bpa 11403-wk 4 &5-accruals & closing (3)
TRANSCRIPT
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COMPLETING THE ACCOUNTING
CYCLE
ACCRUAL ACCOUNTING, THE ADJUSTEDTRIAL BALANCE AND PREPARATION OF
FINANCIAL STATEMENTS
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Learning Objectives
Relate accrual accounting and cashaccounting
Apply the revenue and matchingprinciples
Identify the major types of adjusting
entries Prepare adjusting entries for
prepayments
6
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Learning Objectives
Prepare adjusting entries for accruals
Describe the nature and purpose of anadjusted trial balance
Update the financial statements by adjustingthe accounts
Close the books
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Accrual-basis:
Transactions arerecorded
when revenues are
earned or expensesare incurred.
Cash-basis:Transactions are
recorded whencash is paid or
cash is received.
The Two Bases of Accounting:
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Accrual vs Cash Accounting
Generally accepted accounting principles(GAAP) require that business use accrualaccounting.
cash basis often causes misleading financialstatements as it has matching problems.
The cash basis of accounting recognizesrevenues when received in cash andexpenses when paid in cash, thus, notreflecting the transaction of the period beingreported.
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Accrual vs Cash Accounting
Accrual Accounting Impact of business transactions are recorded
when the transaction occurs
Revenuesare recognized when earned.
Expensesare recognized when incurred.
Cash Accounting Transactions are recorded when cash is received
or paid.
Revenuesare recorded when cash is received.
Expensesare recorded when cash is paid.
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Accrual vs Cash Accounting
Accrual accounting is accomplished by :
(1) recording revenues when earned andexpenses when incurred,and
(2) making end-of-period adjustments torevenue and expense accounts.
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Accrual vs Cash Accounting
Under accrual accounting, cash transactions
are recordedas well as non-cashtransactionssuch as:
Purchases of inventory on account
Sales on account
Depreciation expense Accrual of expenses incurred but not yet paid
Usage of prepaid rent, insurance, and supplies
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Accrual vs. Cash Accounting
On the cash basis the entire $2,400 would be recognizedas insurance expense in 2004. No insurance expense from
this policy would be recognized in 2005 or 2006, periods
covered by the policy.
Jan Feb Mar Apr
-$ -$ -$ -$
May Jun Jul Aug
-$ -$ -$ -$
Sep Oct Nov Dec
-$ -$ -$ 2.400$
Insurance Expense 2004
FastForward paid $2,400 for a 24-month insurance policybeginning December 1, 2004.
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Accrual vs Cash Accounting
Jan Feb Mar Apr
-$ -$ -$ -$
May Jun Jul Aug
-$ -$ -$ -$
Sep Oct Nov Dec
-$ -$ -$ 100$
Jan Feb Mar Apr
100$ 100$ 100$ 100$
May Jun Jul Aug
100$ 100$ 100$ 100$
Sep Oct Nov Dec
100$ 100$ 100$ 100$
Jan Feb Mar Apr
100$ 100$ 100$ 100$
May Jun Jul Aug
100$ 100$ 100$ 100$
Sep Oct Nov Dec
100$ 100$ 100$ -$
Insurance Expense 2004
Insurance Expense 2005
Insurance Expense 2006
On the accrual basis$100of insurance
expense is recognized in2004, $1,200in 2005,
and $1,100in 2006. Theexpense is matched with
the periods benefited bythe insurance coverage.
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Accrual vs. Cash Accounting
On the cash basis the entire $150,000 would be recognized as revenuein 2002. No revenue from this policy would be recognized in 2003 or
2004, periods covered by the policy.
000 omitted 2.002 2.003 2.004
Revenue 150$ -$ -$
Expenses (20) (20) (20)
Net inc./(loss) 130$ (20)$ (20)$
Cash Basis Accounting
In January 2002, Prensa Insurance sells a three-year health insurancepolicy to a business client.The contract specifies that the client had topay $150,000 in advance.Yearly expenses amount to $20,000.What isthe income or loss?
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Accrual vs. Cash Accounting
On the accrual basis $50,000of revenue is recognized in 2002,$50,000in 2003, and $50,000in 2004.The revenue is matched with
the periods benefited by the insurance coverage.
