GUIDELINE FOR FINANCIAL ACCOUNTING

a. Chapter 1: Accounting in Action

b. Identify the activities and users associated with accounting.
c. Accounting Activities and Users
d. Accounting Activities
- Accounting consists of three basic activities – it identifies, records, and communicates
the economic events of an organization to interested users.
- Identification: select economic events (transactions) relevant to the business.
- Recording: record, classify, and summarize.
 To record the events in order to provide a history of its financial activities.
 Recording consists of keeping a systematic, chronological diary of events,
measured in monetary units.
- Communication: Prepare accounting reports and analyze and interpret them for users.
 Analysis: involves use of ratios, percentages, graphs, and charts to highlight
significant financial trends and relationships.
 Interpretation: involves explaining the uses, meaning, and limitations of reported
data.
- Characteristic of economic events: expressed in term of money and affect financial
statements of the company.
- Record in the accounting book: Need to collect evidence of economic events such as
VAT bill, cash receipt, cash payment.... = accounting document
- At the end of accounting period, prepare financial statements
 Communicates with interested users
- The accounting process includes the bookkeeping function. Bookkeeping involves only
the recording step.
e. Accounting Users
- Internal users:
 Are managers who plan, organize, and run the business.
 Include marketing managers, production supervisors, finance directors, and
company officers.
 Managerial accounting provides internal reports to help users make decisions
about their companies.
- External users:
 Are individuals and organizations outside a company who want financial
information about the company.
 The two most common types are investors and creditors.
 Investors (owners) use accounting information to decide whether to buy, hold, or
sell ownership shares of a company.
  Creditors (suppliers, bankers) use accounting information to evaluate the risks of
granting credit of lending money.
 Other external users: taxing authorities, regulatory agencies, labor unions, and
customers.
f. Explain the building blocks of accounting: ethichs, principles, and
assumptions.
1. Ethics in Financial Reporting
- The standards of conduct by which actions are judged as right or wrong, honest or
dishonest, fair or not fair, are ethics.
- Steps in analyzing ethics cases and situations:
1. Recognize an ethical situation and the ethical issues involved: Use your personal
ethics to identify ethical situations and issues. Some businesses and professional
organizations provide written codes of ethics for guidance in some business
situations.
2. Identify and analyze the principal elements in the situation: Identify the
stakholders – persons of groups who may be harmed or benefited. Ask the question:
What are the responsibilities and obligations of the parties involved?
3. Identify the alternatives, and weight the impact of each alternative on various
stakeholders: Select the most ethical alternative, considering all the consequences.
Sometimes there will be one right answer. Other situations involve more than one
right solution; these situations require an evaluation of each and a slection of the best
alternative.
g. Accounting Standards
- To ensure high-quality financial reporting.
- Primary accounting standard-setting bodies:
 International Accounting Standards Board (IASB)
 Determines International Financial Reporting Standards (IFRS)
 Used in 130 countries
 Headquartered in London, with its 15 board members drawn from around
the world.
 Financial Accounting Standards Board (FASB)
 Determines generally accepted accounting principles (GAAP)
 Used by most companies in the U.S.
- In order to increase comparability, in recent years the two standard-setting bodies made
efforts to reduce the differences between IFRS and the U.S GAAP. This process it
referred to as convergence.
h. Measurement Principles
- IFRS generally uses one of two measurement principles, the historical cost principle or
the fair value principle.
 - Historical cost principle (or cost principle): dictates that companies record assets at their
cost. This is true not only at the time the asset is purchased, but also over the time the
asset is held.
- Fair value principle: states that assets and liabilities should be reported at fair value (the
price received to sell an asset or settle a liability)
- Selecting Measurement Principles: selection of which principles to follow generally
relates to trade-offs between relevance and faithful representation.
 Relevance means that financial information is capable of making a difference in a
decision.
 Faithful representation means that the numbers and descriptions match what
really existed or happened – they are factual.
- If company applied historical cost principle, financial information will be faithful
representation.
- And if company applied fair value principle, financial information will be relevance.
i. Assumptions
- Provide a foundation for the accounting process. Two main assumptions are the monetary
unit assumption and the economic entity assumption.
- Monetary unit assumption: requires that companies including in the accounting record
only transaction data that can be expressed in money terms.
 Enables accounting to quantify (measure) economic events.
 Vital to applying the historical cost principle.
- Economic Entity Assumption: requires that the activities of the entity be kept separate
and distinct from the activities of its owner and all other economic entities. Typical entity
forms are proprietorship (1 owner – unlimited liability), partnership (more than 1 owner –
unlimited liability), and corporation (no limit on number of owners – limited liability).
j. State the accounting equation, and define its components
1. The Accounting Equation
- The basis accounting equation:

Assets = Liabilities + Equity

- Assets: resources a business owns

- Liabilities: claims against assets, i.e. existing debts and obligations
- Equity: the ownership claim on a company’s total assets
- Applies to all economic entities regardless of size, nature of business, or form of business
organization.
- Provides the underlying framework for recording and summarizing economic events.
E.g: Ha Anh and Kim Anh open a coffee shop. Ha Anh has $10,000 and KA has $20,000. The
total $30,000 cash invested in the business becomes “Equity”.
Accounting equation of the business (coffee shop)
 Assets = Equity
Cash $30,000 = Equity $30,000
The business borrows $20,000 from the bank -> Liabilities
Accounting equation of the business (coffee shop)
Assets = Liabilities + Equity
Cash $50,000 Bank borrowing $20,000 Owner invest $30,000
a. Assets:
- The common characteristic possessed by all assets is the capacity to provide future
services or benefits.
- Cash = “Cash at bank” in your checking accounts
- Cash in saving account = “note receivable”
- Cash on hand = “Petty cash”
- Supplies: equipment with small value and short-lived (be used up within 1 years)
- Inventory is a group of items: Material, Finished goods, Work in process, Goods, Goods
in transit, Goods on consignment…
 Finished goods: final product of manufacturing -> Manufacturing company
 Goods -> Merchandising company
 Company TNG produces clothes -> have material, finished goods
TNG sell its finished goods to Zara -> it becomes “goods” in Zara
- Fixed assets = Property, Plant, and Equipment (PPE) = Tangible assets
- Equipment: large value and long-lived (used up in more than 1 year)
- Intangible assets: computer software, copyright, license, patent....
- Investment in securities and property
- Account receivable: the right to collect cash from customer
If the company sells goods on account/on credit, the company doesnt get cash from customer
at the point of sale -> record “account receivable”
b. Liability: debts and obligations
- Account payable: the obligation to pay cash to suppliers
The company buys inventory, fixed assets...on account/on credit and postpone payment
- Note payable: sign vehicle....(with interest) with the bank to buy assets such as
equipement or vehicle....
- Salaries and wages payable, Tax payable, Interest payable, Dividend payable...
k. Equity (residual equity) = Assets – Liabilities
- To find out what belongs to shareholders, we subtract creditors’ claims (the liabilities)
from the assets. The remainder is the shareholder’ claim on the assets – equity, or
residual equity – that is, the equity left over after creditors’ claims are satisfied.
- Share capital—ordinary: describes the amounts paid in by shareholders for the ordinary
shares they purchase.
- Revenues: are the gross increases in equity resulting from business activities entered into
for the purpose of earning income. Revenues usually result in an increase in an asset.
 - Expenses: are the cost of assets consumed or services used in the process of earning
revenue.
- Dividends: are distribution of cash or other assets to shareholders. They are not an
expense.
DO IT!
How the accounting equation affected?
1. Owner invests $100,000 cash in exchange for share capital
2. Owner invests an equipment cost $20,000 in exchange for share capital
3. The company purchases a building for $50,000 cash
4. The company borrows $60,000 from the bank by signing a note payable
5. The company purchases goods for $20,000 on account
6. The company pays off $40,000 for the bank
7. The company pays $5,000 to suppliers in transaction 5.
Solutions:
Transaction Assets = Liabilities + Equity Total
1 Cash $100,000 SC $100,000 100,000
Cash $100,000
2 SC $120,000 120,000
Equipment $20,000
Cash $50,000
3 Equipment $20,000 SC $120,000 120,000
Inventory $50,000
Cash $110,000
4 Equipment $20,000 NP $60,000 SC $120,000 180,000
Inventory $50,000
Cash $110,000
NP $60,000
5 Equipment $20,000 SC $120,000 200,000
AP $20,000
Inventory $70,000
Cash $70,000
NP $20,000
6 Equipment $20,000 SC $120,000 160,000
AP $20,000
Inventory $70,000
Cash $65,000
NP $20,000
7 Equipment $20,000 SC $120,000 155,000
AP $15,000
Inventory $70,000

