Accounting Chapter 04- Accounting cycle (Accruals & Deferrals)

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Accounting Chapter 04- Accounting cycle (Accruals & Deferrals)

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<ul><li> 1. ChapterTHE ACCOUNTING 4CYCLE:Accruals and DeferralsMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002</li></ul> <p> 2. At the end of the period, we need tomake adjusting entries to get the accounts upto date for the financial statements.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 3. Adjusting EntriesAdjustingEveryentries areadjusting needed wheneverentry involves arevenue or expenseschange in either aaffect more than onerevenue or expense accounting and an asset period. or liability.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 4. Types of Adjusting Entries Converting Convertingassets toliabilities to expensesrevenue Accruing Accruingunpaiduncollected expensesrevenuesMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 5. Converting Assets to ExpensesEnd of Current Period Prior PeriodsCurrent Period Future Periods Transaction Adjusting Entry Paid future Recognize portion expenses inof asset consumed advanceas expense, and (creates an Reduce balance ofasset). asset account.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 6. Converting Assets to Expenses Examples Include:DepreciationSupplies Expiring Insurance PoliciesMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 7. Converting Assets to Expenses$2,400 Insurance PolicyCoverage for 12 Months$200 Monthly Insurance ExpenseJan. 1Dec. 31 On January 1, Webb Co. purchased a one- year insurance policy for $2,400.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 8. Converting Assets to Expenses Initially, costs that benefit more than oneaccounting period are recorded as assets. GENERAL JOURNAL Date Account Titles and ExplanationDebitCreditJan. 1 Unexpired Insurance2,400Cash2,400Purchase a one-year insurance policy.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 9. Converting Assets to ExpensesThe costs are expensed as they are used togenerate revenue.GENERAL JOURNAL Date Account Titles and Explanation DebitCreditMonthly Adjusting Entry for InsuranceJan. 31 Insurance Expense 200Unexpired Insurance 200Insurance expense for January.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 10. Converting Assets to ExpensesBalance Sheet Income Statement Cost of assets Cost of assets that benefit used this period to future periods.generate revenue. Unexpired InsuranceInsurance Expense 1/1 2,400 1/312001/31 200Bal. 2,200McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 11. The Concept of DepreciationDepreciable assets are physical objectsthat retain their size and shape but lose their economic usefulness over time.Depreciation is the systematic allocation ofthe cost of a depreciable asset to expense.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 12. The Concept of DepreciationThe portion of an assets utility that is usedup must be expensed in the period used. FixedThe assetsAccumulatedAssetusefulness is Depreciation(debit)partially (credit)consumedOn date during theperiod.At end of when initial payment isperiod . . .made . . . Depreciation Cash Expense(credit) (debit)McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 13. Depreciation Is Only an EstimateOn May 2, 2003, JJs 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. Depreciation Cost of the asset expense (per =Estimated useful life period) $50 = $2,50050 The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin 14. Depreciation Is Only an EstimateJJs Lawn Care Service would make the following adjusting entry. GENERAL JOURNAL Date Account Titles and ExplanationDebitCredit May 31 Depreciation Expense: Tools &amp; Eq.50Accumulated Depreciation: Tools &amp; Eq.50To record one months depreciation.Contra-assetMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 15. Depreciation Is Only an Estimate JJs $15,000 truck is depreciated over 60months as follows: GENERAL JOURNAL Date Account Titles and ExplanationDebitCredit May 31 Depreciation Expense: Truck250Accumulated Depreciation: Truck 250To record one months depreciation.$15,00060 months = $250 per McGraw-Hill Companies, Inc., 2002 ThemonthMcGraw-Hill/Irwin 16. JJs Lawn Care ServicePartial Balance Sheet Accumulated depreciation would May 31, 2001appear on the balance sheet asAssetsCashfollows:$ 3,925Accounts receivable75Tools &amp; equipment $ 2,650Less: Accum. depr. 50 2,600Truck$ 15,000 OLess: Accum. depr.250 14,750TMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 17. Converting Liabilities to RevenueEnd of Current Period Prior PeriodsCurrent Period Future PeriodsTransaction Adjusting Entry Collected Recognize portion from earned as revenue, customers inandadvance Reduce balance of (creates a liability account.liability).McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 18. Converting Liabilities to Revenue Examples Include:Airline Ticket Sales Sports Teams Sales ofSeason TicketsMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 19. Converting Liabilities to Revenue $6,000 Rental Contract Coverage for 12 Months$500 Monthly Rental RevenueJan. 1 Dec. 31 On January 1, Webb Co. received $6,000 inadvance for a one-year rental contract.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 20. Converting Liabilities to Revenue Initially, revenues that benefit more than one accounting period are recorded as liabilities.GENERAL JOURNAL Date Account Titles and ExplanationDebitCreditJan. 