000 omitted 2.002 2.003 2.004
Revenue 50$ 50$ 50$
Expenses (20) (20) (20)
Net inc./(loss) 30$ 30$ 30$
Accrual Basis Accounting
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Ethical Issues in Accrual
Accounting
Accruals require the use of judgment to determinewhich period should reflect revenues earned.
Example : Service revenue of RM32,000 paid in advance byclient for 16 month in July 2012.Accounting period ends on31 December 2012. So at the end of the year, only 6months revenue of RM12,000 can be recognized as servicerevenue, whilst the remaining 10 month revenue ofRM20,000 is categorized as Unearned Service Revenue
Managers should notuse accruals to smoothincome by delaying or accelerating recognition ofeither revenues or expenses.
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The Time Period Concept
The time-period assumption ensures that accounting informationis reported at regular intervals.
assumes the economic life of a business can be divided intoartificial time periods
Accounting time periods
generally month, a quarter, half yearly or a year
Basic accounting period is 1 year.
Calendar yearis January 1 to December 31 If other than calendar ,referred to as afiscal year
A fiscal yearends on a date other than December 31. (Example :30 June,30 March etc)
Interim financial statements are usually prepared for periodssuch as a month, a quarter, or semiannual period.
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Interacts with therevenue principle
and the matchingprinciple
Requires thatincome be
measuredaccurately each
period
The Time Period Concept
It requires that accounting information be
reported at regular intervals.
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Revenue Recognition Principle
When should revenue be recorded?
Revenue must be recognized in the accounting period in
which it is earned, not just when money is exchanged. Delivered Good or Service to a Customer
In a service business, revenue is earned at the time theservice is performed.
Recognition of revenue and cash receipts do not
necessarily occur at the same time.
What amount of revenue should be recorded?
The amountof revenue recorded is the cash value of thegoods transferred to the customer.
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Matching Principle
Expenses are costs of assets used up and/orliabilities created in earning revenue.
Expenses are recognized when the benefit from theexpense is received.
Matching involves two steps: Identify all expenses incurredduring the period.
Measure the expenses and match the expenses againstrevenues earned.
Expenses may bepaid in cash.
result from using up an assetsuch as supplies
result from creating a liability(payable)
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The Matching Issue
To adequately measure net income,revenues and expensesmust be assignedto the appropriate accounting period.
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The Matching Rule
The match ing ru lestates that:
Revenuesmust be assigned to theaccounting periodin which thegoodsare sold or services performed.
Expensesmust be assigned to the
accounting periodin whichthey areused to produce revenue.
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The Matching Rule
Expense recognition is thematching
principle. Efforts (expenses)must be matched with
accomplishments (revenues).
Revenuesearned
this month
are offsetagainst....
Expenses
incurred inearning
therevenue
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Matching Expenses with Revenues
Example
Parker Floor sells a wood floor for $15,000
on the last day of May. The wood was purchased from the
manufacturer for $8,000 in March of thesame year.
The floor is installed in June. When is income recognized?
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Revenues $15,000
Cost of goods sold 8,000
Net income $ 7,000
May
Matching Expenses with Revenues
Example
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Discussion
Q. Why must a business recognize rentalexpense in the month of the rent incurred
rather than in the month when cash is paidfor rent?
A.Tomeasure a businesss performanceaccurately, each expense must be matchedwith its related revenue. Otherwise,net
incomewill beoverstatedand the liabilitywill beunderstated.
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GAAP Relationships in Revenue and
Expense RecognitionTime-Period Assumption
Economic life of businesscan be divided into
artificial time periodsRevenue-Recognition
Principle
Revenue recognized inthe accounting period in
which it is earned
Matching Principle
Expenses matched withrevenues
in the same period when effortsare expended to generate
revenues
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Recording Accruals and
Deferrals andAdjusting Accounts for
Accruals and Deferrals
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The Adjusting Process
Accruals and Deferrals:Timing is Everything in Accounting
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Accrual Accounting
Accrual accounting is an applicationof the matching rule.
Accrual Accounting:Recording thefinancial transactions of a business inthe period in which they occu r,rather than in the period in whichcash is exchanged.
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Implementation of
Accrual Accounting
Accrual accounting is done in two ways.
