business accounting chap4
TRANSCRIPT
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THE ACCOUNTING
CYCLE: ACCRUALS
AND DEFERRALS
Chapter
4
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4-2At the end of theperiod, we need to
make adjusting entries
to get the accounts upto date for the financial
statements.
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Adjusting
entries are
needed whenever
revenue or expenses
affect more than one
accountingperiod.
Every
adjusting
entry involves a
change in either a
revenue or expense
and an assetor liability.
Adjusting Entries
Adjusting Entries
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Convertingassets to
expenses
Convertingassets to
expenses
Accruingunpaid
expenses
Accruingunpaid
expenses
Convertingliabilities to
revenue
Convertingliabilities to
revenue
Accruinguncollected
revenues
Accruinguncollected
revenues
Types of Adjusting Entries
Types of Adjusting Entries
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Prior Periods Current Period uture Periods
!ransaction
Paid cash inadvance ofincurringexpense
"creates anasset#.
!ransaction
Paid cash inadvance ofincurringexpense
"creates an
asset#.
End of Current Period
Adjusting Entry
$ecogni%es portion of asset consumed
as expense, and $educes balance of asset account.
Adjusting Entry
$ecogni%es portion of asset consumed
as expense, and $educes balance of
asset account.
Converting Assets to Expenses
Converting Assets to Expenses
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Examples &nclude'(epreciation
)upplies
Expiring &nsurance Policies
Converting Assets to Expenses
Converting Assets to Expenses
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*an. + (ec. +
-,/00 &nsurance PolicyCoverage for + 1onths
-00 1onthly &nsurance Expense
2n *anuary +, 3ebb Co. purchased a one4year insurance policy for -,/00.
2n *anuary +, 3ebb Co. purchased a one4year insurance policy for -,/00.
Converting Assets to ExpensesConverting Assets to Expenses
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5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
*an. + 8nexpired &nsurance ,/00
Cash ,/00
Purchase a one4year insurance policy.
&nitially, costs that benefit more than oneaccounting period are recorded as assets.
&nitially, costs that benefit more than oneaccounting period are recorded as assets.
Converting Assets to ExpensesConverting Assets to Expenses
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!he costs are expensed as they are used togenerate revenue.
!he costs are expensed as they are used togenerate revenue.
5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
1onthly Adjusting Entry for &nsurance
*an. + &nsurance Expense 00
8nexpired &nsurance 00
&nsurance expense for *anuary.
Converting Assets to ExpensesConverting Assets to Expenses
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&nsurance Expense+9+ 00
8nexpired &nsurance+9+ ,/00 +9+ 00
:al. ,00
&ncome )tatement
Cost of assets
used this period togenerate revenue.
&ncome )tatement
Cost of assets
used this period togenerate revenue.
:alance )heet
Cost of assets
that benefitfuture periods.
:alance )heet
Cost of assets
that benefitfuture periods.
Converting Assets to ExpensesConverting Assets to Expenses
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(epreciation is the systematic allocationof the cost of a depreciable asset to
expense.
(epreciation is the systematic allocationof the cost of a depreciable asset to
expense.
(epreciable assets are physical objectsthat retain their si%e and shape but lose
their economic usefulness over time.
(epreciable assets are physical objectsthat retain their si%e and shape but lose
their economic usefulness over time.
The Concept of DepreciationThe Concept of Depreciation
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!he portion of an asset;s utility that is used upmust be expensed in the period used.
!he portion of an asset;s utility that is used upmust be expensed in the period used.
Cash"credit#
Cash"credit#
ixedAsset"debit#
ixedAsset"debit#
2n date
when initialpayment ismade . . .
!he asset;susefulness is
partiallyconsumedduring the
period.At end ofperiod . . .
(epreciationExpense"debit#
(epreciationExpense"debit#
Accumulated(epreciation
"credit#
Accumulated(epreciation
"credit#
The Concept of DepreciationThe Concept of Depreciation
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2n 1ay , 00
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**;s 7awn Care )ervice would make thefollowing adjusting entry.
**;s 7awn Care )ervice would make thefollowing adjusting entry.
5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
1ay + (epreciation Expense' E>uipment
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**;s -+
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Accumulated depreciation would
appear on the balance sheet asfollows'
Accumulated depreciation would
appear on the balance sheet asfollows'
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Prior Periods Current Period uture Periods
!ransactionCollect cash
in advance ofearningrevenue
"creates a
liability#.
!ransactionCollect cash
in advance ofearningrevenue
"creates aliability#.
End of Current Period
Adjusting Entry $ecogni%es portion
earned as revenue,and
$educes balance of
liability account.
Adjusting Entry $ecogni%es portion
earned as revenue,and
$educes balance of
liability account.
Converting Liailities to !evenueConverting Liailities to !evenue
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Examples &nclude'Airline !icket )ales
)ports !eams; )ales of
)eason !ickets
Converting Liailities to !evenueConverting Liailities to !evenue
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*an. + (ec. +
-@,000 $ental ContractCoverage for + 1onths
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5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
*an. + Cash @,000
8nearned $ental $evenue @,000
Collected -@,000 in advance for rent.
