Chapter 3-1
Chapter 3-2
CHAPTER CHAPTER 33
ADJUSTING THE ADJUSTING THE ACCOUNTSACCOUNTS
Accounting Principles, Eighth Edition
Chapter 3-3
1. Explain the time period assumption.
2. Explain the accrual basis of accounting.
3. Explain the reasons for adjusting entries.
4. Identify the major types of adjusting entries.
5. Prepare adjusting entries for deferrals.
6. Prepare adjusting entries for accruals.
7. Describe the nature and purpose of an adjusted trial balance.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 3-4
Adjusting the AccountsAdjusting the AccountsAdjusting the AccountsAdjusting the Accounts
Timing IssuesTiming IssuesTiming IssuesTiming IssuesThe Basics of The Basics of
Adjusting Adjusting
EntriesEntries
The Basics of The Basics of
Adjusting Adjusting
EntriesEntries
The Adjusted The Adjusted
Trial Balance and Trial Balance and
Financial Financial
StatementsStatements
The Adjusted The Adjusted
Trial Balance and Trial Balance and
Financial Financial
StatementsStatements
Time period Time period assumptionassumption
Fiscal and Fiscal and calendar yearscalendar years
Accrual- vs. cash-Accrual- vs. cash-basis accountingbasis accounting
Recognizing Recognizing revenues and revenues and expensesexpenses
Types of Types of adjusting entriesadjusting entries
Adjusting entries Adjusting entries for deferralsfor deferrals
Adjusting entries Adjusting entries for accrualsfor accruals
Summary of Summary of journalizing and journalizing and postingposting
Preparing the Preparing the adjusted trial adjusted trial balancebalance
Preparing Preparing financial financial statementsstatements
Chapter 3-5
Generally a month, a quarter, or a year.Fiscal year vs. calendar yearAlso known as the “Periodicity Assumption”
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accountants divide the economic life of a business into artificial time periods (Time Period Assumption).
LO 1 Explain the time period assumption.LO 1 Explain the time period assumption.
Jan. Feb. Mar. Apr. Dec.. . . . .
Chapter 3-6
The time period assumption states that:The time period assumption states that:
a.a. revenue should be recognized in the accounting period in which it is earned.
b. expenses should be matched 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.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 1 Explain the time period assumption.LO 1 Explain the time period assumption.
Chapter 3-7
Accrual-Basis Accounting
Transactions recorded in the periods in which the events occur
Revenues are recognized when earned, rather than when cash is received.
Expenses are recognized when incurred, rather than when paid.
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accrual- vs. Cash-Basis Accounting
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Chapter 3-8
Cash-Basis Accounting
Revenues are recognized when cash is received.
Expenses are recognized when cash is paid.
Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP).
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accrual- vs. Cash-Basis Accounting
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Chapter 3-9
Revenue Recognition Principle
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Recognizing Revenues and Expenses
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Companies recognize revenue in the accounting period in which it is earned.
In a service enterprise, revenue is considered to be earned at the time the service is performed.
Chapter 3-10
Matching Principle
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Recognizing Revenues and Expenses
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Match expenses with revenues in the period when the company makes efforts to generate those revenues.
“Let the expenses follow the revenues.”
Chapter 3-11
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
GAAP relationships in revenue and expense recognition
GAAP relationships in revenue and expense recognition
Illustration 3-1Illustration 3-1
Chapter 3-12
One of the following statements about the accrual basis of accounting is false. That statement is:
a. Events that change a company’s financial statements are recorded in the periods in which the events occur.
b. Revenue is recognized in the period in which it is earned.
c. The accrual basis of accounting is in accord with generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and expenses are recorded only when cash is paid.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Chapter 3-13
Adjusting entries make it possible to report correct amounts on the balance sheet and on the income statement.
A company must make adjusting entries every time it prepares financial statements.
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
LO 3 Explain the reasons for adjusting entries.LO 3 Explain the reasons for adjusting entries.
Chapter 3-14
RevenuesRevenues - recorded in the period in - recorded in the period in which they are earnedwhich they are earned.
Expenses Expenses - recognized in the period in - recognized in the period in which they are incurredwhich they are incurred.
Adjusting entriesAdjusting entries - needed to ensure - needed to ensure that the that the revenue recognitionrevenue recognition and and matching principlesmatching principles are followed. are followed.
