the accounting cycle: accruals and deferrals
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The Accounting Cycle: Accruals and Deferrals. Chapter 4. Adjusting Entries. Adjusting entries are. Every adjusting. needed whenever revenue or expenses affect more than one. entry involves a change in either a revenue or expense. and an asset or liability . accounting period . - PowerPoint PPT PresentationTRANSCRIPT
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The Accounting Cycle:The Accounting Cycle:Accruals and DeferralsAccruals and DeferralsChapter 4
4-2
Adjusting entries are
needed whenever revenue or expenses affect more than one
accounting period.
Every adjusting
entry involves achange in either a
revenue or expense and an asset
or liability.
Adjusting EntriesAdjusting Entries
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Accruing unpaid
expenses
Converting liabilities to
revenue
Accruing uncollected
revenue
Types of Adjusting EntriesTypes of Adjusting Entries Converting
assets to expenses
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Prior Periods Current Period Future Periods
TransactionPaid cash in advance of incurring expense
(creates an asset).
End of Current Period
Adjusting Entry Recognizes portion of asset consumed as expense, and Reduces balance of asset account.
Converting Assets to Converting Assets to ExpensesExpenses
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1 Jan. 31 Dec.
$2,400 Insurance Policy Coverage for 12 Months
$200 Monthly Insurance Expense
On 1 January, Webb Co. purchased a one-year insurance policy for $2,400.
Converting Assets to Converting Assets to ExpensesExpenses
4-6
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
1 Jan Unexpired Insurance 2,400Cash 2,400
Purchase a one-year insurance policy.
Initially, costs that benefit more than one accounting period are recorded as assets.
Converting Assets to Converting Assets to ExpensesExpenses
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The costs are expensed as they are used to generate revenue.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Monthly Adjusting Entry for Insurance31 Jan Insurance Expense 200
Unexpired Insurance 200Insurance expense for January.
Converting Assets to Converting Assets to ExpensesExpenses
4-8
Insurance Expense31/1 200
Unexpired Insurance1/1 2,400 31/1 200
Bal. 2,200
Income StatementCost of assets
used this period to generate revenue.
Balance SheetCost of assets
that benefit future periods.
Converting Assets to Converting Assets to ExpensesExpenses
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The Concept of The Concept of DepreciationDepreciationDepreciation is the systematic allocation of the cost of a depreciable asset to expense.
Cash (credit)
Fixed Asset (debit)
On date when initial payment is made . . .
The asset’s usefulness is
partially consumed during the
period. At end of period . . .
Depreciation Expense (debit)
Accumulated Depreciation
(credit)
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On 2 May 2009, JJ’s Lawn Care Service purchased a lawn
mower with a useful life of 50 months for $2,500 cash.
Using the straight-line method, calculate the monthly depreciation expense.
$2,50050
=$50$50
Depreciationexpense (per
period)= Cost of the asset
Estimated useful life
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
4-11
JJ’s Lawn Care Service would make the following adjusting entry.
GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
31 May Depreciation Expense: Equipment 50Accumulated Depreciation: Equipment 50
To record one month's depreciation.
Contra-asset
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
4-12
JJ’s $15,000 truck is depreciated over 60 months. Calculate monthly depreciation and
make the journal entry.
GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
31 May Depreciation Expense: Truck 250Accumulated Depreciation: Truck 250
To record one month's depreciation.
$15,00060 months = $250 per month
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
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Accumulated depreciation would appear on the balance sheet as
follows:
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
Cost - Accumulated Depreciation = Book Value
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Prior Periods Current Period Future Periods
TransactionCollect cash in
advance of earning revenue
(creates a liability).
End of Current Period
Adjusting Entry Recognizes portion earned as revenue, and Reduces balance of liability account.
Converting Liabilities to Converting Liabilities to RevenueRevenue
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1 Jan. 31 Dec.
$6,000 Rental Contract Coverage for 12 Months
$500 Monthly Rental Revenue
On January 1, Webb Co. received $6,000 in advance for a one-year rental contract.
Converting Liabilities to Converting Liabilities to RevenueRevenue
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
1 Jan Cash 6,000Unearned Rent Revenue 6,000
Collected $6,000 in advance for rent.
Initially, revenues that benefit more than one accounting period are recorded as liabilities.
Converting Liabilities to Converting Liabilities to RevenueRevenue
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Over time, the revenue is recognized as it is earned.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Monthly Adjusting Entry for Rent Revenue31 Jan Unearned Rent Revenue 500
Rental Revenue 500Rental revenue for January.
Converting Liabilities to Converting Liabilities to RevenueRevenue
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Rental Revenue31/1 500
Unearned Rental Revenue31/1 500 1/1 6,000
Bal. 5,500
Income StatementRevenue earned
this period.
