the accounting cycle accruals and deferrals
DESCRIPTION
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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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
The Accounting CycleThe Accounting CycleAccruals and DeferralsAccruals and Deferrals
Chapter 4
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Adjusting
entries are
needed whenever
revenue or expenses
affect more than oneaccounting
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
Accruing unpaid
expenses
Converting liabilities to
revenue
Converting liabilities to
revenue
Accruing uncollected
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).
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.
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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Jan. 1 Dec. 31
$2,400 Insurance Policy Coverage for 12 Months
$200 Monthly Insurance Expense
On January 1, Webb Co. purchased a one-year insurance policy for $2,400.On January 1, Webb Co. purchased a one-year insurance policy for $2,400.
Converting Assets to Converting Assets to ExpensesExpenses
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Jan. 1 Unexpired Insurance 2,400
Cash 2,400
Purchase a one-year insurance policy.
Initially, costs that benefit more than one accounting period are recorded as assets.
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.
The costs are expensed as they are used to generate revenue.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Monthly Adjusting Entry for Insurance
Jan. 31 Insurance Expense 200
Unexpired Insurance 200
Adjusting entry to record insurance expense for January.
Converting Assets to Converting Assets to ExpensesExpenses
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Insurance Expense1/31 200
Unexpired Insurance1/1 2,400 1/31 200
Bal. 2,200
Income StatementCost of assets
used this period to generate revenue.
Income StatementCost of assets
used this period to generate revenue.
Balance SheetCost of assets
that benefit future periods.
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 DepreciationDepreciation
Depreciation is the systematic allocation of the cost of a depreciable asset to expense.
Depreciation is the systematic allocation of the cost of a depreciable asset to expense.
Cash (credit)
Cash (credit)
Fixed Asset (debit)
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)
Depreciation Expense (debit)
Accumulated Depreciation
(credit)
Accumulated Depreciation
(credit)
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On May 2, 2011, 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 assetEstimated useful life
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
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JJ’s Lawn Care Service would make the following adjusting entry.
JJ’s Lawn Care Service would make the following adjusting entry.
GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
May 31 Depreciation Expense: Equipment 50
Accumulated Depreciation: Equipment 50
To record one month's depreciation.
Contra-asset Contra-asset
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
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JJ’s $15,000 truck is depreciated over 60 months. Calculate monthly depreciation and
make the journal entry.
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
May 31 Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
To record one month's depreciation.
$15,00060 months = $250 per month$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:
Accumulated depreciation would appear on the balance sheet as
follows:
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
Cost - Accumulated Depreciation = Book ValueCost - Accumulated Depreciation = Book Value
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Prior Periods Current Period Future Periods
TransactionCollect cash in
advance of earning revenue
(creates a liability).
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.
Adjusting Entry Recognizes portion earned as revenue, and Reduces balance of liability account.
Converting Liabilities to Converting Liabilities to RevenueRevenue
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Jan. 1 Dec. 31
$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.
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
Jan. 1 Cash 6,000
Unearned Rent Revenue 6,000
Collected $6,000 in advance for rent.
Initially, revenues that benefit more than one accounting period are recorded as liabilities.
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.
Over time, the revenue is recognized as it is earned.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Monthly Adjusting Entry for Rent Revenue
Jan. 31 Unearned Rent Revenue 500
Rental Revenue 500
Adjusting entry to record rental revenue for January.
Converting Liabilities to Converting Liabilities to RevenueRevenue
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Rental Revenue1/31 500
Unearned Rental Revenue
1/31 500 1/1 6,000Bal. 5,500
Income StatementRevenue earned
this period.
Income StatementRevenue earned
this period.
Balance SheetLiability for
future periods.
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.
TransactionPay cash in
settlement of liability.
End of Current Period
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Monday,May 29
Friday, June 2
$3,000 Wages Expense
On May 31, Webb Co. owes wages of $3,000. Payday is Friday, June 2.
On May 31, Webb Co. owes wages of $3,000. Payday is Friday, June 2.
Wednesday,May 31
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
May 31 Wages Expense 3,000
Wages Payable 3,000
Adjusting entry to accrue wages owed to employees.
Initially, an expense and a liability are recorded.
Initially, an expense and a liability are recorded.
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Wages Expense5/31 3,000
Wages Payable5/31 3,000
Income StatementCost incurred this period to generate
revenue.
Income StatementCost incurred this period to generate
revenue.
Balance SheetLiability to be
paid in a future period.
Balance SheetLiability to be
paid in a future period.
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Monday,May 29
Friday, June 2
$5,000 Weekly Wages
Let’s look at the entry for June 2.Let’s look at the entry for June 2.
Wednesday,May 31
$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.
The liability is extinguished when the debt is paid.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
June 2 Wages Expense (for June) 2,000
Wages Payable (accrued in May) 3,000
Cash 5,000
Weekly payroll for May 29-June 2.
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Prior Periods Current Period Future Periods
TransactionCollect cash in settlement of receivable.
TransactionCollect cash in settlement of receivable.
End of Current Period
Adjusting EntryRecognizes revenue earned but not yet recorded, andRecords receivable.
Adjusting EntryRecognizes revenue earned but not yet recorded, andRecords receivable.
Accruing Uncollected Accruing Uncollected RevenueRevenue
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Saturday,Jan. 15
Tuesday, Feb. 15
$170 Interest Revenue
On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the
15th day of each month.
On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the
15th day of each month.
Monday,Jan. 31
Accruing Uncollected Accruing Uncollected RevenueRevenue
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Jan. 31 Interest Receivable 170
Interest Revenue 170
Adjusting entry to record interest revenue.
Initially, the revenue is recognized and a receivable is created.
Initially, the revenue is recognized and a receivable is created.
Accruing Uncollected Accruing Uncollected RevenueRevenue
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Interest Revenue1/31 170
Interest Receivable1/31 170
Income StatementRevenue earned
this period.
Income StatementRevenue earned
this period.
Balance SheetReceivable to
be collected in a future period.
Balance SheetReceivable to
be collected in a future period.
Accruing Uncollected Accruing Uncollected RevenueRevenue
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Saturday,Jan. 15
Tuesday, Feb. 15
$320 Monthly Interest
$170 Interest Revenue
Let’s look at the entry for February 15. Let’s look at the entry for February 15.
Monday,Jan. 31
$150 Interest Revenue
Accruing Uncollected Accruing Uncollected RevenueRevenue
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The receivable is collected in a future period.
The receivable is collected in a future period.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Feb. 15 Cash 320
Interest Revenue (for February) 150
Interest Receivable (accrued Jan. 31) 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.
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
Dec. 31 Income Taxes Expense 780
Income 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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End of Chapter 4End of Chapter 4