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
LO 3 Explain the reasons for adjusting entries.LO 3 Explain the reasons for adjusting entries.
Chapter 3-15
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which they are earned.
c. balance sheet and income statement accounts have correct balances at the end of an accounting period.
d. all of the above.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 3 Explain the reasons for adjusting entries.LO 3 Explain the reasons for adjusting entries.
Chapter 3-16
Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.
Deferrals
3. Accrued Revenues. Revenues earned but not yet received in cash or recorded.
4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.
2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned.
Accruals
LO 4 Identify the major types of adjusting entries.LO 4 Identify the major types of adjusting entries.
Chapter 3-17
Trial BalanceTrial Balance – Each account is analyzed to determine whether it is complete and up-to-date.
Phoenix Consulting - J an. 31st (before adjusting entries)Acct. No. Account Debit Credit
100 Cash 50,000$ 105 Accounts receivable 35,000 110 Prepaid insurance 12,000 120 Equipment 24,000 130 I nvestments 300,000 200 Accounts payable 20,000$ 210 Unearned revenue 24,000 220 Note payable 200,000 300 Austin, capital 40,000 400 Sales 137,000
421,000$ 421,000$
Trial BalanceTrial BalanceTrial BalanceTrial Balance
LO 4 Identify the major types of adjusting entries.LO 4 Identify the major types of adjusting entries.
Chapter 3-18
Deferrals are either:
Prepaid expenses
OR
Unearned revenues.
Adjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for Deferrals
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-19
Payment of cash, that is recorded as an asset because Payment of cash, that is recorded as an asset because service or benefit will be received in the future.service or benefit will be received in the future.
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
insuranceinsurance
suppliessupplies
advertisingadvertising
Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
rentrent
maintenance on maintenance on equipmentequipment
fixed assets fixed assets (depreciation)(depreciation)
Prepayments often occur in regard to:Prepayments often occur in regard to:
Chapter 3-20
Prepaid Expenses
Costs that expire either with the passage of time or through use.
Adjusting entries (1) to record the expenses that apply to the current accounting period, and (2) to show the unexpired costs in the asset accounts.
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-21
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Adjusting entries for prepaid expenses
Increases (debits) an expense account and
Decreases (credits) an asset account.
Illustration 3-4Illustration 3-4
Chapter 3-22
Example Example (Insurance)(Insurance):: On Jan. 1On Jan. 1stst, Phoenix , Phoenix Consulting paid $12,000 for 12 months of insurance Consulting paid $12,000 for 12 months of insurance coverage. Show the journal entry to record the coverage. Show the journal entry to record the payment on Jan. 1payment on Jan. 1stst. .
Cash 12,000
Prepaid Insurance 12,000
Jan. 1
Debit Credit
Prepaid Insurance
12,00012,000 12,00012,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-23
Example Example (Insurance)(Insurance):: On Jan. 1On Jan. 1stst, Phoenix , Phoenix Consulting paid $12,000 for 12 months of insurance Consulting paid $12,000 for 12 months of insurance coverage. Show the coverage. Show the adjusting journal entryadjusting journal entry required at required at Jan. 31Jan. 31stst. .
Prepaid Insurance 1,000
Insurance Expense 1,000Jan. 31
Debit Credit
Prepaid Insurance
12,00012,000 1,0001,000
Debit Credit
Insurance Expense
1,0001,000
11,00011,000
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-24
Depreciation
Buildings, equipment, and 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 (Matching Principle).
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-25
Example Example (Depreciation)(Depreciation):: On Jan. 1On Jan. 1stst, Phoenix , Phoenix Consulting paid $24,000 for equipment that has an Consulting paid $24,000 for equipment that has an estimated useful life of 20 years. Show the journal estimated useful life of 20 years. Show the journal entry to record the purchase of the equipment on Jan. entry to record the purchase of the equipment on Jan. 11stst. .
Cash 24,000
Equipment 24,000
Jan. 1
Debit Credit
Equipment
24,00024,000 24,00024,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-26
Example Example (Depreciation)(Depreciation):: On Jan. 1On Jan. 1stst, Phoenix , Phoenix Consulting paid $24,000 for equipment that has an Consulting paid $24,000 for equipment that has an estimated useful life of 20 years. Show the estimated useful life of 20 years. Show the adjusting adjusting journal entryjournal entry required at Jan. 31 required at Jan. 31stst. . ($24,000 / 20 ($24,000 / 20 yrs. / 12 months = $100)yrs. / 12 months = $100)
Accumulated Depreciation 100
Depreciation Expense 100Jan. 31
Debit Credit
Depreciation Expense
100100 100100
Debit Credit
Accumulated Depreciation
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-27
Depreciation (Statement Presentation)
Accumulated Depreciation is a contra asset account.