DO IT!
On 1st Jan 2021, Charles and Keith set up a clothes store. They invested $5,000 in the store.
During the 1st quarter, the store has conducted following transactions:
1. Purchased some clothes for $5,000 cash
2. Sold all the above clothes for $6,000 cash
3. Purchased some new clothes for $6,000 cash
 4. The weather was hotter than last year, they sold the purchased new clothes for $4,500
cash to get the money back.
Requirement: List all the asset, liability, and equity of the store after each transaction.
Calculate profit/loss of the store in 1st quarter 2021.
Solution:
Transaction Assets = Liabilities + Equity Total
0 Cash $5,000 SC $5,000 5,000
1 Inventory $5,000 SC $5,000 5,000
SC $5,000
2 Cash $6,000 Sales Revenue $6,000 6,000
-COGS $5,000
SC $5,000
3 Inventory $6,000 Sales Revenue $6,000 6,000
-COGS $5,000
SC $5,000
4 Cash $4,500 Sales Rev. $10,500 $4,500
-COGS $11,000
Loss of the store in 1 quarter 2021 = Total revenues – Total expenses
st

= 10,500 – 11,000 = $500

l. Analyze the effects of business transactions on the accounting equation.
1. Accounting Information System
- The system of collecting and processing transaction data and communicating financial
information to decision-makers.
- Accounting information systems rely on a process referred to as the accounting cycle.
- Transactions (business transactions) are a business’s economic events recorded by
accountants.
- Transactions may be external or internal. External transactions involve economic events
between the company and some outside enterprise. Internal transactions are economic
events that occur entirely within one company.
- Each transaction must have a dual effect on the accounting equation. Two or more items
could be affected.
2. Transaction Analysis
- Expanded accounting equation:
 - Each transaction must be analyzed in terms of its effect on:
(a.) The three components of the basic accounting equation.
(b.) Specific types (kinds) of items within each component.
- The two sides of the equation must always be equal.
- The Share Capital—Ordinary and Retained Earnings columns indicate the causes of each
change in the shareholders’ claim on assets.
- Each transaction has a dual effect on the accounting equation.
- 4 types of dual effect:
 An asset increases, another asset decreases, total assets unchange
Ex: the company buys inventory for $1,000 cash
Analyze: Inventory +1,000 and Cash -1,000
Equation: Inventoy and Cash are both assets -> Total assets unchange
 Asset increases, either L or E increase -> total assets increase and Total L+ E
increase
Ex: The company buys an equipment for $5,000 on account
Analyze: Equipment +5,000 and Account payable +5,000
 Asset decreases, either L or E decrease -> total assets decrease and Total L+
E decrease
Ex: The company record cost of goods sold for $2,000
Analyze: Inventory – 2,000 and COGS +2,000
COGS increase = Equity decrease
 Either L or E increase, another L or E decrease -> total L + E unchange
Ex: The company signs a note payable to borrow $1,000 from the bank to pay for
account payable due.
Analyze: Note payable +1,000 and Account payable - 1,000
DO IT! 4 Tabular Analysis
Transaction Assets = Liabilities + Equity Total
1 Cash 25,000 SC 25,000 25,000
Cash 25,000
2 AP 7,000 SC 25,000 32,000
Equipment 7,000
Cash 33,000 SC 25,000
3 AP 7,000 40,000
Equipment 7,000 Service Rev. 8,000
SC 25,000
Cash 32,150
4 AP 7,000 SR 8,000 39,150
Equipment 7,000
-Rent exp. 850
SC 25,000
Cash 31,150 SR 8,000
5 AP 7,000 38,150
Equipment 7,000 -Rent exp. 850
-Div. 1,000
m. Describe the five financial statements and how they are prepared
- Companies prepare five financial statements from the summarized accounting data.
- Income statement: presents the revenues and expenses and resulting net income or net
loss for a specific period of time.
- Retained earnings statement: summarizes the changes in retained earnings for a
specific period of time.
- Statement of financial position: reports the assets, liabilities, and equity of a company
at a specific date. (Sometimes referred to as a balance sheet.)
- Statement of cash flows: summarizes information about the cash inflows (receipts) and
cash outflows (payments) for a specific period of time.
- Comprehensive income statement: presents other comprehensive income items that are
not included in the determination of net income in income statement.
1. Income Statement
- The Income Statement lists revenues first, followed by expenses. Then, the statement
shows net income (or net loss).
- Structure:
 The income statement lists revenues first, followed by expenses.
 Then, the statement shows net income (or net loss).
 When revenues exceed expenses, net income results.
 When expenses exceed revenues, a net loss results.
 The income statement does not include investment and dividend transactions
between the shareholders and the business in measuring net income.
2. Retained Earnings Statement
- The information provided by this statement indicates the reasons why RE increased or
decreased during the period. If there is a net loss, it is deducted with dividends in the RE
statement.
- Structure:
 The first line of the statement shows the beginning retained earnings amount.
 Then add net income (or subtract net loss) and subtract dividends.
 The retained earnings ending balance is the final amount on the statement.
3. Statement of Financial Position (The Balance Sheet)
- The BS is like a snapshot of the company’s financial condition at a specific moment in
time (usually the month-end or year-end).
- Structure:
 Lists assets at the top, followed by equity and then liabilities.
 Total assets must equal total equity and liabilities.
 When two or more liabilities are involved, a customary way of listing is as shown
as follows:
 4. Statement of Cash Flows
- The statement of cash flows provides information on the cash receipts and payments for a
specific period of time.
- Structure: The statement of cash flows reports
 the cash effects of a company’s operations during a period,
 its investing activities,
 its financing activities,
 the net increase or decrease in cash during the period, and
 the cash amount at the end of the period.
n. Comprehensive Income Statement
- Other comprehensive income statement items are not part of net income but are
considered important enough to be reported separately.
- This statement immediately follows the income statement.
- IFRS Alternative:
IFRS allows an alternative statement format in which the information contained in the
income statement and the comprehensive income statement are combined in a single
statement, referred to as a statement of comprehensive income.
- Only if company applies Fair value principle
Today, buy house for 1 bil
At the year end, fair value of house is 1.1 bil
- Report: 0.1 bil is comprehensive income -> unrealized income
This 0.1 bil is not realized income if the company does not sell the house
- Realized income reports in Income statement
- Unrealized income reports in Comprehensive income statement
DO IT! 5 Financial Statement Items
a. Assets = Liabilities + Equity
= SR - Rent Exp + AP - Utilities Exp - SW Exp + NP - Div
= Equipment + Cash + Accounts Receivable
= 27,000
b. Net income
Revenues
Service revenue HK$36,000
Expenses
Rent expense HK$11,000
Salaries and wages expense 7,000
Utilities expense 4,000
Total expenses 22,000
 Net income HK$14,000
c. Equity
Total assets [as computed in (a)] HK$27,000
Less: Liabilities
Notes payable HK$16,500
Accounts payable 2,000 18,500
Equity HK$ 8,500

