Chapter_3 - CHAPTER 3 CHAPTER ADJUSTING THE ADJUSTING...

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Unformatted text preview: CHAPTER 3 CHAPTER ADJUSTING THE ADJUSTING ACCOUNTS ACCOUNTS Financial Accounting, Sixth Edition Chapter 3 -1 Study Objectives 1. 2. 3. 4. 5. 6. 7. Explain thetim pe assum e riod ption. Explain theaccrual basis of accounting. Explain there asons for adjusting e s. ntrie I de ntify them type of adjusting e s. ajor s ntrie Pre pareadjusting e s for de rrals. ntrie fe Pre pareadjusting e s for accruals. ntrie De scribethenatureand purposeof an adjuste trial balance d . Chapter 3 -2 Adjusting the Accounts Timing Issues The Basics of The Adjusting Entries Entries Types of Types adjusting entries adjusting Adjusting entries Adjusting for deferrals for Adjusting entries Adjusting for accruals for Summary of Summary journalizing and posting posting The Adjusted The Trial Balance and Financial Statements Statements Preparing the Preparing adjusted trial balance balance Preparing Preparing financial statements statements Time period Time assumption assumption Fiscal and Fiscal calendar years calendar Accrual- vs. cashbasis accounting Recognizing Recognizing revenues and expenses expenses Chapter 3 -3 Timing Issues Accountants dividethee conom lifeof a busine into ic ss artificial tim pe e riods (Tim Pe Assum e riod ption). ..... Jan. Feb. Mar. Apr. Dec. Ge rally a month, a quarter, or a year. ne Fiscal ye vs. cale ar ndar ye ar Also known as the“Pe riodicity Assum ption” Chapter 3 -4 LO 1 Explain the time period assumption. Timing Issues Accrual- vs. Cash-Basis Accounting Accrual-Basis Accounting Transactions re corde in thepe d riods in which thee nts occur ve Re nue arere ve s cognize whe e d, rathe than whe cash is d n arne r n re ive ce d. Expe s arere nse cognize whe incurre rathe than whe paid. d n d, r n Chapter 3 -5 LO 2 Explain the accrual basis of accounting. Timing Issues Accrual- vs. Cash-Basis Accounting Cash-Basis Accounting Re nue arere ve s cognize whe cash is re ive d n ce d. Expe s arere nse cognize whe cash is paid. d n C ash-basis accounting is not in accordancewith ge rally ne acce d accounting principle (GAAP). pte s Chapter 3 -6 LO 2 Explain the accrual basis of accounting. Timing Issues Recognizing Revenues and Expenses Revenue Recognition Principle C panie re om s cognizere nuein the ve accounting pe in which it is riod e d. arne I n a se rvicee rprise re nueis nte , ve conside d to bee d at thetim re arne e t hese rviceis pe rform d. e Chapter 3 -7 LO 2 Explain the accrual basis of accounting. Timing Issues Recognizing Revenues and Expenses Matching Principle Match e nse with re nue in xpe s ve s t hepe whe thecom riod n pany m se ake fforts to ge ratethose ne re nue ve s. “Let the expenses follow the revenues.” Chapter 3 -8 LO 2 Explain the accrual basis of accounting. Timing Issues GAAP relationships in revenue and expense recognition Illustration 3-1 Chapter 3 -9 LO 2 Explain the accrual basis of accounting. The Basics of Adjusting Entries Adjusting e s m it possibleto re corre am ntrie ake port ct ounts on thebalance sheet and on theincome statement. A com pany m m adjusting e s e ry tim it ust ake ntrie ve e pre s financial state e pare m nts. Chapter 3-10 LO 3 Explain the reasons for adjusting entries. The Basics of Adjusting Entries Revenues - re corde in thepe in which the are d riod y e d. arne Expenses - re d riod y Expenses cognize in thepe in which the are incurre . d incurre Adjusting entries - ne de to e e d nsurethat there nue ve re cognition and m atching principle arefollowe s d. re Chapter 3-11 LO 3 Explain the reasons for adjusting entries. Types of Adjusting Entries Deferrals 1. Prepaid Expenses. Expe s paid in cash and re nse corde as asse be d ts fore t he areuse or consum d. y d e 2. Unearned Revenues. C re ive and re ash ce d corde as liabilitie be d s fore re nueis e d. ve arne Accruals 1. Accrued Revenues. Re nue e d but not ye re ive in cash or ve s arne t ce d re corde d. 2. Accrued Expenses. Expe s incurre but not ye paid in cash or nse d t re corde d. Chapter 3-12 LO 4 Identify the major types of adjusting