Appears just after the account it offsets (Equipment) on the balance sheet.
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Balance Sheet J an. 31
Assets
Equipment 24,000 Accumulated Depreciation (100) Net Equipment 23,900
Chapter 3-28
Receipt of cash that is recorded as a liability Receipt of cash that is recorded as a liability because the revenue has not been earned.because the revenue has not been earned.
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
rentrent
airline ticketsairline tickets
school tuitionschool tuition
Cash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFORE
magazine subscriptionsmagazine subscriptions
customer depositscustomer deposits
Unearned revenues often occur in regard to:Unearned revenues often occur in regard to:
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-29
Unearned Revenues
Company makes an adjusting entry to record the revenue that has been earned and to show the liability that remains.
The adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
Chapter 3-30 LO 5 LO 5 Prepare adjusting entries for deferrals.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 Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
Illustration 3-10Illustration 3-10
Chapter 3-31
Example:Example: On Jan. 1On Jan. 1stst, Phoenix Consulting received , Phoenix Consulting received $24,000 from Arcadia High School for 3 months rent in $24,000 from Arcadia High School for 3 months rent in advance. Show the journal entry to record the receipt advance. Show the journal entry to record the receipt on Jan. 1on Jan. 1stst. .
Unearned Rent Revenue
24,000
Cash 24,000
Jan. 1
Debit Credit
Cash
24,00024,000 24,00024,000
Debit Credit
Unearned Rent Revenue
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-32
Example:Example: On Jan. 1On Jan. 1stst, Phoenix Consulting received , Phoenix Consulting received $24,000 from Arcadia High School for 3 months rent in $24,000 from Arcadia High School for 3 months rent in advance. Show the advance. Show the adjusting journal entryadjusting journal entry required on required on Jan. 31Jan. 31stst. .
Rent Revenue 8,000
Unearned Rent Revenue
8,000Jan. 31
Debit Credit
Rent Revenue
8,0008,000 24,00024,000
Debit Credit
Unearned Rent Revenue
8,0008,000
16,00016,000
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-33
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 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-34
Revenues earned but not yet received in cash or Revenues earned but not yet received in cash or recorded.recorded.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”
rentrent
interestinterest
services performedservices performed
BEFORE
Accrued revenues often occur in regard to:Accrued revenues often occur in regard to:
Cash ReceiptCash ReceiptRevenue RecordedRevenue Recorded
Adjusting entry results in:Adjusting entry results in:
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-35
Accrued Revenues
An adjusting entry serves two purposes:
(1) It shows the receivable that exists, and
(2) It records the revenues earned.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-36
Adjusting entries for accrued revenues
Increases (debits) an asset account and
Increases (credits) a revenue account.
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Illustration 3-13Illustration 3-13
Chapter 3-37
Example:Example: On Jan. 1On Jan. 1stst, Phoenix Consulting invested , Phoenix Consulting invested $300,000 in securities that return 5% interest per year. $300,000 in securities that return 5% interest per year. Show the journal entry to record the investment on Jan. Show the journal entry to record the investment on Jan. 11stst. .
Cash 300,000
Investments 300,000
Jan. 1
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Debit Credit
Investments
300,000300,000 300,000300,000
Debit Credit
Cash
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”
Chapter 3-38
Example:Example: On Jan. 1On Jan. 1stst, Phoenix Consulting invested , Phoenix Consulting invested $300,000 in securities that return 5% interest per year. $300,000 in securities that return 5% interest per year. Show the Show the adjusting journal entryadjusting journal entry required on Jan. 31 required on Jan. 31stst. . ($300,000 x 5% / 12 months = $1,250)($300,000 x 5% / 12 months = $1,250)
Interest Revenue 1,250
Interest Receivable 1,250Jan. 31
Debit Credit
Interest Receivable
1,2501,250 1,2501,250
Debit Credit
Interest Revenue
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-39
Expenses incurred but not yet paid in cash or Expenses incurred but not yet paid in cash or recorded.recorded.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
rentrent
interestinterest
BEFORE
Accrued expenses often occur in regard to:Accrued expenses often occur in regard to:
Cash PaymentCash PaymentExpense RecordedExpense Recorded
taxestaxes
salariessalaries
Adjusting entry results in:Adjusting entry results in:
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-40
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) It recognizes the expenses.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-41
Adjusting entries for accrued expenses
Increases (debits) an expense account and
Increases (credits) a liability account.
