+ All Categories
Home > Documents > Business Accounting Chap4

Business Accounting Chap4

Date post: 07-Aug-2018
Category:
Upload: jawadzaheer
View: 218 times
Download: 0 times
Share this document with a friend

of 15

Transcript
  • 8/21/2019 Business Accounting Chap4

    1/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-1

    THE ACCOUNTING

    CYCLE: ACCRUALS

    AND DEFERRALS

    Chapter 

    4

  • 8/21/2019 Business Accounting Chap4

    2/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-2At the end of theperiod, we need to

    make adjusting entries

    to get the accounts upto date for the financial

    statements.

  • 8/21/2019 Business Accounting Chap4

    3/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-3

    Adjusting

    entries are

    needed whenever

    revenue or expenses

    affect more than one

    accountingperiod.

    Every

    adjusting

    entry involves a

    change in either a

    revenue or expense

     and an assetor liability.

    Adjusting Entries

    Adjusting Entries

  • 8/21/2019 Business Accounting Chap4

    4/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-4

     Convertingassets to

    expenses

     Convertingassets to

    expenses

     Accruingunpaid

    expenses

     Accruingunpaid

    expenses

     Convertingliabilities to

    revenue

     Convertingliabilities to

    revenue

     Accruinguncollected

    revenues

     Accruinguncollected

    revenues

    Types of Adjusting Entries

    Types of Adjusting Entries

  • 8/21/2019 Business Accounting Chap4

    5/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-5

    Prior Periods Current Period uture Periods

    !ransaction

    Paid cash inadvance ofincurringexpense

    "creates anasset#.

    !ransaction

    Paid cash inadvance ofincurringexpense

    "creates an

    asset#.

    End of Current Period

    Adjusting Entry

     $ecogni%es portion  of asset consumed

    as expense, and $educes balance of   asset account.

    Adjusting Entry

     $ecogni%es portion  of asset consumed

    as expense, and $educes balance of 

      asset account.

    Converting Assets to Expenses

    Converting Assets to Expenses

  • 8/21/2019 Business Accounting Chap4

    6/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-6

    Examples &nclude'(epreciation

    )upplies

    Expiring &nsurance Policies

    Converting Assets to Expenses

    Converting Assets to Expenses

  • 8/21/2019 Business Accounting Chap4

    7/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-7

    *an. + (ec. +

    -,/00 &nsurance PolicyCoverage for + 1onths

    -00 1onthly &nsurance Expense

    2n *anuary +, 3ebb Co. purchased a one4year insurance policy for -,/00.

    2n *anuary +, 3ebb Co. purchased a one4year insurance policy for -,/00.

    Converting Assets to ExpensesConverting Assets to Expenses

  • 8/21/2019 Business Accounting Chap4

    8/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-8

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    *an. + 8nexpired &nsurance ,/00

    Cash ,/00

    Purchase a one4year insurance policy.

    &nitially, costs that benefit more than oneaccounting period are recorded as assets.

    &nitially, costs that benefit more than oneaccounting period are recorded as assets.

    Converting Assets to ExpensesConverting Assets to Expenses

  • 8/21/2019 Business Accounting Chap4

    9/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-9

    !he costs are expensed as they are used togenerate revenue.

    !he costs are expensed as they are used togenerate revenue.

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    1onthly Adjusting Entry for &nsurance

    *an. + &nsurance Expense 00

    8nexpired &nsurance 00

    &nsurance expense for *anuary.

    Converting Assets to ExpensesConverting Assets to Expenses

  • 8/21/2019 Business Accounting Chap4

    10/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-10

    &nsurance Expense+9+ 00 

    8nexpired &nsurance+9+ ,/00 +9+ 00 

    :al. ,00

    &ncome )tatement

    Cost of assets

    used this period togenerate revenue.

    &ncome )tatement

    Cost of assets

    used this period togenerate revenue.

    :alance )heet

    Cost of assets

    that benefitfuture periods.

    :alance )heet

    Cost of assets

    that benefitfuture periods.

    Converting Assets to ExpensesConverting Assets to Expenses

  • 8/21/2019 Business Accounting Chap4

    11/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-11

    (epreciation is the systematic allocationof the cost of a depreciable asset to

    expense.

    (epreciation is the systematic allocationof the cost of a depreciable asset to

    expense.

    (epreciable assets are physical objectsthat retain their si%e and shape but lose

    their economic usefulness over time.

    (epreciable assets are physical objectsthat retain their si%e and shape but lose

    their economic usefulness over time.

