Accounting Principles-Lecture 7.pdf - Accounting principles Chapter 3 Adjusting Entries Dr Mohamed Elmaghrabi 1 Types of Adjusting Entries Deferrals

Accounting Principles-Lecture 7.pdf - Accounting principles...

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12/3/2016 1 Accounting principles Chapter 3: Adjusting Entries 1 Dr. Mohamed Elmaghrabi Types of Adjusting Entries: Deferrals: Prepaid Expenses: Expenses paid in cash and recorded as assets before they are used up or consumed. Unearned Revenue: Revenues received in cash and recorded as liabilities before they are earned. Accruals: Accrued Revenue: Revenues earned but not yet received in cash or recorded. Accrued Expenses: Expenses incurred but not yet paid in cash or recorded. 2 Dr. Mohamed Elmaghrabi
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12/3/2016 2 Steps of the Accounting Cycle: Analyze business transactions. Journalize the transactions. Post to ledger accounts. Prepare trial balance. Journalize and post adjusting entries for deferrals and accruals (CHAPTER 3). Prepare an adjusted trial balance (CHAPTER 3). Prepare financial statements. Income Statement. Owner’s Equity Statement. Balance Sheet. Journalize and Post closing entries. Prepare a post-closing trial balance. 3 Dr. Mohamed Elmaghrabi Account Title Dr. Cr. Cash $15200 Advertising Supplies 2500 Prepaid Insurance 600 Office Equipment 5000 Notes Payable $5000 Accounts payable 2500 Unearned Revenue 1200 C. R. Byrd, Capital 10000 C. R. Byrd, Drawing 500 Service Revenue 10000 Salaries Expense 4000 Rent Expense 900 $28700 $28700 Pioneer Advertising Agency Trial Balance October 31, 2010 4 Dr. Mohamed Elmaghrabi
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12/3/2016 3 Supplies On October 5, Pioneer Advertising Agency purchased advertising supplies costing $2500 for cash. An inventory count on October 31, reveals that $1000 of supplies are still on hand. Required : prepare the necessary adjusting entry on October 31. Dr Cr Supplies $2,500 Cash $2,500 5 Dr. Mohamed Elmaghrabi Solution The adjusting entry to record supplies expense on October 31 is: Supplies expense represents the portion of the asset (supplies) that has been used up (consumed) during the period (during October). Supplies expense is computed as follows: Supplies Expense = $2500 supplies before adjustment - $1000 remaining supplies at the end of October = $1500. Date Accounts and Explanation Dr. Cr. Oct. 31 Adjusting Entry Advertising Supplies Expense Advertising Supplies (To record supplies used) 1500 1500 6 Dr. Mohamed Elmaghrabi
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12/3/2016 4 Notes After posting the adjusting entry, the asset “Advertising Supplies” shows a balance of $1000 which represents the actual supplies remaining at the end of October, and “Supplies Expense” shows a balance of $1500 which represents the supplies used during October. If this adjusting entry is not made: Expenses will be understated by $1500. Net income will be overstated by $1500. Owner’s equity will be overstated by $1500. Assets will be overstated by $1500. 7 Dr. Mohamed Elmaghrabi 2. Insurance On October 4, Pioneer Advertising Agency purchased a one-year insurance policy for $600. Coverage began on October 1.
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