&nitially, revenues that benefit more than oneaccounting period are recorded as liabilities.
&nitially, revenues that benefit more than oneaccounting period are recorded as liabilities.
Converting Liailities to !evenueConverting Liailities to !evenue
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2ver time, the revenue is recogni%ed as it isearned.
2ver time, the revenue is recogni%ed as it isearned.
5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
1onthly Adjusting Entry for $ent $evenue
*an. + 8nearned $ental $evenue
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$ental $evenue+9+
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Prior Periods Current Period uture Periods
!ransaction
Pay cash insettlement of
liability.
!ransaction
Pay cash insettlement ofliability.
End of Current Period
Adjusting Entry
$ecogni%es expense incurred, and $ecords liability for future payment.
Adjusting Entry
$ecogni%es expense incurred, and $ecords liability for future payment.
Accruing "npaid ExpensesAccruing "npaid Expenses
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Examples &nclude'&nterest
3ages and )alaries
Property !axes
ey, when dowe get paidB
Accruing "npaid ExpensesAccruing "npaid Expenses
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1onday,1ay
riday,*une
-,000 3agesExpense
2n 1ay +, 3ebb Co. owes wages of-,000. Pay day is riday, *une .
2n 1ay +, 3ebb Co. owes wages of-,000. Pay day is riday, *une .
3ednesday,1ay +
Accruing "npaid ExpensesAccruing "npaid Expenses
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5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
1ay + 3ages Expense ,000
3ages Payable ,000
!o accrue wages owed to employees.
&nitially, an expense and a liability arerecorded.
&nitially, an expense and a liability arerecorded.
Accruing "npaid ExpensesAccruing "npaid Expenses
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3ages Expense
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1onday,1ay
riday,*une
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!he liability is extinguished when the debt ispaid.
!he liability is extinguished when the debt ispaid.
5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
*une 3ages Expense "for *une# ,000
3ages Payable "accrued in 1ay# ,000
Cash
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Prior Periods Current Period uture Periods
!ransaction
Collect cashin settlementof receivable.
!ransaction
Collect cashin settlementof receivable.
End of Current Period
Adjusting Entry
$ecogni%es revenue earned but not yet recorded, and$ecords receivable.
Adjusting Entry
$ecogni%es revenue earned but not yet recorded, and$ecords receivable.
Accruing "ncollected !evenueAccruing "ncollected !evenue
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Examples &nclude'&nterest Earned
3ork Completed :ut 6ot
Det :illed to Customer
Accruing "ncollected !evenueAccruing "ncollected !evenue
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)aturday,*an. +<
!uesday,eb. +<
-+0 &nterest$evenue
2n *an. +, the bank owes 3ebb Co.interest of -+0. &nterest is paid on the +
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5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
*an. + &nterest $eceivable +0
&nterest $evenue +0
!o recogni%e interest revenue.
&nitially, the revenue is recogni%ed and areceivable is created.
&nitially, the revenue is recogni%ed and areceivable is created.
Accruing "ncollected !evenueAccruing "ncollected !evenue
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&nterest $evenue+9+ +0
&nterest $eceivable+9+ +0
&ncome )tatement
$evenue earnedthis period.
&ncome )tatement
$evenue earnedthis period.
:alance )heet
$eceivable to
be collected in afuture period.
:alance )heet
$eceivable to
be collected in afuture period.
Accruing "ncollected !evenueAccruing "ncollected !evenue
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)aturday,*an. +<
!uesday,eb. +<
-0 1onthly &nterest
-+0 &nterest
$evenue
7et;s look at the entry for ebruary +
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!he receivable is collected in a future period.!he receivable is collected in a future period.
5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
eb. +< Cash 0
&nterest $evenue "for ebruary# +
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As a corporation earns taxable income, itincurs income taxes expense, and also aliability to governmental tax authorities.
As a corporation earns taxable income, itincurs income taxes expense, and also aliability to governmental tax authorities.
5E6E$A7 *28$6A7
(ate Account !itles and Explanation (ebit Credit
(ec. + &ncome !axes Expense F0&ncome !axes Payable F0
Estimated income taxes applicable to
taxable income earned in (ecember.
Accruing Income Taxes Expense# The $inalAdjusting Entry
Accruing Income Taxes Expense# The $inalAdjusting Entry
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*ournali%etransactions.
Post entries tothe ledgeraccounts.
Prepare trialbalance.
1ake end4of4year
adjustments.
Prepare adjusted
trial balance.
7et;s look at **;s 7awn Care)ervices; adjusted trial balance.
7et;s look at **;s 7awn Care)ervices; adjusted trial balance.
Effects of the Adjusting Enties
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**?s 7awn Care )ervice
Adjusted !rial :alance
1ay +, 00<
Cash ,
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End of Chapter 4End of Chapter 4