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Illustration 3-16Illustration 3-16
Chapter 3-42
Notes Payable 200,000
Cash 200,000
Jan. 2
Debit Credit
Cash
200,000200,000 200,000200,000
Debit Credit
Notes Payable
Example:Example: On Jan. 2On Jan. 2ndnd, Phoenix Consulting borrowed , Phoenix Consulting borrowed $200,000 at a rate of 9% per year. Interest is due on first $200,000 at a rate of 9% per year. Interest is due on first of each month. Show the journal entry to record the of each month. Show the journal entry to record the borrowing on Jan. 2borrowing on Jan. 2ndnd..
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-43
Example:Example: On Jan. 2On Jan. 2ndnd, Phoenix Consulting borrowed , Phoenix Consulting borrowed $200,000 at a rate of 9% per year. Interest is due on first $200,000 at a rate of 9% per year. Interest is due on first of each month. Show the of each month. Show the adjusting journal entryadjusting journal entry required required on Jan. 31on Jan. 31stst. . ($200,000 x 9% / 12 months = $1,500)($200,000 x 9% / 12 months = $1,500)
Interest Payable 1,500
Interest Expense 1,500Jan. 31
Debit Credit
Interest Expense
1,5001,500 1,5001,500
Debit Credit
Interest Payable
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-44
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) it recognizes the expenses.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-45
After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance).
Its purpose is to prove the equality of debit balances and credit balances in the ledger.
The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Chapter 3-46
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.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Chapter 3-47
Financial Statements are prepared directly from the Adjusted Trial Balance. Financial Statements are prepared directly from the Adjusted Trial Balance.
Balance Sheet
Income Statemen
t
Statement of Cash
Flows
Owner’s Equity
Statement
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Chapter 3-48
I ncome Statement
For the Month Ended J an. 31, 2008
Revenues:
S ales 137,000$
I nterest revenue 1,250
Rent revenue 8,000
T otal revenue 146,250
Expenses:
I nterest expense 1,500
Depreciation expense 100
I nsurance expense 1,000
T otal expenses 2,600
Net income 143,650$
Income Statement
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Adjusted Trial Balance Debit Credit
Cash 50,000$ Accounts receivable 35,000 I nterest receivable 1,250 Prepaid insurance 11,000 Equipment 24,000 Accumulated depreciation 100$ I nvestments 300,000 Accounts payable 20,000 I nterest payable 1,500 Unearned revenue 16,000 Note payable 200,000 Austin, capital 40,000 Sales 137,000 I nterest revenue 1,250 Rent revenue 8,000 I nterest expense 1,500 Depreciation expense 100 I nsurance expense 1,000
423,850$ 423,850$
Chapter 3-49
Statement of Owner' s Equity
For the Month Ended J an. 31, 2008
Austin, Capital, J an. 1 40,000$
+ N et income 143,650
- Drawings 0
Austin, Capital, J an. 31 183,650$
Statement of Owner’s Equity
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Adjusted Trial Balance Debit Credit
Cash 50,000$ Accounts receivable 35,000 I nterest receivable 1,250 Prepaid insurance 11,000 Equipment 24,000 Accumulated depreciation 100$ I nvestments 300,000 Accounts payable 20,000 I nterest payable 1,500 Unearned revenue 16,000 Note payable 200,000 Austin, capital 40,000 Sales 137,000 I nterest revenue 1,250 Rent revenue 8,000 I nterest expense 1,500 Depreciation expense 100 I nsurance expense 1,000
423,850$ 423,850$
Chapter 3-50
Adjusted Trial Balance Debit Credit
Cash 50,000$ Accounts receivable 35,000 I nterest receivable 1,250 Prepaid insurance 11,000 Equipment 24,000 Accumulated depreciation 100$ I nvestments 300,000 Accounts payable 20,000 I nterest payable 1,500 Unearned revenue 16,000 Note payable 200,000 Austin, capital 40,000 Sales 137,000 I nterest revenue 1,250 Rent revenue 8,000 I nterest expense 1,500 Depreciation expense 100 I nsurance expense 1,000
423,850$ 423,850$
Balance Sheet J an. 31, 2008
Assets
Cash 50,000$
Accounts receivable 35,000
I nterest receivable 1,250
Prepaid insurance 11,000
Equipment 24,000
Accum. Depreciation (100)
I nvestments 300,000
T otal assets 421,150$
Liabilities & Owner' s Equity
Accounts payable 20,000$
I nter st payable 1,500
Unearned revenue 16,000
N ote payable 200,000
Austin, capital 183,650
T otal liab. & equity 421,150$
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Chapter 3-51
Some companies use an alternative treatment for prepaid expenses and unearned revenues.
