Post on 18-Jan-2016
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ACCRUAL ACCOUNTINGCONCEPTS
Accounting, Fifth Edition
4
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After studying this chapter, you should be able to:
1. Explain the revenue recognition principle and the expense recognition principle.
2. Differentiate between the cash basis and the accrual basis of accounting.
3. Explain why adjusting entries are needed, and identify the major types of adjusting entries.
4. Prepare adjusting entries for deferrals.
5. Prepare adjusting entries for accruals.
6. Describe the nature and purpose of the adjusted trial balance.
7. Explain the purpose of closing entries.
8. Describe the required steps in the accounting cycle.
9. Understand the causes of differences between net income and cash provided by operating activities.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
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Preview of Chapter 4
AccountingFifth Edition
Kimmel Weygandt Kieso
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Generally a month, a quarter, or a year.
Fiscal year vs. calendar year
Accountants divide the economic life of a business into artificial time periods (Periodicity Assumption).
LO 1 Explain the revenue recognition principle LO 1 Explain the revenue recognition principle and the expense recognition principle.and the expense recognition principle.
Jan. Feb. Mar. Apr. Dec.. . . . .
Timing IssuesTiming IssuesTiming IssuesTiming Issues
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What is the periodicity assumption?What is the periodicity assumption?
a.a. Companies should recognize Companies should recognize revenue in the accounting period in which it is earned.
b. Companies should match expenses with revenues.
c. The economic life of a business can be divided into artificial time periods.
d. The fiscal year should correspond with the calendar year.
Review QuestionReview Question
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 1 Explain the revenue recognition principle LO 1 Explain the revenue recognition principle and the expense recognition principle.and the expense recognition principle.
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Timing IssuesTiming IssuesTiming IssuesTiming Issues
The Revenue Recognition Principle
Companies recognize
revenue in the accounting
period in which the
performance obligation is
satisfied.
LO 1 Explain the revenue recognition principle LO 1 Explain the revenue recognition principle and the expense recognition principle.and the expense recognition principle.
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Timing IssuesTiming IssuesTiming IssuesTiming Issues
Illustration: Assume Conrad Dry Cleaners cleans clothing
on June 30, but customers do not claim and pay for their
clothes until the first week of July. The journal entries for
June and July would be:
LO 1 Explain the revenue recognition principle LO 1 Explain the revenue recognition principle and the expense recognition principle.and the expense recognition principle.
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Timing IssuesTiming IssuesTiming IssuesTiming Issues
“Let the expenses follow the revenues.”
LO 1 Explain the revenue recognition principle LO 1 Explain the revenue recognition principle and the expense recognition principle.and the expense recognition principle.
Illustration 4-1 (Partial)
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Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 1 Explain the revenue recognition principle LO 1 Explain the revenue recognition principle and the expense recognition principle.and the expense recognition principle.
Illustration 4-1 GAAPrelationships in revenueand expense recognition
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Accrual-Basis Accounting
► Transactions recorded in the periods in which the
events occur.
► Revenues are recognized when services performed,
even if cash was not received.
► Expenses are recognized when incurred, even if cash
was not paid.
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accrual versus Cash Basis of Accounting
LO 2 Differentiate between the cash basis LO 2 Differentiate between the cash basis and the accrual basis of accounting.and the accrual basis of accounting.
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Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 2 Differentiate between the cash basis LO 2 Differentiate between the cash basis and the accrual basis of accounting.and the accrual basis of accounting.
Accrual versus Cash Basis of Accounting
Cash-Basis Accounting
► Revenues are recognized only when cash is received.
► Expenses are recognized only when cash is paid.
► Prohibited under generally accepted accounting
principles (GAAP).
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Timing IssuesTiming IssuesTiming IssuesTiming Issues
Illustration: Suppose that Fresh Colors paints a large building in 2013. In 2013, it incurs and pays total expenses (salaries and paint costs) of $50,000. It bills the customer $80,000, but does not receive payment until 2014.
Illustration 4-2 (Partial)
LO 2 Differentiate between the cash basis LO 2 Differentiate between the cash basis and the accrual basis of accounting.and the accrual basis of accounting.
2013 2014
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Which one of these statements about the accrual basis of accounting is false?
a. Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged.
b. Companies recognize revenue in the period in which the performance obligation is satisfied.
c. This basis is in accord with generally accepted accounting principles.
d. Companies record revenue only when they receive cash, and record expense only when they pay out cash.