1. By recording revenues when earnedand expenses when incurred.
When a sale is made on credit, revenue isrecorded, as the cash is not received, the
Accounts Receivable account is recorded. When an expense is incurred on credit, an
expense is recorded as thethe cash is not paid,the Accounts Payable account is recorded.
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2. By making end-of-period adjustments torevenue and expense accounts.
Those transactions that span the cutoffperiod must be allocatedto theproperaccounting period.
Example : A prepayment of 6 months office rent must be
adjusted on a monthly basis if accurate monthly financialstatements are to be prepared.
E.g : On February 2010,XYZ co. paid in advance, 6 monthoffice rent of RM6,000. So, at the end of February, 1 monthoffice rent of RM1,000 has incurred and must be allocated toFebruary transactions.
Implementation of
Accrual Accounting
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Why Adjust Accounts?
Allows financial statements to more
accuratelyrepresent financial positionof businessIncome Statement
Matches Expenses with RevenuesBalance Sheet
Prevents Misstatement of Assets,Liabilities and Equity
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The Adjustment Process
Adjusting entriesare used to apply accrual
accounting to transactions that span morethan one accounting period.
Adjusting entriesinvolve at least onebalance sheet account and at least one
income statement account.
Adjusting entriesnever involve the Cashflowaccount.
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Adjusting Entries
Adjusting entries are required each timefinancial statements are prepared
Adjusting entries are made in order for: revenuesto be recorded in the period in which they
are earned
expenses to be recognized in the period in whichthey are incurred
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Adjusting Entries
Assign revenueto the period earned.
Assign expensesto the period incurred. Bring related assetand liability
accountsinto correct balance.
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Four Types of Adjusting Entries
1.Costs have been recorded that must be allocatedbetween two or more accounting periods.
2. Expenses have been incurred but are not yetrecorded.
3. Revenues have been recorded that must be allocatedbetween two or more accounting periods.
4. Revenues have been earned but not yet recorded.
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Categories of Accounting
Adjustments
Deferrals/Prepayments
Converting assets to expenses Converting liabilities to revenues
Depreciation
Accruals Accruing unpaid expenses
Accruing uncollected revenue
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What is a Deferral?
A deferral eventoccurs when cash isreceived or paid before revenue is earned oran expense is incurred.
Adeferralis the postponementof:
The recognition of an expense already paid
or a revenue received in advance Deferral events are a part of the accrual
basis of accounting
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What is an Accrual
An accrualisthe recognition of an expenseor revenue that has arisen but has not yet
been recorded.
Expenses or revenues arerecorded beforethe cash settlement.
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Adjustments
An adjusting entry is recorded to bring an asset or
liability account balance to its proper amount.
Adjusting Accounts
Paid (or received) cash beforeexpense (or revenue) recognized
Paid (or received) cash afterexpense (or revenue) recognized
Prepaid(Deferred)expenses*
Unearned(Deferred)revenues
Accruedexpense
Accruedrevenues
Framework for Adjustments
*including depreciation
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The Adjustment Process
Examine the trial balance for accounts that may needto be adjusted.
Basic categories of adjusting entries:
Deferrals/Prepayments
Paid Cash in Advancefor resource that will beused up in the future
Supplies, Insurance, Rent, Plant assets, etc.
Received Cash BEFOREperforming Service
Collected subscription revenue, paid for class
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The Adjustment Process
Basic categories of adjusting entries:
Depreciation Special type of Deferral for Long Term Assets
Allocation of the cost of an asset to expense over theassets useful life e.g motor vehicle, plant, off.equipment, etc will be depreciated.
Accruals Provided Service or sold product before receiving Cash on account
An Expense has occurred before paying Cash
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Deferral/Prepayments
The first category of adjusting entry isprepayments.
Required to record revenues earned andexpenses incurred
Also ensures that assets and liabilities are not overstated
The adjusting entry for prepayments:Increases an income statement account
Decreases a balance sheet account
Adjusting Entries for
Deferrals/Prepayments
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Adjusting Entries for
Deferrals Prepayments
Adjusting Entries
Asset
UnadjustedBalance
CreditAdjustingEntry (-)
Expense
DebitAdjustingEntry (+)
PrepaidExpenses
Liability
UnadjustedBalance
DebitAdjusting
Entry (-)
Revenue
CreditAdjusting
Entry (+)
Unearned Revenues
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Types of Adjusting Entries-Deferrals
Deferrals/Prepayments
Prepaid ExpensesExpenses paid in cash - recorded as assets beforeused or consumed
Unearned Revenues
Cash received - recorded as liabilities beforethe revenue is earned
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Adjusting Deferred Assets
Prepaid Expense
A prepaid expense is an expense paid forin advance in cash and recorded as assetsbefore they are used or consumed
Because they provide future economic
benefit, prepaid expenses are classified asassets.