When a company prepays an expense, it debits that amount to an expense account.
When a company receives payment for future services, it credits the amount to a revenue account.LO 8 Prepare adjusting entries for the alternative treatment of LO 8 Prepare adjusting entries for the alternative treatment of
deferrals.deferrals.
Alternative Treatment of Prepaid Expenses and Unearned Revenues
Chapter 3-52
Example Example (Insurance)(Insurance):: On Dec. 1On Dec. 1stst, Phoenix , Phoenix Consulting paid $12,000 for 12 months of insurance Consulting paid $12,000 for 12 months of insurance coverage. Show the journal entry to record the coverage. Show the journal entry to record the payment on Dec. 1payment on Dec. 1stst. .
Cash 12,000
Insurance Expense 12,000
Dec. 1
Debit Credit
Insurance Expense
12,00012,000 12,00012,000
Debit Credit
Cash
Alternative Treatment for “Prepaid Expenses”
LO 8 Prepare adjusting entries for the alternative treatment of deferrals.LO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Chapter 3-53
Example Example (Insurance)(Insurance):: On Dec. 1On Dec. 1stst, Phoenix , Phoenix Consulting paid $12,000 for 12 months of insurance Consulting paid $12,000 for 12 months of insurance coverage. Show the coverage. Show the adjusting journal entryadjusting journal entry required at required at Dec. 31Dec. 31stst. .
Insurance Expense 11,000
Prepaid Insurance 11,000
Dec. 31
Debit Credit
Insurance Expense
12,000 11,000
Debit Credit
Prepaid Insurance
Alternative Treatment for “Prepaid Expenses”
11,00011,000
1,000
LO 8 Prepare adjusting entries for the alternative treatment of LO 8 Prepare adjusting entries for the alternative treatment of deferrals.deferrals.
Chapter 3-54
Example:Example: On Dec. 1On Dec. 1stst, Phoenix Consulting received , Phoenix Consulting received $24,000 from Arcadia High School for 3 months rent in $24,000 from Arcadia High School for 3 months rent in advance. Show the journal entry to record the receipt advance. Show the journal entry to record the receipt on Dec. 1on Dec. 1stst. .
Rent Revenue 24,000
Cash 24,000
Dec. 1
Debit Credit
Cash
24,00024,000 24,00024,000
Debit Credit
Rent Revenue
Alternative Alternative Treatment for “Unearned Treatment for “Unearned Revenues”Revenues”Alternative Alternative Treatment for “Unearned Treatment for “Unearned Revenues”Revenues”
LO 8 Prepare adjusting entries for the alternative treatment of deferrals.LO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Chapter 3-55
Example:Example: On Dec. 1On Dec. 1stst, Phoenix Consulting received , Phoenix Consulting received $24,000 from Arcadia High School for 3 months rent in $24,000 from Arcadia High School for 3 months rent in advance. Show the advance. Show the adjusting journal entryadjusting journal entry required on required on Dec. 31Dec. 31stst. .
Unearned Rent Revenue
16,000
Rent Revenue 16,000
Dec. 31
Debit Credit
Unearned Rent Revenue
16,00016,000 24,00024,000
Debit Credit
Rent Revenue
16,00016,000
8,0008,000
Alternative Treatment for “Unearned Alternative Treatment for “Unearned Revenues”Revenues”Alternative Treatment for “Unearned Alternative Treatment for “Unearned Revenues”Revenues”
LO 8 Prepare adjusting entries for the alternative treatment of deferrals.LO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Chapter 3-56
Summary of Basic Relationships for Deferrals
Illustration 3A-7Illustration 3A-7
LO 8 Prepare adjusting entries for the alternative treatment of deferrals.LO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Chapter 3-57
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