Review QuestionReview Question
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 2 Differentiate between the cash basis LO 2 Differentiate between the cash basis and the accrual basis of accounting.and the accrual basis of accounting.
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Adjusting entries
ensure that the revenue recognition and expense
recognition principles are followed.
are required every time a company prepares financial
statements.
includes one income statement account and one
balance sheet account.
never include cash.
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
LO 3 LO 3 Explain why adjusting entries are needed, and Explain why adjusting entries are needed, and identify the major types of adjusting entriesidentify the major types of adjusting entries
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Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are incurred.
b. revenues are recognized in the period in which the performance obligation is satisfied.
c. balance sheet and income statement accounts have correct balances at the end of an accounting period.
d. All of the above.
Review QuestionReview Question
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
LO 3 LO 3 Explain why adjusting entries are needed, and Explain why adjusting entries are needed, and identify the major types of adjusting entriesidentify the major types of adjusting entries
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Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
Illustration 4-3Categories of adjusting entries
LO 3 LO 3 Explain why adjusting entries are needed, and Explain why adjusting entries are needed, and identify the major types of adjusting entriesidentify the major types of adjusting entries
Deferrals:
1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed.
2. Unearned revenues: Cash received before service are performed.
Accruals:
1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.
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Trial BalanceTrial Balance –
Each account is
analyzed to
determine
whether it is
complete and up-
to-date.
Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
LO 3 LO 3 Explain why adjusting entries are needed, and Explain why adjusting entries are needed, and identify the major types of adjusting entriesidentify the major types of adjusting entries
Illustration 4-4
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Deferrals are either:
Prepaid expenses
OR
Unearned revenues.
Adjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for Deferrals
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
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Payment of cash, that is recorded as an asset because service or benefit will be received in the future.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
insurance
supplies
advertising
Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE
rent
equipment
buildings
Prepayments often occur in regard to:
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
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Prepaid Expenses
Costs that expire either with the passage of time or
through use.
Adjusting entry results in an increase (a debit) to an
expense account and a decrease (a credit) to an asset
account.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
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Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
Adjusting entries for prepaid expenses
Increases (debits) an expense account and
Decreases (credits) an asset account.
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Illustration 4-5
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Illustration: Sierra Corporation purchased supplies costing $2,500
on October 5. Sierra recorded the purchase by increasing (debiting)
the asset Supplies. This account shows a balance of $2,500 in the
October 31 trial balance. An inventory count at the close of business
on October 31 reveals that $1,000 of supplies are still on hand.
Supplies 1,500
Supplies Expense 1,500Oct. 31
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Illustration 4-6 (Partial)($2,500 – 1,000 = $1,500)
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Illustration: On October 4, Sierra Corporation paid $600 for a one-
year fire insurance policy. Coverage began on October 1. Sierra
recorded the payment by increasing (debiting) Prepaid Insurance.
This account shows a balance of $600 in the October 31 trial balance.
Insurance of $50 ($600 ÷ 12) expires each month.
Prepaid Insurance 50
Insurance Expense 50Oct. 31
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Illustration 4-7 (Partial)
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Depreciation
Buildings, equipment, and motor vehicles (long-lived
assets) are recorded as assets, rather than an expense,
in the year acquired.
Companies report a portion of the cost of a long-lived
asset as an expense (depreciation) during each period of
the asset’s useful life.
Depreciation does not attempt to report the actual
change in the value of the asset.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
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Illustration: For Sierra Corporation, assume that depreciation on
the office equipment is $480 a year, or $40 per month.
Accumulated Depreciation-Equipment 40
Depreciation Expense 40Oct. 31
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Illustration 4-8 (Partial)
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Statement Presentation
Accumulated Depreciation-Equipment is a contra asset account.
Appears just after the account it offsets (Equipment) on the balance sheet.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Illustration 4-9
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Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
SummaryIllustration 4-10
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Receipt of cash recorded as a liability before services are performed.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
rent
airline tickets
Cash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFORE
magazine subscriptions
customer deposits
Unearned revenues often occur in regard to:
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
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Unearned Revenues
Adjusting entry to record the revenue that has been
earned and to show the liability that remains.
Adjusting entry results in a decrease (a debit) to a
liability account and an increase (a credit) to a revenue
account.
LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
4-32 LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Adjusting entries for unearned revenues
Decrease (a debit) to a liability account and
Increase (a credit) to a revenue account.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
Illustration 4-11
4-33 LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
Illustration: Sierra Corporation received $1,200 on October 2 from
R. Knox for guide services for multi-day trips expected to be
completed by December 31. Unearned Service Revenue shows a
balance of $1,200 in the October 31 trial balance. From an evaluation
of the service Sierra performed for Knox during October, the company
determines that it has earned $400 in October.
Service Revenue 400
Unearned Service Revenue 400Oct. 31
Illustration 4-12 (Partial)
4-34 LO 4 Prepare adjusting entries for deferrals.LO 4 Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
Illustration 4-13Summary
Unearned Revenues recorded in liability accounts are now recognized as revenue for services performed
ACCOUNTING FOR UNEARNED REVENUES
ExamplesReason for Adjustment
Accounts BeforeAdjustment
AdjustingEntry
Rent, magazine subscriptions, customer deposits for future service
Liabilities overstated.Revenues understated.
Dr. Liabilities Cr. Revenues
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Made to record:
Revenues earned and
OR
Expenses incurred
in the current accounting period that have not been recognized through daily entries.
Adjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for Accruals
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
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Revenues for services performed but not yet received in cash or recorded.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
rent
interest
services performed
BEFORE
Accrued revenues often occur in regard to:
Cash ReceiptCash ReceiptRevenue RecordedRevenue Recorded
Adjusting entry results in:
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
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Accrued Revenues
An adjusting entry serves two purposes:
(1) Shows the receivable that exists, and
(2) Records the revenues for services performed.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
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Adjusting entries for accrued revenues
Increases (debits) an asset account and
Increases (credits) a revenue account.
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
Illustration 4-14
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Illustration: In October, Sierra Corporation performed guide
services for $200 that were not billed to clients before October
31.
Service Revenue 200
Accounts Receivable 200Oct. 31
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
Illustration 4-15
4-41
Illustration 4-16
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
Illustration 4-16Summary
Services performed but not yet received in cash or recorded
ACCOUNTING FOR ACCRUED REVENUES
ExamplesReason for Adjustment
Accounts BeforeAdjustment
AdjustingEntry
Interest, rent, services performed but not collected
Assets understated.Revenues understated.
Dr. Assets Cr. Revenues
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Expenses incurred but not yet paid in cash or recorded.
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
BEFORE
Accrued expenses often occur in regard to:
Cash PaymentCash PaymentExpense RecordedExpense Recorded
taxes
salaries
Adjusting entry results in:
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
rent
interest
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Accrued Expenses
An adjusting entry serves two purposes:
(1) Records the obligations, and
(2) Recognizes the expenses.
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
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Adjusting entries for accrued expenses
Increases (debits) an expense account and
Increases (credits) a liability account.
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Illustration 4-17
4-45
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
Illustration: Sierra Corporation signed a three-month note payable in the amount of $5,000 on October 1. The note requires Sierra to pay interest at an annual rate of 12%.
Interest Payable 50
Interest Expense 50Oct. 31
Illustration 4-19 (Partial)
Illustration 4-18
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4-47
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
Illustration 4-20
Illustration: Sierra Corporation last paid salaries on October 26;
the next payment of salaries will not occur until November 9. The
employees receive total salaries of $2,000 for a five-day work
week, or $400 per day. Thus, accrued salaries at October 31 are
$1,200 ($400 × 3 days).
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Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
Illustration: Sierra Corporation last paid salaries on October 26;
the next payment of salaries will not occur until November 9. The
employees receive total salaries of $2,000 for a five-day work
week, or $400 per day. Thus, accrued salaries at October 31 are
$1,200 ($400 x 3 days).
Salaries and Wages Payable 1,200
Salaries and Wages Expense 1,200Oct. 31
Illustration 4-21
4-49
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
SummaryIllustration 4-22
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Summary of Basic RelationshipsSummary of Basic RelationshipsSummary of Basic RelationshipsSummary of Basic Relationships
LO 5 Prepare adjusting entries for accruals.LO 5 Prepare adjusting entries for accruals.
Illustration 4-23Summary of adjusting entries
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After all adjusting entries are journalized and posted the
company prepares another trial balance from the ledger
accounts (Adjusted Trial Balance).
The adjusted trial balance’s purpose is to prove the equality of
debit balances and credit balances in the ledger.