Prepaid Insurance, Prepaid Rent, etc.
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Adjusting Deferred Assets
Prepaid Expense
Prepaid expenses expire with the passageof time or through use and consumption
Anasset-expense account relationshipexists with prepaid expenses
Before financial statements are prepared,prepaid expenses are adjusted to reflect theamount of the asset used up during the
period of the statements.
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Adjusting Deferred Assets
Upon the transaction
debit asset(prepaid exp.) account
credit asset (cash) account
Prior to adjustment
assets are overstatedand expenses are understated
Adjusting entry debit expense account
credit asset (prepaid exp.) account
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Adjusting Deferred Assets
Adjustment records the effect of using up an Asset Using Up an Asset
the Asset value has been reduced We need to Credit the Asset-Prepaid exp.
Debits must Equal Credits
If Assets create economic benefits,
Using them up leads to a Cost/Expense
We need to Debit an Expense Account
Deferred Asset Rule
Debit Expense and Credit Asset-Prepaid Exp.
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Adjusting Prepaid Expenses
To record $3,000 paid for 3 months rent on April 1, 20X3.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 1 Prepaid Rent 3,000
Cash 3,000Paid 3 months rent in advance
Prepaid RentApr 1 3,000
CashApr 1 3,000
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Adjusting Prepaid Expenses
To adjust for one months rent expired at April 30.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Rent Expense (3,000/3) 1,000
Prepaid Rent 1,000Expensed one months rent
Rent
ExpenseApr 30 1,000
Prepaid
RentApr 30 1,000
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Adjusting Prepaid Expenses
The following shows the effect of the adjustment.
Prepaid Rent
Apr 1 3,000 Apr 30 1,000Bal. 2,000
Bal. 2,000
Rent Expense
Apr 30 1,000
Bal. 1,0003,000 3,000
Bal. 1,000
1,000 1,000
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Adjusting Supplies
To record the purchase of supplies.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 2 Supplies 700
Cash 700
Paid cash for supplies
SuppliesApr 2 700
CashApr 2 700
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Adjusting Supplies
To adjust for supplies used during April.
Calculate Supplies Expense:
Supplies available during the periodLess: Supplies on hand at end of period
Equals: Supplies used during the period (expense)
$700 - $400 = $300
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Adjusting Supplies
To adjust for supplies used during April.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Supplies Expense 300
Supplies 300To record Supplies Expense
Supplies ExpenseApr 30 300
SuppliesApr 30 300
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Adjusting Supplies
The following shows the effect of the adjustment.
Supplies
Apr 1 700 Apr 30 300
Bal. 400
Supplies Expense
Apr 30 300
Bal. 300700 700
Bal. 400Bal. 300
300 300
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Unearned revenues
revenues received and recorded asliabilities before they are earned
earned by rendering a service to a
customer
A liability-revenueaccount relationship existswith unearned revenues
Deferred Revenue/Unearned
Revenue
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Deferred Revenue/Unearned
Revenue
Unearned revenueexists when customers have paidin advance for services that have not yet beenprovided.
The organization owes the customer the service in thefuture
Thus, Unearned Revenue is a liability(an obligation) Liability Increases, thus Credit Unearned Revenue Received Cash, thus Debit Cash
Revenue is recognized when the services areprovided. Reduces the organizations obligation
Thus Liability is reduced, Debit Unearned Revenue Revenue is increased, Credit Service Revenue
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Prior to adjustment
liabilities are overstatedand revenues are
understated Adjusting entry
debitto a liability account
creditto a revenue account
Examples rent, magazine subscriptions and customer
deposits for future services
Deferred Revenue/Unearned
Revenue
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Unearned Revenue
To record cash received in advance from customers.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 20 Cash 450
Unearned Service Revenue 450
Received cash for revenue in advance
Cash
Apr 20 450
UnearnedService Revenue
Apr 20 450
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Unearned Revenue
To record revenues earned at the end of the month.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Unearned Service Revenue (450/3) 150
Service Revenue 150To record unearned service revenue that has beenearned
Unearned
Service RevenueApr 30 150
Service
RevenueApr 30 150
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Unearned Revenue
The following shows the effect of the adjustment.
