5-*Learning Objective 1Explain accrual accounting and how it improves financial statements.

Accrual basis accounting uses the adjusting process to recognize revenues when earned and expenses when incurred.Cash basis accounting recognizes revenue when cash is received and records expenses when cash is paid.It is commonly held that accrual accounting better reflects business performance than cash basis accounting.As an example, consider FastForwards Prepaid Insurance account. FastForward paid $2,400 for 24 months of insurance coverage beginning December 1, 2010. Accrual accounting requires that $100 of insurance expense be reported on December 2010s income statement keeping the accounts more accurate.LO1

5-*Learning Objective 2 Identify the types of accounting adjustments and their purpose.

AdjustmentsCash before work(Deferrals)Work before cash (Accruals)Unearned (Deferred) revenuesPrepaid (deferred) expensesAccrued revenuesAccrued expenses

Reflects transactions when cash is paid or received after a related expense or revenue is recognized.

Reflects unearned revenues and prepaid expenses.LO2

5-*Learning Objective 3Prepare and explain adjusting entries.

An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. This entry also updates a related expense or revenue account.LO3

5-*Prepaid ExpensesResources paid for prior to receiving the actual benefits.Remember that a prepaid expense is an asset that results from the payment of cash before the expense is recognized. LO3

5-*Prepaid Insurance On December 1, 2010, FastForward paid $4,800 for insurance for 24 months. FastForward recorded the expenditure as Prepaid Insurance on December 1. What adjustment is required?LO3

Larson

T- AccountCompany NameDec. 31Insurance Expense200

Financial StatementPrepaid Insurance200

DateTo record first month's expired insurance

5-*Supplies During December, FastForward purchased $9,720 of supplies. FastForward recorded the expenditures with a debit to Supplies. On December 31, a count of the supplies indicated $8,670 on hand. LO3

Larson

T- AccountCompany NameDec. 31Supplies Expense1,050

Financial StatementSupplies1,050

DateTo record supplies used during December

5-*DepreciationDepreciation is the process of spreading the costs of plant and equipment over their expected useful lives.LO3

5-*Depreciation FastForward purchased equipment for $20,000 in early December. The equipment is expected to have a useful life of four years and a salvage value of $8,000. LO3

Larson

Dr.Cr.

Insurance ExpenseCompany NameDec. 31Depreciation Expense250

Dec. 31 2,000Financial StatementAccumulated Depreciation - Equipment250

DateTo record equipment depreciation

5-*Equipment is shown net of accumulated depreciation.DepreciationNotice the contra-account, accumulated depreciation, will be shown as a reduction in the cost of the assetLO3

Sheet1

FastForward

Partial Balance Sheet

At December 31, 2010

Assets

Cash

.

Equipment$20,000

Less: accumulated deprec.(250)19,750

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Total Assets

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5-*FastForwards employee earns $70 per day, or $350 for a five-day workweek beginning on Monday and ending on Friday. This employee is paid every two weeks on Friday. On December 12 and 26, the wages are paid, recorded in the journal, and posted to the ledger. At December 31, the employee has worked for three days for FastForward and will be paid on January 9, 2011.Accrued Salaries ExpenseLO3

Larson

Dr.Cr.

Basketball RevenueCompany NameDec. 31Salaries Expense210

Dec. 31 50,000Financial StatementSalaries Payable210

DateTo accrue three days' salary

5-*Learning Objective 4Explain and prepare an adjusted trial balance.

LO4

Sheet1

FastForwardWork SheetFor Month Ended December 31, 2010

Trial BalanceAdjustmentsAdjusted Trial BalanceIncome StatementBalance Sheet & Statement of Owner's Equity

No.AccountDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.

101Cash$4,350$4,350

126Supplies$9,720(b)$1,050$8,670

128Prepaid insurance$2,400(a)$100$2,300

167Equipment$26,000$26,000

168Accum. depr. - Equip.0.0(c)$375$375

201Accounts payable$6,200$6,200

209Salaries payable0.0(d)$210$210

236Unearned revenue$3,000$3,000

301C. Taylor, Capital$30,000$30,000

302C. Taylor, Withdrawals$200$200

403Consulting revenue$5,800$5,800

406Rental revenue$300$300

612Depr. expense0.0(c)$375$375

622Salaries expense$1,400(d)$210$1,610

637Insurance expense0.0(a)$100$100

640Rent expense$1,000$1,000

652Supplies expense0.0(b)$1,050$1,050

690Utilities expense$230$230

Totals$45,300$45,300$1,735$1,735$45,885$45,885

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5-*Learning Objective 5Prepare financial statements from an adjusted trial balance.

Notice how we took the information directly from the worksheet and prepared the income statement. LO5

Sheet1

FastForward

Income Statement

For the Month Ended December 31, 2010

Revenues:

Consulting revenue$5,800

Rental revenue300

Operating expenses:

Depr. expense - Equip.$375

Salaries expense1,610

Insurance expense100

Rent expense1,000

Supplies expense1,050

Utilities expense230

Total expenses4,365

Net income$1,735

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Adjusted

Trial Balance

December 31, 2010

Dr.Cr.

Cash$4,350

Supplies8,670

Prepaid insurance2,300

Equipment26,000

Accum. depr. - Equip.$375

Accounts payable6,200

Salaries payable210

Unearned revenue3,000

C. Taylor, Capital30,000

C. Taylor, Withdrawals200

Consulting revenue5,800

Rental revenue300

Depr. expense375

Salaries expense1,610

Insurance expense100

Rent expense1,000

Supplies expense1,050

Utilities expense230

Totals$45,885$45,885

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5-*Note: Investment by owner and withdrawals by owner come from the adjusted trial balance.Preparing Financial StatementsLO5

Sheet1

FastForward

Statement of Changes in Owner's Equity

For the Month Ended December 31, 2010

C. Taylor, Capital 12/1/10$ -0-

Add: Net income$1,735

Investment by owner30,00031,735

Total31,735

Less: Withdrawals by owner200

C. Taylor, Capital 12/31/10$31,535

0.0

0

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FastForward

Income Statement

For the Month Ended December 31, 2010

Revenues:

Consulting revenue$5,800

Rental revenue300

Operating expenses:

Depr. expense - Equip.$375

Salaries expense1,610

Insurance expense100

Rent expense1,000

Supplies expense1,050

Utilities expense230

Total expenses4,365

Net income$1,735

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5-*Preparing Financial StatementsNotice assets and liabilities balances are transferred over from the adjusted trial balance to the Balance Sheet. LO5

Sheet1

FastForward

Balance Sheet

December 31, 2010

Assets

Cash$4,350

Supplies$8,670

Prepaid Insurance$2,300

Equipment$26,000

Accumulated Depreciation$37525,625

Total assets$40,945

Liabilities

Accounts Payable$6,200

Salaries Payable$210

Unearned Revenue$3,000

Total Liabilities9,410

Equity

C Taylor, Capital31,535

Total liabilities and Equity$40,945

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Adjusted

Trial Balance

December 31, 2010

Dr.Cr.

Cash$4,350

Supplies8,670

Prepaid insurance2,300

Equipment26,000

Accum. depr. - Equip.$375

Accounts payable6,200

Salaries payable210

Unearned revenue3,000

C. Taylor, Capital30,000

C. Taylor, Withdrawals200

Consulting revenue5,800

Rental revenue300

Depr. expense375

Salaries expense1,610

Insurance expense100

Rent expense1,000

Supplies expense1,050

Utilities expense230

Totals$45,885$45,885

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5-*End of Chapter 5

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