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Chapter3-1

Impact of Adjusted Entriesby Group 1

Fernando Casco-Downing, Katie

Fleming, Michael Kubik, Emily

Stone, Fei Wang

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Chapter3-2

Introduction

Accounting Equation (A= L + SE) Accounting Cycle

Accounting Concepts

Revenue

Expense

Revenue Recognition

Matching Principle

Types of Adjusted Entries Examples of Adjusted Entries

Impact without entries

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Chapter3-3

The Accounting Equation

Relationship among the assets, liabilities andstockholders equity of a business:

The equation must be in balance after everytransaction. For every Debitthere must be a Credit.

Illustration 3-3

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Chapter3-4

The Accounting Cycle

Transactions

1. Journalization

6. Financial Statements

7. Closing entries

8. Post-closing trail balance

9. Reversing entries

3. Trial balance

2. Posting

5. Adjusted trial balance

4. AdjustmentsWorkSheet

Illustration 3-6

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Chapter3-5

Adjusting Entries

Revenues- recorded in the period in which theyare earned.

Expenses - recognized in the period in which they

are incurred.

Adjusting entries - needed to ensure that therevenue recognition and matching principles are

followed.

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Chapter3-6

Types of Adjusting Entries

1. Prepaid Expenses.Expenses paid in cash and

recorded as assets beforethey are used or consumed.

Prepayments

3. Accrued Revenues.Revenues earned but not

yet received in cash orrecorded.

4. Accrued Expenses.Expenses incurred but not

yet paid in cash orrecorded.

2. Unearned Revenues.Revenues received in cash

and recorded as liabilitiesbefore they are earned.

AccrualsIllustration 3-20

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Chapter3-7

Expedient Recording Method

Expedient Records an expense upon payment of cash

before goods or services are consumed

Records revenue upon receipt of cashbefore goods or services are provided

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Chapter3-8

Debit Credit

Service Revenue

45,000

Debit Credit

Cash

45,000

45,000

Expedient General Entries

Q1: On December 1, 2011, Johnson received a $45,000 payment forservices to be rendered equally over a four-month period. Service revenuewas credited.

Service revenue 45,000

Cash 45,000Dec. 1

45,000

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Chapter3-9

Debit Credit

Service Revenue

33,750 33,750

Debit Credit

Unearned Service Revenue

45,000

11,250

Adjusting Entries for Unearned Revenues

Q1: On December 1, 2011, Johnson received a $45,000 payment forservices to be rendered equally over a four-month period. Service revenuewas credited.

Unearned service revenue 33,750

Service revenue 33,750Dec. 31

33,750

(=45,000-45,000/4)

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Chapter3-10

Q1: On December 1, 2011, Johnson received a $45,000 payment forservices to be rendered equally over a four-month period. Service revenuewas credited.

Unearned service revenue (L) 33,750

Service revenue (SE) 33,750Dec. 31 (=45,000-45,000/4)

Impact Without Adjusted Entries

Total

Assets

Total

Liab.

Stk.

Equity

Net

Income

Retained

Earning

None

Understate

33750

Overstate

33750

Overstate

33750

Overstate

33750

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Chapter3-11

Standard Recording Method

Standard

Asset upon payment of cashLiability upon receipt of cash

before goods or services areprovided

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Chapter3-12

Debit Credit

Unearned Service Revenue

45,000

Debit Credit

Cash

45,000

45,000

Standard General Entries

Q1: On December 1, 2011, Johnson received a $45,000 payment forservices to be rendered equally over a four-month period.

Unearned service revenue 45,000

Cash 45,000Dec. 1

45,000

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Chapter3-13

Debit Credit

Service Revenue

45,000

Debit Credit

Unearned Service Revenue

11,250 11,250

Adjusting Entries for Unearned Revenues

Q1: On December 1, 2011, Johnson received a $45,000 payment forservices to be rendered equally over a four-month period.

Service revenue 11,250

Unearned service revenue 11,250Dec. 31

33,75011,250

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Chapter3-14

Expedient Vs. General

Expedient

General

Debit CreditService Revenue

33,750 33,750

Debit CreditUnearned Service Revenue

45,000

11,25033,750

Debit Credit

Service Revenue

45,000

Debit Credit

Unearned Service Revenue

11,250 11,250

33,75011,250

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Chapter3-15

Q2.On December 31, 2011, the company paid a local radio station $16,000for 40 radio ads that were to be aired, 20 per month, throughout January andFebruary of 2012. Prepaid advertising was debited.

