Accounting initials 04

8/20/2019 Accounting initials 04

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© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

Chapter

4THE ACCOUNTING

CYCLE:Accruals and Deferrals


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At the end of theperiod, we need to

make adjusting entries

to get the accounts upto date for the financial

statements.


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Adjusting

entries are

needed whenever

revenue or expenses

affect more than one

accountingperiod.

Every

adjusting

entry involves a

change in either a

revenue or expense

and an assetor liability.

Adjusting Entries

Adjusting Entries


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Convertingassets to

expenses

Convertingassets to

expenses

Accruingunpaid

expenses

Accruingunpaid

expenses

Convertingliabilities to

revenue

Convertingliabilities to

revenue

Accruinguncollected

revenues

Accruinguncollected

revenues

Types of Adjusting Entries

Types of Adjusting Entries


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Prior Periods Current Period uture Periods

!ransaction

Paid futureexpenses in

advance"creates an

asset#.

!ransaction

Paid futureexpenses inadvance

"creates anasset#.

End of Current Period

Adjusting Entry

$ecogni%e portion of asset consumed

as expense, and $educe balance of asset account.

Adjusting Entry

$ecogni%e portion of asset consumed

as expense, and $educe balance of

asset account.

Converting Assets to Expenses



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Examples &nclude'(epreciation

)upplies

Expiring &nsurance Policies




7/41© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

*an. + (ec. +

-,/00 &nsurance PolicyCoverage for + 1onths

-00 1onthly &nsurance Expense

2n *anuary +, 3ebb Co. purchased a one4year insurance policy for -,/00.

2n *anuary +, 3ebb Co. purchased a one4year insurance policy for -,/00.

Converting Assets to ExpensesConverting Assets to Expenses



5E6E$A7 *28$6A7

(ate Account !itles and Explanation (ebit Credit

*an. + 8nexpired &nsurance ,/00

Cash ,/00

Purchase a one4year insurance policy.

&nitially, costs that benefit more than oneaccounting period are recorded as assets.

&nitially, costs that benefit more than oneaccounting period are recorded as assets.




!he costs are expensed as they are used togenerate revenue.

!he costs are expensed as they are used togenerate revenue.

5E6E$A7 *28$6A7


1onthly Adjusting Entry for &nsurance

*an. + &nsurance Expense 00

8nexpired &nsurance 00

&nsurance expense for *anuary.




&nsurance Expense+9+ 00

8nexpired &nsurance+9+ ,/00 +9+ 00

:al. ,00

&ncome )tatement

Cost of assets

used this period togenerate revenue.

&ncome )tatement

Cost of assets

used this period togenerate revenue.

:alance )heet

Cost of assets

that benefitfuture periods.

:alance )heet

Cost of assets

that benefitfuture periods.




(epreciation is the systematic allocationof the cost of a depreciable asset to

expense.

(epreciation is the systematic allocationof the cost of a depreciable asset to

expense.

(epreciable assets are physical objectsthat retain their si%e and shape but lose

their economic usefulness over time.

(epreciable assets are physical objectsthat retain their si%e and shape but lose

their economic usefulness over time.

The Concept of DepreciationThe Concept of Depreciation



!he portion of an asset;s utility that is usedup must be expensed in the period used.

!he portion of an asset;s utility that is usedup must be expensed in the period used.

Cash"credit#

Cash"credit#

ixedAsset"debit#

ixedAsset"debit#

2n date

when initialpayment ismade . . .

!he asset;susefulness is

partiallyconsumedduring the

period.At end ofperiod . . .

Accumulated(epreciation

"credit#

Accumulated(epreciation

"credit#

(epreciationExpense"debit#

(epreciationExpense"debit#

The Concept of DepreciationThe Concept of Depreciation



2n 1ay , 00, **;s 7awn Care )ervicepurchased a lawn mower with a useful

life of



**;s 7awn Care )ervice would make thefollowing adjusting entry.

**;s 7awn Care )ervice would make thefollowing adjusting entry.

5E6E$A7 *28$6A7


1ay + (epreciation Expense' !ools > E?.



**;s -+


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Accumulated depreciation would

appear on the balance sheet asfollows'

Accumulated depreciation would

appear on the balance sheet asfollows'


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!ransactionCollected

fromcustomers in

advance"creates a

liability#.

!ransactionCollected

fromcustomers in

advance"creates aliability#.


Adjusting Entry $ecogni%e portion

earned as revenue,and

$educe balance ofliability account.

Adjusting Entry $ecogni%e portion

earned as revenue,and

$educe balance ofliability account.

Converting Liailities to !evenueConverting Liailities to !evenue


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Examples &nclude'Airline !icket )ales

)ports !eams; )ales of

)eason !ickets



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*an. + (ec. +

-,000 $ental ContractCoverage for + 1onths

-


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5E6E$A7 *28$6A7


*an. + Cash ,000

8nearned $ental $evenue ,000

Collected -,000 in advance for rent.

&nitially, revenues that benefit more than oneaccounting period are recorded as liabilities.

