CH-3 PPT - Adjusting the Accounts Financial Accounting Seventh Edition Slide 3 1 Study Objectives Study Objectives 1 2 Explain the accrual basis of

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Unformatted text preview: Adjusting the Accounts Financial Accounting, Seventh Edition Slide 3- 1 Study Objectives Study Objectives 1. 2. Explain the accrual basis of accounting. 3. Explain the reasons for adjusting entries. 4. Identify the major types of adjusting entries. 5. Prepare adjusting entries for deferrals. 6. Prepare adjusting entries for accruals. 7. Slide 3-2 Explain the time period assumption. Describe the nature and purpose of an adjusted trial balance. Adjusting the Accounts Adjusting the Accounts Timing Issues Fiscal and calendar Fiscal years years Accrual- vs. cashbasis accounting Recognizing Recognizing revenues and expenses expenses Slide 3- 3 The The Basics of Adjusting Entries Adjusting Types of adjusting Types entries entries Adjusting entries for Adjusting deferrals deferrals Adjusting entries for Adjusting accruals accruals Summary of Summary journalizing and posting posting The Adjusted Trial The Balance and Financial Statements Financial Preparing the Preparing adjusted trial balance adjusted Preparing financial Preparing 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” Slide 3-4 SO 1 Explain the time period assumption. Timing Issues Timing Issues Review The time period assumption states that: a. revenue should be recognized in the accounting period in which it is earned. b. expenses should be matched with revenues. c. the economic life of a business can be divided into artificial time periods. d. the fiscal year should correspond with the calendar year. Slide 3- 5 Solution on notes page SO 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. Slide 3- 6 SO 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). Slide 3-7 SO 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. Slide 3-8 SO 2 Explain the accrual basis of accounting. Timing Issues Timing Issues Recognizing Revenues and Expenses Expense Recognition Principle – (Matching Principle) Match expenses with revenues in the period when the company makes efforts to generate those revenues. “Let the expenses follow the revenues.” Slide 3- 9 SO 2 Explain the accrual basis of accounting. Timing Issues Timing Issues GAAP relationships in revenue and expense recognition Slide 3-10 Illustration 3-1 SO 2 Explain the accrual basis of accounting. Slide 3-11 SO 2 Timing Issues Timing Issues Match the description of the concept to the concept. g f c b Slide 3-12 Solution on notes page SO 2 Explain the accrual basis of accounting. Timing Issues Timing Issues Review One of the following statements about the accrual basis of accounting is false. That statement is: a. Events that change a company’s financial statements are recorded in the periods in which the events occur. b. Revenue is recognizedin the period in which it is earned. c. The accrual basis of accounting is in accord with generally accepted accounting principles. d. Revenue is recorded only when cash is received, and expenses are recorded only when cash is paid. Slide 3-13 Solution on notes page SO 2 Explain the accrual basis of accounting. The Basics of Adjusting Entries The Basics of Adjusting Entries Adjusting entries make it possible to report correct amounts on the balance sheet and on the income statement. A company must make adjusting entries every time it prepares financial statements. Slide 3-14 SO 3 Explain the reasons for adjusting entries. 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 incurred. Expenses ­ recognized in the period in which they are incurred Adjusting entries ­ needed to ensure that the revenue recognition and matching principles are followed. Slide 3-15 SO 3 Explain the reasons for adjusting entries. The Basics of Adjusting Entries The Basics of Adjusting Entries Review Adjusting entries are made to ensure that: a. expenses are recognized in the period in which they are incurred. b. revenues are recorded in the period in which they are earned. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. all of the above. Slide 3-16 SO 3 Explain the reasons for adjusting entries. Types of Adjusting Entries Types of Adjusting Entries Types of Adjusting Entries Illustration 3-2 Categories of adjusting entries Deferrals 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. Slide 3-17 Accruals 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. SO 4 Identify the major types of adjusting entries. Types of Adjusting Entries Types of Adjusting Entries Trial Balance – Illustrations are based on the January 31, trial balance of Phoenix Consulting. Slide 3-18 Phoenix Consult ing - J an. 31st (bef ore adj ust ing ent ries) Acct . No. 10 0 10 5 110 12 0 13 0 200 2 10 220 300 400 Account Debit Ca s h $ 5 0 ,0 0 0 Ac c o unt s r e c e iva b le 3 5 ,0 0 0 Pr e pa id ins ur a nc e 12 ,0 0 0 Eq uipm e nt 2 4 ,0 0 0 I nve s t m e nt s 3 0 0 ,0 0 0 Ac c o unt s pa y a b le Une a r ne d r e nt r e ve nue No te pa y a b le Co m m o n s t o c k S a le s $ 4 2 1,0 0 0 Credit $ 2 0 ,0 0 0 2 4 ,0 0 0 2 0 0 ,0 0 0 4 0 ,0 0 0 13 7 ,0 0 0 $ 4 2 1,0 0 0 SO 4 Identify the major types of adjusting entries. Types of Adjusting Entries Types of Adjusting Entries Adjusting Entries for Deferrals Deferrals are either: Prepaid expenses OR Unearned revenues. Slide 3-19 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Payment of cash that is recorded as an asset because service or benefit will be received in the future. Cash Payment BEFORE Expense Recorded Prepayments often occur in regard to: insurance supplies advertising Slide 3-20 rent maintenance on equipment fixed assets (depreciation) SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Prepaid Expenses Costs that expire either with thepassage 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. Slide 3-21 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Adjusting entries for prepaid expenses Illustration 3-4 Increases (debits) an expense account and Decreases (credits) an asset account. Slide 3-22 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Illustration (Insurance): On Jan. 1st, Phoenix Consulting paid $12,000 for 12 Illustration (Insurance): On Jan. 1 months of insurance coverage. Show the journal entry to record the payment on Jan. 1st. Jan. 1 Prepaid Insurance 12,000 Cash 12,000 Prepaid Insurance Debit 12,000 Slide 3-23 Credit Cash Debit Credit 12,000 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Illustration (Insurance): On Jan. 1st, Phoenix Consulting paid $12,000 for 12 Illustration (Insurance): On Jan. 1 months of insurance coverage. Show the adjusting journal entry required at Jan. 31st. Jan. 31 Insurance Expense 1,000 Prepaid Insurance Prepaid Insurance Debit 12,000 1,000 Insurance Expense Credit 1,000 Debit Credit 1,000 11,000 Slide 3-24 SO 5 Prepare adjusting entries for deferrals. 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). Slide 3-25 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Illustration (Depreciation): On Jan. 1st, Phoenix Consulting paid $24,000 for Illustration (Depreciation): On Jan. 1 equipment that has an estimated useful life of 20 years. Show the journal entry to record the purchase of the equipment on Jan. 1st. Jan. 1 Equipment 24,000 Cash 24,000 Equipment Debit 24,000 Slide 3-26 Credit Cash Debit Credit 24,000 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Illustration (Depreciation): On Jan. 1st, Phoenix Consulting paid $24,000 for Illustration (Depreciation): On Jan. 1 equipment that has an estimated useful life of 20 years. Show the adjusting journal entry required at Jan. 31st. ($24,000 / 20 yrs. / 12 months = ($24,000 $100) $100) Jan. 31 Depreciation Expense 100 Accumulated Depreciation Depreciation Expense Debit Credit 100 Slide 3-27 100 Accumulated Depreciation Debit Credit 100 SO 5 Prepare adjusting entries for deferrals. 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. Balance Sheet Jan. 31 Asset s Eq uipm e nt A c c um ulat e d De pr e c iat io n Ne t Eq uipm e nt Slide 3-28 2 4 ,0 0 0 (10 0 ) 2 3 ,9 0 0 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Summary Slide 3-29 Illustration 3-9 SO 5 Prepare adjusting entries for deferrals. 