o. Career Opportunities in Accounting

- Public Accounting
Individuals in public accounting offer expert service to the general public, in much the
same way that doctors serve patients and lawyers serve clients.
Choices: Auditing, taxation, management consulting
- Private Accounting
Individuals in private accounting are employees of for-profit companies and not-for-
profit organizations.
Choices: Cost accounting, budgeting, accounting information system design and
support, tax planning and preparation, internal auditing
- Governmental Accounting
Choices: Tax authorities, local governments, law enforcement agencies, company
regulators, accounting educators at public colleges and universities
- Forensic Accounting
Choices: Investigate theft and fraud using accounting, auditing, and investigative
skills
p. Problems
P1.2
a.
Transaction Assets = Liabilities + Equity Total
Cash 5,000
AR 1,500 SC 4,000
July 31 AP 4,200 13,000
Supplies 500 RE 4,800
Equipment 6,000
Cash 6,200
AR 300 SC 4,000
1 AP 4,200 13,000
Supplies 500 RE 4,800
Equipment 6,000
Cash 3,400
AR 300 SC 4,000
2 AP 1,400 10,200
Supplies 500 RE 4,800
Equipment 6,000
 Cash 7,400
SC 4,000
AR 3,800
3 AP 1,400 RE 4,800 17,700
Supplies 500
SR 7,500
Equipment 6,000
Cash 7,000
SC 4,000
AR 3,800
4 AP 3,000 RE 4,800 19,300
Supplies 500
SR 7,500
Equipment 8,000
SC 4,000
Cash 2,900 RE 4,800
AR 3,800 SR 7,500
5 AP 3,000 15,200
Supplies 500 -SW Exp 2,800
Equipment 8,000 -Rent Exp 900
-Adv exp 400
SC 4,000
RE 4,800
Cash 2,200
SR 7,500
AR 3,800
6 AP 3,000 -SW Exp 2,800 14,500
Supplies 500
-Rent Exp 900
Equipment 8,000
-Adv exp 400
-Div 700
SC 4,000
RE 4,800
Cash 4,200
SR 7,500
AR 3,800 AP 3,000
7 -SW Exp 2,800 16,500
Supplies 500 NP 2,000
-Rent Exp 900
Equipment 8,000
-Adv exp 400
-Div 700
SC 4,000
RE 4,800
Cash 4,200 SR 7,500
AR 3,800 AP 3,270 -SW Exp 2,800
8 16,500
Supplies 500 NP 2,000 -Rent Exp 900
Equipment 8,000 -Adv exp 400
-Utilities exp 270
-Div 700
b.
Ai Fang Co.
Income Statement
For the Month Ended August 31, 2020
 Monetary unit: ¥
Revenues
Service Revenue 7,500
Expenses
SW Exp 2,800
Rent Exp 900
Adv Exp 400
Utilities Exp 270
Total expenses 4,370
Net income 3,130
Ai Fang Co.
Retained Earnings Statement
For the Month Ended August 31, 2020
Monetary unit: ¥
Retained Earnings, August 1 4,800
Add: Net income 3,130
7,930
Less: Dividends 700
Retained earnings, August 31 7,230
Ai Fang Co.
Statement of Financial Position
At August 31, 2020
Monetary unit: ¥
Assets
Equipment 8,000
Supplies 500
Accounts Receivable 3,800
Cash 4,200
Total assets 16,500
Equity and Liabilities
Equity
Share capital – ordinary 4,000
Retained earnings 7,230 11,230
Liabilities
Accounts payable 3,270
Note payable 2,000
Total equity and liabilities 16,500

P1.3
a.
Park Flying School Ltd.
 Income Statement
For the Month Ended May 31, 2020
Monetary unit: W 000
Revenues
Service Revenue 6,800
Expenses
Rent Exp 1000
Adv Exp 500
Maintenance and Repairs Exp 400
Gasoline Exp 2,500
Utilities Exp 400
Total expenses 4,800
Net income 2,000
Park Flying School Ltd.
Retained Earnings Statement
For the Month Ended May 31, 2020
Monetary unit: W 000
Retained Earnings, August 1 0
Add: Net income 2,000
2,000
Less: Dividends 480
Retained earnings, August 31 1,520
Park Flying School Ltd.
Statement of Financial Position
At August 31, 2020
Monetary unit: ¥
Assets
Equipment 64,000
Accounts Receivable 7,420
Cash 4,500
Total assets 75,920
Equity and Liabilities
Equity
Share capital – ordinary 45,000
Retained earnings 1,520 46,520
Liabilities
Accounts payable 1,400
Note payable 28,000
Total equity and liabilities 75,920
b.
(1) W900,000 worth of services were performed and billed but not collected at May 31
 Analysis: AR + 900; SR + 900
(2) W1,500,000 of gasoline expense was incurred but not paid.
Analyze: AP + 1,500; Gasoline exp + 1,500
Park Flying School Ltd.
Income Statement
For the Month Ended May 31, 2020
Monetary unit: W 000
Revenues
Service Revenue 7,700
Expenses
Rent Exp 1000
Adv Exp 500
Maintenance and Repairs Exp 400
Gasoline Exp 4,000
Utilities Exp 400
Total expenses 6,300
Net income 1,400
Park Flying School Ltd.
Retained Earnings Statement
For the Month Ended May 31, 2020
Monetary unit: W 000
Retained Earnings, August 1 0
Add: Net income 1,400
1,400
Less: Dividends 480
Retained earnings, August 31 920

P1.4
a.
Transaction Assets = Liabilities + Equity Total
June 1 Cash 10,000 SC 10,000 10,000
Cash 8,000
2 NP 12,000 SC 10,000 22,000
Equipment 14,000
Cash 7,500 SC 10,000
3 NP 12,000 21,500
Equipment 14,000 -Rent exp 500
Cash 7,500 SC 10,000
5 AR 4,800 NP 12,000 SR 4,800 26,300
Equipment 14,000 -Rent exp 500
9 Cash 7,200 NP 12,000 SC 10,000 26,000
AR 4,800 SR 4,800
 -Rent exp 500
Equipment 14,000
-Div 300
Cash 7,200 NP 12,000 SC 10,000
AR 4,800 AP 150 SR 4,800
12 26,150
Equipment 14,000 -Rent exp 500
Supplies 150 -Div 300
Cash 8,450 NP 12,000 SC 10,000
AR 3,550 AP 150 SR 4,800
15 26,150
Equipment 14,000 -Rent exp 500
Supplies 150 -Div 300
SC 10,000
Cash 8,450
SR 4,800
AR 3,550 NP 12,000
17 -Rent exp 500 26,050
Equipment 14,000 AP 250
-Gasoline exp 100
Supplies 150
-Div 300
SC 10,000
Cash 9,950
SR 6,300
AR 3,550 NP 12,000
20 -Rent exp 500 27,550
Equipment 14,000 AP 250
-Gasoline exp 100
Supplies 150
-Div 300
SC 10,000
Cash 9,450
SR 6,300
AR 3,550 NP 11,500
23 -Rent exp 500 27,050
Equipment 14,000 AP 250
-Gasoline exp 100
Supplies 150
-Div 300
Cash 9,200 SC 10,000
AR 3,550 SR 6,300
Equipment 14,000 NP 11,500 -Rent exp 500
26 26,800
Supplies 150 AP 250 -Gasoline exp 100
-Utilities exp 250
-Div 300
Cash 9,100 SC 10,000
AR 3,550 SR 6,300
Equipment 14,000 NP 11,500 -Rent exp 500
29 26,800
Supplies 150 AP 150 -Gasoline exp 100
-Utilities exp 250
-Div 300
30 Cash 8,100 NP 11,500 SC 10,000 25,800
AR 3,550 AP 150 SR 6,300
Equipment 14,000 -Rent exp 500
 -Gasoline exp 100
-Utilities exp 250
Supplies 150
-SW exp 1,000
-Div 300
b.
Stiner Deliveries Ltd.
Income Statement
For the Month Ended June 30, 2020
Monetary unit: £
Revenues
Service Revenue 6,300
Expenses
Rent Exp 500
Gasoline Exp 100
Utilities Exp 250
SW Exp 1,000
Total expenses 1,850
Net income 4,450
Stiner Deliveries Ltd.
Retained Earnings Statement
For the Month Ended June 30, 2020
Monetary unit: W 000
Retained Earnings, August 1 0
Add: Net income 4,450
4,450
Less: Dividends 300
Retained earnings, August 31 4,150
c.
Stiner Deliveries Ltd.
Statement of Financial Position
At June 30, 2020
Monetary unit: ¥
Assets
Equipment 14,000
Accounts Receivable 3,350
Supplies 150
Cash 8,100
Total assets 25,800
Equity and Liabilities
Equity
 Share capital – ordinary 10,000
Retained earnings 4,150 14,150
Liabilities
Accounts payable 150
Note payable 11,500
Total equity and liabilities 25,800

P1.5

Equity change in year = additional investment – dividend + revenues – expense

Equity at the year beginning + Equity change in year = Equity at the year ending
Equity at the year beginning + additional investment – dividend + revenues - expense = Equity at
the year ending

a. Determine the missing amounts.