Balance SheetLiability for
future periods.
Converting Liabilities to Converting Liabilities to RevenueRevenue
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Prior Periods Current Period Future Periods
TransactionPay cash in
settlement of liability.
End of Current Period
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Monday,29 May
Friday, 2 June
$3,000 Wages Expense
On 31 May, Webb Co. owes wages of $3,000. Payday is Friday, 2 June.
Wednesday,31 May
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
31 May Wages Expense 3,000Wages Payable 3,000
To accrue wages owed to employees.
Initially, an expense and a liability are recorded.
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Wages Expense31/5 3,000
Wages Payable31/5 3,000
Income StatementCost incurred this period to generate
revenue.
Balance SheetLiability to be
paid in a future period.
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Monday,29 May
Friday, 2 June
$5,000 Weekly Wages
Let’s look at the entry for 2 June.
Wednesday,31 May
$2,000 Wages Expense
$3,000 Wages Expense
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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The liability is extinguished when the debt is paid.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
2 June Wages Expense (for June) 2,000Wages Payable (accrued in May) 3,000
Cash 5,000Weekly payroll for 29 May - 2 June
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Prior Periods Current Period Future Periods
TransactionCollect cash in settlement of receivable.
End of Current Period
Adjusting EntryRecognizes revenue earned but not yet recorded, andRecords receivable.
Accruing Uncollected Accruing Uncollected RevenueRevenue
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Saturday,15 Jan.
Tuesday, 15 Feb.
$170 Interest Revenue
On 31 Jan., the bank owes Webb Co. interest of $170. Interest is paid on the
15th day of each month.
Monday,31 Jan.
Accruing Uncollected Accruing Uncollected RevenueRevenue
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
31 Jan Interest Receivable 170Interest Revenue 170
To recognize interest revenue
Initially, the revenue is recognized and a receivable is created.
Accruing Uncollected Accruing Uncollected RevenueRevenue
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Interest Revenue31/1 170
Interest Receivable31/1 170
Income StatementRevenue earned
this period.
Balance SheetReceivable to
be collected in a future period.
Accruing Uncollected Accruing Uncollected RevenueRevenue
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Saturday,15 Jan.
Tuesday, 15 Feb.
$320 Monthly Interest
$170 Interest Revenue
Let’s look at the entry for 15 February.
Monday,31 Jan.
$150 Interest Revenue
Accruing Uncollected Accruing Uncollected RevenueRevenue
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The receivable is collected in a future period.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
15 Feb Cash 320Interest Revenue (for February) 150Interest Receivable (accrued 31 Jan) 170
To record interest received.
Accruing Uncollected Accruing Uncollected RevenueRevenue
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As a corporation earns taxable income, it incurs income taxes expense, and also a liability to governmental tax authorities.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
31 Dec Income Taxes Expense 780Income Taxes Payable 780
Estimated income taxes applicable to taxable income earned in December.
Accruing Income Taxes Accruing Income Taxes Expense: The Final Expense: The Final Adjusting EntryAdjusting Entry
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Costs are matched with revenue in two ways:
Direct association of costs with specific revenue
transactions.
Systematic allocation of costs over the “useful life” of the
expenditure.
Adjusting Entries and Adjusting Entries and Accounting PrinciplesAccounting Principles
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An item is “material” if knowledge of the item might reasonably influence the
decisions of users of financial statements.
Supplies
Light bulbs
Many companies immediately charge
the cost of immaterial items to
expense.
The Concept of MaterialityThe Concept of Materiality
4-34
Effects of the Adjusting Effects of the Adjusting EntriesEntries
Adjustment Revenue Expenses Profit Assets Liabilities EquityType IConverting Assets to Expenses No effect Increase Decrease Decrease No effect DecreaseType IIConverting Liabilities to Revenue Increase No effect Increase No effect Decrease IncreaseType IIIAccruing Unpaid Expenses No effect Increase Decrease No effect Increase DecreaseType IVAccruing Uncollected Revenue Increase No effect Increase Increase No effect Increase
Income Statement Balance Sheet
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JJ's Lawn Care Service Adjusted Trial Balance
31 May 2009Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accum. depreciation: tools & eq. 50$ Truck 15,000 Accum. depreciation: truck 250 Notes payable 13,000 Accounts payable 150 Share capital 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depreciation exp.: tools & eq. 50 Depreciation exp.: truck 250 Total 22,200$ 22,200$
All balances are taken from
the ledger accounts on 31 May after
preparing the two
depreciation adjusting entries.
Adjusted Trial BalanceAdjusted Trial Balance
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End of Chapter 4End of Chapter 4