ACC202 Lecture Notes & Cheat Sheet PDF

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SUThe main purpose of financial and managerial accounting is to provide useful information to decision makers. Financial accounting is focused on the information need of external users. Management accounting provides information for internal users for planning, control, cost accounting, and decision...

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SU1 The main purpose of financial and managerial accounting is to provide useful information to decision makers. Financial accounting is focused on the information need of external users. Management accounting provides information for internal users for planning, control, cost accounting, and decision-making purposes. Assets (+ Dr/- Cr) = Liabilities (+ Cr/- Dr) + Equity (+ Cr/- Dr) +: normal behaviour/nature Equity = Owner’s Capital (+Cr) - Owner’s Withdrawal (+Dr) + Profit Profit = Revenue (+Cr) – Expenses (+Dr) Assets owned by firm that provides future economic benefits: Cash Accounts Receivable Notes Receivable Prepaid Expenses Equipment Buildings Land Liabilities are obligations to provide services or products: Accounts Payable Notes Payable Unearned Revenue Accrued liabilities (Interest Payable, Income taxes payable) Equity accounts are shareholders’ residual interest and claim on a firm’s assets after deducting liabilities: Share capital Revenues Expenses Transaction Analysis 1. Investment by Owner (+Dr Asset/Cash; +Cr Equity/Capital) 2. Purchase Supplies/Equipment for Cash (-Cr Asset/Cash; +Dr Asset/Supplies) 3. Purchase Supplies on Credit (+Dr Asset/Supplies; +Cr Liabilities/Accounts Payable) 4. Provide Services for Cash (+Dr Asset/Cash; +Cr Equity/Revenue) 5. Payment of Expenses in Cash (-Cr Asset/Cash; -Dr Equity/Rental + Salaries + Utilities Expenses) 6. Provide Services and Facilities for Credit (+Dr Asset/Accounts Receivable; +Cr Equity/Revenue) 7. Receipt of Cash from Accounts Receivable (+Dr Asset/Cash; -Cr Asset/Accounts Receivable) 8. Payment of Accounts Payable (-Cr Asset/Cash; -Dr Liabilities/Accounts Payable) 9. Withdrawal of Cash by Owner (-Cr Asset/Cash; -Dr Equity/Owner’s Withdrawal) 10. Receipt of Cash for Future Services (+Dr Asset/Cash; +Cr Liabilities/Unearned Revenue) 11. Pay Cash for Future Insurance Coverage (-Cr Asset/Cash; +Dr Prepaid Insurance) Adjusting Accounts Accrual Accounting Principle: Company records revenue when it is earned and records expense when it is incurred To recognise expenses in the same period when the income is earned as a result of the expenses Deferrals – Cash paid/received before expenses are recognised, e.g., prepaid expense (including depreciation), prepaid insurance, unearned revenue Accruals – Cash paid/received after expenses are recognised, e.g., accrued salary, accrued interest Cash Basis Accounting: Company records revenues when cash is received and records expenses when cash is paid. Cash basis income is cash receipts minus cash payments. Revenue Recognition Principle requires that revenue be recorded when goods or services are provided to customers and at an amount expected to be received from customers. Adjustments ensure revenue is recognised in the time period when those services and products are provided.  Recording revenue early overstates current-period income; recording it late understates current-period income. Expense Recognition (Matching) Principle requires that expenses be recorded in the same accounting period as the revenues that are recognised as a result of those expenses.  Recording expense early understates current-period income; recording it late overstates current-period income.

Prepaid (Deferred) Expenses: assets paid for in advance of receiving benefits  Decrease Asset (-Cr); Increase Equity/Expense (-Dr)  E.g., prepaid insurance, supplies and depreciation Prepaid Insurance Not making the adjustment would:  Understate expense by $xxx amount for the (month) income statement.  Overstate prepaid insurance (assets) by $xxx amount in the (month) balance sheet. (Own words) Account for the amount of insurance that was used up. For example, bought insurance plan in October 2021, adjusting account in December 2021  two months used up, so increase Insurance Expense (-Dr in Equity) and decrease Prepaid Insurance (-Cr in Asset)

Supplies Expenses Not making the adjustment would:  Understate expense by $xxx in the (month) income statement  Overstate supplies by $xxx in the (month) balance sheet

Depreciation Not making the adjustment would:  Understate expense by $xxx in the (month) income statement  Overstate asset by $xxx in the (month) balance sheet An asset’s expected value at the end of its useful life is called salvage value. Step 1: ABC purchased equipment for $26,000 in early December to use in earning revenue. This equipment’s cost must be depreciated. Step 2: The equipment is expected to have a useful life of 5 years and to be worth about $8,000 at the end of five years. This means the net cost of this equipment over its useful life is $18,000 ($26,000 - $8,000). ABC depreciates it using straight-line depreciation, which allocates equal amounts of the asset’s net cost to depreciation during its useful life. Dividing the $18,000 net cost by the 60 months (5 years) in the asset’s useful life gives a monthly cost of $300 ($18,000/60). Step 3: The adjusting entry to record monthly depreciation expense. -Dr Equity/Depreciation Expense +Cr Contra Asset/Accumulated Depreciation – Equipment Equipment accounts’ net cost = Equipment before adjustment – Accumulated Depreciation  2 methods to calculate Depreciation: 1. Straight-line method

Depreciable amount x Depreciation Rate = Depreciation Expense Depreciable amount = Cost – Residual Value 2.

Double-declining method

Unearned revenue  Cash received in advance of providing products and services. Unearned (deferred) revenues are liabilities.  Decrease the unearned revenue (balance sheet) account and increase the revenue (income statement) account +Dr Asset/Cash +Cr Liabilities/Unearned Revenue After adjustment -Dr Liabilities/Unearned Revenue +Cr Equity/Revenue Not making the adjustment would:  Understate revenue by $xxx in the (month) income statement

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Overstate unearned revenue by $xxx on the (month) balance sheet

Accrued Expenses  cost incurred in a period that are both unpaid and unrecorded (liabilities)  increase the expense account and increase a liability account Accrued Salary Expense Dr Equity/Salary Expense Cr Liabilities/Salaries Payable Not making the adjustment would:  Understate salaries expense by $xxx in the (month) income statement  Overstate salaries payable by $xxx in the (month) balance sheet Accrued Interest Expense Principal amount owed x Annual interest rate x Fraction of year since last payament e.g., $6,000 x 0.05 x 30/360 Dr Equity/Interest Expense Cr Liabilities/Interest Payable Future Cash Payment of Accrued Expenses

Accrued Revenue  Revenues earned in a period that are both unrecorded and not yet received in cash (Revenues earned but not yet paid by customers or have not been billed by service provider/seller) Accrued Service/Interest Revenue Revenue earned but not yet paid (maybe not come due yet, but revenue earned) For interest, it is like they are lending money out, then got interest that the borrower needs to pay up, but haven’t paid yet, but at the time of recording, must record already, so they have to record down the accrued interest earned Service: Dr Assets/Accounts Receivable; Cr Equity/Revenue Interest: Dr Assets/Interest Receivable; Cr Equity/Interest Revenue

Future Cash Receipt of Accrued Revenues

SU2 COGS = Qty sold x Cost price per unit...