Crosby
a = equity = Assets – liabilities = 900,000-650,000=250,000
b = assets = liabilities + equity = 550,000+400,000 = 950,000
c = additional investment = Equity at the year ending + dividend - revenues + expense - Equity at
the year beginning = 400,000 + 100,000 – 3,500,000 + 3,300,000 – 250,000 = 50,000
Stills
d = liabilities = Assets – equity = 1,100,000 – 500,000 = 600,000
e = equity = Assets – liabilities = 1,370,000 – 750,000 = 620,000
f = dividends = Equity at the year beginning + additional investment + revenues – expense -
Equity at the year ending = 500,000 + 150,000 + 4,200,000 - 3,850,000 - 620,000 = 380,000
Nash
g = assets = liabilities + equity = 750,000 + 450,000 = 1,200,000
h = liabilities = Assets – equity = 2,000,000 – 1,300,000 = 700,000
i = Total revenues = Equity at the year ending - Equity at the year beginning - additional
investment + dividend + expense - = 1,300,000 - 450,000 - 100,000 + 140,000 + 3,420,000 =
4,310,000
Young
J = liabilities = Assets – equity = 1,500,000 – 1,000,000 = 500,000
K = assets = liabilities + equity = 800,000 +1,400,000 = 2,200,000
L = total expenses = Equity at the year beginning + additional investment – dividend + revenues
- Equity at the year ending = 1,000,000 + 150,000 - 100,000 +5,000,000 – 1,400,000 = 4,650,000
b. Prepare the retained earnings statement for Stills Company. Assume beginning
retained earnings was HK$200,000.

Retained earnings statement

Stills Company
For the year ended Dec 31, 2020
Monetary unit: HK$

RE, Jan 1 2020 200,000

Add: Net income of 2020 (=revenues – expenses) 350,000
Less: dividends 380,000
RE, Dec 31 2020 170,000
q. Chapter 2: The Recording Process
I. Describe how accounts, debits, and credits are used to record business
transactions
1. Accounts
- An account is an individual accounting record of increases and decreases in a specific
asset, liability, or equity item.
- In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side
(Dr.), and (3) a right or credit side (Cr.).

2. Dr./Cr. Procedures for Assets

- Whenever we are referring to a specific account, we capitalize the name.

- Both sides of the basic equation (Assets = Liabilities + Equity) must be equal.
- The equality of debits and credits provides the basis for the double-entry system of
recording transactions.
- Companies issue share capital—ordinary in exchange for the owners’ investment paid in
to the company.
- Retained earnings is net income that is kept (retained) in the business. It represents the
portion of equity that the company has accumulated through the profitable operation of
the business.
- Dividend: A company’s distribution to its shareholders. The most common form of a
distribution is a cash dividend.

3. Equity Relationships
- Dividends, revenues, and expenses are eventually transferred to retained earnings at the
end of the period. As a result, a change in any one of these three items affects equity.
 II. Indicate how a journal is used in the recording process
1. The journal
- Companies initially record transactions in chronological order. Thus, the journal is
referred to as the book of original entry.
- The journal makes several significant contributions to the recording process:
 It discloses in one place the complete effects of a transaction.
 It provides a chronological record of transactions.
 It helps to prevent or locate errors because the debit and credit amounts for each
entry can be easily compared.
- It is important to use correct and specific account titles in journalizing. Erroneous account
titles lead to incorrect financial statements.
Example: On September 1, Softbyte SA shareholders invested €15,000 cash in the corporation
in exchange for ordinary shares, and Softbyte purchased computer equipment for €7,000 cash.
How do you enter the transaction data in the journal?/Journalize the transaction/Prepare journal
entry => these three questions ask for the same purpose is to journalize the transaction data.
Solution:
September 1
Dr. Cash 15,000
Cr. SC 15,000
Sept 1
Dr. Equipment 7,000
 Cr. Cash 7,000

2. Simple and Compound Entries

- Simple entry: Involves one debit and one credit account.
- Compound entry: An entry that requires three or more accounts. The standard format
requires that all debits be listed before credits.
DO IT! 2 Recording Business Activities
Each transaction that is recorded is entered in the general journal.
Journalize:
Dr. Cash 20,000
Cr. SC 20,000
Dr. Equipment 4,800
Cr. AP 4,800
No entry.

3. Rule of journalizing
- Always Debit first, followed by Credit
- Total debit always equal total credit in a journal entry
- Accepting form of compound entry: Dr/Dr/Cr or Dr/Cr/Cr.
- Do not Debit more than 2 accounts and Credit more than 2 accounts at the same time
- Should divide compound entry into simple entry but do not combine simple entry to be
compound entry because it will be too complicated.

III. The Ledger and Posting

1. Ledger
- Ledger: The entire group of accounts maintained by a company.
- Provides the balance in each of the accounts as well as keeps track of changes in these
balances.
- Companies may use various kinds of ledgers, but every company has a general ledger.
- A general ledger contains all the asset, liability, and equity accounts.
- Ledger also can be expressed as T-account.
- The simple T-account form used in accounting texts is often very useful for illustration
purposes.
- The above format is called the three-column form of account. It has three money columns
– debit, credit, and balance. The balance in the account is determined after each
transaction. Companies use the explanation space and reference columns to provide
special information about the transaction.
- T-account:

Opening balance + Increase – Decrease = Closing balance

2. Posting
- The procedure of transferring journal entries to the ledger accounts is called posting.
- This phase of the recording process accumulates the effects of journalized transactions
into the individual accounts.
- Posting involves the following steps.
1. In the ledger, in the appropriate columns of the account(s) debited, enter the
date, journal page, and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to which the
debit amount was posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter the
date, journal page, and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which the
credit amount was posted.
- Posting should be performed in chronological order. That is, the company should post
all the debits and credits of one journal entry before proceeding to the next journal entry.

3. Chart of Accounts
- Lists the accounts and the account numbers that identify their location in the ledger.
- Numbering system: Usually starts with the statement of financial position accounts and
follows with the income statement accounts.
- Number of accounts: Depends on the amount of detail management desires.
- Companies leave gaps to permit the insertion of new accounts as needed during the life
of the business.

4. The Recording Process Illustrated

- The purpose of transaction analysis is first to identify the type of account involved, and
then to determine whether to make a debit or a credit to the account.
  If being required posting, first use T-account to list all the accounts changed after
transactions, that use a table to summarize all of these T-account.
 General journal
Date Account Titles and Explanation Ref. (no Debit Credit
need to
fill in)

DO IT! 3 POSTING
Debit Cash Credit
OB: 600 (1)
2,280 (4) 400 (15)
92 (19)
CB: 2,388 (30)

IV. Trial Balance

- The trial balance is a list of accounts and their balances at a given time.
- It provides the mathematical equality of debits and credits after posting.
- Three steps of preparation:
 List the account titles and their balances in the appropriate debit or credit column.
  Total the debit and credit columns.
 Verify the equality of the two columns.
- Example

1. Limitations of a Trial Balance

- A trial balance may balance even when:
1 - Transaction not journalized.
2 - Correct journal entry not posted.
3 - Journal entry posted twice.
4 - Incorrect accounts used in journalizing or posting.
5 - Offsetting errors made in recording the amount of a transaction.
- Trial balance will not balance only if:
Example: the transaction “Purchase inventory for 500 on account” was journalized as:
Dr Inventory 500
Cr Accounts payable 50

