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3
Accounting Cycle (II)
- Accruals
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To complete accounting cycle, twomore additional ournal entries are
needed:
Closing Entries
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Adjusting Entries
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Prior Periods Current Period Future Periods
BusinessRevenues or expenses not
recognized in business
Transactions
included to reflect a firms
performance
Entries Entries
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Costs are matched with revenuein two ways:
with specific revenue
over the useful life of the
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.
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enera u es
Every
Cash is not involved entry involves a
revenue or expense
or liability.
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1. Converting Assets toExpenses
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Convertin Assets to Ex ensesEnd of Current Period
Prior Periods Current Period Future Periods
TransactionPaid cash in
Adjusting Entry Recognizes portion
advance ofincurring
of asset consumedas expense, and
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(creates anasset).
asset account.
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n a y, cos s a ene more an oneaccounting period are recorded as assets.
Date Account Titles and Explanation Debit Credit
Jan. 1 Prepaid Insurance Expense 2,400
Cash 2,400
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- .
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Cost of assetsCost of assetsused this period to
generate revenue.
that benefit
future periods.
1/31 2001/1 2,400 1/31 200
Bal. 2 200
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De reciable assets are h sical ob ects
that retain their size and shape but losetheir economic usefulness over time.
Depreciation is the systematic allocation ofthe cost of a depreciable asset to expense.
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The ortion of an assets utilit that is used
up must be expensed in the period used.
Fixed
Asset
The assets
usefulness is
Depreciation
Expense
On date
consumedduring the
period. At end of
e
payment ismade . . .
period . . .Accumulated
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(credit)
(credit)
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, ,
mower with a useful life of 50 months for, .
Using the straight-line method, calculatet e mont y eprec at on expense.Depreciation
Cost of the asset
expense perperiod) = Estimated useful life
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,
50=$50$50
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wou ma e e o ow ng a us ng en ry.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Accumulated Depreciation: Equipment 50
To record one month's depreciation.
by Vincent Chen 19Contra-asset
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s , ruc s eprec a e over months as follows:
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Accumulated Depreciation: Truck 250
To record one month's depreciation.
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appear on the balance sheet as
o ows:qu pmen ,
Less: Accum. depr. 50 2,450
,
Less: Accum. depr. 250 14,750
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Exercise 1
corpora on ren s a ware ouse or s comp e e nven ory ocustomized engines. Rent of $60,000, covering a one-year periodbeginning February 1, 2008 was paid on February 1, 2008.
Please prepare the necessary adjusting entry for 2008
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2. Converting Liabilities toRevenue
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Examples Include:
Rental
Airline Ticket Sales
Sports Teams Salesof Season Tickets
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$6,000 Rental ContractCovera e for 12 Months
$500 Monthly Rental Revenue
. .On January 1, NUS received $6,000 in
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advance for a one-year rental contract.
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n a y, revenues a ene more an oneaccounting period are recorded as liabilities.
Date Account Ti tles and Ex planation Debit Credi t
Jan. 1 Cash 6,000Unearned Rental Revenue 6,000
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, .
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ver me, e revenue s recogn ze as searned.
Date Account Ti tles and Explanation Debit Credi t
Monthl y Adjusting Entry for Rent RevenueJan. 31 Unearned Rental Revenue 500
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Rental revenue for January.
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Exercise 2
corpora on prov es mon y ma n enance o s cus omerson certain custom engines. Most customers pay for this servicemonthly, but one customer paid $6,000 on September 1, 2008 formonthl services throu h Au ust 31 2009.
Please prepare the necessary adjusting entry for 2008
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Expenses
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End of Current Period
Prior Periods Current Period Future Periods
TransactionPay cash in
Adjusting Entry Recognizes expense
settlement ofliability.
incurred, and Records liabil ity for
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.
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Examples Include:
Wages and Salaries
ncome axes
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$3,000 WagesExpense
Monday,May 29
Friday,June 2
Wednesday,May 31
On May 31,NUS owes wages of $3,000.
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Payday is Friday, June 2.
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n a y, an expense an a a y arerecorded.
Date Account Ti tles and Ex planation Debit Credi t
May 31 Wages Ex pense 3,000Wages Payable 3,000
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.
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Cost incurred thisLiability to beperiod to generate
revenue.paid in a future
period.
5/31 3,000
5/31 3,000
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s a corpora on earns axa e ncome,
incurs income taxes expense, and also aa y o governmen a ax au or es.
Date Account Titles and Explanation Debit Credit
Dec. 31 Income Taxes Expense 780Income Taxes Payable 780
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s ma e ncome axes app ca e o
taxable income earned in December.
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4. Accruing UncollectedRevenue
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$170 InterestRevenue
a ur ay,Jan. 15
ues ay,Feb. 15
on ay,Jan. 31
On Jan. 31, the bank owes NUS interest of$170. Interest is paid on the 15th day of
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each month.
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n a y, e revenue s recogn ze an a
receivable is created.
Date Account Ti tles and Ex planation Debit Credi t
Jan. 31 Interest Receivable 170Interest Revenue 170
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.
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Income Statement
Receivable toevenue earnethis period.
be collected in afuture period.
1/31 1701/31 170
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$170 Interest $150 InterestRevenue Revenue
Saturday, Tuesday,Monday,
Jan. 15 Feb. 15
Jan. 31
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.
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Eff t f th Adj ti E t i
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Effects of the Adjusting Entries
Journalizetransactions.
Post entries to
the led er
Prepare trial
balance.
Make end-of-year
adjustments.accounts.
Lets look at NUSs adjusted trial
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Prepare adjusted
trial balance.
.
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NUS
May 31, 2008
Cash 3,925$Accounts receivable 75 are taken fromthe led er
oo s equ pmen ,
Accum. depreciation: tools & eq. 50$
Truck 15,000
Accum. depreciation: truck 250
accounts on
May 31 afterNotes payable 13,000Accounts payable 150
Capital stock 8,000
Dividends 200
preparing thetwo
Sales revenue 750Gasoline expense 50
Depreciation exp.: tools & eq. 50adjusting
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.
Total 22,200$ 22,200$ (pp19,20)
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Summary
The reasoning to make adjusting entries
Four types of adjusting entries
How do those adjusting entries affect there aration for trial balance
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