entries. Trial Balance Trial Balance – Each account is analyze to de rm whe r it is d te ine the com teand up-to-date ple . PIONEER ADVERTISING AGENCY INC. Trial Balance October 31, 2008 Debit $ 15,200 2,500 600 5,000 $ 5,000 2,500 1,200 10,000 0 500 10,000 4,000 900 $28,700 $ 28,700 Account Credit Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Rent Expense Chapter 3-13 LO 4 Identify the major types of adjusting entries. Adjusting Entries for Deferrals Deferrals aree r: ithe Pre paid e nse or xpe s Une d re nue arne ve s. Chapter 3-14 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Paym nt of cash, that is re e corde as an asse be d t cause se rviceor be fit ne Paym will bere ive in thefuture ce d . will C Paym nt ash e BEFORE Expe Re nse corde d Pre paym nts ofte occur in re e n gard to: insurance supplie s Adve rtising re nt Chapter 3-15 building purchase s e quipm nt e purchase s purchase LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Prepaid Expenses C that e osts xpiree r with thepassageof tim or through use ithe e . Adjusting e s ntrie (1) to re thee nse that apply to thecurre accounting cord xpe s nt pe riod, and (2) to show theune xpire costs in theasse accounts. d t Chapter 3-16 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Illustration 3-4 Adjusting e s for pre ntrie paid e nse xpe s I ncre s (de ase bits) an e nseaccount and xpe De ase (cre cre s dits) an asse account. t Chapter 3-17 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Example (Insurance): On Oct. 4th, Pionee Adve rtising paid $600 for On Pione r a one ar fireinsurancepolicy. S -ye how thejournal e to re thepaym nt ntry cord e on Oct 4th. on Oct. 4 Pre paid insurance C ash Pre paid I nsurance De bit 600 C dit re De bit Cash C dit re 600 600 600 Chapter 3-18 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Example (Insurance): On Oct. 4th, Pioneer Advertising paid $600 for a one-year fire insurance policy. Show theadjusting journal e re ntry quire at Oct. 31st . d Oct. 31 I nsurancee nse xpe Pre paid insurance Pre paid I nsurance De bit 600 550 Chapter 3-19 50 50 I nsuranceExpe nse De bit C dit re 50 C dit re 50 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Depreciation Buildings, e quipm nt, and ve s (long-live asse are e hicle d ts) re corde as asse rathe than an e nse in theye acquire d ts, r xpe , ar d. C panie re a portion of thecost of a long-live asse as an om s port d t e nse(de ciation) during e pe of theasse use life xpe pre ach riod t’s ful (Matching Principle ). Chapter 3-20 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Example (Depreciation): On Oct. 2nd, Pione r Advertising paid e On Pione $5,000 for officee quipm nt that has an e cte use lifeof 10 ye S e xpe d ful ars. how thejournal e to re thepurchaseof thee ntry cord quipm nt on Oct. 2nd. e t he Oct. 2 Equipm nt e C ash Equipm nt e De bit 5,000 C dit re De bit Cash C dit re 5,000 5,000 5,000 Chapter 3-21 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Example (Depreciation): On Oct. 2nd, Pione r Advertising paid $5,000 e On Pione f or officee quipm nt that has an e cte use lifeof 10 ye S e xpe d ful ars. how theadjusting journal e re d quipm nt has a $200 salvagevalue e . journal ntry quire at Oct. 31st . Thee ([$5,000- $200 salvage value] / 5 yrs / 12 months = $40) Jan. 31 De ciation e nse pre xpe Accum ulate de ciation d pre De ciation Expe pre nse De bit 40 40 C dit re 40 40 Accum ulate De ciation d pre De bit C dit re 40 Chapter 3-22 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Depreciation (Statement Presentation) Accum ulate De ciation—is a contra asse account. d pre t Appe just afte theaccount it offse (Equipm nt) on thebalance ars r ts e she t. e Office equipment $5,000 40 $4,960 Less: Accumulated depreciation-Office Equipment Chapter 3-23 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Re ipt of cash that is re ce corde as a liability be d causethere nuehas ve Re not be n e d. not e arne C Re ipt ash ce BEFORE Re nueRe ve corde d Une d re nue ofte occur in re arne ve s n gard to: re nt m agazinesubscriptions custom r de e custom posits for future se rvice se Chapter 3-24 saleof airlineticke