2. Locating Errors
- Determine the amount of the difference between the two columns of the trial balance.
- Take one of the commonly useful steps as follows:
 3. Currency Signs and Underlining
Currency Signs
• Do not appear in journals or ledgers.
• Typically used only in the trial balance and the financial statements.
• Shown only for the first item and the total in the column.
Underlining
• A single line is placed under the column of figures to be added or subtracted.
• Totals are double-underlined.
V. Problems
P2.2
Apr. 1
Dr. Cash 20,000
Cr. SC 20,000
Apr. 1 No entry
Apr. 2
Dr. Rent Exp 1,100
Cr. Cash 1,100
Apr. 3
Dr. Supplies 4,000
Cr. AP 4,000
Apr. 10
Dr. AR 5,100
Cr. Ser. Rev 5,100
Apr. 11
Dr. Cash 1,000
Cr. Unearned Ser. Rev (liability) 1,000
Apr. 20
Dr. Cash 2,100
Cr. Ser. Rev 2,100
Apr. 30
Dr. SW Exp 2,800
Cr. Cash 2,800
Apr. 30
Dr. AP 2,400
Cr. Cash 2,400
b. Ledger
Debit Cash Credit
OB: 0 (1)
20,000 (1) 1,100 (2)
1,000 (11) 2,800 (30)
2,100 (20) 2,400 (30)
CB: 16,800 (30)

Debit SC Credit
OB: 0 (1)
20,000 (1)
CB: 20,000 (30)

Debit Rent Exp Credit

1,100 (2)
Total: 1,100 (30)
 Debit Supplies Credit
OB: 0 (1)
4,000 (3)
CB: 4,000 (30)

Debit Accounts Payable Credit

OB: 0 (1)
2,400 (30) 4,000 (3)
CB: 1,600 (30)

Debit Accounts Receivable Credit

OB: 0 (1)
5,100 (10)
CB: 5,100 (30)

Debit Services Revenue Credit

5,100 (10)
2,100 (20)
Total: 7,200 (30)

Debit Unearned Ser. Rev. Credit

OB: 0 (1)
1,000 (11)
CB: 1,000 (30)

Debit SW Exp Credit

2,800 (30)
Total: 2,800 (30)
c.
Emily stansbury dentist
Trial balance
April 30, 2020
Monetary unit: Euro
Accounts Debit Credit
Cash 16,800
Account receivable 5,100
Supplies 4,000
 Rent expense 1,100
SW expense 2,800
Account payable 1,600
Unearned Ser. Revenue 1,000
Common stock 20,000
Ser. Revenue 7,200
Total 29,800 29,800

P2.3
Rent expense of a month = 24,000/12

Prepaid expense is asset account. Common: prepaid rent, prepaid insurance…

Insurance expense of a month = 1,800/12

a.
May 1.1
Dr. Cash 40,000
Cr. SC 40,000
May 1.2. No entry
May 1.3
Dr. Prepaid rent (assets) 24,000
Cr. Cash 24,000
May 1.4
Dr. Equipment 30,000
Cr. Cash 10,000
Cr. AP 20,000
May 1.5
Dr. Prepaid Insurance (assets)1,800
Cr. Cash 1,800
May 6
Dr. Supplies 420
Cr. Cash 420
May 7
Dr. Supplies 1,500
Cr. AP 1,500
May 8
Dr. Cash 8,000
Dr. AR 12,000
Cr. Ser. Rev. 20,000
May 9
Dr. AP 400
Cr. Cash 400
May 10
Dr. Cash 3,000
Cr. AR 3,000
May 11
Dr. Utilities Exp 380
Cr. AP 380
May 12
Dr. SW Exp 6,100
Cr. Cash 6,100
c. T-account
d. Debit Cash Credit
OB: 0 (1)
40,000 (1) 24,000 (1)
8,000 (8) 10,000 (1)
3,000 (10) 1,800 (1)
420 (6)
400 (9)
6,100 (12)
CB: 8,280 (31)

Debit SC Credit
OB: 0 (1)
 40,000 (1)
CB: 40,000 (30)

Debit Prepaid rent (assets) Credit

OB: 0 (1)
24,000 (1)
Total: 24,000 (31)

Debit Prepaid Insurance (assets) Credit

OB: 0 (1)
1,800 (1)
Total: 1,800 (31)

Debit Supplies Credit

OB: 0 (1)
420 (6)
1,500 (7)
CB: 1,920 (31)

Debit Accounts Payable Credit

OB: 0 (1)
400 (9) 20,000 (1)
1,500 (7)
380 (11)
CB: 21,480 (31)

Debit Accounts Receivable Credit

OB: 0 (1)
12,000 (8) 3,000 (10)
CB: 9,000 (31)

Debit Services Revenue Credit

20,000 (8)
Total: 20,000 (31)

Debit Equipment Credit

OB: 0 (1)
 30,000 (1)
CB: 30,000 (31)

Debit SW Exp Credit

6,100 (12)
Total: 6,100 (31)

Debit Utilities Exp Credit

380 (11)
Total: 380 (31)

c. Trial Balance
Kochi Services
Trial Balance
At May 31, 2020
Monetary unit:
Accounts Debit Credit
Cash 8,280
Account receivable 9,000
Supplies 1,920
Equipment 30,000
Prepaid Rent 24,000
Prepaid Insurance 1,800
Utilities expense 380
SW expense 6,100
Account payable 21,480
Common stock 40,000
Ser. Revenue 20,000
Total 81,480 81,480

P2.4
Correcting entry + Incorrect entry = Correct entry
a.
June 1
Incorrect entry:
Dr. Cash 580
 Cr. AR 580
Correct entry:
Dr. Cash 850
Cr. AR 850
Correcting entry:
Dr. Cash 270
Cr. AR 270
June 2:
Incorrect entry:
Dr. Supplies 710
Cr. AP 710
Correct entry:
Dr. Equipment 710
Cr. AP 710
Correcting entry:
Dr. Equipment 710
Cr. Supplies 710
June 3
Incorrect entry:
Dr. AR 980
Cr. Ser. Rev 98
Correct entry:
Dr. AR 980
Cr. Sev. Rev. 980
Correcting entry:
Cr. Ser. Rev. 882
June 4
Incorrect entry: omit
Correct entry:
Dr. SW Exp 700
Cr. Cash 700
Correcting entry:
Dr. SW Exp 700
Cr. Cash 700
June 5
Incorrect entry:
Cr. Cash 306
Cr. AP 360
Correct entry:
Dr. AP 306
Cr. Cash 306
Correcting entry:
Dr. AP 666
June 6
Incorrect entry:
Dr. SW Exp 600
Cr. Cash 600
Correct entry:
Dr. Div 600
Cr. Cash 600
Correcting entry:
Dr. Dividends 600
Cr. SW Exp 600
De Bortoli Co.
Trial Balance
June 30, 2020
 Monetary unit: $
Accounts Incorrect trial balance Correct trial balance
Dr Cr Dr Cr
Cash (Dr 3,340 + 270) 3,340 3,610
Account receivable (2,812 – 270) 2,812 2,542
Supplies (1,200 – 710) 1,200 490
Equipment (2,600 +710) 2,600 3,310
Account payable (3,666 – 666) 3,666 3,000
Unearned Ser. Revenue (Cr 1,100) 1,100 1,100
Share capital 8,000 8,000
Dividends (800 +600) 800 1,400
Ser. Revenue (2,480 + 882) 2,480 3,362
Salaries and wages expense (3,200 3,200 3,300
+700 -600)
Utilities expense 810 810
Total 12,522 17,486 15,462 15,462

r. Chapter 3: Adjusting the Accounts

I. Explain the accrual basis of accounting and the reasons for adjusting
entries
1. Time period (periodicity) assumption
- Accountants divide the economic life of a business into artificial time periods.
- Fiscal and Calendar Years:
 Accounting time periods are generally a month, a quarter, or a year.
 Monthly and quarterly time periods are called interim periods.
 Most large companies must prepare both quarterly and annual financial
statements.
 Fiscal Year = Accounting time period that is one year in length.
 Calendar Year = January 1 to December 31.
- Fiscal year can be the same as calendar year
- Fiscal year also can be
 Apr.1, N => Mar. 31, N+1
 July 1, N => June 30, N+1
 Oct.1, N => Sept. 30, N+1

