Chapter 3 Accounting Measurement System - Articulation of Financial Statements

Chapter 3 (Accounting Measurement System – Articulation of Financial Statements) Accounting equation: Assets = Liabilities + Owners’ equities Steps in the accounting cycle: Recording phase

 Step 1: Identify, analyze the transaction to determine its effect on assets, liabilities, and S/E

and record entries in General Journal (supported by source documents)  Step 2: Post General Journal entries to the General Ledger by transferring the date and the

amount to the proper accounts  Step 3: Determine the accounts balances and prepare a Trial Balance. Adjusting Phase

 Step 4: Enter adjusting entries in the General Journal and post them to the General Ledger.  Step 5: Prepare an adjusted Trial Balance. Closing Phase

Step 6: Prepare financial statements using information in the Adjusted Trial Balance. Step 7: Enter closing the Closing entries in the General Journal and post them to the General ledger.

Step 8: Prepare a post–closing Trail Balance Articulation of Financial Statements Net Income = Revenue – Expenses ± Other gains

Retained Earnings = Net Income – Dividends (if retained earnings is negative, it is called a deficit) Contributed Capital + Retained Earnings = Shareholders’ Equity Retained earnings also contain these accounts:

 Revaluation reserve  Fair value reserve

 Translation reserve (not covered in AA102) – reporting of earnings in another currency

General Journal Date Description Dr $ Cr $ Depreciation expense of $3,000 for 2008 was not recorded 31 Dec Depreciation expense (-OE) 3,000 Accumulated depreciation (-A) 3,000 To record depreciation expense for 2008 Wages of $1,500 earned by employees during 2009 were not recorded or paid in 2008 but will be paid in 2009 31 Dec Wages expense (-OE) 1,500 Wages Payable (+L) 1,500 To record wages expense for 2008 Revenue of $3,500 earned during 2008 but not collected or recorded until 2009 31 Dec Accounts Receivable (+A) 3,500 Revenue (+OE) 3,500 To record sales revenue in 2008 Insurance premium of $1,800 paid for year 2009 was recorded as an expense in 2008. 31 Dec Prepaid insurance (+A) 1,800 Insurance expense (-OE) 1,800 To make correcting journal entry for prepaid insurance Cash of $9,000 collected from customer for services to be rendered in 2009 but was recorded as revenue in 2008. 31 Dec Revenue (-OE) 9,000 Unearned revenue (+L) 9,000 To make correcting journal entry for sale revenue On December 31 2008, equipment costing $20,000 was purchased on credit but not recorded until payment made on 28 January 2009. 31 Dec Equipment (+A) 20,000 Other payables (+L) 20,000 To record purchase of equipment