Upload
amjad-kareem
View
1.716
Download
1
Embed Size (px)
DESCRIPTION
Citation preview
AAccounting Principlesccounting Principles
Adjusting Adjusting Entries: Entries:
Accruals
REVENUE RECOGNITION PRINCIPLE
The revenue recognition principle dictates that revenue be recognized in the accounting period in which it is earned.
In a service business, revenue is considered to be earned at the time the service is performed.
THE MATCHING PRINCIPLE
The practice of expense recognition is referred to as the matching principle.
The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues).
Revenues earned
this monthare offset against....
expensesincurred inearning the
revenue
STUDY OBJECTIVE STUDY OBJECTIVE
Identify the major types of adjusting entries.
Adjusting entries are required each time financial statements are prepared.
Adjusting entries can be classified as1 prepayments (prepaid expenses or unearned revenues) OR2 accruals (accrued revenues or accrued expenses)
ADJUSTING ENTRIES
TYPES OF ADJUSTING ENTRIES
Prepayments1 Prepaid Expenses — Expenses paid in cash
and recorded as assets before they are used or consumed
2 Unearned Revenues — cash received and recorded as liabilities before revenue is earned
TYPES OF ADJUSTING ENTRIES
Accruals1 Accrued Revenues — Revenues earned but
not yet received in cash or recorded2 Accrued Expenses — Expenses incurred but
not yet paid in cash or recorded
ILLUSTRATION 3-3 TRIAL BALANCE
The Trial Balance is the starting
place for adjusting entries.
STUDY OBJECTIVE STUDY OBJECTIVE
Prepare adjusting entries for accruals.
ACCRUALS
The second category of adjusting entries is accruals.
Adjusting entries for accruals are required to record revenues earned and expenses incurred in the current period.
The adjusting entry for accruals will increase both a balance sheet and an income statement account.
Adjusting Entries
Asset
Debit Adjusting Entry (+)
Accrued RevenuesRevenue
Credit Adjusting Entry (+)
Accrued ExpensesExpense
Debit Adjusting Entry (+)
Liability
Credit Adjusting Entry (+)
ILLUSTRATION 3-10 ADJUSTING ENTRIES FOR ACCRUALS
Accrued revenues may accumulate with the passing of time or through services performed but not billed or collected.
An asset-revenue account relationship exists with accrued revenues.
Prior to adjustment, assets and revenues are understated.
The adjusting entry requires a debit to an asset account and a credit to a revenue account.
ACCRUED REVENUES
ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED REVENUESOctober 31, the agency earned $200 for advertising services that were not billed to clients before October 31.
JOURNAL ENTRY
POSTING
ADJUSTMENT
Accrued expenses are expenses incurred but not paid yet.
A liability-expense account relationship exists
Prior to adjustment, liabilities and expenses are understated
The Adjusting Entry results in a debit to an expense account and a credit to a liability account
ACCRUED EXPENSES
ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED INTEREST
JOURNAL ENTRY
POSTING
ADJUSTMENT October 31, the portion of the interest to be accrued on a 3-month note payable is calculated to be $50.
ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED SALARIES
JOURNAL ENTRY
POSTING
ADJUSTMENT October 31, accrued salaries are calculated to be $1,200.
ILLUSTRATION 3-16 SUMMARY OF ADJUSTING ENTRIES
1 Prepaid Assets and Assets overstated Dr. Expenses expenses expenses Expenses understated Cr. Assets2 Unearned Liabilities and Liabilities overstated Dr. Liabilities revenues revenues Revenues understated Cr. Revenues3 Accrued Assets and Assets understated Dr. Assets revenues revenues Revenues understated Cr. Revenues4 Accrued Expenses and Expenses understated Dr. Expenses expenses liabilities Liabilities understated Cr. Liabilities
Journalize transactions. Post entries to
the ledger accounts.
Prepare trial balance.
Make end-of-year
adjustments.
Prepare adjusted trial balance.
Let’s look at JJ’s Lawn Care Services’ adjusted trial balance.
Effects of the Adjusting Entries