The adjusted trial balance is the primary basis for the
preparation of the financial statements.
The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance
LO 6 Describe the nature and purpose of the adjusted trial balance.LO 6 Describe the nature and purpose of the adjusted trial balance.
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The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance
LO 6LO 6
Illustration 4-26Adjusted trial balance
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Which of the following statements is incorrect concerning the adjusted trial balance?
a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the preparation of financial statements.
c. The adjusted trial balance lists the account balances segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
Review QuestionReview Question
The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance
LO 6 Describe the nature and purpose of the adjusted trial balance.LO 6 Describe the nature and purpose of the adjusted trial balance.
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Financial statements are prepared directly from the Adjusted Trial Balance.
Financial statements are prepared directly from the Adjusted Trial Balance.
Balance Sheet
Income Statement
Retained Earnings
Statement
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 6 Describe the nature and purpose of the adjusted trial balance.LO 6 Describe the nature and purpose of the adjusted trial balance.
4-55
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
Illustration 4-27
4-56
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
Illustration 4-28
4-57
Quality of Earnings – company provides full and transparent
information.
Earnings Management - the planned timing of revenues,
expenses, gains, and losses to smooth out bumps in net income. Companies may manage earnings by:
Quality of EarningsQuality of EarningsQuality of EarningsQuality of Earnings
one-time items to prop up earnings numbers.
inflate revenue numbers in the short-run.
improper adjusting entries.
As a result of the Sarbanes-Oxley Act, many companies are trying to improve the quality of their financial reporting.
LO 6 Describe the nature and purpose of the adjusted trial balance.LO 6 Describe the nature and purpose of the adjusted trial balance.
4-58
At the end of the accounting period, companies transfer the
temporary account balances to the permanent stockholders’
equity account—Retained Earnings.
Closing the BooksClosing the BooksClosing the BooksClosing the Books
LO 7 Explain the purpose of closing entries.LO 7 Explain the purpose of closing entries.
Illustration 4-29
4-59
In addition to updating Retained Earnings to its correct ending
balance, closing entries produce a zero balance in each
temporary account.
Closing the BooksClosing the BooksClosing the BooksClosing the Books
LO 7 Explain the purpose of closing entries.LO 7 Explain the purpose of closing entries.
Illustration 4-30
4-60
Closing the BooksClosing the BooksClosing the BooksClosing the Books
Illustration 4-31
2014
4-61
Illustration 4-32Posting of closing entries
LO 7 Explain the purpose LO 7 Explain the purpose of closing entries.of closing entries.
Closing the BooksClosing the BooksClosing the BooksClosing the Books
4-62
The purpose of the post-closing trial balance is to prove
the equality of the permanent account balances that the
company carries forward into the next accounting period.
Preparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial Balance
All temporary accounts will have zero balances.
LO 7 Explain the purpose of closing entries.LO 7 Explain the purpose of closing entries.
4-63
Summary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting Cycle
1. Analyze business transactions1. Analyze business transactions
2. Journalize the transactions
2. Journalize the transactions
6. Prepare an adjusted trial balance
6. Prepare an adjusted trial balance
7. Prepare financial statements
7. Prepare financial statements
8. Journalize and post closing entries
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
9. Prepare a post-closing trial balance
4. Prepare a trial balance4. Prepare a trial balance
3. Post to ledger accounts3. Post to ledger accounts
5. Journalize and post adjusting entries:Deferrals/Accruals
5. Journalize and post adjusting entries:Deferrals/Accruals
LO 8 Describe the required steps in the accounting cycle.LO 8 Describe the required steps in the accounting cycle.
Illustration 4-33Required steps in theaccounting cycle
4-64
Sierra Corporation’s income statement shows net income of $2,860. Net income and net cash provided by operating activities often differ.
Keep an Eye on CashKeep an Eye on CashKeep an Eye on CashKeep an Eye on Cash
LO 9 LO 9 Understand the causes of differences between Understand the causes of differences between net net income and cash provided by operating income and cash provided by operating activities.activities.
Net income on a cash basis is
referred to as “Net cash
provided by operating
activities.”
The statement of cash flows,
reports net cash provided by
operating activities.
Illustration 4-27
4-65
The difference for Sierra is $2,840 ($5,700 - $2,860). The following summary shows the causes of this difference.