ServiceRevenue
Apr 30 250
Bal. 7,400
Unearned Service
RevenueApr 30 150
Bal. 300
Apr 20 450 7,000
Apr 30 150
Bal. 300Bal. 7,400
450450 7,4007,400
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Depreciation
the allocation of the cost of an asset toexpense over its useful life in a rational andsystematic manner
Equipment or a building
viewed as a long-term prepayment of services allocated in the same manner as other prepaid
expenses
Depreciation
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Depreciation
Depreciation is an estimate rather than a factual measurement of the
cost that has expired
Recording depreciation
Debit Depreciation Expense
CreditAccumulated Depreciation (contra asset)
Depreciation Expense
XXX
Accumulated DepreciationXXX
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Balance Sheet
Accumulated Depreciation is offsetagainst the asset account
Book Value
difference between the cost of any
depreciable asset and its relatedaccumulated depreciation is the bookvalue of the asset
not market value
Depreciation
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Depreciation of Long Term Assets
On April 3, the business purchased furnitureon account for $16,500. The furniture isexpected to last 5 years.
16,500
Furniture Accounts Payable
16,500
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Depreciation of Long Term Assets
Straight-line method of depreciation allocates
equal amounts each accounting period.
SLM Method :
Depreciation exp.per year = Cost of Asset- Salvage Value
Period of expected life
$16,000 5 years = $3,300 per year $3,300 12 months = $275 per month
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Depreciation of Long Term Assets
To record the depreciation expense at the end of the month.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Depreciation Expense -Furniture 275
Accum. Depreciation Exp.-Furniture 275To record depreciation expense for furniture
Depreciation
Expense-Furniture275
Accum. Dep.Exp-
Furniture275
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Book Value
The net amount of a plant Long Term Assets(cost minus accumulated depreciation)
Furniture 16.500$
Less Accumulated Depreciation (275)
Net Book Value of Furniture 16.225$
Building 48.000$Less Accumulated Depreciation (200)
Net Book value of Building 47.800
Long Term Assets of Air & Sea at April 30, 2012
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Accruals
Second category of adjusting entries isaccruals
Adjusting entries
required to record revenues earned and expenses
incurred in the current period
Adjusting entry for accruals increase both a balance sheetand an income
statement account
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Adjusting Entries
Asset
DebitAdjustingEntry (+)
AccruedRevenues Revenue
CreditAdjustingEntry (+)
Accrued ExpensesExpense
DebitAdjustingEntry (+)
Liability
CreditAdjustingEntry (+)
Adjusting Entries for Accruals
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Types of Adjusting Entries-Accruals
Accruals
Accrued Revenuesrevenues earned but not yet received in cash orrecorded
Accrued Expenses
expenses incurred but not yet paid in cash or recorded
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Accruals that need to be made before thefinancial statements are prepared --
adjustments to the books
1. Any revenue earned that has not been billed(no receivable has been recorded)-Accrued
revenue2. Any interest revenue that has been earned on
investments that has not been recordedAccrued interest revenue
3. Any expense that has been incurred (used) but
has not been recorded (a common one is salaryexpense)- (Accrued salary exp.)
4. Income tax expense incurred but not recorded-(Accrued Income tax exp.)
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Accrued Revenues
Revenue that needs to be accruedAnyrevenue earnedthat hasnot been billed.
( Work that has been completed -- but nothing has beenrecorded for the financial statements.)
This situation arises when a
customer has not been billedyet and has not paid for thework or services done
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Adjusting Accrued Revenues
Accrued revenueis revenue that has been earnedbut cash has not been collected.
On Account, On Credit
The other type of accrued revenueis for interest--thecost of borrowing money.
If you loaned the money, youd be dealing with
interest revenue. If you borrowed the money, youd be dealing with
interest expense.
