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Accounting 211 Thursday, January 21st, 1999 Announcements: none Lecture notes: Example: 7/1/98 $36,000 is received from a tenant. The payment covers the 2 year period beginning 7/1/98 and ending 6/30/98. Cash <a href="/keyword/unearned-revenue/" >unearned revenue</a> 36,000 36,000 Deferral: covers the next 2 years, we don't recognize revenue because we haven't earned it Adjusting Entry (12/31/98): <a href="/keyword/unearned-revenue/" >unearned revenue</a> Revenue 9,000 9,000 What is the impact on financial statements if the adjusting entry is now made? Income Statement: Revenues are too high, Net Income is too low Balance Sheet: Liabilities are too high, SE is too low As of 12/31/98: Revenue Unearned $9,000 $27,000 Revenue <a href="/keyword/retained-earnings/" >retained earnings</a> Illustration (assumptions--business began in 1991) 1991 Net Income 1991 Dividends 12/31/91 <a href="/keyword/retained-earnings/" >retained earnings</a> 1992 Net Income 1992 Dividends 12/31/92 <a href="/keyword/retained-earnings/" >retained earnings</a> $15,000 -$3,000 $12,000 $21,000 -$7,000 $26,000 *<a href="/keyword/retained-earnings/" >retained earnings</a> are the accumulative undistributed profits of an organization Page 122, Exercise #10: PREPAID INSURANCE Beginning Balance 1450 X Ending Balance 1200 Credits are greater than debits by $250 X = Insurance Payments = $1,900 Insurance Expense Adjustment 2150 Accrual: recognition of the expense before the cash flow WAGES PAYABLE Cash Payment Change = 500 Cash Payments are greater than Accrued Wages by $500 Cash Payments = $9,750 <a href="/keyword/unearned-revenue/" >unearned revenue</a> Revenue Earned Cash Collections Change = 1,150 Accrued Wages Cash Collections are greater than Revenue Earned by $1,150 Cash Collections = $4,450 Page 123, Exercise #13: PREPAID RENT Rent Payments <a href="/keyword/rent-expense/" >rent expense</a> Made Recognition Change = 900 Rent Payment made is greater than <a href="/keyword/rent-expense/" >rent expense</a> by $900 Rent Payments = $6,100 Answers to other 2 parts: #2--$9,000 #3--$78,400 Example: A company recognized revenue during 1997 which should have been deferred (recognized) until (in) 1998. What is the impact of this error? 1997 Income Statement: Revenues are too high, Net Income is too high 1997 Year End Balance Sheet: Liabilities are too low, SE is too high Revenue should have been deferred Example: A company failed to accrue wages earned by its employees. What is the impact? Income Statement: Expenses are too low, Net Income is too high Balance Sheet: Liabilities are too low, SE is too high The Closing Process 1. Close the revenue accounts to the income summary account. Revenues Income Summary XX XX 2. Close the expense accounts to the income summary account. Income Summary Expenses (1 &amp; 2 together represent net income) XX XX 3. Close the income summary account balance to the <a href="/keyword/retained-earnings/" >retained earnings</a> account. 1) Income Summary <a href="/keyword/retained-earnings/" >retained earnings</a> OR: 2) <a href="/keyword/retained-earnings/" >retained earnings</a> Income Summary XX XX XX XX *Choose #1 if Revenue is greater than Expenses. 4. Close the dividends (temporary account) to the <a href="/keyword/retained-earnings/" >retained earnings</a> account. <a href="/keyword/retained-earnings/" >retained earnings</a> Dividends XX XX ... View Full Document

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