ACCT 209 Lecture Notes - Lecture 3: Deferral, General Ledger, Trial Balance

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5 Feb 2017
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ADJUSTING ENTRIES (Ch 3) and RECORDING BUSINESS TRANSACTIONS (Ch 2)
ADJUSTING ENTRIES
Accrual basis accounting:
Goal is to record events when they occur rather than based on when cash is
received or paid
Revenue recognition
Record revenue when earned
Matching principle
Record expenses in the same period as the revenue that the expense helped
generate
Match expense with revenue that the expense helped earn
Record expense in time period to which it relates
Record expense in systematic and rational way (depreciation)
Accrual basis – requires adjusting entries to ensure that all revenues and expenses are correctly
recorded (on
Income Statement) and that all Assets and Liabilities are correctly stated (on Balance Sheet).
Adjusting entries:
Dated on last day of accounting period
Each entry affects one income statement account (revenue or expenses) and
1 balance sheet account (asset or liability)
Never affects cash!!
When all adjusting entries have been recorded, the adjusted trial balance, or trial balance after
adjustments, is
prepared. The account balances from the adjusted trial balance, are used to prepare the financial
statements.
Adjusting entries fall into two major categories, deferrals and accruals.
Deferrals – adjustments needed to update prepaid expenses and unearned revenues. Adjustments are
needed to record the portion of the expense incurred or revenue earned in the current accounting
period.
Accrualsrevenues earned or expenses incurred that have not yet been recorded. Adjustments are
needed to record the revenue or expense so that it will be included in the current financial
statements.
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Example: Adjusting entries
Reliable Cleaning Service was organized in September, 2015; the company actually began operations in
October of that year. The company’s October 1 account balances are shown on the transactions grid at
the end of these notes; transactions for October follow:
October
1 RCS purchased cleaning equipment, paying $1,450 cash
2 Paid office rent for the period Oct 1 – Dec 31, $1,200
2 Purchased cleaning supplies on account, $520
3 Received $1,800 cash in advance from customers for cleaning services that
will be provided during the period Oct 3 – Dec 31
5 Provided cleaning services for cash customers, $2,675
20 Paid wages, $880
29 Billed customers for cleaning services provided during October, $2,260
29 Paid for the supplies purchased previously
30 Received Cash, $1,200, from customers billed previously
Additional information
Supplies on hand as of October 31, $210
Wages earned by company employees from October 21 – 30, $300; these wages will be paid
in November
The note payable account pertains to a one year note dated September 30; principal and 6%
interest will be paid on September 30, 2016
Of the cleaning services for which customers had paid in advance, 1/3 of the work was
completed during October
Equipment is expected to be useful for 6 years, then scrapped
Required:
1. Using the transactions grid at the end of these notes, record the October transactions for RCS.
2. Using the transactions grid and additional information, record the required adjusting entries.
3. Prepare October financial statements for RCS.
4. For each of the adjusting entries, determine the effect on the income statement and the balance
sheet if the
adjustment IS NOT recorded.
If adjustment is NOT recorded:
Adjusting entry
Income
Statement
Balance Sheet
For supplies used during October
For accrued wages
For accrued interest
For unearned revenue now earned
For prepaid rent
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