Ch4 Slides - Timing Issues Timing Issues Accrual versus...

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Unformatted text preview: Timing Issues Timing Issues Accrual versus Cash Basis of Accounting Cash-Basis Accounting ► Revenues are recognized only when cash is received. ► Expenses are recognized only when cash is paid. ► Prohibited under generally accepted accounting principles (GAAP). 4-1 Timing Issues Timing Issues Accrual versus Cash Basis of Accounting Accrual-Basis Accounting ► Transactions recorded in the periods in which the events occur. ► Revenues are recognized when earned, even if cash was not received. ► Expenses are recognized when incurred, even if cash was not paid. 4 -2 Timing Issues Timing Issues The 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. 4-3 Timing Issues Timing Issues Illustration: Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim and pay for their clothes until the first week of July. The journal entries for June and July would be: 4 -4 Timing Issues Timing Issues Illustration 4-1 (Partial) “Let the expenses follow the revenues.” 4-5 Timing Issues Timing Issues Illustration: Suppose that Fresh Colors paints a large building in 2011. In 2011, it incurs and pays total expenses (salaries and paint costs) of $50,000. It bills the customer $80,000, but does not receive payment until 2012. Illustration 4-2 (Partial) 4-6 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. Includes one income statement account and one balance sheet account. 4 -7 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. Adjusting entries - needed to ensure that the revenue recognition and expense recognition principles are followed. 4 -8 Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Payment of cash, that is recorded as an asset because Payment service or benefit will be received in the future. service Cash Payment BEFORE Expense Recorded Prepayments often occur in regard to: insurance supplies advertising 4-9 rent equipment buildings Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Adjusting entries for prepaid expenses Illustration 4-5 Increases (debits) an expense account and Decreases (credits) an asset account. 4-10 Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Depreciation Buildings, equipment, and motor vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired. Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset’s useful life. Depreciation does not attempt to report the actual change in the value of the asset. 4-11 Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses” Summary 4-12 Illustration 4-10 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 BEFORE Revenue Recorded Unearned revenues often occur in regard to: rent airline tickets 4-13 magazine subscriptions customer deposits Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Unearned Revenues Adjusting entry to record the revenue that has been earned and to show the liability that remains. Adjusting entry results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account. 4-14 Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Adjusting entries for unearned revenues Illustration 4-11 Decrease (a debit) to a liability account and Increase (a credit) to a revenue account. 4-15 Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Summary Illustration 4-13 4-16 Adjusting Entries for Accruals 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. 4-17 Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Revenues earned but not yet received in cash or Revenues recorded. recorded. Adjusting entry results in: Revenue Recorded BEFORE Cash Receipt Accrued revenues often occur in regard to: rent interest services performed 4-18 Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Adjusting entries for accrued revenues Illustration 4-14 Increases (debits) an asset account and Increases (credits) a revenue account. 4-19 Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” Summary Illustration 4-16 4-20 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 4-21 taxes salaries Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Adjusting entries for accrued expenses Illustration 4-17 Increases (debits) an expense account and Increases (credits) a liability account. 4-22 Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 × 3 days). Illustration 4-20 4-23 Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 x 3 days). Oct. 31 Salaries Expense 1,200 Salaries Payable 1,200 Illustration 4-21 4-24 SO 5 Prepare adjusting entries for accruals. Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Summary Illustration 4-22 4-25 SO 5 Prepare adjusting entries for accruals. Summary of Basic Relationships Summary of Basic Relationships 4-26 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). The adjusted trial balance’s purpose is to prove the equality of debit balances and credit balances in the ledger. The adjusted trial balance is the primary basis for the preparation of the financial statements. 4-27 The Adjusted Trial Balance The Adjusted Trial Balance 4-28 Preparing Financial Statements Preparing Financial Statements Preparing Financial statements are prepared directly from the Financial statements are prepared directly from the Adjusted Trial Balance.. Adjusted Trial Balance Income Statement 4-29 Retained Earnings Statement Balance Sheet Preparing Financial Statements Preparing Financial Statements Illustration 4-27 4-30 Preparing Financial Statements Preparing Financial Statements 4-31 Illustration 4-28 Summary of the Accounting Cycle Summary of the Accounting Cycle 1. Analyze business transactions Illustration 4-33 Required steps in the accounting cycle 9. Prepare a post-closing trial balance 8. Journalize and post closing entries 3. Post to ledger accounts 7. Prepare financial statements 4. Prepare a trial balance 6. Prepare an adjusted trial 6. balance 4-32 2. Journalize the 2. transactions 5. Journalize and post adjusting entries: Deferrals/Accruals ...
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