2. Accrual- versus Cash-Basis Accounting

Accrual-Basis Accounting
- Transactions are recorded in the periods in which the events occur.
 - Companies recognize revenues when they perform services (rather than when they
receive cash).
- Expenses are recognized when incurred (rather than when paid).
- Accrual-basis accounting is in accordance with IFRS.
Cash-Basis Accounting
- Revenues are recorded when cash is received.
- Expenses are recorded when cash is paid.
- Cash-basis accounting is not in accordance with IFRS.
DO IT!
Followings are transactions occurred in August 2021:
1. Sent out an invoice for $5,000 for services completed this month
2. Received a bill for $1,000 in advertising fees for work done this month
3. Paid $75 in fees for a bill you received last month
4. Received $1,000 from a customer for a project that was invoiced last month
Journalize the transaction and calculate net income/loss based on:
a. Accrual basis
b. Cash basis
Solution:
a. Accrual basis
August 1
Dr. AR 5,000
Cr. Ser. Rev. 5,000
August 2
Dr. Adv. Exp 1,000
Cr. AP 1,000
August 3
Dr. AP 75
Cr. Cash 75
August 4
Dr. Cash 1,000
Cr. AR 1000
Net income of August = Rev. of August – Exp. Of August
= 5,000 – 1,000
= 4,000
b. Cash-basis
August 1. No entry
August 2. No entry
August 3.
Dr. Utilities Exp 75
Cr. Cash 75
August 4
Dr. Cash 1,000
Cr. Ser. Rev. 1,000
Net income of August = Rev. of August – Exp. Of August
= 1,000 – 75
= 925 => Income Statement

Net change in cash = Cash inflow – Cash outflow

= Dr. Cash – Cr. Cash
= 1,000 – 75
= 925 => Statement of cash flow
 Net change in cash is the same for Accrual- and Cash-Basis Accounting

3. Recognizing Revenues and Expenses

- When a company agrees to perform a service or sell a product to a customer, it has a
performance obligation.
- Rev. is recognized when performance obligation is satisfied.
- Service Revenue is recorded when performed service.
- Sales Revenue is recorded when the buyer received the goods and agree to make payment.
- Expense Recognistion (matching) principle “Let the expenses follow the revenues.”
- Expense is recorded when effects are made to generate revenue.

4. The Need for Adjusting Entries

- Adjusting entries ensure that the revenue recognition and expense recognition
principles are followed.
- Adjusting entries are necessary because the trial balance – the first pulling together of the
transaction data – may not contain up-to-date and complete data.
- Required every time a company prepares financial statements.
- Will include one income statement account and one statement of financial position
account.
- Reasons:
 Some events are not recorded daily because it is not efficient to do so.
 Some costs are not recorded during the accounting period because these costs
expire with the passage of time rather than as a result of recurring daily
transactions.
 Some items may be unrecorded.

5. Types of Adjusting Entries

II. Prepare adjusting entries for deferrals

- Deferrals are expenses or revenues that are recognized at a date later than the point when
cash was originally exchanged.
- There are two types:
 Prepaid expenses, and
 Unearned revenues

1. Prepaid expenses
- When companies record payments of expenses that will benefit more than one accounting
period, they record an asset called prepaid expenses or prepayments.
- Prepaid expenses are costs that expire either with the passage of time (e.g., rent and
insurance) or through use (e.g., supplies).
- At each statement date, they make adjusting entries to record the expenses applicable to
the current accounting period and to show the remaining amounts in the asset accounts.
 - Prior to adjusment, assets are overstated and expenses are understated.
- Adjusting entries for prepaid expenses.

2. Supplies
- Rather than record supplies expense as the supplies are used, companies recognize
supplies expense at the end of the accounting period.
- Example:
Oct. 5
Dr. Supplies 2,500
Cr. Cash 2,500
Supplies on hand is 1,000 => Used 1,500 of supplies.
Adjusting entry
Dr. Supplies Exp 1,500
Cr. Supplies 1,500
T-account
Debit Supplies Credit
OB: 0 (1)
2,500 (5) 1,500 (31)
CB: 1,000 (31)

3. Insurance
- Insurance need to be paid in advance.
- Insurance purchased, record asset
- Insurance expired, record insurance expense.
- The cost of insurance (premiums) paid in advance is recorded as an increase (Dr.) in the
asset account Prepaid Insurance. At the financial statement date, companies increase (Dr.)
Insurance Expense and decrease (Cr.) Prepaid Insurance for the cost of insurance that has
expired during the period.
- Example:
Oct. 4
Dr. Prepaid Insurance 600
Cr. Cash 600
Insurance expense monthly is = 600/12 = 50
Oct. 31 used up 1 month of insurance
Adjusting entry: Oct. 31 (or every month after)
Dr. Insurance expense 50
Cr. Prepaid Insurance 50
T-account
Debit Prepaid Insurance Credit
OB: 0 (1)
600 (4) 50 (31)
CB: 550 (31)

T- account in Nov. 30
Debit Prepaid Insurance Credit
OB: 550 (1)
50 (30)
CB: 500 (30)
4. Depreciation
 Depreciation is the process of allocating the cost of an asset to expense over its useful
life.
 The period of service is referred to as the useful life of the asset.
 Useful life is estimated by management due to intended use.
 An adjusting entry for depreciation is needed to recognize the cost that has been used (an
expense) during the period and to report the unused cost (an asset) at the end of the
period.
 Depreciation is an allocation concept, not a valuation concept.
 That is, depreciation allocates an asset’s cost to the periods in which it is used.
 Depreciation does not attempt to report the actual change in the value of the asset.
 Depreciation recognized; record depreciation expense.
 Example: For Yazici Advertising, depreciation on the equipment is 480 a year, or 40 per
month.
At the end of month
Adjusting entry
 Dr. Depreciation Exp 40
Cr. Accumulated Depreciation – Equipment 40

Historal cost = Purchase price + Other expenditure

 Other costs along with purchase assets: shipping cost, installment cost, registration cost,
commission…
 Historical cost includes all expenditures necessary to acquire an asset and make it ready
for intended use.
 Example: 1/9/2020 purchase a machine for $10,000, shipping cost is $500 and
installment cost is $1,500; all is paid by cash.
Dr. Equipment 12,000
Cr. Cash 12,000
 Salvage value (residual value) is the estimated value of assets at the end of its useful
lives.

Depreciation cost = Historical cost – salvage value

5. Method of depreciation: Straigh-line method

Annual depreciation expense = Depreciation cost / useful lives

Monthly depreciation expense = Annual depreciation expense / 12 (months)

6. Accumulated Depreciation –
 Accumulated depreciation is contra assets account.
 All contra accounts have increases, decreases, and normal balances opposite to the
account to which they relate.
 Accumulated depreciation is specified for the assets its contra for.
 This account keeps track of the total amount of depreciation expense taken over the life
of the asset.
 Post to ledger (T-account)
Debit Accumulated Credit
Depreciation -
Equipment
OB:

CB:

 The balance sheets

 Assets
Equipment
Less: Accumulated Depreciation – Equipment
Book value of equipment
 Adjusting entry
Date
Dr. Depreciation Exp
Cr. Accumulated Depreciation – Equipment
 At the end of useful lives, the asset is fully depreciated, book value = salvage value.
 Book value is the difference between the cost of any depreciable asset and its related AD.
 The book value and the fair value of the asset are generally two different values.
 Depreciation expense identifies the portion of an asset’s cost that expired during the
period.
 If not using AD account, instead of Cr. AD- you will use Dr. () If using AD account,
provide more information for external users.
 AD comes along with the asset it contra for. In the balance sheet, they always come
together.

7. Unearned Revenues
  When companies receive cash before services are performed, they record a liability by
increasing (crediting) a liability account called unearned revenues. The company
subsequently recognizes revenues when it performs the service.
 In other words, a company now has a performance obligation (liability) to transfer a
service to one of its customers.
 Unearned revenues are the opposite of prepaid expenses. Indeed, unearned revenue on the
books of one company is likely to be a prepaid expense on the books of the company that
has made the advance payment.
 The adjusting entry for unearned revenues results in a decrease (a debit) to a
liability account and an increase (a credit) to a revenue account.

