Mgmt_200_Spring_2008_Chap_4_Adjustments(1,22)

Mgmt_200_Spring_2008_Chap_4_Adjustments(1,22) - MGMT 200...

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MGMT 200 INTRODUCTORY FINANCIAL ACCOUNTING Adjusting and Closing Entries 1. The accounting cycle 1. Adjusting entries 1. Contra accounts 1. Closing the books 1. Earnings Per Share and Net Profit Margin
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The Accounting Cycle During period Analyze transactions Record journal entries Post amounts to the general ledger At end of period Adjust revenues and expenses for unrecorded items Prepare financial statements Close revenue, expense, and dividend accounts and update the retained earnings account Repeat for next period
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The Accounting Cycle • A 1 = L 1 + CC 1 +RE 1 Start of year balance sheet • A 2 = L 2 + CC 2 +RE 1 + Rev* 2 – Exp* 2 - Div 2 After this year’s transactions have been processed • A 2 = L 2 + CC 2 +RE 1 + Rev 2 – Exp 2 - Div 2 After adjusting entries to “correct” revenues and expenses • A 2 = L 2 + CC 2 +RE 2 After closing entries to close temporary accounts and update retained earnings Start of year balance sheet for next year – repeat cycle
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Adjusting entries Adjusting entries are necessary at the end of the period to measure revenues and expenses in compliance with accrual accounting Accrued expenses Incurred expenses not yet recorded Deferred expenses Assets that have been used up Accrued revenues Revenues that have been earned but not yet recorded Deferred revenues Revenues received in advance of being earned
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E 4-6: Recording Seven Typical Adjusting Entries Heald’s Variety Store is completing the accounting process for the year just ended, December 31, 2007. The transactions during 2007 have been journalized and posted. The following data with respect to adjusting entries are available: a. Office supplies on hand at January 1, 2007, totaled $350. Office supplies purchased and debited to Office Supplies during the year amounted to $800. The year-end count showed $300 of supplies on hand. b. Wages earned by employees during December 2007, unpaid and unrecorded at December 31, 2007, amounted to $3,700. The last payroll was December 28; the next payroll will be January 6, 2008. c. Three-fourths of the basement of the store is rented for $1,500 per month to another merchant, M. Dittman Inc. Dittman sells compatible, but not competitive, merchandise. On November 1, 2007, the store collected six months’ rent in the amount of $9,000 in advance from Dittman; it was credited in full to Unearned Rent Revenue when collected. d. The remaining basement space is rented to Kathy’s Specialty Shop for $820 per month, payable monthly. On December 31, 2007, the rent for November and December 2007 had not been collected or recorded. Collection is expected January 10, 2008.
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E 4-6: Recording Seven Typical Adjusting Entries e. The store used delivery equipment that cost $30,000; $5,000 was the estimated depreciation for 2007. f. On July 1, 2007, a two-year insurance premium amounting to $4,200
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Mgmt_200_Spring_2008_Chap_4_Adjustments(1,22) - MGMT 200...

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