Chapter 3! The Adjusting Entry Unit 1 Test (cover chapter 1 to 4) will occur on Friday September 26!
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Transcript of Chapter 3! The Adjusting Entry Unit 1 Test (cover chapter 1 to 4) will occur on Friday September 26!
Chapter 3! Chapter 3! The Adjusting EntryThe Adjusting Entry
Unit 1 Test (cover chapter 1 to 4) will occur on
Friday September 26!
Accrual Accounting means recording revenues and expenses when they happen, regardless of whether cash is received or paid.
Cash basis Accounting means recording transactions only when cash is received or paid.
In reality, nobody uses cash basis accounting any more.
Accrual AccouningAccrual Accouning
The Time Period Concept ensures that the Comparability objective in accounting is met.
This means that reporting period must be consistent such as one year, one month or one quarter
Some revenues and expenses occur continuously, and accrural accounting require accounting clerks to record them as they happen.
Accounting clerks make entries only when there is source document.
Financial Statement ComparabilityFinancial Statement Comparability
There are many different types of adjusting entries accountants make at the end of the fiscal period:Prepaid Expense Prepaid InsuranceAccrued RevenueSupplies adjustment (Accrued
Expense)Unearned RevenueLate-Arriving Purchase Invoice
(Accrued Expenses)
Adjusting EntryAdjusting Entry
Insurance premium is paid for assets (building, equipment or car) to protect against fire, theft etc….
We use : “Prepaid Insurance” (= asset) account is used to record
Journal Entry:PurchaseJuly 1Prepaid Insurance 2400
Bank 2400Paid for annual insurance premium
Prepaid InsurancePrepaid Insurance
Insurance premium is paid for assets (building, equipment or car) to protect against fire, theft etc….
Adjustment on Dec 31, 2013Insurance Expense 1200
Prepaid Insurance1200Adjusting Insurance premium
Prepaid InsurancePrepaid Insurance
Prepaid InsurancePrepaid Insurance
An expense is paid in advance to benefit more than one accounting period.
Any current asset costs will be used up in the near future.
Example: Prepaid Insurance, Licenses, Rent and Advertising
Oct 1 you paid $5000 for radio ads which will go on for 5 months.
Oct 1 Prepaid Advertising 5000 Bank 5000
Prepaid ExpensesPrepaid Expenses
Dec 31, you will make an adjusting entry:
Advertising Expense 3000Prepaid Advertising (asset)3000
Adjusting Entry for prepaid advertising
Prepaid ExpensesPrepaid Expenses
Some Revenues are earned but not yet received in cash or recorded at the statement date.
Accrued revenues may accumulate (or accrue) with the passage of time, as happens with interest revenue and rent revenue.
An adjusting entry is required for two purposes: to record the accurate revenue and to record increase in AR or NR.
Accrued RevenueAccrued Revenue
In October, Pioneer Advertising Agency earned $200 (they performed their service) in fees for adverting services that were not billed to clients until November.
Because these services have not been billed, they have not been recorded.
Accrued RevenueAccrued Revenue
The following adjusting entry is made on October 31:
Oct 31 AR 200Service Revenue 200
To accrue revenue earned but not billed
On November 10, Pioneer receives $200 cash for the services they performed in October.
Accrued RevenueAccrued Revenue
On November 10, Pioneer receives $200 cash for the services they performed in October: JE
Nov 10Cash 200
AR 200Received $200 from Oct revenue
Invoice#156
Accrued RevenueAccrued Revenue
BMO’s perspective: Park Accounting borrowed $50,000 at 5% interest on September 1, 2014 which is due August 31, 2015. What kind of JE is made on September 1, 2014?
Sept 1Loan Receivable $50,000
Bank $50,000
Accrued RevenueAccrued Revenue
Adjusting Entry that BMO has to make on December 31, 2014?
(5% * 50000 * 4 months / 12 months = 1667)
Dec 31, 2014Interest Receivable $1667
Interest Revenue $1667
Accrued RevenueAccrued Revenue
JE on August 31 2015?Aug 31Cash $52500
Loan Receivable $50000Interest Receiable $1667Interest Revenue $833
Accrued RevenueAccrued Revenue
Expenses incurred not yet paid or recorded but at the statement date are called “accrued expenses.”
Interest, Rent, Property Tax and salaries can be accrued expenses.
For example, Park Accounting would make a JE on September 1 2014
Sep 1Cash $50,000
Loan Payable $50,000
Accrued ExpenseAccrued Expense
For example, Park Accounting would make a JE on September 1 2014
Sep 1Cash $50,000
Loan Payable $50,000 On December 31, Park would make the
following Adjusting Entry:Dec 31
Interest Expense$1667Interest Payable $1667
Accrued ExpenseAccrued Expense
Park Accounting would make a JE on August 31, 2014, as they pay back the loan with interest .
Aug 31Interest Expense $833Loan Payable $50000Interest Payable $1667
Cash $52500
Accrued ExpenseAccrued Expense
P137 E3-2, E3-3 (except d, e and i), E3-6
P142 P3-4
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