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 airline tickets school tuition Slide 3-30 magazine subscriptions customer deposits SO 5 Prepare adjusting entries for deferrals. 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. Slide 3-31 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Adjusting entries for unearned revenues Illustration 3-10 Decrease (a debit) to a liability account and Increase (a credit) to a revenue account. Slide 3-32 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Illustration: On Jan. 1st, Phoenix Consulting received $24,000 from Arcadia On Jan. 1 High School for 3 months rent in advance. Show the journal entry to record the receipt on Jan. 1st. Jan. 1 Cash 24,000 Unearned Rent Revenue Cash Debit 24,000 Slide 3-33 24,000 Unearned Rent Revenue Credit Debit Credit 24,000 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Illustration: On Jan. 1st, Phoenix Consulting received $24,000 from Arcadia On Jan. 1 High School for 3 months rent in advance. Show the adjusting journal entry required on Jan. 31st. Jan. 31 Unearned Rent Revenue 8,000 Rent Revenue Rent Revenue Debit 8,000 Unearned Rent Revenue Credit 8,000 Debit 8,000 Credit 24,000 16,000 Slide 3-34 SO 5 Prepare adjusting entries for deferrals. Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Summary Illustration 3-12 Slide 3-35 SO 5 Prepare adjusting entries for deferrals. Slide 3-36 SO 5 Types of Adjusting Entries Types of Adjusting Entries Adjusting Entries for Accruals Made to record: Revenues earned and OR Expenses incurred in the current accounting period that have not been recognized through daily entries. Slide 3-37 SO 6 Prepare adjusting entries for accruals. 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: rent interest services performed Slide 3-38 SO 6 Prepare adjusting entries for accruals. 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. Slide 3-39 SO 6 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Adjusting entries for accrued revenues Illustration 3-13 Increases (debits) an asset account and Increases (credits) a revenue account. Slide 3-40 SO 6 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Illustration: On Jan. 1st, Phoenix Consulting invested $300,000 in securities On Jan. 1 that return 5% interest per year. Show the journal entry to record the investment on Jan. 1st. Jan. 1 Investments 300,000 Cash 300,000 Investments Debit 300,000 Slide 3-41 Credit Cash Debit Credit 300,000 SO 6 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Illustration: On Jan. 1st, Phoenix Consulting invested $300,000 in securities On Jan. 1 that return 5% interest per year. Show the adjusting journal entry required on Jan. 31st. ($300,000 x 5% / 12 months = $1,250) Jan. 31 Interest Receivable 1,250 Interest Revenue Interest Receivable Debit 1,250 Slide 3-42 Credit 1,250 Interest Revenue Debit Credit 1,250 SO 6 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Summary Illustration 3-15 Slide 3-43 SO 6 Prepare adjusting entries for accruals. 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: rent interest Slide 3-44 taxes salaries SO 6 Prepare adjusting entries for accruals. 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. Slide 3-45 SO 6 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Adjusting entries for accrued expenses Illustration 3-16 Increases (debits) an expense account and Increases (credits) a liability account. Slide 3-46 SO 6 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Illustration: On Jan. 2nd, Phoenix Consulting borrowed $200,000 at a rate of On Jan. 2 9% per year. Interest is due on first of each month. Show the journal entry to record the borrowing on Jan. 2nd. Jan. 2 Cash 200,000 Notes Payable Cash Debit 200,000 Slide 3-47 200,000 Notes Payable Credit Debit Credit 200,000 SO 6 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Illustration: On Jan. 2nd, Phoenix Consulting borrowed $200,000 at a rate of On Jan. 2 9% per year. Interest is due on first of each month. Show the adjusting journal entry required on Jan. 31st. ($200,000 x 9% / 12 months = $1,500) Jan. 31 Interest Expense 1,500 Interest Payable Interest Expense Debit 1,500 Slide 3-48 Credit 1,500 Interest Payable Debit Credit 1,500 SO 6 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Summary Illustration 3-21 Slide 3-49 SO 6 Prepare adjusting entries for accruals. 