Chapter 4 lecture outline

Chapter 4 lecture outline - Chapter 4 Adjusting the...

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Chapter 4 : Adjusting the Accounts and the Completion of the Accounting Cycle 1 A. The Accounting Cycle the end of the period: h Adjust revenues and expenses. h Prepare Adjusted TB B. Adjusting the Accounts Why are adjusting entries needed? Types of adjusting entries Deferrals (Prepayments) -- Cash before action Accruals -- Action before cash
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Adjusting Entries for Deferrals and Accruals: 1. Deferrals: Deferred Expenses and Deferred Revenues 1 0 1 a. Deferred Expenses (Prepaid Expenses) -Payment of expenses that will benefit more than one accounting period (e.g., supplies, prepaid rent, prepaid insurance, purchase of building or equipments) 1 Supplies: Example 1: In January, Pioneer Advertising Agency purchased an estimated 3-month supply of advertising materials on account from Allen Supply for $2,500. Journal entry: Pioneer Agency prepares monthly financial statements. At the end of January, a supply count reveals that $1,000 of $2,500 of supplies is still on hand. Adjusting entry: 1 Insurance Example 2: On January 1, Pioneer Advertising paid $600 for a one-year insurance policy. Journal entry: An analysis of the policy reveals that $50 of insurance expires each month. Prepare an adjusting entry on January 31. Adjusting entry:
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Building, Equipment and Depreciation of Building and Equipment 1 2 The process of depreciation 1 Depreciation expense 1 Accumulated depreciation 1 Book value Example 3 On April 1, Office equipment costing $4,800 is purchased by signing a $4,800 notes payable. The equipment is expected to last 10 years with an estimated salvage value of $0. Journal entry: Depreciation on the office equipment is estimated to be $480 a year, or $40 per month. Prepare an adjusting entry for the equipment at the end of April. Adjusting entry: b. Deferred Revenues (Unearned Revenues) 0 – Cash received before revenue is earned (e.g, magazine subscription, sale of air tickets). • Adjusting entries for unearned revenues Example 4 October 1, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed by December.
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