    The Concept of DepreciationThe Concept of Depreciation

  • 8/21/2019 Business Accounting Chap4

    12/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-12

    !he portion of an asset;s utility that is used upmust be expensed in the period used.

    !he portion of an asset;s utility that is used upmust be expensed in the period used.

    Cash"credit#

    Cash"credit#

    ixedAsset"debit#

    ixedAsset"debit#

    2n date

    when initialpayment ismade . . .

    !he asset;susefulness is

    partiallyconsumedduring the

    period.At end ofperiod . . .

    (epreciationExpense"debit#

    (epreciationExpense"debit#

    Accumulated(epreciation

    "credit#

    Accumulated(epreciation

    "credit#

    The Concept of DepreciationThe Concept of Depreciation

  • 8/21/2019 Business Accounting Chap4

    13/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-13

    2n 1ay , 00

  • 8/21/2019 Business Accounting Chap4

    14/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-14

    **;s 7awn Care )ervice would make thefollowing adjusting entry.

    **;s 7awn Care )ervice would make thefollowing adjusting entry.

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    1ay + (epreciation Expense' E>uipment

  • 8/21/2019 Business Accounting Chap4

    15/40© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-15

    **;s -+

  • 8/21/2019 Business Accounting Chap4

    16/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-16

    Accumulated depreciation would

    appear on the balance sheet asfollows'

    Accumulated depreciation would

    appear on the balance sheet asfollows'

  • 8/21/2019 Business Accounting Chap4

    17/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-17

    Prior Periods Current Period uture Periods

    !ransactionCollect cash

    in advance ofearningrevenue

    "creates a

    liability#.

    !ransactionCollect cash

    in advance ofearningrevenue

    "creates aliability#.

    End of Current Period

    Adjusting Entry $ecogni%es portion

      earned as revenue,and

     $educes balance of

    liability account.

    Adjusting Entry $ecogni%es portion

      earned as revenue,and

     $educes balance of

    liability account.

    Converting Liailities to !evenueConverting Liailities to !evenue

  • 8/21/2019 Business Accounting Chap4

    18/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-18

    Examples &nclude'Airline !icket )ales

    )ports !eams; )ales of

    )eason !ickets

    Converting Liailities to !evenueConverting Liailities to !evenue

  • 8/21/2019 Business Accounting Chap4

    19/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-19

    *an. + (ec. +

    -@,000 $ental ContractCoverage for + 1onths

    -

  • 8/21/2019 Business Accounting Chap4

    20/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-20

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    *an. + Cash @,000

    8nearned $ental $evenue @,000

    Collected -@,000 in advance for rent.

    &nitially, revenues that benefit more than oneaccounting period are recorded as liabilities.

    &nitially, revenues that benefit more than oneaccounting period are recorded as liabilities.

    Converting Liailities to !evenueConverting Liailities to !evenue

  • 8/21/2019 Business Accounting Chap4

    21/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-21

    2ver time, the revenue is recogni%ed as it isearned.

    2ver time, the revenue is recogni%ed as it isearned.

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    1onthly Adjusting Entry for $ent $evenue

    *an. + 8nearned $ental $evenue

  • 8/21/2019 Business Accounting Chap4

    22/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-22

    $ental $evenue+9+

  • 8/21/2019 Business Accounting Chap4

    23/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-23

    Prior Periods Current Period uture Periods

    !ransaction

    Pay cash insettlement of

    liability.

    !ransaction

    Pay cash insettlement ofliability.

    End of Current Period

    Adjusting Entry

     $ecogni%es expense  incurred, and $ecords liability for   future payment.

    Adjusting Entry

     $ecogni%es expense  incurred, and $ecords liability for   future payment.

    Accruing "npaid ExpensesAccruing "npaid Expenses

  • 8/21/2019 Business Accounting Chap4

    24/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-24

    Examples &nclude'&nterest

    3ages and )alaries

    Property !axes

    ey, when dowe get paidB

    Accruing "npaid ExpensesAccruing "npaid Expenses

  • 8/21/2019 Business Accounting Chap4

    25/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-25

    1onday,1ay

    riday,*une

    -,000 3agesExpense

    2n 1ay +, 3ebb Co. owes wages of-,000. Pay day is riday, *une .

    2n 1ay +, 3ebb Co. owes wages of-,000. Pay day is riday, *une .

    3ednesday,1ay +

    Accruing "npaid ExpensesAccruing "npaid Expenses

  • 8/21/2019 Business Accounting Chap4

    26/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-26

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    1ay + 3ages Expense ,000

    3ages Payable ,000

    !o accrue wages owed to employees.

