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ACCT 1021 (20)
Chapter 4

Chapter 4 Slides.pdf

17 Pages
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Department
Accounting
Course Code
ACCT 1021
Professor
Divya Khaitan

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1/30/2014 Adjustments, Financial Statements and the Quality of Earnings Chapter 4 Accounting Cycle 4-2 1 1/30/2014 Unadjusted Trial Balance ● Listing of all the balance sheet and income statement accounts, usually in financial statement order. ● Ending debit or credit balances are listed in two separate columns. ● Total debit account balance should equal total credit account balance. XYZ Company Unadjusted TrialBalance 31-Dec-09 $ $ Cash 11,900 Prepaid Insurance 3,000 Accounts receivable 2,000 Inventory 1,000 Supplies 100 Furniture and fixtures 1,000 Equipment 10,000 Accounts payable 100 Unearned revenue 5,000 Loans payable 10,000 Contributed Capital 15,000 Retained earnings 1,000 Note that total Sales Revenue 11,000 debits = total Cost ofgoods sold 4,000 Salaries expense 5,000 credits Utilities expense 3,000 Gainonsale offurniture 900 Total 42,000 42,000 2 1/30/2014 Adjusting Entries Types of Adjustments Revenues Expenses 1. Unearned or 3. Prepaid or Deferred Deferred Revenues Expenses 2. Accrued 4. Accrued Revenues Expenses Unearned/Deferred Revenues End of accounting period. Cash received. Revenues earned. ● Arise when a company receives cash advance from a customer. The amount should be recorded as a liability because the amount has not been earned yet. ● Over time, as the cash advance is earned, revenue should be recognized. 3 1/30/2014 Unearned Revenue On Dec 1, 2013, the company received a check for $5,000, for two months of service beginning Dec 1, 2013 from a new customer. What is the journal entry recorded on Dec 1, 2013? Dr Cash 5,000 Cr Unearned Revenue 5,000 The adjustment on December 31, 2013, to reduce the liability and record the revenue earned would be: Date Description Debit Credit Dec 31 Unearned Revenue (-L) 2,500 Revenue (+R, +SE) 2,500 $5,000 × 1/2 = $2,500 Accrued Revenues End of accounting period. Revenues earned Cash received ● Arise when revenue has been earned but customer has not paid. 4 1/30/2014 Accrued Revenue – Accounts Receivable On December 31 , a customer informed the company that they will make the payment of $115,0000 n JJannuarry200144 orrserrvcees rendeered in December 2013. Date Description Debit Credit Dec 31 Accounts Receivable (+A) 15,000 Revenue (+R, +SE) 15,000 Accrued Revenue – Accounts Receivable ● A customer pays at the end of every other month for services received worth $100/month. The last payment made by the customer was on Nov. 30, 2013. Prepare the adjusting entry at the end of 2013 (Dec. 31, 2013) and the first related entry in 2010 (Jan. 31, 2014). Date Description Debit Credit Dec 31 Accounts Receivable 100 Revenue 100 Date Description DebitCredit Jan 31 CasAccounts Receivable 200100 Revenue 100 5 1/30/2014 Accrued Revenue – Interest Receivable At December 31 , the company earned, but has not received, interest on its money market account. The company deposited $6,000 in the money market st. account on December 1 The account pays 2 percent interest per year. Date Description Debit Credit Dec 31 Interest Receivable (+A) 10 Interest Income (+R, +SE) 10 Prepaid Expenses End of accounting period. Cash paid. Expense incurred. ● Arise when an expense is paid for in advance. This creates a resource or benefit that is purchased but not consumed immediately, thereby creating an asset. ● Over time, this asset is used and the balance needs to be updated to recognize its consumption. 6 1/30/2014 Prepaid Insurance Expense On January 1, 2013, the company paid $3,000 for a 3-year fire insurance policy. They are paying in advance for a resource they will use over a 3-year period. What is the journal entry on January 1, 2013? Dr Prepaid insurance expense 3,000 Cr Cash 3,000 At December 31 , the company must recognize the portion of the insurance that has been consumed and becomes an expense. Date Description Debit Credit Dec 31 Insurance Expense (+E, -SE) 1,000 Prepaid Insurance (-A) 1,000 $3,000 × 1/3 = $1,000 per year. Depreciation Expense ● Allocation of an asset’s cost over all periods for which it provides a benefit. ● Straight-line depreciation ●One method of calculating depreciation. This assumes that the asset is used equally every year. ●Annual Depreciation = (Cost – Salvage Value) / Useful life 7 1/30/2014 Depreciation Expense On January 1, 2013, the company paid $10,000 for equipment that has a 5-year life and is expected to have a salvage value of $1,000 at the end of its useful life. They are paying in advance for a resource they will use over a 5-year period. st At December 31 , the company must recognize the portion of the equipment that has been consumed and becomes an expense. Date Description Debit Credit Dec 31 Depreciation Expense (+E, -SE1,800 Acc Depreciation (+XA, -A) 1,800 ($10,000 - $1000) × 1/5 = $1,800 per year. Depreciation Expense BALANCE SHEET: Equipment $10,000 Less: Accumulated depreciation 1,800 Net cost of equipment $8,200 ● Accumulated depreciation is a contra-asset account. ● Used to accumulate the amount of historical cost allocated to prior periods. ● Directly related to the plant, property and equipment account but has the opposite balance (a credit balance). 8 1/30/2014 Accrued Expenses End of accounting period. Expense incurred. Expense paid. ● Arise when expenses are incurred but no cash payment has been made yet. Accrued Expenses – Salaries Payable ● The company pays employees $500/week at the end of a 5- day work week starting every Monday. Assume that December 31, 2013 ends on a Tuesday. Prepare the adjusting entry at the end of 2013 (Dec. 31, 2013) and the first related entry in year 2014. Date Description Debit Credit Dec 31 Salaries expense 200 Salaries payable 200 Date Description Debit Credit Jan 1 Salaries expense 300 Salaries payable 200 Cash 500 9 1/30/2014 Accrued Expenses – Interest Payable The company has a loan outstanding of $10,000 that pays interest of 5% per year with both principal and interest payable at the end of year 2014. Assume that the interest rate is 5% per year. What is the adjusting entry required? Date Description Debit Credit Dec 31 Interest Expense 500 Interest Payable 500 XYZ Company Adjusted Trial Balance 31-Dec-09 Unadjusted Adjustments Adjusted $ $ $ $ Cash 11,900 11,900 Prepaid Insurance 3,000 1,000 2,000 Accounts receivable 2,000 15,100 17,100 Interest receivable 10 10 Inventory 1,000 1,000 Supplies 100 100 Furniture and fixtures 1,000 1,000 Equipment 10,000 10,000 Accumulated depreciation 1,800 1,800 Accounts payable 100 100 Salaries payable 400 400 Interest payable 500 500 Unearned revenue 5,000 2,500 2,500 Loans payable 10,000 10,000 Contributed Capital 15,000 15,000 Retained earnings 1,000 1,000 Sales Revenue 11,000 17,600 28,600 Cost of goods sold 4,000 4,000 Salaries expense 5,000 400 5,400 Utilities expense 3,000 3,000 Interest expense 500 500 Depreciation expense 1,800 1,800 Insu
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