Financial Accounting 2.1.11

Financial Accounting 2.1.11 - Financial Accounting 2010...

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Financial Accounting 2010 2/1/11 ADJUSTING ENTRIES Chapter 2, Spring 2011 Type of Accounting Adjustment Examples of Transaction Original Entry (Prior to fiscal yearend) Adjusting Entry (At end of fiscal year) Financial Effects if Adjustment is NOT Made Unearned revenues Cash advance is received from customers; company completes part or all of project prior to fiscal year end DR. Cash CR. Unearned Revenue (liability) DR. Unearned Revenue CR. Revenue (for completed portion of project only) Liabilities overstated Revenue understated Equity understated Depreciation Company purchased long-term operating assets (PPE) DR. PPE CR. Cash (Original entry may have been made years ago) DR. Depreciation Expense CR. Accumulated depreciation Assets overstated Expenses understated Equity overstated Prepaid expenses Company pays in advance for rent or insurance DR. Prepaid asset CR. Cash DR. Expense CR. Prepaid asset (for expired portion only) Assets overstated Expenses understated Equity overstated Accrued revenues Earned but not billed/paid for services performed NONE DR. Receivable CR. Revenue Assets understated Revenue understated Equity understated Accrued expenses Incurred but unpaid wages, interest, and taxes NONE DR. Expense CR. Payable Liabilities understated Expense understated Equity overstated
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Financial Accounting 2010 2/1/11 Unearned Revenue You pay your insurance premiums in advance. All insurance companies are going to have unearned revenues from the customer, but they haven’t provided any services yet. Relatively short-term construction contracts qualifies as unearned revenue. Publishers haven’t provided any services even though they earned money from your subscription. (unearned revenue) Health clubs – you pay an upfront fee for the resources the club provides throughout the year (unearned revenue) Rentals on buildings – real estate companies you have to pay the rent in advance (unearned revenue) Firms can’t record the revenue that goes on the income statement of that year UNTIL THE FIRM EARNED IT Ex. Lets say you buy a subscription to a magazine to the first of July 1, Company says “if you pay 120 dollars on July 1 st , I will give you subscription to magazine for a year.” Every month that goes by, and the company sends you a magazine, they earn a portion of that revenue. July 1st DR. Cash $120 CR unearned revenue $120 12/31 Adjusted Entry DR. Unearned Revenue $60 dollars CR Revenue $60 Liability at the end of the year is 60 dollars (goes on income statement at the end of the year during that fiscal period). Income they earned during that fiscal period is 60 dollars. All expenses associated with producing that magazine is also recorded in income
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This note was uploaded on 02/23/2011 for the course COMMERCE COMM 201 taught by Professor Erickson during the Spring '08 term at UVA.

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Financial Accounting 2.1.11 - Financial Accounting 2010...

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