    &nitially, an expense and a liability arerecorded.

    &nitially, an expense and a liability arerecorded.

    Accruing "npaid ExpensesAccruing "npaid Expenses

  • 8/21/2019 Business Accounting Chap4

    27/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-27

    3ages Expense

  • 8/21/2019 Business Accounting Chap4

    28/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-28

    1onday,1ay

    riday,*une

    -

  • 8/21/2019 Business Accounting Chap4

    29/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-29

    !he liability is extinguished when the debt ispaid.

    !he liability is extinguished when the debt ispaid.

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    *une 3ages Expense "for *une# ,000

    3ages Payable "accrued in 1ay# ,000

    Cash

  • 8/21/2019 Business Accounting Chap4

    30/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-30

    Prior Periods Current Period uture Periods

    !ransaction

    Collect cashin settlementof receivable.

    !ransaction

    Collect cashin settlementof receivable.

    End of Current Period

    Adjusting Entry

    $ecogni%es revenue  earned but not yet  recorded, and$ecords receivable.

    Adjusting Entry

    $ecogni%es revenue  earned but not yet  recorded, and$ecords receivable.

    Accruing "ncollected !evenueAccruing "ncollected !evenue

  • 8/21/2019 Business Accounting Chap4

    31/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-31

    Examples &nclude'&nterest Earned

    3ork Completed :ut 6ot

     Det :illed to Customer 

    Accruing "ncollected !evenueAccruing "ncollected !evenue

  • 8/21/2019 Business Accounting Chap4

    32/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-32

    )aturday,*an. +<

    !uesday,eb. +<

    -+0 &nterest$evenue

    2n *an. +, the bank owes 3ebb Co.interest of -+0. &nterest is paid on the +

  • 8/21/2019 Business Accounting Chap4

    33/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-33

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    *an. + &nterest $eceivable +0

    &nterest $evenue +0

    !o recogni%e interest revenue.

    &nitially, the revenue is recogni%ed and areceivable is created.

    &nitially, the revenue is recogni%ed and areceivable is created.

    Accruing "ncollected !evenueAccruing "ncollected !evenue

  • 8/21/2019 Business Accounting Chap4

    34/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-34

    &nterest $evenue+9+ +0 

    &nterest $eceivable+9+ +0 

    &ncome )tatement

    $evenue earnedthis period.

    &ncome )tatement

    $evenue earnedthis period.

    :alance )heet

    $eceivable to

    be collected in afuture period.

    :alance )heet

    $eceivable to

    be collected in afuture period.

    Accruing "ncollected !evenueAccruing "ncollected !evenue

  • 8/21/2019 Business Accounting Chap4

    35/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-35

    )aturday,*an. +<

    !uesday,eb. +<

    -0 1onthly &nterest

    -+0 &nterest

    $evenue

    7et;s look at the entry for ebruary +

  • 8/21/2019 Business Accounting Chap4

    36/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-36

    !he receivable is collected in a future period.!he receivable is collected in a future period.

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    eb. +< Cash 0

    &nterest $evenue "for ebruary# +

  • 8/21/2019 Business Accounting Chap4

    37/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-37

    As a corporation earns taxable income, itincurs income taxes expense, and also aliability to governmental tax authorities.

    As a corporation earns taxable income, itincurs income taxes expense, and also aliability to governmental tax authorities.

    5E6E$A7 *28$6A7

    (ate Account !itles and Explanation (ebit Credit

    (ec. + &ncome !axes Expense F0&ncome !axes Payable F0

    Estimated income taxes applicable to

    taxable income earned in (ecember.

    Accruing Income Taxes Expense# The $inalAdjusting Entry

    Accruing Income Taxes Expense# The $inalAdjusting Entry

    4 38

  • 8/21/2019 Business Accounting Chap4

    38/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-38

    *ournali%etransactions.

    Post entries tothe ledgeraccounts.

    Prepare trialbalance.

    1ake end4of4year

    adjustments.

    Prepare adjusted

    trial balance.

    7et;s look at **;s 7awn Care)ervices; adjusted trial balance.

    7et;s look at **;s 7awn Care)ervices; adjusted trial balance.

    Effects of the Adjusting Enties

    4 39

  • 8/21/2019 Business Accounting Chap4

    39/40

    © The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

    4-39

    **?s 7awn Care )ervice 

    Adjusted !rial :alance

    1ay +, 00<

    Cash ,

  • 8/21/2019 Business Accounting Chap4

    40/40

    4-40

    End of Chapter 4End of Chapter 4


Recommended