Adjustments Entries

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Accounting Schoolwork

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<ul><li><p>Recognition: formally </p><p>recording an item in </p><p>the financial statements </p><p>of an entity</p><p>Recognition and Measurement</p><p>I know I </p><p>need to </p><p>record </p><p>this...</p><p>Measurement: </p><p>quantification of the </p><p>economic effects of </p><p>the item on the entity</p><p>...but at </p><p>current value</p><p>or historical </p><p>cost?</p></li><li><p>Cash vs. Accrual Basis</p><p>Cash basis: revenues and expenses are</p><p>recorded only when cash is received or paid</p><p>Accrual basis: revenues are recognized when</p><p>earned; expenses are recognized when incurred</p></li><li><p>Cash basis</p><p>statement</p><p>Accrual basis </p><p>statement</p><p>Statement of</p><p>Cash Flows</p><p>Cash flows from </p><p>operating activities:</p><p>$(4,000)</p><p>Income</p><p>Statement</p><p>Net income: </p><p>$ 7,000</p><p>What accounts for </p><p>the difference?</p></li><li><p>Revenue Recognition Principle</p><p>Exceptions:</p><p> Long-term contracts</p><p> Franchises</p><p> Commodities</p><p> Installment sales</p><p> Rent and interest</p><p>Revenue is recognized when realized and </p><p>earnedusually at point of sale</p></li><li><p>Expense Recognition</p><p>Income Statement</p><p>PP&amp;E</p><p>Intangibles</p><p>as used</p><p>Balance Sheet</p><p>when sold</p><p>over period they </p><p>provide benefits</p><p>ASSETS: EXPENSES:</p><p>Cost of goods sold</p><p>Supplies expense</p><p>Insurance expense</p><p>Rent expense</p><p>Depreciation expense</p><p>Amortization expense</p><p>Other expenses </p><p>(as incurred)</p><p>Inventory</p><p>Supplies</p><p>Prepaid assets</p></li><li><p>Matching Principle</p><p>Directly</p><p>e.g., Inventory e.g., Buildings e.g., Utilities</p><p>Match expenses with associated revenues</p><p>Indirectly over </p><p>period they </p><p>provide benefits</p><p>Simultaneously</p><p>upon their </p><p>acquisition</p></li><li><p>Types of Adjusting Entries</p><p>RECOGNIZE </p><p>REVENUE OR </p><p>EXPENSES </p><p>BEFORE OR </p><p>AFTER CASH IS </p><p>EXCHANGED</p><p>Deferred </p><p>expense</p><p>Accrued </p><p>liability</p><p>Accrued</p><p>asset</p><p>Deferred</p><p>revenue</p></li><li><p>Deferred ExpenseCash paid before expense is incurred</p><p> Examples: Prepaid rent </p><p> Prepaid insurance</p><p> Office supplies</p><p> Property and equipment</p><p> Costs are initially recorded as assets and allocated to </p><p>expenses in future periods</p></li><li><p>Prepay rent on office space for one year on September 1</p><p>Initial journal entry:</p><p>9/1 Prepaid Rent 2,400</p><p>Cash 2,400</p><p>Monthly adjusting journal entry:</p><p>9/30 Rent Expense 200</p><p>Prepaid Rent 200</p><p>($2,400 annual 1/12 = $200 per month for 12 months)</p><p>Deferred Expense Example #1</p></li><li><p>Deferred Expense Example #2</p><p>Initial journal entry:</p><p>1/1 Store fixtures 5,000</p><p>Cash 5,000</p><p>Monthly adjusting journal entry:</p><p>1/31 Depreciation Expense 75 Accumulated Depreciation 75</p><p>($5,000 $500) 1/60 = $75 per month for 60 months)</p><p>Purchase new store fixtures on January 1 for $5,000. </p><p>Estimated useful life is 5 years (60 months); estimated </p><p>salvage value is $500</p></li><li><p>Deferred Revenue Cash received before revenue is earned</p><p> Examples:</p><p> Insurance collected in advance</p><p> Subscriptions collected in advance</p><p> Gift certificates</p><p> Receipts