ch03 WebCT - Chapter 1 Summaries Transaction Analysis...

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Unformatted text preview: Chapter 1 Summaries Transaction Analysis Chapter 2 Summaries Accounting Equation Debit and Credit Journal Entries General Ledger Trial Balance Chapter 3 -1 CHAPTER 3 CHAPTER ADJUSTING THE ADJUSTING ACCOUNTS ACCOUNTS Chapter 3 -2 ACCT 2111– Introductory Financial Accounting Timing Issues Accountants divide the economic life of a business into artificial time periods (Time Period Assumption). ..... 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 -3 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 -4 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 -5 Why do I leave a blank page here? Chapter 3 -6 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 -7 The Basics of Adjusting Entries Adjusting e s m it possibleto re C ntrie ake port ORRECT (TIMELY) am ounts on thebalance sheet and on the income 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 -8 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 -9 Adjusting Entries for Deferrals Deferrals are either: Pre paid e nse (for getting futureservice) or xpe s Une d re nue (for providing futureservice). arne ve s Chapter 3-10 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 supplies Advertising rent Chapter 3-11 building purchase s e quipm nt e purchase s purchase 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) t o re thee nse that apply to thecurre accounting cord xpe s nt pe riod, and (2) t o show theune xpire costs in theasse accounts. d t Chapter 3-12 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 3-13 Adjusting Entries for “Prepaid Expenses” Adjusting Example (Insurance): On Oct. 4th, Pioneer Advertising paid Pioneer Example (Insurance) On $600 for a one-year fire insurance policy. Show the journal one-year Show entry to record the payment on Oct 4th. Oct De bit C dit re De bit C dit re Chapter 3-14 Adjusting Entries for “Prepaid Expenses” Adjusting Example (Insurance): On Oct. 4th, Pioneer Advertising paid (Insurance) $600 for a one-year fire insurance policy. Show the adjusting one-year Show journal entry required at Oct. 31st. journal Oct. De bit C dit re De bit C dit re Chapter 3-15 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 e nse during e pe of theasse xpe pre xpe ) ach riod t’s use life(Matching Principle ful ). Chapter 3-16 Depreciation ,h h ,h Accum ulate De ciation d pre ,, 8Ç ´: , 8Ç ´: Chapter 3-17 Adjusting Entries for “Prepaid Expenses” Adjusting Example (Depreciation): On Oct. 2nd, Pioneer Advertising Pioneer Example (Depreciation) On paid $5,000 for office equipment that has an expected useful office life of 10 years. Show the journal entry to record the purchase of the equipment on Oct. 2nd. Oct. De bit C dit re De bit C dit re Chapter 3-18 Adjusting Entries for “Prepaid Expenses” Example (Depreciation): On Oct. 2nd, Pioneer Advertising paid Pioneer Example (Depreciation) On $5,000 for office equipment that has an expected useful life of 10 office years. Show the adjusting journal entry required at Oct. 31st. The adjusting Oct. The equipment has a $200 salvage/remaining value. equipment How much expenses are prepaid? Chapter 3-19 Adjusting Entries for “Prepaid Expenses” Adjusting Example (Depreciation): On Oct. 2nd, Pioneer Advertising paid Pioneer Example (Depreciation) On $5,000 for office equipment that has an expected useful life of 10 office years. Show the adjusting journal entry required at Oct. 31st. The adjusting Oct. The equipment has a $200 salvage value. equipment De bit C dit re De bit C dit re Chapter 3-20 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 3-21 AIRLINE Company A Balance Sheet Assets (Airplane) 10,000 Accumulated Depreciation 9,000 AIRLINE Company B Balance Sheet Assets (Airplane) 20,000 Accumulated Depreciation 9,000 QUESTION: Which Airline company provides more safe trip? Chapter 3-22 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: rent magazine subscriptions customer deposits for customer future service future Chapter 3-23 sale of airline tickets school tuition 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 3-24 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 3-25 Adjusting Entries for “Unearned Revenues” Adjusting Example: On Oct. 2nd, Pioneer Advertising received $1,200 On Pioneer from R. Knox for services to be completed by December 31. services Show the journal entry to record the receipt on Oct 2nd. Oct De bit C dit re De bit C dit re Chapter 3-26 Adjusting Entries for “Unearned Revenues” Adjusting Example: On Oct. 2nd, Pioneer Advertising received $1,200 fromR. Knox for services t o becom te by De m r 31. S ple d ce be how theadjusting journal e ntry services adjusting re quire on Oct. 31st. d Oct. De bit C dit re De bit C dit re Chapter 3-27 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 3-28 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: interest rent services performed Chapter 3-29 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 3-30 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 3-31 Adjusting Entries for “Accrued Revenues” Adjusting Example: In October Pioneer Advertising earned $200 for advertising services that have not been recorded. Show the advertising journal entry to record the accrued revenues in October. De bit C dit re De bit C dit re Chapter 3-32 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: interest rent taxe s salarie s Chapter 3-33 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 3-34 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 3-35 Adjusting Entries for “Accrued Expenses” Example: On Oct 1st, Pioneer Advertising signed a $5000, 3Example: On 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% X 3/12). due Show the journal entry to record the borrowing on Oct. 1st. Oct. De bit C dit re De bit C dit re Chapter 3-36 Adjusting Entries for “Accrued Expenses” Adjusting 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. Show theadjusting journal entry adjusting re quire on Oct. 31st. d Oct. De bit C dit re De bit C dit re Chapter 3-37 The Adjusted Trial Balance The Afte all adjusting e s arejournalize and poste thecom r ntrie d d, pany pre s anothe trial balance(Adjusted Trial Balance). pare r Its purposeis to provethee quality of de balance and cre bit s dit balance in thele r. s dge Chapter 3-38 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 3-39 ...
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This note was uploaded on 11/07/2010 for the course BBA 1023 taught by Professor Dkwidkdksiw during the Spring '10 term at City University of Hong Kong.

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