ts school tuition LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Unearned Revenues C pany m s an adjusting e to re there nuethat has om ake ntry cord ve be n e d and to show theliability that re ains. e arne m Theadjusting e for une d re nue re ntry arne ve s sults in a de ase(a cre de to a liability account and an incre (a cre to a re nue bit) ase dit) ve account. Chapter 3-25 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Illustration 3-10 Adjusting e s for une d re nue ntrie arne ve s De ase(a de to a liability account and cre bit) I ncre (a cre to a re nueaccount. ase dit) ve Chapter 3-26 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Example: On Oct. 2nd, Pionee Adve rtising re ive $1,200 fromR. Knox ce d On Pione r f or se s to becom te by De m r 31. S rvice ple d ce be how thejournal e to re ntry cord there ipt on Oct 2nd. t he ce Oct. 2 C ash Une d Re nue arne ve Cash De bit 1,200 C dit re Une d Re Re nue arne nt ve De bit C dit re 1,200 1,200 1,200 Chapter 3-27 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Example: On Oct. 2nd, Pioneer Advertising received $1,200 from R. Knox for services to be completed by December 31. from S how theadjusting journal e re ntry quire on Oct. 31st . d Oct. 31 Une d Re nue arne ve S rviceRe nue e ve S rviceRe nue e ve De bit C dit re 400 Une d Re nue arne ve De bit 400 C dit re 1,200 800 Chapter 3-28 400 400 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for Accruals Madeto re cord: Re nue e d and ve s arne Expe s incurre nse d in thecurre accounting pe that havenot be n re nt riod e cognize d t hrough daily e s. ntrie Chapter 3-29 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Revenues” Re nue e d but not ye re ive in cash or re ve s arne t ce d corde d. Adjusting e re ntry sults in: Re nueRe ve corde d BEFORE C Re ipt ash ce Accrue re nue ofte occur in re d ve s n gard to: inte st re re nt se s pe rvice rform d e Chapter 3-30 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Revenues” Accrued Revenues An adjusting e se s two purpose ntry rve s: (1) I t shows there ivablethat e ce xists, and (2) I t re cords there nue e d. ve s arne Chapter 3-31 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Revenues” Illustration 3-13 Adjusting e s for accrue re nue ntrie d ve s I ncre s (de ase bits) an asse account and t I ncre s (cre ase dits) a re nueaccount. ve Chapter 3-32 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Revenues” Example: In October Pione r Adve e rtising e d $200 for adve arne rtising se s that havenot be n re rvice e corde S d. how thejournal e to re the ntry cord accrue re nue in Octobe d ve s r. Oct. 31 Accounts Re ivable ce S rviceRe nue e ve Accounts Re ivable ce De bit 200 C dit re S rviceRe nue e ve De bit C dit re 200 200 200 Chapter 3-33 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Expe s incurre but not ye paid in cash or re nse d t corde d. Adjusting e re ntry sults in: Expe Re nse corde d BEFORE C Paym nt ash e Accrue e nse ofte occur in re d xpe s n gard to: inte st re re nt taxe s salarie s Chapter 3-34 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Adjusting Accrued Expenses An adjusting e se s two purpose ntry rve s: (1) I t re cords theobligations, and (2) I t re cognize thee nse s xpe s. Chapter 3-35 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Illustration 3-16 Adjusting e s for accrue e nse ntrie d xpe s I ncre s (de ase bits) an e nseaccount and xpe I ncre s (cre ase dits) a liability account. Chapter 3-36 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Example: On Oct 1st , Pione r Adve e rtising signe a $,5000, 3-m d onth note On Pione payableat a rateof 12%pe ye Thetotal inte st dueon thenoteat its duedate r ar. re is $150 ($5,000 X 12%X 3/12). S how thejournal e to re theborrowing on ntry cord Oct. 1st . Oct. Oct. 1 C ash Note payable s Cash De bit 5,000 C dit re Note Payable s De bit C dit re 5,000 5,000 5,000 Chapter 3-37 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Example: On Oct 1st, Pioneer Advertising signed a $,5000, 3On month note payable at a rate of 12% per year. The total interest month due on the note at its due date