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. Slide 3-50 Adj ust ed Trial Balance Ca s h Ac c o unts r e c e iva b le I nt e r e s t r e c e iva b le Pr e pa id ins ur a nc e Eq uipm e nt Ac c um ula t e d d e pr e c ia tio n I nve s t m e nts Ac c o unts pa y a b le I nt e r e s t pa y a b le Une a r ne d r e ve nue No te pa y a b le Co m m o n s to c k S a le s I nt e r e s t r e ve nue Re nt r e ve nue I nt e r e s t e x pe ns e De pr e c ia tio n e x pe ns e I ns ur a nc e e x pe ns e Debit $ 5 0 ,0 0 0 3 5 ,0 0 0 1,2 5 0 11,0 0 0 2 4 ,0 0 0 3 0 0 ,0 0 0 1,5 0 0 10 0 1,0 0 0 $ 4 2 3 ,8 5 0 Credit $ 10 0 2 0 ,0 0 0 1,5 0 0 16 ,0 0 0 2 0 0 ,0 0 0 4 0 ,0 0 0 13 7 ,0 0 0 1,2 5 0 8 ,0 0 0 $ 4 2 3 ,8 5 0 SO 7 The Adjusted Trial Balance The Adjusted Trial Balance Review Question Which of the following statements is incorrect concerning the adjusted trial balance? a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. b. The adjusted trial balance provides the primary basis for the preparation of financial statements. c. The adjusted trial balance lists the account balances segregated by assets and liabilities. d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted. Slide 3-51 SO 7 Describe the nature and purpose of an adjusted trial balance. Preparing Financial Statements Preparing Financial Statements Financial Statements are prepared directly from the Adjusted Financial Statements are prepared directly from the Adjusted Trial Balance. Trial Balance. Balance Sheet Slide 3-52 Income Statement Retained Earnings Statement SO 7 Describe the nature and purpose of an adjusted trial balance. Preparing Financial Statements Preparing Financial Statements Adj ust ed Trial Balance Debit Ca s h Ac c o unts r e c e iva b le I nt e r e s t r e c e iva b le Pr e paid ins ur a nc e Eq uipm e nt Ac c um ula t e d d e pr e c ia tio n I nve s t m e nts Ac c o unts pa y a b le I nt e r e s t pay a b le Une ar ne d r e ve nue No t e pa y a b le Co m m o n s to c k S a le s I nt e r e s t r e ve nue Re nt r e ve nue I nt e r e s t e x pe ns e De pr e c ia tio n e x pe ns e I ns ur a nc e e x pe ns e $ 5 0 ,0 0 0 3 5 ,0 0 0 1,2 5 0 11,0 0 0 2 4 ,0 0 0 Slide 3-53 3 0 0 ,0 0 0 1,5 0 0 10 0 1,0 0 0 $ 4 2 3 ,8 5 0 Credit $ 10 0 2 0 ,0 0 0 1,5 0 0 16 ,0 0 0 2 0 0 ,0 0 0 4 0 ,0 0 0 13 7 ,0 0 0 1,2 5 0 8 ,0 0 0 Ret ained Earnings St at ement For t he Mont h Ended J an. 31, 2010 Be g inning b a la nc e , J a n. 1 + Ne t inc o m e ­ Divid e nd s End ing b a la nc e , J a n. 3 1 $ ­ 14 3 ,6 5 0 0 $ 14 3 ,6 5 0 $ 4 2 3 ,8 5 0 SO 7 SO Preparing Financial Statements Preparing Financial Statements Adj ust ed Trial Balance Debit Ca s h Ac c o unts r e c e iva b le I nt e r e s t r e c e iva b le Pr e paid ins ur a nc e Eq uipm e nt Ac c um ula t e d d e pr e c ia tio n I nve s t m e nts Ac c o unts pa y a b le I nt e r e s t pay a b le Une ar ne d r e ve nue No t e pa y a b le Co m m o n s to c k S a le s I nt e r e s t r e ve nue Re nt r e ve nue I nt e r e s t e x pe ns e De pr e c ia tio n e x pe ns e I ns ur a nc e e x pe ns e $ 5 0 ,0 0 0 3 5 ,0 0 0 1,2 5 0 11,0 0 0 2 4 ,0 0 0 Slide 3-54 3 0 0 ,0 0 0 1,5 0 0 10 0 1,0 0 0 $ 4 2 3 ,8 5 0 Credit Balance Sheet J an. 31, 2010 Asset s $ 10 0 2 0 ,0 0 0 1,5 0 0 16 ,0 0 0 2 0 0 ,0 0 0 4 0 ,0 0 0 13 7 ,0 0 0 1,2 5 0 8 ,0 0 0 $ 4 2 3 ,8 5 0 Ca s h Ac c o unts r e c e iva b le I nte r e s t r e c e iva b le Pr e pa id ins ur a nc e Eq uipm e nt Ac c um . De pr e c ia tio n I nve s tm e nt s T o ta l a s s e ts Liabilit ies & Equit y $ 5 0 ,0 0 0 3 5 ,0 0 0 1,2 5 0 11,0 0 0 2 4 ,0 0 0 (10 0 ) 3 0 0 ,0 0 0 $ 4 2 1,15 0 Ac c o unts pa y a b le I nte r s t pa y a b le Une a r ne d r e ve nue No te pa y a b le Co m m o n s to c k Re ta ine d e a r ning s T o ta l lia b . & e q uity $ 2 0 ,0 0 0 1,5 0 0 16 ,0 0 0 2 0 0 ,0 0 0 4 0 ,0 0 0 14 3 ,6 5 0 $ 4 2 1,15 0 SO 7 Describe the nature