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Accrued revenues
accumulate with the passing of time or through
services performed but not billed or collected An asset-revenue account relationship exists
Prior to adjustment
assets and revenuesare understated
Adjusting entry
debit an asset account
credit a revenue account
Adjusting Accrued Revenues
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Accruing Service Revenue Example
The company has performed a service ofRM 250, which the client has not beenbilled at month end.
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Accruing Service Revenue Example
To accrue revenues at the end of the month.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Accounts Receivable 250
Service Revenue 250
To accrue service revenue
Accounts
Receivable250
Service
Revenue250
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Accruing Service Revenue Example
The following shows the effect of the adjustment.
ServiceRevenue
Apr 30 250
Bal. 7,250
AccountsReceivable
2,250
Bal. 2,500
Apr 30 250
7,000
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Accruing Interest Revenue Example
The company have a 12-month, $100 CD thatearns 12% p.a,(always given as an annual rate),
purchased on April 1. The natural recording of this interest revenue will
happen when you receive the money.
An income statement for April needs to show the
amount of interest revenue for April.
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Accruing Interest Revenue Example
Interest = principal x rate x time
Interest = $100 x .12 x 1/12 = $1 Since the rate is per year, the time has to be
given in terms of a year.
Interest receivable and interest revenuewill each be $1. What would be the
month end journal entry?
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Accruing Interest Revenue Example
To accrue interest revenues at the end of the month.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Interest Receivable 1
Interest Revenue 1Monthly interest earned
Interest
ReceivableApr 30 1
Interest
RevenueApr 30 1
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Accruing Interest Revenue Example
The following shows the effect of the adjustment.
InterestRevenue
Apr 30 1
Bal. 1
Interest Receivable
Bal. 1
Apr 30 1 Bal. 1Bal. 1
1 1 1 1
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Adjusting Accrued Expenses
Accrued Expense An expense of an Organization that hasnt been paid for by
Cash Matching Principle requires that we determine all Costs
associated with Revenue, even if cash hasnt been paid
Taxes owed, Salaries owed, Interest owed, etc.
Before financial statements are prepared, expenses
are adjusted to reflect the cost to the organization forthe period of the statements.
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Accrued expenses
Expenses incurred but not paid yet
A liability-expense account relationshipexists
Prior to adjustment,
liabilities and expenses are understated
Adjusting Entry The expense value has increased, debit an expense
account
Liability value has increased, credit a liability account
Adjusting Accrued Expenses
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Accruing Expenses Example
Any expense that has been incurred (used) but hasnot been recorded(a common one is salary expense
and tax expenses)
Salary expense and tax expense is a commonexpense that needs to be accrued before financialstatements are prepared.
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Accruing Salary Expense Example
Salaries for the month is RM1,900. Only half
of the amount was paid on April 15
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Accruing Salary Expense Example
To record salaries expense during the month.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 15 Salaries Expense 950Cash 950
To pay salaries
Salaries
ExpenseApr 15 950
CashApr 15 950
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Accruing Salary Expense Example
To adjust salaries expense at the end of the month.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Salaries Expense 950
Salaries Payable 950To accrue salaries expense
Salaries
Expense15/4 95030/4 950
Salaries
Payable30/4 950
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Accruing Salary Expense Example
The following shows the effect of the adjustment.
SalariesPayable
Apr 30 950
Salaries Expense
Apr 15 950Apr 30 950
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Accruing Salary Expense Example 2
Suppose employees work five days per week
and are paid every Friday, but April 30 falls on aTuesday.
The salary expense for the week from April 30 toMay 3 will not be paid until Friday, May 4.
The income statement for January should havethe expense for January 30 and 31, while theFebruary income statement will have theexpense for February 1, 2, and 3.
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April February
29 30
1 2 3
Accruing Salary Expense Example 2
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Accruing Salary Expense Example 2
Suppose a weeks payroll is $5,000.
On April 30, the company should accrue$2,000 worth of salary expense.
i.e., 2 out of 5 days worth of the salary mustbe an April expense.
How is this reflected in the accounts?
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Accrued Salary Expenses Example 2
What is the entry on April 30?
They worked April 29 and 30.