DO IT! 2 ADJUSTING ENTRIES FOR DEFERRALS

Adjusting entries:
March 1
Dr. Insurance Exp 100
Cr. Prepaid Insurance 100
March 2
Dr. Supplies Exp 2,000
Cr. Supplies 2000
March 3
Dr. Depreciation Exp 200
Cr. AD- Equiment 200
March 4
Dr. Unearned Ser. Rev. 4,000
Cr. Ser. Rev. 4,000
 III. Adjusting Entries for Accruals
 Prior to an accrual adjustment, the revenue account (and the related asset account) or the
expense account (and the related liability account) are understated.
 The adjusting entry for accruals will increase both a statement of financial position and
an income statement account.
 Accruals are made to record the following:
 Revenues for services performed but not yet recorded at the statement date –
accrued revenues. Or,
 Expenses incurred but not yet paid or recorded at the statement date – accrued
expenses.

1. Accrued Revenues

 Revenue and AR are recorded for unbilled services.

 When cash is received, AR is reduced.
 An adjusting entry for accrued revenues results in an increase (a debit) to an asset
account and an increase (a credit) to a revenue account.
 Without the adjusting entry, assets and equity on the statement of fi nancial position and
revenues and net income on the income statement are understated.

2. Accrued Expenses
 An adjusting entry for accrued expenses results in an increase (a debit) to an
expense account and an increase (a credit) to a liability account.
 3. Accrued Interest
 Example: Yazici Advertising signed a three-month note payable in the amount of 5,000
on October 1. The note requires Yazici to pay interest at an annual rate of 12%.
Solution:
Annual interest of the three-month note payable = 5,000 x 12% = 600
Monthly interest = 600/12 = 50
Adjusting entry:
Dr. Interest Exp 50
Cr. Interest Payable 50

4. Accrued Salaries and Wages

 Example: On October 31, the salaries and wages for these three days represent an accrued
expense and a related liability to Yazici. The employees receive total salaries and wages
of 2,000 for a five-day work week, or 400 per day. Thus, accrued salaries and wages on
October 31 are 1,200 (400 × 3).
How do you create the adjustment for accrued salaries and wages on October 31?
Solution:
Oct. 31
Dr. SW Expense 1,200
Cr. SW Payable 1,200
Nov. 9
Dr. SW Payable 1,200
Cr. Cash 1,200
Salary from Nov. 1 to Nov. 9 (except Sar. And Sunday)
Dr. SW Exp 2,800
Cr. Cash 2,800

5. Summary of Basic Relationships

DO IT! 3 Adjusting Entries for Accruals
Adjusting entries
August 31.1
Dr. SW Exp 800
Cr. SW Payble 800
August 31.2
Annual interest = 30,000 x 10% = 3,000
Monthly interest = 3,000/12 = 250
Dr. Interest Exp 250
Cr. Interest Payable 250
August 31.3
Dr. AR 1,100
Cr. Ser. Rev. 1,100

IV. Describe the nature and purpose of an adjusted trial balance

1. Adjusted Trial Balance
 Proves the equality of the total debit balances and the total credit balances in the ledger
after all adjustments.
 Is the primary basis for the preparation of financial statements.
 Prepared after all adjusting entries are journalized and posted.

2. Preparing the Adjusted Trial Balance

 .

3. Preparing Financial Statements

 Companies can prepare fi nancial statements directly from the adjusted trial balance.
 First, companies prepare the income statement from the revenue and expense accounts.
Next, they use the Retained Earnings and Dividends accounts and the net income (or net
loss) from the income statement to prepare the retained earnings statement. Companies
then prepare the statement of fi nancial position from the asset and liability accounts and
the ending Retained Earnings balance as reported in the retained earnings statement.
DO IT! 4 Trial Balance
Kang Company
Income Statement
For the Month Ended June 30, 2020
Monetary unit: W 000,000
Revenues
 Service Revenue 14,200
Rent Revenue 800
Total revenues 15,000
Expenses
SW Exp 9,400
Rent Exp 1,500
Depreciation Exp 850
Supplies Exp 200
Utilities Exp 510
Interest Exp 50
Total expenses 12,510
Net income 2,490
Kang Company
Retained Earnings
For the Month Ended June 30, 2020
Monetary unit: W 000,000
Retained earnings at April 1 0
Add: Net income 2,490
Less: Dividends 600
Retained earnings at June 30 1,890
Kang Company
Partly The Balance Sheet
At June 30, 2020
Monetary unit: W 000,000
Assets
Equipment 15,000
Less: Accumulated Depreciation – Equip. 850 14,150
Supplies 1,000
Prepaid Rent 900
Accounts Receivable 600
Cash 6,700
Total assets 23,350
Liabilities
Notes Payable 5,000
Accounts Payable 1,510
SW Payable 400
Interest Payable 50
Unearned Rent Revenue 500
Total liabilities 7,460

V. Prepare adjusting entries for the alternative treatment of deferrals

 Use alternative treatment when:
 When a company prepays an expense, it debits that amount to an expense
account.
 When it receives payment for future services, it credits the amount to a revenue
account.

 Alternative adjusting entries do not apply to accrued revenues and accrued expenses
because no entries occur before companies make these types of adjusting entries.
 Example: Yazici Advertising purchased supplies costing 2,500 on October 5. Yazici
recorded the purchase by increasing (debiting) Supplies Expense (rather than to the asset
account Supplies). An inventory count at the close of business on October 31 reveals that
1,000 of supplies are still on hand.
Solution:
Oct. 5
Dr. Supplies Exp 2,500
Cr. Cash 2,500
Oct. 31
Dr. Supplies 1,000
Cr. Supplies Exp 1,000
 Example: Yazici Advertising received 1,200 on October 2 from R. Knox for advertising
services expected to be completed by October 31. However, Yazici has not performed
800 of the services by October 31.
Solution:
Oct. 2
Dr. Cash 1,200
Cr. Ser. Rev. 1,200
Oct. 31
Dr. Revenue 800
Cr. Unearned Service Revenue 800

VI. Discuss financial reporting concepts

Revenue Recognition Principle
Requires that companies recognize revenue in the accounting period in which the performance
obligation is satisfied.
Expense Recognition Principle
Dictates that companies recognize expense in the period in which they make efforts to generate
revenue. Thus, expenses follow revenues.
Full Disclosure Principle
Requires that companies disclose all circumstances and events that would make a difference to
financial statement users.
If an important item cannot reasonably be reported directly in one of the four types of financial
statements, then it should be discussed in notes that accompany the statements.
Cost Constraint
It weighs the cost that companies will incur to provide the information against the benefit that
financial statement users will gain from having the information available.

VII. Problems
P3.2
a. Adjusting entries:
May 31.1
Monthly insurance expense = 2,400/12 = 200
Dr. Insurance Exp 200
Cr. Prepaid Insurance 200
May 31.2
Dr. Supplies Exp 1,330
Cr. Supplies 1,330
May 31.3
Monthly depreciation on the buildings = 3,600/12 = 300
Monthly depreciation on equipment = 1,500/12 = 125
Dr. Depreciation Exp 425
Cr. Accumulated Depreciation – Buildings 300
Cr. Accumulated Depreciation – Equipment 125
May 31.4
Annual interest of mortgage = 40,000 x 6% = 2,400
Monthly interest of mortgage = 2,400/12 = 200
Dr. Interest Exp 200
Cr. Interest Payable 200
May 31.5
2/3 of Unearned rent rev. = 3,300 x 2/3 = 2,200
Dr. Unearned Rent Rev. 2,200
Cr. Rent Rev. 2,200
May 31.6
Dr. SW Exp 750
Cr. SW Payable 750
b.
Prepare a ledger
Debit Cash Credit
3,400
CB: 3,400