and purpose of an adjusted trial balance. Is Your Old Computer a Liability? California adds $6 to $10 of sales tax to the cost of computers and televisions to fund recycling programs. Each cathode ray tube (CRT) monitor contains 4–6 pounds of lead. Consumer electronic products account for about 40% of the lead found in landfills. Environmental groups put a resolution on a recent Apple Computer ’s shareholder meeting agenda requiring the company to study how it can increase recycling. The average household has two to three old computers in its garage or storage area. Slide 3-55 Slide 3-56 Should companies accrue for environmental cleanup costs as liabilities on their financial statements? YES: As more states impose laws holding companies responsible, and as more courts levy pollution­related fines, it becomes increasingly likely that companies will have to pay large amounts in the future. NO: The amounts still are too difficult to estimate. Putting inaccurate estimates on the financial statements reduces their usefulness. Instead, why not charge the costs later, when the actual environmental cleanup or disposal occurs, at which time the company knows the actual cost? Slide 3-57 Alternative Treatment of Prepaid Expenses Alternative Treatment of Prepaid Expenses Alternative Alternative and Unearned Revenues and Unearned Revenues and and APPENDIX Some companies use an alternative treatment for prepaid expenses and unearned revenues. When a company prepays an expense, it debits that amount to an expense account. When a company receives payment for future services, it credits the amount to a revenue account. Slide 3-58 SO 8 Prepare adjusting entries for the alternative treatment of deferrals. Alternative Treatment for “Prepaid Expenses” Alternative Treatment for “Prepaid Expenses” Illustration (Insurance): On Dec. 1st, Phoenix Consulting paid $12,000 for 12 Illustration (Insurance): On Dec. 1 months of insurance coverage. Show the journal entry to record the payment on Dec. 1st. Dec. 1 Insurance Expense 12,000 Cash 12,000 Insurance Expense Debit 12,000 Slide 3-59 Credit Cash Debit Credit 12,000 SO 8 Prepare adjusting entries for the alternative treatment of deferrals. Alternative Treatment for “Prepaid Expenses” Alternative Treatment for “Prepaid Expenses” Illustration (Insurance): On Dec. 1st, Phoenix Consulting paid $12,000 for 12 Illustration (Insurance): On Dec. 1 months of insurance coverage. Show the adjusting journal entry required at Dec. 31st. Dec. 31 Prepaid Insurance 11,000 Insurance Expense Insurance Expense Debit 12,000 Credit 11,000 11,000 Prepaid Insurance Debit Credit 11,000 1,000 Slide 3-60 SO 8 Prepare adjusting entries for the alternative treatment of deferrals. Alternative Treatment for “Unearned Revenues” Alternative Treatment for “Unearned Revenues” Illustration: On Dec. 1st, Phoenix Consulting received $24,000 from Arcadia On Dec. 1 High School for 3 months rent in advance. Show the journal entry to record the receipt on Dec. 1st. Dec. 1 Cash 24,000 Rent Revenue Cash Debit 24,000 Slide 3-61 24,000 Rent Revenue Credit Debit Credit 24,000 SO 8 Prepare adjusting entries for the alternative treatment of deferrals. Alternative Treatment for “Unearned Revenues” Alternative Treatment for “Unearned Revenues” Illustration: On Dec. 1st, Phoenix Consulting received $24,000 from Arcadia On Dec. 1 High School for 3 months rent in advance. Show the adjusting journal entry required on Dec. 31st. Dec. 31 Rent Revenue 16,000 Unearned Rent Revenue Unearned Rent Revenue Debit Credit 16,000 16,000 Rent Revenue Debit 16,000 Credit 24,000 8,000 Slide 3-62 SO 8 Prepare adjusting entries for the alternative treatment of deferrals. Summary of Additional Adjustment Relationships Summary of Additional Adjustment Relationships Illustration 3A-7 Slide 3-63 SO 8 Prepare adjusting entries for the alternative treatment of deferrals. ...
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This note was uploaded on 11/05/2011 for the course BMGT 220 taught by Professor Bulmash during the Spring '08 term at Maryland.

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