are initially recorded as liabilities (unearned </p><p>or refundable receipts) and recorded as revenues in </p><p>future periods when earned</p></li><li><p>Deferred Revenue Example</p><p>Received $2,400 for an insurance policy in advance on </p><p>September 1</p><p>Initial journal entry:</p><p>9/1 Cash 2,400</p><p>Insurance Collected in Advance 2,400</p><p>Monthly adjusting journal entry:</p><p>9/30 Insurance Collected in Advance 200</p><p>Rent Revenue 200</p><p>($2,400 annual 1/12 = $200 per month for 12 months)</p></li><li><p>Accrued Liability Expense incurred before cash is paid</p><p> Examples:</p><p> Payroll</p><p> Taxes</p><p> Interest</p><p> Record expense (and corresponding liability) in period incurred; pay for it in a future period</p><p> No cash flow on recording, only when paid</p></li><li><p>Accrued Liability Example #1 </p><p>At end of month, between pay periods:</p><p>Wages Expense 40,000</p><p>Wages Payable 40,000</p><p>Next payday:</p><p>Wages Payable 40,000</p><p>Wages Expense 240,000</p><p>Cash 280,000</p><p>Pay biweekly wages of $280,000</p></li><li><p>Accrued Liability Example #2 </p><p>Initial journal entry:</p><p>3/1 Cash 20,000Note Payable 20,000</p><p>Monthly adjusting journal entry:</p><p>3/31 Interest Expense 150 </p><p>Interest Payable 150</p><p>($20,000 principal 9% 3/12 = $450 for 3months or $450/3 = $150 per month)</p><p>On March 1, assume a 9%, 90-day, $20,000 </p><p>loan is taken out with a bank</p></li><li><p>Accrued Asset Revenue earned before cash is received</p><p> Examples:</p><p> Rent</p><p> Interest</p><p> Record revenue (and corresponding receivable) in </p><p>period earned; receive payment in a future period</p></li><li><p>Accrued Asset Example</p><p>First day of the month:</p><p>Rent Receivable 2,500</p><p>Rent Revenue 2,500</p><p>Upon receipt of cash:</p><p>Cash 2,500 </p><p>Rent Receivable 2,500</p><p>Rent payment of $2,500 due within first 10 </p><p>days of month</p></li><li><p>Steps in the Accounting Cycle</p><p>1. Collect and </p><p>analyze info2. Journalize</p><p>transactions</p><p>3. Post </p><p>transactions to</p><p>general ledger</p><p>4. Prepare</p><p>work sheet</p><p>5. Prepare</p><p>financial </p><p>statements</p><p>6. Record and</p><p>post adjusting</p><p>entries</p><p>7. Close the</p><p>accounts</p></li><li><p>RevenuesNormal</p><p>balance</p><p>Nominal Accounts</p><p>Expenses</p><p>Normal</p><p>balance</p><p>DividendsNormal</p><p>balance</p><p>$ XX $ XX</p><p>$ XX</p><p>Zero out</p><p>nominal accounts</p><p>to start accumulation </p><p>of next periods</p><p>results</p><p>Close to </p><p>Income</p><p>Summary</p><p>$ XX</p><p>Close to </p><p>Income</p><p>Summary</p><p>$ XX</p><p>Close to </p><p>Retained</p><p>Earnings</p><p>$ XX</p></li><li><p>Closing Entries</p><p>(Net loss) or net income</p><p>closed to Retained Earnings</p><p>Income Summary$XX </p><p>from revenue</p><p>accounts</p><p>$XX </p><p>from expense</p><p>accounts</p></li><li><p>Accounting Tools:</p><p>Work Sheets</p></li><li><p>Unadjusted Trial Balance ColumnsBegin by filling in the trial balance accounts </p><p>and amounts</p></li><li><p>The Adjusting Entries Columns</p><p>Make adjustments; </p><p>formal journal entries </p><p>are prepared later</p></li><li><p>Adjusted Trial Balance Columns</p></li><li><p>The Income Statement Columns</p><p>Extend revenue and </p><p>expense account balances </p><p>to the income statement</p></li><li><p>The Balance Sheet Columns</p><p>Extend asset, liability, </p><p>and equity accounts to </p><p>the balance sheet</p></li></ul>