Keep an Eye on CashKeep an Eye on CashKeep an Eye on CashKeep an Eye on Cash
LO 9 LO 9
4-66
Trial BalanceTrial Balance –
Each account is
analyzed to
determine whether
it is complete and
up-to-date.
Illustration 4-4
Adjusting Entries in an Automated World— Using a Worksheet
Appendix 4AAppendix 4AAppendix 4AAppendix 4A
LO 10 LO 10
4-67
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Supplies 2,500 Prepaid Insurance 600 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Service Revenue 1,200 Common Stock 10,000 Dividends 500 Service Revenue 10,000
Salaries & Wages Exp. 4,000 Rent Expense 900
Totals 28,700 28,700
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
LO 10 Describe the purpose and the basic form of a worksheet.LO 10 Describe the purpose and the basic form of a worksheet.
1. Prepare a Trial Balance on the Worksheet Illustration 4A-1
Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet
4-68
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Supplies 2,500 Prepaid Insurance 600 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Service Revenue 1,200 Common Stock 10,000 Dividends 500 Service Revenue 10,000
Salaries & Wages Exp. 4,000 Rent Expense 900
Totals 28,700 28,700
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
1. Prepare a Trial Balance on the Worksheet
Trial balance amounts come directly from ledger accounts.
Include all accounts with balances.
Illustration 4A-1
Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet
LO 10 Describe the purpose and the basic form of a worksheet.LO 10 Describe the purpose and the basic form of a worksheet.
4-69
Illustration 4-24General journal showing adjusting entries
Adjusting Journal Entries
Using a WorksheetUsing a WorksheetUsing a WorksheetUsing a Worksheet
2012
LO 10 LO 10
4-70
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Supplies 2,500 1,500 Prepaid Insurance 600 50 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Service Revenue 1,200 400 Common Stock 10,000 Dividends 500 Service Revenue 10,000 400
200 Salaries & Wages Exp. 4,000 1,200 Rent Expense 900
Totals 28,700 28,700
Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation 40 Depreciation Expense 40 Accounts Receivable 200 Interest Expense 50 Interest Payable 50 Salaries and Wages Payable 1,200
Totals 3,440 3,440
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
2. Enter the Adjustments in the Adjustments Columns
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Enter adjustment amounts, total adjustments columns,and check for equality.
Add additional accounts as needed.
Adjustments Key:
(a) Supplies Used.(b) Insurance Expired.(c) Depreciation Expensed.(d) Service Revenue Earned.(e) Service Revenue Accrued.(f) Interest Accrued.(g) Salaries Accrued.
Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet
LO 10 Describe the purpose and the LO 10 Describe the purpose and the basic form of a worksheet.basic form of a worksheet.
4-71
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Service Revenue 1,200 400 800 Common Stock 10,000 10,000 Dividends 500 500 Service Revenue 10,000 400 10,600
200 Salaries & Wages Exp. 4,000 1,200 5,200 Rent Expense 900 900
Totals 28,700 28,700
Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 Accounts Receivable 200 200 Interest Expense 50 50 Interest Payable 50 50 Salaries and Wages Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
3. Complete the Adjusted Trial Balance Columns
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Total the adjusted trial balance columns and check for equality.
Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet
LO 10 Describe the purpose and the LO 10 Describe the purpose and the basic form of a worksheet.basic form of a worksheet.
4-72
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Service Revenue 1,200 400 800 Common Stock 10,000 10,000 Dividends 500 500 Service Revenue 10,000 400 10,600 10,600
200 Salaries & Wages Exp. 4,000 1,200 5,200 5,200 Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 Interest Expense 50 50 50 Interest Payable 50 50 Salaries and Wages Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
LO 10LO 10
4. Extend Amounts to Financial Statement Columns
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Extend all revenue and expense account balances to the income statement columns.
Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet
4-73
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 15,200 Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Service Revenue 1,200 400 800 800 Common Stock 10,000 10,000 10,000 Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600
200 Salaries & Wages Exp. 4,000 1,200 5,200 5,200 Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries and Wages Payable 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590 Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450
Balance Sheet Adjusted Income
Trial Balance Adjustments Trial Balance Statement
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Compute Net Income or Net Loss.
5. Total Columns, Compute Net Income (Loss)
Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet Steps in Preparing a Worksheet
LO 10LO 10
4-74 LO 11LO 11
4-75 LO 11LO 11
4-76
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