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Principles of Accounting II
Lecture 1
Adjusting the Accounts
Basic Accounting Equation
• What the business owns = What the business owes
• Assets = Liabilities (owed to creditors)+ Owners Equity (residual equity owed to owners)
• liabilities are shown before owners’ equity, because creditors’ claims are paid before owners’ claims if the business is liquidated
• Each transaction has a dual effect on the equation
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Illustration 2-11
Assets Liabilities = Basic
Equation
Expanded
Basic
Equation
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Summary of Debits/Credits Rules
Relationship among the assets, liabilities and owner’s equity
of a business:
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
LO 2 Define debits and credits and explain their use in recording business transactions.
Owner’s Equity
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Problem 2-2A (Pg 74-75) • Keynes is a licensed dentist. During the first month of operations of her
business, the following events and transactions occurred. April 1 Invested $20,000 cash in her business. 1 Hired a secretary at a salary of $700 per week payable monthly. 2 Paid office rent for the month $1,100. 3 Purchased dental supplies on account from Smile Company $4,000. 10 Performed dental services and billed insurance companies $5,100. 11 Received 1,000 cash advance from Heather Greene for an implant. 20 Received $2,100 cash from services performed from James Chang. 30 Paid secretary for the month $2,800. 30 Paid $2,400 to Smile Company for accounts payable due. The company uses the following chart of account: No. 101 Cash, No. 112
Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Service Revenue, No. 301 Owner’s Capital, No. 400 Service Revenue, No. 726 Salaries Expense, and No. 729 Rent Expense.
(a) Journalize the transactions (b) Post to ledger accounts (c) Prepare a trial balance on April 30, 2014
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The Trial Balance • The trial balance is a list of accounts and their balances at
a given time.
• The primary purpose of a trial balance is to prove debits = credits after posting.
• If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.
• The Steps in preparing the Trial Balance are: • List the account titles and balances.
• Total the debit and credit columns.
• Prove the equality of the two columns. 10
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Steps of the Accounting Cycle: • Analyze business transactions. • Journalize the transactions. • Post to ledger accounts. • Prepare trial balance. • Journalize and post adjusting entries for deferrals
and accruals. • Prepare an adjusted trial balance. • Prepare financial statements.
– Income Statement. – Owner’s Equity Statement. – Balance Sheet.
• Journalize and Post closing entries. • Prepare a post-closing trial balance.
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The Reasons for Adjusting Entries: • Adjusting entries are made at the end of the accounting
period before preparation of the financial statements.
• Adjusting entries are made to ensure that the revenue recognition principle and the matching principle are followed.
• That is, to ensure that revenues are recorded in the period in which they are earned and that expenses are recorded in the period in which they are incurred.
• Adjusting entries make it possible to report the correct amounts on the balance sheet and on the income statement.
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Illustration 3-2 Categories of adjusting entries
The Basics of Adjusting Entries
Types of Adjusting Entries
1. Prepaid Expenses. Expenses
paid in cash before they are used
or consumed.
Deferrals
1. Accrued Revenues. Revenues
for services performed but not
yet received in cash or recorded.
2. Accrued Expenses. Expenses
incurred but not yet paid in cash
or recorded.
2. Unearned Revenues.
Cash received before services are
performed.
Accruals
LO 3 Explain the reasons for adjusting entries and Identify the major types of adjusting entries. 14
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Remington Repair Services Trial Balance
April 30, 2014
Account Title Dr. Cr.
Cash $6,300
Accounts Receivable 5,500
Supplies 4,100
Prepaid Insurance 3,600
Equipment 25,000
Accumulated depreciation- Equipment $3,600
Account Payable 3,000
Notes Payable 6,000
Unearned Revenue 3,100
Remington, Capital 26,000
Remington, Drawing 2,000
Service Revenue 10,300
Salaries Expense 4,000
Rent Expense 1,500
$52,000 $52,000
Adjustment data: 1. The remaining supplies at April 30 are $1600. 2. The insurance policy was purchased on April 1 for one year. 3. The equipment is depreciated at the rate of $400 per month. 4. $1,850 of unearned service revenue has been earned at the end
of April. 5. Invoices representing $1,300 of services performed during the
month have not been recorded as of April 30. 6. The notes payable represent a 6-month, 10% note that was
signed on April 1. 7. Salaries of $1,000 are accrued at April 30. Instructions: 1. Journalize the adjusting entries at April 30. 2. If the adjusting entries 1 to 7 are not made. Indicate the effect on
net income, assets and liabilities (i.e. Overstatement, Understatement or N/A).
