Ch03_Wey_Fin_6e

Ch03_Wey_Fin_6e - Chapter 3: Chapter 3: ADJUSTING THE...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 3: Chapter 3: ADJUSTING THE ACCOUNTS Chapter 3- 1 Adjusting the Accounts Adjusting the Accounts Timing Issues Timing Issues Time period Time assumption assumption Fiscal and Fiscal calendar years calendar Accrual- vs. cashbasis accounting Recognizing Recognizing revenues and expenses expenses Chapter 3-2 The Basics of The Basics of Adjusting 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 Adjusted Trial Balance and Trial Balance and Financial Statements Statements Preparing the Preparing adjusted trial balance balance Preparing Preparing financial statements statements Timing Issues Timing Issues Accountants divide the economic life of a business into artificial time periods (Time Period Assumption). ..... Jan. Feb. Mar. Apr. Dec. Generally a month, a quarter, or a year. Fiscal year vs. calendar year Also known as the “Periodicity Assumption” Chapter 3- 3 LO 1 Explain the time period assumption. Timing Issues Timing Issues Accrual- vs. Cash-Basis Accounting Accrual-Basis Accounting Transactions recorded in the periods in which the events occur Revenues are recognized when earned, rather than when cash is received. Expenses are recognized when incurred, rather than when paid. Chapter 3- 4 LO 2 Explain the accrual basis of accounting. Timing Issues Timing Issues Accrual- vs. Cash-Basis Accounting Cash-Basis Accounting Revenues are recognized when cash is received. Expenses are recognized when cash is paid. Cash­basis accounting is not in accordance with generally accepted accounting principles (GAAP). Chapter 3- 5 LO 2 Explain the accrual basis of accounting. Timing Issues Timing Issues Recognizing Revenues and Expenses Revenue Recognition Principle Companies recognize revenue in the accounting period in which it is earned. In a service enterprise, revenue is considered to be earned at the time the service is performed. Chapter 3- 6 LO 2 Explain the accrual basis of accounting. Timing Issues Timing Issues Recognizing Revenues and Expenses Matching Principle Match expenses with revenues in the period when the company makes efforts to generate those revenues. “Let the expenses follow the revenues.” Chapter 3-7 LO 2 Explain the accrual basis of accounting. Timing Issues Timing Issues GAAP relationships in revenue and expense recognition Illustration 3-1 Chapter 3-8 LO 2 Explain the accrual basis of accounting. The Basics of Adjusting Entries The Basics of Adjusting Entries Revenues ­ recorded in the period in which they are earned. Expenses ­ recognized in the period in which they are Expenses ­ recognized in the period in which they are incurred. Adjusting entries ­ needed to ensure that the revenue recognition and matching principles are followed. Chapter 3- 9 LO 3 Explain the reasons for adjusting entries. Types of Adjusting Entries Types of Adjusting Entries Deferrals 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. 2. Unearned Revenues. Cash received and recorded as liabilities before revenue is earned. Accruals 1. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 2. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. Chapter 3-10 LO 4 Identify the major types of adjusting entries. Adjusting Entries for Deferrals Adjusting Entries for Deferrals Deferrals are either: Prepaid expenses or Unearned revenues. Chapter 3-11 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Payment of cash, that is recorded as an assetbecause service or benefit will be received in the future. Cash Payment BEFORE Expense Recorded Prepayments often occur in regard to: insurance supplies Advertising rent Chapter 3-12 building purchases equipment purchases LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Prepaid Expenses Costs that expire either with the passage of time or through use. Adjusting entries (1) to record the expenses that apply to the current accounting period, and (2) to show the unexpired costs in the asset accounts. Chapter 3-13 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Illustration 3-4 Adjusting entries for prepaid expenses Increases (debits) an expense account and Decreases (credits) an asset account. Chapter 3-14 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Example (Insurance): On Oct. 4th, Pioneer Advertising paid $600 for a Example (Insurance) On Oct. 4 one­year fire insurance policy. Show the journal entry to record the payment on Oct 4th. Oct. 4 Prepaid insurance 600 Cash 600 Prepaid Insurance Debit Cash Credit Debit 600 Chapter 3-15 Credit 600 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Example (Insurance): On Oct. 4th, Pioneer Advertising paid Example (Insurance) $600 for a one-year fire insurance policy. Show the adjusting journal Show the entry required at Oct. 31st. Oct. 31 Insurance expense 50 Prepaid insurance Prepaid Insurance Debit Insurance Expense Credit 600 50 Debit 50 Credit 50 550 Chapter 3-16 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Depreciation Buildings, equipment, and vehicles (long­lived assets) are recorded as assets, rather than an expense, in the year acquired. Companies report a portion of the cost of a long­lived asset as an expense (depreciation) during each period of the asset’s useful life (Matching Principle). Chapter 3-17 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Example (Depreciation): On Oct. 2nd, Pioneer Advertising paid Example (Depreciation) On Oct. 2 $5,000 for office equipment that has an expected useful life of 10 years. Show the journal entry to record the purchase of the equipment on Oct. 2nd. Oct. 2 Equipment 5,000 Cash 5,000 Equipment Debit Cash Credit Debit 5,000 Chapter 3-18 Credit 5,000 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Example (Depreciation): On Oct. 2nd, Pioneer Advertising paid $5,000 for Example (Depreciation) On Oct. 2 office equipment that has an expected useful life of 10 years. Show the adjusting journal entry required at Oct. 31st. The equipment has a $200 salvage value. ([$5,000- $200 salvage value] / 5 yrs / 12 months = $40) Jan. 31 Depreciation expense 40 Accumulated depreciation Depreciation Expense Debit 40 Accumulated Depreciation Credit Debit 40 Credit 40 40 Chapter 3-19 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Depreciation (Statement Presentation) Accumulated Depreciation—is a contra asset account. Appears just after the account it offsets (Equipment) on the balance sheet. Office equipment $5,000 Less: Accumulated depreciation-Office Equipment Chapter 3-20 LO 5 LO 40 $4,960 Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Receipt of cash that is recorded as a liability because the revenue has not been earned. Cash Receipt Revenue Recorded BEFORE Unearned revenues often occur in regard to: rent magazine subscriptions customer deposits for future service Chapter 3-21 LO 5 LO sale of airline tickets school tuition Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Unearned Revenues Company makes an adjusting entry to record the revenue that has been earned and to show the liability that remains. The adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account. Chapter 3-22 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Illustration 3-10 Adjusting entries for unearned revenues Decrease (a debit) to a liability account and Increase (a credit) to a revenue account. Chapter 3-23 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Example: On Oct. 2nd, Pioneer Advertising received $1,200 from R. Knox On Oct. 2 for services to be completed by December 31. Show the journal entry to record the receipt on Oct 2nd. Oct. 2 Cash 1,200 Unearned Revenue Cash Debit Unearned Rent Revenue Credit Debit 1,200 Chapter 3-24 1,200 Credit 1,200 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for “Unearned Revenues” 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 Show the adjusting journal entry required on Oct. 31st. Show the Oct. 31 Unearned Revenue 400 Service Revenue Service Revenue Debit 400 Unearned Revenue Credit Debit 400 Credit 400 1,200 800 Chapter 3-25 LO 5 LO Prepare adjusting entries for deferrals. Prepare Adjusting Entries for Accruals Adjusting Entries for Accruals Made to record: Revenues earned and Expenses incurred in the current accounting period that have not been recognized through daily entries. Chapter 3-26 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Revenues earned but not yet received in cash or recorded. Adjusting entry results in: Revenue Recorded BEFORE Cash Receipt Accrued revenues often occur in regard to: interest rent services performed Chapter 3-27 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Accrued Revenues An adjusting entry serves two purposes: (1) It shows the receivable that exists, and (2) It records the revenues earned. Chapter 3-28 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Illustration 3-13 Adjusting entries for accrued revenues Increases (debits) an asset account and Increases (credits) a revenue account. Chapter 3-29 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Example: In October Pioneer Advertising earned $200 for advertising October Pioneer Advertising earned $200 for advertising services that have not been recorded. Show the journal entry torecord the accrued revenues in October. Oct. 31 Accounts Receivable 200 Service Revenue Accounts Receivable Debit Service Revenue Credit Debit 200 Chapter 3-30 200 Credit 200 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Expenses incurred but not yet paid in cash or recorded. Adjusting entry results in: Expense Recorded BEFORE Cash Payment Accrued expenses often occur in regard to: interest rent Chapter 3-31 taxes salaries LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Accrued Expenses An adjusting entry serves two purposes: (1) It records the obligations, and (2) It recognizes the expenses. Chapter 3-32 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Illustration 3-16 Adjusting entries for accrued expenses Increases (debits) an expense account and Increases (credits) a liability account. Chapter 3-33 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Example: On Oct 1st, Pioneer Advertising signed a $,5000, 3­month note On Oct 1 payable at a rate of 12% per year. The total interest due on the note at its due date is $150 ($5,000 X 12% X 3/12). Show the journal entry to record the borrowing on Oct. 1st. Oct. 1 Cash 5,000 Notes payable 5,000 Cash Debit Notes Payable Credit Debit 5,000 Chapter 3-34 Credit 5,000 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” 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 Show the adjusting journal entry required on Oct. 31st. Show the Oct. 31 Interest expense 50 Interest payable Interest Expense Debit Interest Payable Credit Debit 50 Chapter 3-35 50 Credit 50 LO 6 LO Prepare adjusting entries for accruals. Prepare Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Accrued Expenses An adjusting entry serves two purposes: (1) It records the obligations, and (2) it recognizes the expenses. Chapter 3-36 LO 6 LO Prepare adjusting entries for accruals. Prepare The Adjusted Trial Balance The Adjusted Trial Balance After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance). Its purpose is to prove the equality of debit balances and credit balances in the ledger. Chapter 3-37 LO 7 LO Describe the nature and purpose of an adjusted trial balance. Describe Preparing Financial Statements Preparing Financial Statements Financial Statements are prepared directly from the Adjusted Trial Financial Statements are prepared directly from the Adjusted Trial Balance. Balance. Income Statement Chapter 3-38 LO 7 LO Retained Earnings Statement Balance Sheet Statement of Cash Flows Describe the nature and purpose of an adjusted trial balance. Describe Preparing Financial Statements Preparing Financial Statements Account Debit 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 3-39 LO 7 LO Credit Income Statement PIONEER ADVERTISING AGENCY INC. Income Statement For the Month Ended October 31, 2008 $40 5,000 2,500 800 1,200 50 10,000 0 10,600 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 10,600 7,740 $ 2,860 $ 30,190 Describe the nature and purpose of an adjusted trial balance. Describe Preparing Financial Statements Preparing Financial Statements Account Debit 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 3-40 LO 7 LO Credit $40 5,000 2,500 800 1,200 50 10,000 0 10,600 Retained Earnings Statement 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 Describe the nature and purpose of an adjusted trial balance. Describe Preparing Financial Statements Preparing Financial Statements Account Debit 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 3-41 LO 7 LO Credit $40 5,000 2,500 800 1,200 50 10,000 0 10,600 $ 30,190 Balance Sheet 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 40 4,960 Total Assets $ 21,910 Liabilities and Stockholders’ Equity 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 Describe the nature and purpose of an adjusted trial balance. Describe ...
View Full Document

Ask a homework question - tutors are online