$5,000 5 = $1,000 per day
$1,000 2 days = $2,000
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Accrued Salary Expenses Example 2
To adjust salaries expense at the end of the month.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Salaries Expense 2,000
Salaries Payable 2,000To accrue salaries expense for 29 & 30 April
SalariesExpense
Apr 15 950Apr 30 950Apr 30 2,000
SalariesPayable
Apr 30 950Apr 30 2,000
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Accruing Salary Expense Example 2
The following shows the effect of the adjustment.
SalariesPayableApr 30 950
Bal. 2,950
Salaries Expense
Apr 15 950Apr 30 950
Bal. 3,900
Apr 30 2,000Apr 30 2,000
Bal. 3,900
3,900 3,900
Bal. 2,950
2,9502,950
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Accruing Tax Expense Example
The estimated tax expense calculated forcompany A is RM24,000 per year and isusually due in June.
So what is the portion of tax expense forApril? Show the entry at month end.
Tax per month =24,000/12 = 2,000
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Accrued Tax Expenses Example
To adjust salaries expense at the end of the month.
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT
Apr 30 Tax Expense 2,000
Tax Payable 2,000To accrue tax expense for April
TaxExpense
Apr 30 2,000
TaxPayable
Apr 30 2,000
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Accruing Tax Expense Example
The following shows the effect of the adjustment.
Tax Payable
Bal. 2,000
Tax Expense
Bal. 2,000Apr 30 2,000 Apr 30 2,000
Bal. 2,000
2,000 2,000
Bal. 2,000
2,0002,000
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Summary of Adjusting Entries
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Summary of Adjusting Process
Prepare a trial balance.
Review trial balance and other records for
adjustments that should be made: Accruals
Deferrals
Depreciation
Prepare and post adjusting entries. Prepare an adjusted trial balance to ensure accuracy
of debits and credits after posting.
Prepare financial statements.
S
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Type
Balance
Sheet Account
Income
Statement
Account Adjusting Entry
Prepaid Asset Expense Dr. Expense
Expenses Overstated Understated Cr. Asset
Unearned Liability Revenue Dr. Liability
Revenues Overstated Understated Cr. Revenue
Accrued Liability Expense Dr. ExpenseExpenses Understated Understated Cr. Liability
Accrued Asset Revenue Dr. Asset
Revenues Understated Understated Cr. Revenue
Before Adjustment
Summary of Adjustments and Financial Statement Links
Links to Financial Statements
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The Adjusting Process inPerspective
The recording process has a final goal - thepreparation of accurate financial statements
prepared on the accrual basis. The final steps of the process can be shown as:
LedgerUnadjusted
Trial Balance
Journalize &
Post Adjustments
Adjusted
Trial Balance
Financial
Statements
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Adjusted Trial Balance
The adjusting process starts with theunadjusted trial balance.
Adjusting entries are made at the end of the
accounting periodand then an adjusted trialbalance is prepared.
The adjusted trial balance serves as thebasis for the preparation of the financial
statements.
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Adjusted Trial Balance
Prepared after all adjusting entries havebeen journalized and posted
purpose is to prove equality of the totaldebit and credit balances in the ledger
after adjustments have been made
Financial statementsprepared directly fromthe adjusted trial balance
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The Adjustments Worksheet
Shows adjustments and their effects on TrialBalance
Simplifies preparation of adjusting entries
Account Trial Balance AdjustingEntries
AdjustedTrial Balance
No. Title dr. cr. dr. cr. dr. cr.
Trial Balance and the Adjusted TrialBalance Compared
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Balance Compared
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Preparing Financial Statements
Financial statements are prepared directly fromthe adjusted trial balance Income statement
use the revenue and expense accounts
Owners Equity Statementuse the owners capital and drawing accounts and the net
income (or net loss) from the Income Statement
Balance sheetuse asset and liability accounts and ending owners capitalbalance reported in Owners Equity Statement
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Preparing Financial Statements
Financial statements have two parts:
