Download - The Accounting Cycle:Accruals and Deferrals
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The Accounting Cycle:The Accounting Cycle:Accruals and DeferralsAccruals and Deferralsotaleem.blogspot.comotaleem.blogspot.comfor more presentation(follow me)for more presentation(follow me)
Chapter 4
4-2
Adjusting entries are
needed whenever revenue or expenses affect more than one
accounting period.
Every adjusting
entry involves achange in either a
revenue or expense and an asset
or liability.
Adjusting EntriesAdjusting Entries
4-3
Types of Adjusting EntriesTypes of Adjusting EntriesConverting asset to expenses
(i.e Supplies, Unexpired Insurance) Converting liabilities to revenue
(i.e Unearned revenue to revenue earned) Accruing unpaid expenses
(i.e Interest Exp./Salary Exp. To Interest/Salary Payable)
Accruing uncollected revenue (i.e A/R or Interest Receivable to Service
Rev. Earned or interest Receivable)
4-4
Converting Assets to Converting Assets to ExpensesExpenses
An adjusting entries to convert an asset to expense consists of debit to an expense account and credit to an asset account.
Prepaid Expenses It always be assets, becoming
expenses only as service and goods are used up.(i.e Shop Supplies and Insurance policies)
4-5
Prior Periods Current Period Future Periods
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.
Converting Assets to Converting Assets to ExpensesExpenses
4-6
The Concept of The Concept of DepreciationDepreciationDepreciation is the systematic allocation of the cost of a depreciable asset to expense.
Cash (credit)
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)
Accumulated Depreciation
(credit)
4-7
On May 2, 2009, 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 asset
Estimated useful life
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
4-8
JJ’s Lawn Care Service would make the following adjusting entry.
GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
May 31 Depreciation Expense: Equipment 50Accumulated Depreciation: Equipment 50
To record one month's depreciation.
Contra-asset
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
4-9
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 250Accumulated Depreciation: Truck 250
To record one month's depreciation.
$15,00060 months = $250 per month
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
4-10
Accumulated depreciation would appear on the balance sheet as
follows:
Depreciation Is Only an Depreciation Is Only an EstimateEstimate
Cost - Accumulated Depreciation = Book Value
4-11
Prior Periods Current Period Future Periods
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.
Converting Liabilities to Converting Liabilities to RevenueRevenue
4-12
Converting Liabilities to Converting Liabilities to RevenueRevenueAmount collected from customer in
advance are recorded by debiting the cash account and crediting an unearned revenue(deferred revenue) account.
For Examples:AdvanceTicketing for Travel and sports match
4-13
Prior Periods Current Period Future Periods
TransactionPay cash in
settlement of liability.
End of Current Period
Accruing Unpaid ExpensesAccruing Unpaid Expenses
4-14
Accruing Unpaid ExpensesAccruing Unpaid ExpensesIt recognizes expenses that will
be paid in future. (interest on borrowing, wages expense etc)
Adjusting entry consists of a debit to an expense account and credit to a liability account.
Examples:Accrual of Wages or salaries Expenses.Accrual of Interest Expenses.
4-15
Prior Periods Current Period Future Periods
TransactionCollect cash in settlement of receivable.
End of Current Period
Adjusting EntryRecognizes revenue earned but not yet recorded, andRecords receivable.
Accruing Uncollected Accruing Uncollected RevenueRevenue
4-16
Accruing Uncollected Accruing Uncollected RevenueRevenueA revenue accrual is necessary when
revenue has been earned in the current accounting period but the cash will not be collected until the next period. Examples of revenue accruals include interest earned on investments or loans made to others, and work completed but not yet billed to the customer.
In the adjusting entry we will record a receivable, an asset account, and recognize the revenue earned.
4-17
Costs are matched with revenue in two ways:
Direct association of costs with specific revenue
transactions.
Systematic allocation of costs over the “useful life” of the
expenditure.
Adjusting Entries and Adjusting Entries and Accounting PrinciplesAccounting Principles
4-18
Effects of the Adjusting Effects of the Adjusting EntriesEntries
Adjustment Revenue ExpensesNet
Income Assets LiabilitiesOwners' Equity
Type IConverting Assets to Expenses No effect Increase Decrease Decrease No effect DecreaseType IIConverting Liabilities to Revenue Increase No effect Increase No effect Decrease IncreaseType IIIAccruing Unpaid Expenses No effect Increase Decrease No effect Increase DecreaseType IVAccruing Uncollected Revenue Increase No effect Increase Increase No effect Increase
Income Statement Balance Sheet
4-19
JJ's Lawn Care Service Adjusted Trial Balance
May 31, 2009Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accum. depreciation: tools & eq. 50$ Truck 15,000 Accum. depreciation: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depreciation exp.: tools & eq. 50 Depreciation exp.: truck 250 Total 22,200$ 22,200$
All balances are taken from
the ledger accounts on May 31 after
preparing the two
depreciation adjusting entries.
Adjusted Trial BalanceAdjusted Trial Balance
4-20
End of Chapter 4End of Chapter 4