Prepare Income Statement and Balance Sheet According to Accrual Basis Principles of Cost Analysis and Management © Dale R Geiger 2011 Did Lacy Really Make $70? Cash Other Assets (+) 200 15 50 (-) 20 10 65 40 -130 Financial Position (-) (+) 20 65 20 40 -140 Liabilities (-) (-) Revenues – Expenses = Change in Financial Position (+) 40 - - Revenues (+) 200 (-) 40 (+) 15 20 50 85 © Dale R Geiger 2011 Expenses (+) 10 15 (-) Terminal Learning Objective • Task: Prepare Income Statement and Balance Sheet According to Accrual Basis • Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard: with at least 80% accuracy: • • • • Explain purpose of adjusting transactions Describe types of adjusting transactions Record adjusting transactions in tabular format Identify and enter relevant report data (using macros provided in Excel template) to prepare income statement and balance sheet according to accrual basis © Dale R Geiger 2011 Review: The Accounting Cycle Record Post-Closing Transactions Post to Trial Balance Ledger Close Accounts Prepare Trial Balance Prepare Statements Adjusted Trial Balance Adjust Accounts © Dale R Geiger 2011 Why Adjust Accounts? • Allows financial statements to accurately represent financial position of the entity • Statement of Activities • Correctly report revenues and expenses for the period • Statement of Financial Position • Correctly state ending balances for assets, liabilities and financial position © Dale R Geiger 2011 Purpose for Adjustments • Assign activity to proper time period • Revenue recognition principle: Revenue is reported on the Statement of Activities in the period in which it is EARNED • Revenue is earned when service is provided or product is sold Plan Take Orders Complete Service or Ship Product Collect Cash Revenue & Non-Cash Asset © Dale R Geiger 2011 Purpose for Adjustments • Assign activity to proper time period • Matching principle: Expenses are reported on the Statement of Activities in the period RESOURCES ARE CONSUMED Plan Order Receive Pay Asset & Liability Remove Liability © Dale R Geiger 2011 Consume Expense Learning Check • What is the accounting principle that defines when expenses should be reported? • In what period should revenues be reported? © Dale R Geiger 2011 Basic Types of Adjustments • Prepayments: Cash is paid before the resource is consumed • When cash is paid in advance, an asset is created • At the end of the period, some of the asset may have been consumed expense Pay Consume Record Asset Reduce Asset, Record Expense © Dale R Geiger 2011 Basic Types of Adjustments • Accruals: Resources have been consumed but no cash has been paid • Results in a liability Consume Pay Expense & Liability Remove Liability © Dale R Geiger 2011 10 Recording Adjustments • Record depreciation in the accounting equation: Transaction Description Balance Forward Depreciation New Balance + Other Assets 130 + 80 + -1 130 + 79 Cash = = = = Liab + Financial + Position + 200 + + + + 200 + © Dale R Geiger 2011 Rev – 85 85 - Exp 75 +1 76 23 Lacy’s Ledger Liabilities (-) 40 Expenses (+) 10 60 79 (+) 40 (-) Lacy agrees to reimburse Madge $3 for using the family refrigerator © Dale R Geiger 2011 24 Lacy’s Ledger Liabilities (-) 40 (+) 40 Expenses (+) 10 60 79 (-) Both Expenses and Liabilities Increase Accrued Expense: benefit received but no cash paid © Dale R Geiger 2011 25 Recording Adjustments • Record refrigerator use in the accounting equation: Transaction Description Balance Forward + Other = Assets 130 + 79 = Cash Liab + Financial + Position + 200 + © Dale R Geiger 2011 Rev – 85 - Exp 76 26 Recording Adjustments • Record refrigerator use in the accounting equation: Transaction Description Balance Forward Refrigerator use New Balance + Other Assets 130 + 79 + 130 + 79 Cash = = = = + Financial + Position + 200 + +3 + + + 200 + Liab © Dale R Geiger 2011 Rev – 85 85 - Exp 76 +3 79 27 Lacy‘s Adjusted Trial Balance Account Title dr cr $130 79 Liabilities $ Financial Position 200 Revenues 85 Expenses 79 $288 $288 Cash Other Assets Totals © Dale R Geiger 2011 28 Lacy’s Statement of Activities Revenues: $85 Expenses: 79 Excess of revenues over expenses: $6 Other Financing Source – Equity Transfer from General Fund 200 Change in Financial Position $206 Add: Beginning Financial Position -0Ending Financial Position $206 © Dale R Geiger 2011 29 Lacy’s Statement of Financial Position Assets: Liabilities & Financial Position: Cash $130 Other Assets 79 Total: $209 Liabilities: $ Financial Position: 206 Total: $209 © Dale R Geiger 2011 30 Learning Check • Which adjusting transaction resulted in a liability? • Which adjusting transaction(s) reduced assets? © Dale R Geiger 2011 31 Practical Exercise © Dale R Geiger 2011 32 Accounting Cycle Spreadsheet Post adjusting transactions to T-Accounts New balances calculate automatically © Dale R Geiger 2011 33 Accounting Cycle Spreadsheet Remember: Debits = Credits © Dale R Geiger 2011 34 Accounting Cycle Spreadsheet The Statement of Activity is generated automatically © Dale R Geiger 2011 35 Accounting Cycle Spreadsheet Enter details to complete the Statement of Financial Position Ending financial position is calculated automatically © Dale R Geiger 2011 36 Practical Exercise © Dale R Geiger 2011 37 ... Objective • Task: Prepare Income Statement and Balance Sheet According to Accrual Basis • Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness... transactions in tabular format Identify and enter relevant report data (using macros provided in Excel template) to prepare income statement and balance sheet according to accrual basis © Dale... Post to Trial Balance Ledger Close Accounts Prepare Trial Balance Prepare Statements Adjusted Trial Balance Adjust Accounts © Dale R Geiger 2011 Why Adjust Accounts? • Allows financial statements