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Unformatted text preview: etermine which accounts to use. The contra asset‐ Accumulated Depreciation – Equipment is increased and the Stockholders’ Equity account – Depreciation Expense is increased. $22,500 is debited to Depreciation Expense. The credit, however, does not go directly to the asset account (Equipment). A contra asset, Accumulated Depreciation, is used. This allows the asset to reflect the purchase price. Accumulated Depreciation reflects the total of all deprecation that has been recorded for the asset. The AE – Debit Depreciation Expense and Credit Accumulated Depreciation for $22,500. On the Balance Sheet, the balance of Accumulated Depreciation is subtracted from the Equipment account. The balance represents the book value (also referred to as the carrying value) of the asset.The 12/31/X2 Balance Sheet reflects: Assets Property, Plant and Equipment Equipment Less Accumulated Depreciation Book Value $240,000 22,500 $217,500 Depreciation expense goes on the Income Statement. Example 4: On 7/25/X2, a law firm and its client sign a contract and the client pays $8,400 cash. The contract states the law firm will provide monthly legal services for 12 months, beginning on 8/1/X2. A regular journal entry is needed on 7/25/X2 – debit Cash and credit Unearned Revenue for $8,400. On 12/31/X2, an adjusting journal entry is needed to record the amount of revenue that has been earned. The entry also results in the correct balance of the liability account as of 12/31/X2. Computation: $8,400 divided by 12 months equals $700 per month. $700 times 5 months (Aug – Dec) equals $3,500. $3,500 has now been earned. This complies with the revenue recognition principle – record revenue when it is earned. The liability is reduced because the services have been provided for 5 months. Liabilities – Unearned Revenue is decreased. Stockholders’ Equity – Legal Fees Earned is increased. The journal entry includes a debit to Unearned Revenue and a credit to Legal Fees Earned for $3,500 When the debit of $3,500 is posted to Unearned Revenue, the ending balance will be correct ($8,400 less $3,500). Legal Fees Earned goes to the Income Statement. Example 5: On 12/31/X2, the accountant questions the managers and discovers that revenue of $12,500 has been earned (the services have been provided) but the clients have not yet been billed. This is an accrual of revenue. Revenue has been earned and must be recorded to comply with the revenue recognition principle. The client billings will occur later. Accounts affected – Assets – Fees Receivable is increased and Stockholders’ Equity – Service Revenue is increased. The AE – Debit Fees Receivable and credit Service Revenue for $12,500. Step 3 – After posting the debit to Fees Receivable, the account has the correct ending balance of $12,500. This is an asset on the Balance Sheet. Service Revenue goes to the Income Statement. Example 6: On 10/1/X2, the company provides services of $15,000 to a client. The client will not be able to pay for the services until 4/1/X3. Thus, the client signs a promissory note for 6 months. The note bears 6% annual interest. The regular entry on 10/1/X2 is a debit to Notes Receivab...
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This note was uploaded on 09/26/2013 for the course ACCOUNTING 201 taught by Professor Malu during the Fall '12 term at Ateneo de Manila University.

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