Chapter 3-1

Impact of Adjusted EntriesImpact of Adjusted Entriesby Group 1by Group 1

Fernando Casco-Downing, Katie Fernando Casco-Downing, Katie Fleming, Michael Kubik, Emily Fleming, Michael Kubik, Emily

Stone, Fei Wang Stone, Fei Wang

Chapter 3-2

IntroductionIntroduction Accounting Equation (A= L + SE)Accounting Equation (A= L + SE) Accounting CycleAccounting Cycle Accounting ConceptsAccounting Concepts

RevenueRevenue ExpenseExpense Revenue RecognitionRevenue Recognition Matching PrincipleMatching Principle

Types of Adjusted EntriesTypes of Adjusted Entries Examples of Adjusted EntriesExamples of Adjusted Entries Impact without entriesImpact without entries

Chapter 3-3

The Accounting EquationThe Accounting Equation

Relationship among the assets, liabilities and Relationship among the assets, liabilities and stockholders’ equity of a business: stockholders’ equity of a business:

The equation must be in balance after every The equation must be in balance after every transaction. For every transaction. For every DebitDebit there must be a there must be a CreditCredit..

Illustration 3-3

Chapter 3-4

The Accounting CycleThe Accounting Cycle

Transactions

1. Journalization

6. Financial Statements

7. Closing entries

8. Post-closing trail balance

9. Reversing entries

3. Trial balance

2. Posting

5. Adjusted trial balance

4. AdjustmentsWork Sheet

Illustration 3-6

Chapter 3-5

Adjusting EntriesAdjusting Entries

RevenuesRevenues - recorded in the period in which - recorded in the period in which they are earnedthey are earned.

Expenses Expenses - recognized in the period in which - recognized in the period in which they are incurredthey are incurred.

Adjusting entriesAdjusting entries - needed to ensure that - needed to ensure that the the revenue recognitionrevenue recognition and and matching matching principlesprinciples are followed. are followed.

Chapter 3-6

Types of Adjusting EntriesTypes of Adjusting Entries

1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.

Prepayments3. Accrued Revenues.

Revenues earned but not yet received in cash or recorded.

4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.

2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned.

AccrualsIllustration 3-

20

Chapter 3-7

Expedient Recording MethodExpedient Recording Method

ExpedientExpedient Records an Records an expense expense upon payment of cash upon payment of cash

before goods or services are consumedbefore goods or services are consumed

Records Records revenue revenue upon receipt of cash upon receipt of cash before goods or services are providedbefore goods or services are provided

Chapter 3-8

Debit CreditService Revenue

45,00045,000Debit Credit

Cash

45,00045,00045,00045,000

Expedient General Entries Expedient General Entries

Q1 : On December 1, 2011, Johnson received a $45,000 payment for services to be rendered equally over a four-month period. Service revenue was credited.

Service revenue 45,000

Cash 45,000

Dec. 1

45,00045,000

Chapter 3-9

Debit CreditService Revenue

33,75033,750 33,75033,750Debit CreditUnearned Service

Revenue

45,00045,000

11,25011,250

Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”

Q1 : On December 1, 2011, Johnson received a $45,000 payment for services to be rendered equally over a four-month period. Service revenue was credited.

Unearned service revenue 33,750

Service revenue 33,750

Dec. 31

33,75033,750

(=45,000-45,000/4)

Chapter 3-10

Q1 : On December 1, 2011, Johnson received a $45,000 payment for services to be rendered equally over a four-month period. Service revenue was credited.

Unearned service revenue (L)

33,750

Service revenue (SE) 33,750

Dec. 31 (=45,000-45,000/4)

Impact Without Adjusted EntriesImpact Without Adjusted Entries

Total Assets

Total Liab.

Stk. Equity

Net Income

Retained Earning

None

Understate 33750

Overstate 33750

Overstate 33750

Overstate 33750

Chapter 3-11

Standard Recording MethodStandard Recording Method

StandardStandard

Asset Asset upon payment of cashupon payment of cashLiability Liability upon receipt of cash upon receipt of cash

before goods or services are before goods or services are providedprovided

Chapter 3-12

Debit CreditUnearned Service

Revenue

45,00045,000Debit Credit

Cash

45,00045,00045,00045,000

Standard General Entries Standard General Entries

Q1 : On December 1, 2011, Johnson received a $45,000 payment for services to be rendered equally over a four-month period.

Unearned service revenue 45,000

Cash 45,000

Dec. 1

45,00045,000

Chapter 3-13

Debit CreditService Revenue

45,00045,000Debit CreditUnearned Service

Revenue

11,25011,250 11,25011,250

Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”

Q1 : On December 1, 2011, Johnson received a $45,000 payment for services to be rendered equally over a four-month period.