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Review Problem- Your turn David Advertising
Trial Balance December 31, 2014
Account Title Dr. Cr.
Cash $7,600
Accounts Receivable 8,400
Supplies 4,700
Prepaid Insurance 3,600
Equipment 24,000
Accumulated depreciation- Equipment $6,500
Accounts Payable 4,400
Notes Payable 9,000
Unearned Revenue 3,600
Owner’s, Capital 20,000
Owner’s, Drawings 2,500
Service Revenue 14,000
Salaries Expense 5,200
Rent Expense 1,500
$57,500 $57,500
Adjustment data: 1. The remaining supplies at December 31 are $1,500. 2. The insurance policy was purchased on December 1 for
one year. 3. The equipment is depreciated at the rate of $500 per
month. 4. $2,000 of the unearned service revenue has been earned
at the end of December. 5. Invoices representing $1,600 of services performed during
December have not been recorded as of December 31. 6. The notes payable represent a 3-month 10% note that
was signed on December 1. 7. Salaries of $1,800 are accrued at December 31. Instructions: 1. Journalize the adjusting entries for David Advertising at
December 31.
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Pioneer Advertising Agency Trial Balance
October 31, 2010
Account Title Dr. Cr.
Cash $15200
Advertising Supplies 2500
Prepaid Insurance 600
Office Equipment 5000
Notes Payable $5000
Accounts payable 2500
Unearned Revenue 1200
C. R. Byrd, Capital 10000
C. R. Byrd, Drawing 500
Service Revenue 10000
Salaries Expense 4000
Rent Expense 900
$28700 $28700 19
Exercise 3 (solved) • Assume the following adjustments: 1. Supplies on hand at October 31 total $500. 2. Expired insurance for the month is $50. 3. Depreciation for the equipment for the month is $50. (Note: the
company uses straight line depreciation; useful life= 7 years, salvage value= $800).
4. Services related to unearned service revenue in October worth $600 were performed.
5. Services performed but not recorded at October 31 are $300. 6. Interest accrued at October 31 is $95. 7. Accrued salaries at October 31 are $1,625. • Instructions a) Determine the type of adjustment required for each of the cases
above b) Prepare the adjusting entries for the items above.
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Prepaid Expenses
1. Oct.31 Supplies Expense 2,000 Supplies ($2,500 – $500) 2,000 Note: supplies used= supplies balance $2500 – supplies on hand $500
= $2000
2. 31 Insurance Expense 50 Prepaid Insurance 50 Note: annual insurance = $600; hence monthly insurance= $600 ÷ 12
months = $50/ month
3. 31 Depreciation Expense 50 Accumulated Depreciation— Equipment 50
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Depreciation
• Any business owns a variety of assets such as equipment, building, trucks,….etc., These long-lived assets provide services for a number of years called the useful life of the asset.
• Depreciation is the process of allocating the cost of the long-lived asset to expense over its useful life in a systematic manner.
• From an accounting standpoint, the purchase of equipment or a building is viewed as a long–term prepayment for services.
• Companies need to make periodic adjusting entries for depreciation. These entries record the portion of the asset that has been used (an expense) during the period, and report the unexpired portion (an asset) at the end of the period.
• A common procedure in computing depreciation is to divide the cost of the asset by its useful life.
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• Pioneer Advertising Agency estimates depreciation on the office equipment to be $600 a year, or $50 ($600 ÷ 12) per month.
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Unearned Revenues
4. Oct. 31 Unearned Service Revenue 600
Service Revenue 600
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Accrued Revenues
5. 31 Accounts Receivable 300 Service Revenue 300
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Accrued Expenses
6. Oct.31 Interest Expense 95
Interest Payable 95
7. 31 Salaries and Wages Expense 1,625
Salaries and Wages Payable 1,625
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The Basics of Adjusting Entries
LO 5 Prepare adjusting entries for accruals.
Summary of Basic Relationships Illustration 3-22
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End of Lecture 1