitbalancesintheassetaccountsthemselveswhenfinancialstatementsareprepared.
Larrycollected$750inJuly,representingmanagementfeesforhalfofJulyandallofAugust(transaction#11).ItisnowJuly31,sohehasnotearnedthe$500portionofthefeethatpertainstoAugust.Hehas,however,earnedthe$250portionofthefeepertainingtoJuly.Wethereforeneedtoremovethis$250fromtheliabilityaccount,UnearnedManagementFees,andassignittoarevenueaccount:
(19)UnearnedManagementFees250
ManagementFeesEarned250
Inordertopreparefinancialstatements,theadjustingjournalentries(17)through(19)arepostedtothetrialbalanceandthebalancesextendedouttotheincomestatementandstatementoffinancialpositioncolumns.Thisdocumentisreferredtoasaworksheet.Thefinancialstatementscanthenbeprepareddirectlyfromthisworksheet.
Notethatweneedtoentera$500debittothebottomoftheincomestatementtobalancethedebitandcreditcolumns.Thisisbecauserevenues(whicharecredits)exceededexpenses(whicharedebits)by$500resultingina$500netincomefortheperiod.Wealsoneedtoaddthe$500netincomefiguretothestatementoffinancialpositioncre
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