1 The first part includes the following:
name of the entity
title of the statement
date or period covered
2 The second part is the body of the statement.
PREPARATION OF THE INCOME STATEMENT AND
THE OWNERS EQUITY ST TEMENT FROM THE
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PIONEER ADVERTISING AGENCYAdjusted Trial Balance
October 31, 2005
Debit Credit
Cash $ 15,200
Accounts Receivable 200
Advertising Supplies 1,000
Prepaid Insurance 550
Office Equipment 5,000Accumulated Depreciation - Office Equipment $ 40
Notes Payable 5,000
Accounts Payable 2,500
Interest Payable 50
Unearned Revenue 800
Salaries Payable 1,200
C. R. Byrd, Capital 10,000
C. R. Byrd, Drawing 500
Service Revenue 10,600
Salaries Expense 5,200
Advertising Supplies Expense 1,500
Rent Expense 900
Insurance Expense 50
Interest Expense 50
Depreciation Expense 40
$ 30,190 $ 30,190
ADJUSTED TRIAL BALANCE
PREPARATION OF THE INCOME STATEMENT AND
THE OWNERS EQUITY ST TEMENT FROM THE
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ADJUSTED TRIAL BALANCE
PIONEER ADVERTISING AGENCYIncome Statement
For the Month Ended October 31, 2005
RevenuesFees earned $ 10,600
ExpensesSalaries expense $ 5,200Advertising supplies expense 1,500Rent expense 900Insurance expense 50Interest expense 50
Depreciation expense 40Total expenses 7,740
Net income $ 2,860
The income statement is prepared from the revenue and expense accounts.
PREPARATION OF THE INCOME STATEMENT AND THEOWNERS EQUITY STATEMENT FROM THE ADJUSTED
TRIAL BALANCE
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PIONEER ADVERTISING AGENCYAdjusted Trial Balance
October 31, 2005
Debit Credit
Cash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550
Office Equipment 5,000Accumulated DepreciationOffice Equipment $ 40Notes Payable 5,000Accounts Payable 2,500Interest Payable 50Unearned Revenue 800Salaries Payable 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500
Service Revenue 10,600Salaries Expense 5,200Advertising Supplies Expense 1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 30,190 $ 30,190
PREPARATION OF THE INCOME STATEMENT AND THEOWNERS EQUITY STATEMENT FROM THE ADJUSTED
TRIAL BALANCE
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TRIAL BALANCE
PIONEER ADVERTISING AGENCYOwners Equity Statement
For the Month Ended October 31, 2005
C.R. Byrd, Capital, October 1 $ -0-Add: Investments $ 10,000
Net income 2,860 12,86012,860
Less: Drawings 500C.R . Byrd, Capital, October 31 $ 12,360
The owners equity statement is prepared from the owners capitaland drawing accountsand the net income (or net loss)shown in theincome statement.
PREPARATION OF THE BALANCE SHEET FROMTHE ADJUSTED TRIAL BALANCE
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PIONEER ADVERTISING AGENCYAdjusted Trial Balance
October 31, 2005
Debit Credit
Cash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550
Office Equipment 5,000Accumulated DepreciationOffice Equipment $ 40Notes Payable 5,000Accounts Payable 2,500Interest Payable 50Unearned Revenue 800Salaries Payable 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500
Service Revenue 10,600Salaries Expense 5,200Advertising Supplies Expense 1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 30,190 $ 30,190
PREPARATION OF THE BALANCE SHEET
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FROM THE ADJUSTED TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Balance SheetOctober 31, 2005
Assets Liabilities and Owners Equity
Cash $ 15,200 LiabilitiesAccounts receivable 200 Notes payable $ 5,000Advertising supplies 1,000 Accounts payable 2,500Prepaid insurance 550 Interest payable 50Office equipment $ 5,000 Unearned fees 800Less: Accumulated Salaries payable 1,200
depreciation 40 4,960 Total liabilities 9,550
Owners equity
C.R. Byrd, Capital 12,360Total liabilities and owners
Total assets $ 21,910 equity $ 21,910
The balance sheet is then prepared from the assetand liabilityaccounts and theending owners capital balanceas reported in the owners equity statement.
Overview of the Accounting Cycle
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THE ACCOUNTING CYCLE
DECISIONMAKERS
MEASUREMENT
1.
Analyzebusinesstransactions
COMMUNICATION
6.
Preparefinancialstatements
PROCESSING
5.
Close theaccountsand preparea post-closing trialbalance
2.
Record theentries
4.
Adjust theaccountsand preparean adjustedtrial balance
3.
Post theentries andprepare atrial balance
BUSINESSACTIVITIES
Overview of the Accounting Cycle