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Copyright © 2010 by The McGraw-Hill Companies, Inc. All McGraw-Hill/Irwin
The Accounting Cycle: The Accounting Cycle:
Accruals and DeferralsAccruals and Deferrals
Chapter 4
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4-2
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 asset
or liability.
Adjusting EntriesAdjusting Entries
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4-3
Prior Periods Current Period Future Periods
Transaction
Paid cash inadvance of incurringexpense
(creates anasset).
TransactionPaid cash inadvance of incurringexpense
(creates anasset).
End of Current Period
Adjusting Entry
Recognizes portionof asset consumedas expense, and
Reduces balance of asset account.
Adjusting Entry Recognizes portion
of asset consumedas expense, and
Reduces balance of asset account.
Converting Assets toConverting Assets to
ExpensesExpenses
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4-4
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)
FixedAsset(debit)
FixedAsset(debit)
On date
when initialpayment ismade . . .
The asset’susefulness is
partiallyconsumedduring the
period.
At end of
period . . .
DepreciationExpense(debit)
DepreciationExpense(debit)
AccumulatedDepreciation
(credit)
AccumulatedDepreciation
(credit)
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4-6
JJ’s Lawn Care Service would make thefollowing adjusting entry.
JJ’s Lawn Care Service would make thefollowing adjusting entry.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
May 31 Depreciation Expense: Equipment 50
Accumulated Depreciation: Equipment 50
To record one month's depreciation.
Contra-asset
Contra-asset
Depreciation Is Only anDepreciation Is Only an
EstimateEstimate
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JJ’s $15,000 truck is depreciated over 60months. Calculate monthly depreciation and
make the journal entry.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
May 31 Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
To record one month's depreciation.
$15,000÷
60 months = $250 per month$15,000 ÷ 60 months = $250 per month
Depreciation Is Only anDepreciation Is Only an
EstimateEstimate
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Accumulated depreciation wouldappear on the balance sheet as
follows:
Accumulated depreciation wouldappear on the balance sheet as
follows:
Depreciation Is Only anDepreciation Is Only an
EstimateEstimate
Cost - Accumulated Depreciation = Book Value
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Prior Periods Current Period Future Periods
TransactionCollect cash in
advance of earning revenue(creates aliability).
TransactionCollect cash in
advance of
earning revenue(creates aliability).
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 toConverting Liabilities to
RevenueRevenue
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Prior Periods Current Period Future Periods
Transaction
Pay cash insettlement of liability.
TransactionPay cash in
settlement of liability.
End of Current Period
Accruing Unpaid ExpensesAccruing Unpaid Expenses
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Prior Periods Current Period Future Periods
Transaction
Collect cash insettlement of receivable.
TransactionCollect cash in
settlement of receivable.
End of Current Period
Adjusting Entry
Recognizes revenueearned but not yetrecorded, andRecords receivable.
Adjusting EntryRecognizes revenue
earned but not yetrecorded, andRecords receivable.
Accruing UncollectedAccruing Uncollected
RevenueRevenue
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Costs are matched with revenuein two ways:
Costs are matched with revenuein two ways:
Direct association of costswith specific revenue
transactions.
Direct association of costswith specific revenue
transactions.
Systematic allocation of costsover the “useful life” of the
expenditure.
Systematic allocation of costsover the “useful life” of the
expenditure.
Adjusting Entries andAdjusting Entries and
Accounting PrinciplesAccounting Principles
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Effects of the AdjustingEffects of the Adjusting
EntriesEntries
Adj
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JJ's Law n Care Se rvice Adjusted Trial Balance
Ma y 31, 2009
Ca sh 3,925$
Accounts re ce iva ble 75
Tools & e quipm e nt 2,650
Accum . de pre cia tion: tools & e q. 50$
Truck 15,000 Accum . de pre cia tion: truck 250
Note s pa ya ble 13,000
Accounts pa ya ble 150
Ca pita l stock 8,000
Divide nds 200
Sa le s re ve nue 750
Ga soline e x pe nse 50
De pre cia tion e x p.: tools & e q. 50
De pre cia tion e x p.: truck 250
Tota l 22,200$ 22,200$
All balancesare taken from
the ledger
accounts onMay 31 after
preparing thetwo
depreciationadjustingentries.
Adjusted Trial BalanceAdjusted Trial Balance
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End of Chapter 4End of Chapter 4