Service revenue 11,250

Unearned service revenue

11,250

Dec. 31

33,75033,75011,25011,250

Chapter 3-14

Expedient Vs. GeneralExpedient Vs. GeneralExpedientExpedient

GeneralGeneral

Debit CreditService Revenue

33,75033,750 33,75033,750Debit CreditUnearned Service

Revenue

45,00045,00011,25011,250

33,75033,750

Debit CreditService Revenue

45,00045,000Debit CreditUnearned Service

Revenue

11,25011,250 11,25011,250

33,75033,75011,25011,250

Chapter 3-15

Q2. On December 31, 2011, the company paid a local radio station $16,000 for 40 radio ads that were to be aired, 20 per month, throughout January and February of 2012. Prepaid advertising was debited.

Cash 16,000

Prepaid Advertising 16,000

Dec. 31

Debit CreditPrepaid Advertising

16,00016,000 16,00016,000Debit Credit

Cash

Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”

16,00016,000

Chapter 3-16

Salaries payable 8,400Salaries expense 8,400Dec. 31

Debit CreditSalaries Expense

8,4008,400 8,4008,400Debit CreditSalaries Payable

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”

Q3. Employee salaries for the month of December 2011 totaling $8,400 will be paid on January 5, 2012.

8,4008,400

Chapter 3-17

Salaries payable(L) 8,400Salaries expense(SE) 8,400Dec. 31

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”

Q3. Employee salaries for the month of December 2011 totaling $8,400 will be paid on January 5, 2012.

Total Assets

Total Liab.

Stk. Equity

Net Income

Retained Earning

NoneUnderstate

8400Overstate

8400Overstate

8400Overstate

8400

Chapter 3-18

Interest payable 900Interest expense 900Dec. 31

Debit CreditInterest Expense

900900 900900Debit CreditInterest Payable

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”

Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local bank. A note was signed with principal and 6% interest to be paid on September 1, 2012.

(Interest = 60,000 * 6% /12 *3)

Chapter 3-19

Interest payable(L) 900Interest expense(SE) 900Dec. 31

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”

Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local bank. A note was signed with principal and 6% interest to be paid on September 1, 2012.

(Interest = 60,000 * 6% /12 *3)

Total Assets

Total Liab.

Stk. Equity

Net Income

Retained Earning

NoneUnderstate

900Overstate

900Overstate

900Overstate

900

Chapter 3-20

Allowance for Doubtful Accounts 8,000Bad Debt Expense 8,000Dec. 31

Debit CreditBad Debt Expense

8,0008,000 8,0008,000Debit Credit

Allowance for Doubtful Accounts

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”

Q5. On December 31, 2011, it was determined that $8,000 of the recorded Accounts receivable would prove to be uncollectible.

Chapter 3-21

Impact Without Adjusted EntriesImpact Without Adjusted Entries

Total Assets

Total Liab.

Stk. Equity

Net Income

Retained Earning

Overstated 8000 None

Overstated8000

Overstated8000

Overstated8000

Q5. On December 31, 2011, it was determined that $8,000 of the recorded Accounts receivable would prove to be uncollectible.

Allowance for Doubtful Account (A)

8,000Bad Debt Expense (SE) 8,000Dec. 31

Chapter 3-22

Impact Without Adjusted Entries Impact Without Adjusted Entries

Total Assets

Total Liab.

Stk. Equity

Net Income

Retained Earning

Q1 NoneUnderstate

33750Overstate

33750Overstate

33750Overstate

33750

Q2 None None None None None

Q3 NoneUnderstate

8400Overstate

8400Overstate

8400Overstate

8400

Q4 NoneUnderstate

900Overstate

900Overstate

900Overstate

900

Q5Overstated

8000 NoneOverstated

8000Overstated

8000Overstated

8000

TotalOverstate

8000Understate

43050Overstate

51050Overstate

51050Overstate

51050

Chapter 3-23

ConclusionConclusion Accounting ConceptsAccounting Concepts

Revenue and ExpenseRevenue and Expense Revenue Recognition and Matching PrincipleRevenue Recognition and Matching Principle

Standard Vs. Standard Vs. ExpedientExpedient Recording Method Recording Method Types of Adjusted EntriesTypes of Adjusted Entries

Prepayments : Prepaid Expense and Unearned Prepayments : Prepaid Expense and Unearned RevenueRevenue

Accruals: Accrued Rev. and Accrued Exp.Accruals: Accrued Rev. and Accrued Exp. Impact without adjusted entries Impact without adjusted entries

Overstated A, L, SE, NI, REOverstated A, L, SE, NI, RE UnderstatedUnderstated A, L, SE, NI, REA, L, SE, NI, RE

Chapter 3-24

QuestionsQuestions