Cash 16,000

Prepaid Advertising 16,000Dec. 31

Debit Credit

Prepaid Advertising

16,000 16,000

Debit Credit

Cash

Adjusting Entries for Prepaid Expenses

16,000

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Chapter3-16

Salaries payable 8,400

Salaries expense 8,400Dec. 31

Debit Credit

Salaries Expense

8,400 8,400

Debit Credit

Salaries Payable

Adjusting Entries for Accrued Expenses

Q3. Employee salaries for the month of December 2011 totaling$8,400 will be paid on January 5, 2012.

8,400

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Chapter3-17

Salaries payable(L) 8,400

Salaries expense(SE) 8,400Dec. 31

Adjusting Entries for Accrued Expenses

Q3. Employee salaries for the month of December 2011 totaling$8,400 will be paid on January 5, 2012.

Total

Assets

Total

Liab.

Stk.

Equity

Net

Income

Retained

Earning

None

Understate

8400

Overstate

8400

Overstate

8400

Overstate

8400

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Chapter3-18

Interest payable 900

Interest expense 900Dec. 31

Debit Credit

Interest Expense

900 900

Debit Credit

Interest Payable

Adjusting Entries for Accrued Expenses

Q4.On September 31, 2011, Johnson Corp. borrowed $60,000 from a localbank. A note was signed with principal and 6% interest to be paid on

September 1, 2012.

(Interest = 60,000 * 6% /12 *3)

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Chapter3-19

Interest payable(L) 900

Interest expense(SE) 900Dec. 31

Adjusting Entries for Accrued Expenses

Q4.On September 31, 2011, Johnson Corp. borrowed $60,000 from a localbank. A note was signed with principal and 6% interest to be paid on

September 1, 2012.

(Interest = 60,000 * 6% /12 *3)

Total

Assets

Total

Liab.

Stk.

Equity

Net

Income

Retained

Earning

None

Understate

900

Overstate

900

Overstate

900

Overstate

900

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Chapter3-20

Allowance for Doubtful Accounts 8,000

Bad Debt Expense 8,000Dec. 31

Debit Credit

Bad Debt Expense

8,000 8,000

Debit Credit

Allowance for Doubtful Accounts

Adjusting Entries for Accrued Expenses

Q5.On December 31, 2011, it was determined that $8,000 of the recordedAccounts receivable would prove to be uncollectible.

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Chapter3-21

Impact Without Adjusted Entries

Total

Assets

Total

Liab.

Stk.

Equity

Net

Income

Retained

Earning

Overstated

8000 None

Overstated

8000

Overstated

8000

Overstated

8000

Q5.On December 31, 2011, it was determined that $8,000 of the recordedAccounts receivable would prove to be uncollectible.

Allowance for Doubtful Account (A) 8,000

Bad Debt Expense (SE) 8,000Dec. 31

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Chapter3-22

Impact Without Adjusted Entries

TotalAssets

TotalLiab.

Stk.Equity

NetIncome

RetainedEarning

Q1 None

Understate

33750

Overstate

33750

Overstate

33750

Overstate

33750

Q2 None None None None None

Q3 None

Understate

8400

Overstate

8400

Overstate

8400

Overstate

8400

Q4 None

Understate

900

Overstate

900

Overstate

900

Overstate

900

Q5Overstated

8000 NoneOverstated

8000Overstated

8000Overstated

8000

Total

Overstate

8000

Understate

43050

Overstate

51050

Overstate

51050

Overstate

51050

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Chapter3-23

Conclusion

Accounting Concepts

Revenue and Expense

Revenue Recognition and Matching Principle

Standard Vs. Expedient Recording Method

Types of Adjusted Entries Prepayments : Prepaid Expense and Unearned

Revenue

Accruals: Accrued Rev. and Accrued Exp.

Impact without adjusted entries

Overstated A, L, SE, NI, RE

Understated A, L, SE, NI, RE

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Chapter3-24

Questions