Debit Supplies Credit

2,080 1,330
CB: 750

Debit Prepaid Credit

Insurance
2,400 200
CB: 2,200

Debit Land Credit

12,000
CB: 12,000

Debit Buildings Credit

60,000 300
CB: 59,700

Debit Equipment Credit

14,000 125
CB: 13,875

Debit Accounts Payable Credit

4,700
OB: 4,700

Debit Unearned Rent Credit

Revenue
2,200 3,300
CB: 1,100

Debit Mortgage Payable Credit

40,000
CB: 40,000

Debit SC - Ordinary Credit

41,380
CB: 41,380

Debit Dividends Credit

1,000
CB: 1,000

Debit Rent Revenue Credit

10,300
2,200
Total: 12,500

Debit Advertising Exp. Credit

600
Total: 600
 Debit SW Expense Credit
3,300
750
Total: 4,050

Debit Utilities Exp Credit

900
Total: 900

Insurance exp
200 (1)
Total: 200

Supplies Accu
expense Dep Equip
1,330 OB: 0
(2) 125 (3)
Total: CB:
1,330 125

Deprec Accu
exp Dep Buil
425 (3) OB: 0
300
(3)
Total: CB:
425 300

Interest Interest
exp payable
200 (4) OB: 0
200
(4)
Total: CB:
200 200

SW
payable
OB: 0
750 (6)
 CB: 750

Adjusted trial balance

Lazy River Resort
Adjusted Trial Balance
May 31, 2020
Monetary unit: Euro
Debit Credit
Cash 3,400
Supplies 750
Prepaid Insurance 2,200
Land 12,000
Buildings 60,000
Equipment 14,000
Dividends 1,000
Advertising Expense 600
SW Expense 4,050
Utilities Expense 900
Interest Expense 200
Supplies Expense 1,330
Insurance Expense 200
Depreciation Expense 425
Accumulated Depreciation – Equip. 125
Accumulated Depreciation – Buildings 300
Unearned Rent Revenue 1,100
Accounts Payable 4,700
Mortgage Payable 40,000
SW Payable 750
Interest Payable 200
SC – Ordinary 41,380
Rent Rev. 12,500
Total 101,055 101,055

Lazy River Resort

Income Statement
For the Month Ended May 31, 2020
Monetary unit: Euro
Revenues
Rent Revenue 12,500
Expenses
Advertising Expense 600
SW Expense 4,050
Utilities Expense 900
Interest Expense 200
Supplies Expense 1,330
Insurance Expense 200
Depreciation Expense 425
Total expenses 7,705
Net income 4,795

Lazy River Resort

Retained Earnings Statement
For the Month Ended May 31, 2020
Monetary unit: Euro
Retained Earnings May 1, 2020 0
Add: Net income 4,795
Less: Dividends 1,000
Retained Earnings May 31, 2020 3,795

Lazy River Resort

The Statement of Financial Position
May 31, 2020
Monetary unit: Euro
Assets
Supplies 750
Prepaid Insurance 2,200
Land 12,000
Buildings 60,000
Less: AD – Buildings 300 59,700
Equipment 14,000
Less: AD – Equipment 125 13,875
Cash 3,400
Total assets 91,925
Equity and Liabilities
Equity
SC – Ordinary 41,380
Retained Earnings 3,795
Liabilities
Unearned Rent Revenue 1,100
Accounts Payable 4,700
Mortgage Payable 40,000
SW Payable 750
Interest Payable 200 46,750
Total equity and liabilities 91,925
P3.3
Accounting period is 1 quarter
Adjusting entries
Gặp bài như này làm bảng giá trị thay đổi, sau đó nối các cặp giá trị bằng nhau lại đi đôi
với nhau. Áp dụng cả basic relationship of deferrals and accruals.
(1) Dr Supplies exp 850
Cr Supplies 850
(2) Dr Rent exp 1,700
Cr Prepaid rent 1,700
(3) Dr Depreciation exp 700
Cr Accumulated Depreciation –Equipment 700
(4) Dr Interest exp 100
Cr Interest payable 100
(5) Dr Unearned rent revenue 1,450
Cr Rent revenue 1,450
(6) Dr Account receivable 1,100
Cr Service revenue 1,100
(7) Dr SW expense 725
Cr SW payable 725
(b) Prepare an income statement and a retained earnings statement for 3 months ended Sept 30
and a statement of financial position at Sept 30.
 Use information in “Adjusted column”
Company: Alena
Income statement
for the quarter ended Sept 30, 2020

Monetary unit: $
Revenues
Service revenue 17,100
Rent revenue 2,860
Total revenues 19,960
Less: expenses
SW expense 8,725
 Interest exp 100
Depreciation exp 700
Supplies exp 850
Rent exp 3,600
Utilities exp 1,510
Total expenses 15,485
Net Income 4,475

Company: Alena
Retained earnings statement
for the quarter ended Sept 30, 2020

Monetary unit: $
RE, July 1 0
Add: Net Income of the quarter 4,475
Less: Dividends 1,600
RE, Sept 30 2,875

Statement of financial position (Balance sheet)

Company: Alena
On Sept 30, 2020

Monetary unit: $
Assets
Equipment 18,000
Less: Accumulated Depreciation-Equipment 700
Prepaid rent 500
Supplies 650
 AR 11,500
Cash 8,700
Total assets 38,650
Equity and Liabilities
Equity
Share capital 22,000
Retained earnings 2,875
Total Equity 22,875
Liabilities
Note payable 10,000
Account payable 2,500
Unearned rent revenue 450
SW payable 725
Interest payable 100
Total liabilities 13,775
Total Equity and Liabilties 38,650
c) If the note bears interest at 12%, how many months has it been outstanding?

Gặp câu giống tính phần trăm lãi hàng tháng (annual interest rate/12) rồi nhân ra tiền lãi từng
tháng, so sánh với interest expense để xem mất bao nhiêu tháng thì trả hết nợ.

Interest of 12% per year equals a monthly rate of 1%; monthly interest is $100 ($10,000 X
1%). Since total interest expense is $100, the note has been outstanding one month.

P3.6
a. Journalize: Time period is 6 months
(1) At June 30, 1,300 supplies on hand => CB of supplies is 1,300
In January
Dr. Supplies Exp 3,700
Cr. AP 3,700
Adjusting entry
Dr. Supplies 1,300
Cr. Supplies Exp 1,300
(2)
Annual interest of NP = 20,000 x 6% = 1,200
NP starts on January 1, so the first interest is issued on Feb, to June, there are only five time of
interest issued. 6-month NP interest in June = 1,200 x 5/12 = 500
Dr. Interest Exp 500
Cr. Interest Payable 500
(3)
When purchased insurance
Dr. Insurance Exp 2,700
Cr. Cash/AP 2,700
One month insurance exp = 2,700/12 = 225 (because this is one-year premium insurance)
The first month is Apr, the second month is May, the third month is June.
 3-month insurance exp = 225 x 3 = 675
Insurance premium leftover is 2,070 – 675 = 2,2025 cover for the next 9 months
 CB of Prepaid Insurance (asset) is 2,025
Dr. Prepaid Insurance 2,025
Cr. Insurance Exp 2,025
(4)
When received revenue:
Dr. Cash/AR 58,100
Cr. Ser. Rev. 58,100
At June 30, services rev. of 1,300 are unearned => CB of Unearned Ser. Rev. is 1,300
Dr. Ser. Rev. 1,300
Cr. Unearned Ser. Rev 1,300
(5)
Revenue for services performed but unrecorded means you are not paid but have the obligation
to be paid. => AR
Dr. AR 2,000
Cr. Ser. Rev. 2,000
(6)
Dr. Depreciation Exp 2,250
Cr. Accumulated Depreciation- Equip. 2,250
b. Adjusted Trial Balance
Alpha’s Graphics
Adjusted Trial Balance
June 30, 2020
Monetary unit: Euro
Debit Credit
Cash 8,600
Accounts Receivable 16,000
Supplies 1,300
Prepaid Insurance 2,025
Equipment 45,000
Advertising Expense 1,900
SW Expense 30,000
Utilities Expense 1,700
Interest Expense 500
Supplies Expense 3,700 1,300
Insurance Expense 2,700 2,025
Depreciation Expense 2,250
Accumulated Depreciation – Equip. 2,250
Unearned Serv. Revenue 1,300
Accounts Payable 9,000
Notes Payable 20,000
Interest Payable 500
SC – Ordinary 22,000
Ser. Rev. 1,300 58,100
Total 111,750 113.850