is $150 ([$5,000 x 12%] / 12 months). $150 S how theadjusting journal e re ntry quire on Oct. 31st . d Oct. 31 I nte st e nse re xpe I nte st payable re I nte st Expe re nse De bit 50 C dit re I nte st Payable re De bit C dit re 50 50 50 Chapter 3-38 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Adjusting Accrued Expenses An adjusting e se s two purpose ntry rve s: (1) I t re cords theobligations, and (2) it re cognize thee nse s xpe s. Chapter 3-39 LO 6 LO Prepare adjusting entries for accruals. Prepare The Adjusted Trial Balance The Afte all adjusting e s arejournalize and poste thecom r ntrie d d pany pre s anothe trial balancefromthele r accounts pare r dge (Adjusted Trial Balance). Its purposeis to provethee quality of de balance and cre bit s dit balance in thele r. s dge Chapter 3-40 LO 7 LO Describe the nature and purpose of an adjusted trial balance. Describe Preparing Financial Statements Financial S m nts arepre d dire fromtheAdjuste Trial tate e pare ctly d Balance . I ncom e S m nt tate e Re taine d Earnings S m nt tate e BalanceS e he t S m nt of tate e C Flows ash Chapter 3-41 LO 7 LO Describe the nature and purpose of an adjusted trial balance. Describe Preparing Financial Statements Account Debit Credit Cash $ 15,200 Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment 5,000 Accumulated Depreciation-Off Equip Notes Payable Accounts Payable Unearned Revenue Salaries Payable Interest Payable Common Stock Retained Earnings Dividends 500 Service Revenue Salaries Expense 5,200 Advertising Supplies Expense 1,500 Rent Expense 900 Insurance Expense 50 Interest Expense 50 Depreciation Expense 40 $ 30,190 Chapter 3-42 I ncom S m nt e tate e PIONEER ADVERTISING AGENCY INC. Income Statement For the Month Ended October 31, 2008 Revenues Service Revenue Expenses Salaries Expense 5,200 Advertising Supplies Expense1,500 Rent Expense 900 Insurance Expense 50 Interest Expense 50 Depreciation Expense 40 Total expenses Net income $40 5,000 2,500 800 1,200 50 10,000 0 10,600 10,600 7,740 $ 2,860 $ 30,190 LO 7 LO Describe the nature and purpose of an adjusted trial balance. Describe Preparing Financial Statements Account Debit Credit Cash $ 15,200 Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment 5,000 Accumulated Depreciation-Off Equip Notes Payable Accounts Payable Unearned Revenue Salaries Payable Interest Payable Common Stock Retained Earnings Dividends 500 Service Revenue Salaries Expense 5,200 Advertising Supplies Expense 1,500 Rent Expense 900 Insurance Expense 50 Interest Expense 50 Depreciation Expense 40 $ 30,190 Chapter 3-43 Re taine Earnings d S m nt tate e $40 5,000 2,500 800 1,200 50 10,000 0 10,600 PIONEER ADVERTISING AGENCY INC. Retained Earnings Statement For the Month Ended October 31, 2008 Retained earnings, October 1 Add: Net income Less: Dividends Retained Earnings, October 31 $0 2,860 2,860 500 2,360 $ 30,190 LO 7 LO Describe the nature and purpose of an adjusted trial balance. Describe Preparing Financial Statements Account Debit Credit BalanceS e he t PIONEER ADVERTISING AGENCY INC. Balance Sheet October 31, 2008 Assets Cash $ 15,200 Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment 5,000 Accumulated Depreciation-Off Equip Notes Payable Accounts Payable Unearned Revenue Salaries Payable Interest Payable Common Stock Retained Earnings Dividends 500 Service Revenue Salaries Expense 5,200 Advertising Supplies Expense 1,500 Rent Expense 900 Insurance Expense 50 Interest Expense 50 Depreciation Expense 40 $ 30,190 Chapter 3-44 $40 5,000 2,500 800 1,200 50 10,000 0 10,600 Cash $ 15,200 Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment $5,000 Accumulated Depreciation-Off Equip 40 4,960 Total Assets $ 21,910 Liabilities and Stockholders’ Equity $ 30,190 Liabilities Notes Payable Accounts Payable Unearned Revenue Salaries Payable Interest Payable Total liabilities Stockholders’ Equity Common Stock Retained Earnings Total liabilities and stockholders’ equity $ 5,000 2,500 800 1,200 50 9,550 10,000 2,360 $ 21,910 LO 7 LO Describe the nature and purpose of an adjusted trial balance. Describe ...
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