&nitially, revenues that benefit more than oneaccounting period are recorded as liabilities.



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2ver time, the revenue is recogni%ed as it isearned.

2ver time, the revenue is recogni%ed as it isearned.

5E6E$A7 *28$6A7


1onthly Adjusting Entry for $ent $evenue

*an. + 8nearned $ental $evenue


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$ental $evenue+9+


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!ransaction

7iability willbe paid.

!ransaction

7iability willbe paid.


Adjusting Entry

$ecogni%e expense incurred, and $ecord liability for future payment.

Adjusting Entry

$ecogni%e expense incurred, and $ecord liability for future payment.

Accruing "npaid ExpensesAccruing "npaid Expenses


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Examples &nclude'&nterest

3ages and )alaries

Property !axes

Bey, when dowe get paid



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1onday,1ay D

riday,*une

-,000 3agesExpense

2n 1ay +, 3ebb Co. owes wages of-,000. Pay day is riday, *une .

2n 1ay +, 3ebb Co. owes wages of-,000. Pay day is riday, *une .

3ednesday,1ay +



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5E6E$A7 *28$6A7


1ay + 3ages Expense ,000

3ages Payable ,000

!o accrue wages owed to employees.

&nitially, an expense and a liability arerecorded.

&nitially, an expense and a liability arerecorded.



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3ages Expense


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1onday,1ay D

riday,*une

-


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!he liability is extinguished when the debt ispaid.

!he liability is extinguished when the debt ispaid.

5E6E$A7 *28$6A7


*une 3ages Expense "for *une# ,000

3ages Payable "accrued in 1ay# ,000

Cash


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!ransaction

$eceivablewill be

collected.

!ransaction

$eceivablewill becollected.


Adjusting Entry

$ecogni%e revenue earned but not yet recorded, and$ecord receivable.

Adjusting Entry

$ecogni%e revenue earned but not yet recorded, and$ecord receivable.

Accruing "ncollected !evenueAccruing "ncollected !evenue


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Examples &nclude'&nterest Earned

3ork Completed :ut 6ot

et :illed to Customer



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)aturday,*an. +<

!uesday,eb. +<

-+F0 &nterest$evenue

2n *an. +, the bank owes 3ebb Co.interest of -+F0. &nterest is paid on the +


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5E6E$A7 *28$6A7


*an. + &nterest $eceivable +F0

&nterest $evenue +F0

!o recogni%e interest revenue.

&nitially, the revenue is recogni%ed and areceivable is created.

&nitially, the revenue is recogni%ed and areceivable is created.



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&nterest $evenue+9+ +F0

&nterest $eceivable+9+ +F0

&ncome )tatement

$evenue earnedthis period.

&ncome )tatement

$evenue earnedthis period.

:alance )heet

$eceivable to

be collected in afuture period.

:alance )heet

$eceivable to

be collected in afuture period.



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)aturday,*an. +<

!uesday,eb. +<

-0 1onthly &nterest

-+F0 &nterest

$evenue

7et;s look at the entry for ebruary +


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!he receivable is collected in a future period.!he receivable is collected in a future period.

5E6E$A7 *28$6A7


eb. +< Cash 0

&nterest $evenue "for ebruary# +


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As a corporation earns taxable income, itincurs income taxes expense, and also aliability to governmental tax authorities.

As a corporation earns taxable income, itincurs income taxes expense, and also aliability to governmental tax authorities.

5E6E$A7 *28$6A7


(ec. + &ncome !axes Expense FG0&ncome !axes Payable FG0

Estimated income taxes applicable to

taxable income earned in (ecember.

Accruing Income Taxes Expense# The$inal Adjusting Entry

Accruing Income Taxes Expense# The$inal Adjusting Entry


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Costs are matched with revenuein two ways'

Costs are matched with revenuein two ways'

(irect association of costswith specific revenue

transactions.

(irect association of costswith specific revenue

transactions.

)ystematic allocation of costsover the Huseful lifeI of the

expenditure.

)ystematic allocation of costsover the Huseful lifeI of the

expenditure.

Adjusting Entries and Accounting%rinciples

Adjusting Entries and Accounting%rinciples


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An item is HmaterialI if knowledge of theitem might reasonably influence the

decisions of users of financial statements.

An item is HmaterialI if knowledge of theitem might reasonably influence the

decisions of users of financial statements.

)upplies

7ightbulbs

1any companies

immediately chargethe cost ofimmaterial items to

expense.

The Concept of &aterialityThe Concept of &ateriality


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*ournali%etransactions.

Post entries tothe ledgeraccounts.

Prepare trialbalance.

1ake end4of4year

adjustments.

Prepare adjusted

trial balance.

$ecall from the accounting cyclediscussed in Chapter , that afterthe adjusting entries are made, anadjusted trial balance is prepared.

$ecall from the accounting cyclediscussed in Chapter , that afterthe adjusting entries are made, anadjusted trial balance is prepared.

Effects of the Adjusting Entries


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End of Chapter 4End of Chapter 4

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Accounting initials 04