1 Cash 6,000Unearned Rental Revenue 6,000Collected $6,000 in advance for rent.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 21. Converting Liabilities to RevenueOver time, the revenue is recognized as it isearned.GENERAL JOURNAL Date Account Titles and ExplanationDebitCredit Monthly Adjusting Entry for Rent RevenueJan. 31 Unearned Rental Revenue500Rental Revenue 500Rental revenue for January.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 22. Converting Liabilities to RevenueBalance SheetIncome Statement Liability for Revenue earned future periods. this period.Unearned Rental Revenue Rental Revenue1/315001/1 6,000 1/31500Bal. 5,500McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 23. Accruing Unpaid ExpensesEnd of Current Period Prior Periods Current Period Future Periods Adjusting Entry Transaction Recognize expenseLiability willincurred, andbe paid. Record liability forfuture payment.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 24. Accruing Unpaid ExpensesHey, when dowe get paid? Examples Include: InterestWages and SalariesProperty TaxesMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 25. Accruing Unpaid Expenses $3,000 Wages ExpenseMonday,Wednesday,Friday,May 29May 31 June 2 On May 31, Webb Co. owes wages of $3,000. Pay day is Friday, June 2.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 26. Accruing Unpaid Expenses Initially, an expense and a liability are recorded.GENERAL JOURNAL Date Account Titles and ExplanationDebitCredit May 31 Wages Expense 3,000Wages Payable 3,000To accrue wages owed to employees.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 27. Accruing Unpaid ExpensesBalance SheetIncome StatementLiability to beCost incurred this paid in a futureperiod to generate period.revenue.Wages PayableWages Expense 5/31 3,0005/31 3,000McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 28. Accruing Unpaid Expenses $5,000 Weekly Wages $3,000 Wages $2,000 Wages ExpenseExpenseMonday,Wednesday,Friday,May 29May 31 June 2 Lets look at the entry for June 2.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 29. Accruing Unpaid Expenses The liability is extinguished when the debt is paid. GENERAL JOURNAL Date Account Titles and ExplanationDebitCreditJune 2 Wages Expense (for June) 2,000Wages Payable (accrued in May)3,000Cash5,000Weekly payroll for May 29-June 2.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 30. Accruing Uncollected Revenue End of Current Period Prior PeriodsCurrent Period Future Periods Adjusting EntryTransactionRecognize revenueReceivable earned but not yetwill be recorded, and collected.Record receivable.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 31. Accruing Uncollected Revenue Examples Include:Interest Earned Work Completed But NotYet Billed to CustomerMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 32. Accruing Uncollected Revenue$170 InterestRevenue Saturday,Monday,Tuesday,Jan. 15 Jan. 31 Feb. 15On Jan. 31, the bank owes Webb Co.interest of $170. Interest is paid on the 15th day of each month.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 33. Accruing Uncollected RevenueInitially, the revenue is recognized and areceivable is created.GENERAL JOURNAL Date Account Titles and ExplanationDebitCreditJan. 31 Interest Receivable170Interest Revenue 170To recognize interest revenue.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 34. Accruing Uncollected RevenueBalance SheetIncome Statement Receivable tobe collected in aRevenue earned future period.this period.Interest ReceivableInterest Revenue1/311701/31 170McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 35. Accruing Uncollected Revenue$320 Monthly Interest$170 Interest $150 InterestRevenue Revenue Saturday,Monday, Tuesday,Jan. 15 Jan. 31Feb. 15Lets look at the entry for February 15.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 36. Accruing Uncollected Revenue The receivable is collected in a future period. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCreditFeb. 15 Cash320Interest Revenue (for February) 150Interest Receivable (accrued Jan. 31) 170To record interest received.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 37. Accruing Income Taxes Expense: The Final Adjusting Entry As a corporation earns taxable income, it incurs income taxes expense, and also aliability to governmental tax authorities.GENERAL JOURNAL Date Account Titles and Explanation DebitCreditDec. 31 Income Taxes Expense780Income Taxes Payable780Estimated income taxes applicable totaxable income earned in December.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 38. Adjusting Entries and Accounting Principles 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 theexpenditure.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 39. The Concept of Materiality An item is material if knowledge of the item might reasonably influence thedecisions of users of financial statements.Many companies immediately chargethe cost of Lightbulbs immaterial items to expense. SuppliesMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 40. Effects of the Adjusting EntriesMake end-of- Journalize yearPost entries to Prepare trial transactions.adjustments.the ledgerbalance.accounts.Recall from the accounting cyclediscussed in Chapter 3, that after the adjusting entries are made, an Prepare adjusted adjusted trial balance is prepared. trial balance.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 41. End of Chapter 4McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 </p>

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