Slides On Accounting
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Chapter
4
McGraw-Hill/Irwin
THE ACCOUNTING CYCLE: Accruals and Deferrals
© The McGraw-Hill Companies, Inc., 20
At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Adjusting Adjusting Entries Entries Adjusting entries are needed whenever revenue or expenses affect more than one accounting period.
McGraw-Hill/Irwin
Every adjusting entry involves a change in either a revenue or expense and an asset or liability.
© The McGraw-Hill Companies, Inc., 20
Types Types of of Adjusting Adjusting Entries Entries ❶ ❶ Converting Converting assets assets to to expenses expenses
❷ ❷ Converting Converting liabilities liabilities to to revenue revenue
❸ ❸ Accruing Accruing unpaid unpaid expenses expenses
❹ ❹ Accruing Accruing uncollected uncollected revenues revenues
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses End of Current Period Prior Periods
Transaction Transaction Paid Paid future future expenses expensesin in advance advance (creates (createsan an asset). asset).
McGraw-Hill/Irwin
Current Period
Future Periods
Adjusting AdjustingEntry Entry ❶ ❶ Recognize Recognize portion portion of ofasset assetconsumed consumed
as as expense, expense, and and ❷ ❷ Reduce Reducebalance balanceof of asset account. © The McGraw-Hill Companies, Inc., 20 asset account.
Converting Converting Assets Assets to to Expenses Expenses
Examples Include: Depreciation Supplies Expiring Insurance Policies
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses $2,400 Insurance Policy Coverage for 12 Months $200 Monthly Insurance Expense
Jan. 1
Dec. 31
On On January January 1, 1, Webb Webb Co. Co. purchased purchased aa oneoneyear year insurance insurance policy policy for for $2,400. $2,400.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses Initially, Initially, costs costs that that benefit benefit more more than than one one accounting accounting period period are are recorded recorded as as assets. assets. GENERAL JOURNAL Date Jan.
P R Debit
Account Titles and Explanation 1 Unexpired Insurance
Credit
2,400
Cash
2,400
Purchase a one-year insurance policy.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses The The costs costs are are expensed expensed as as they they are are used used to to generate generate revenue. revenue. GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
Credit
Monthly Adjusting Entry for Insurance Jan. 31 Insurance Expense Unexpired Insurance
200 200
Insurance expense for January.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses Balance Balance Sheet Sheet
Income Income Statement Statement
Cost Cost of of assets assets that that benefit benefit future future periods. periods.
Cost Cost of of assets assets used used this this period period to to generate generate revenue. revenue.
Unexpired Insurance 1/1 2,400 1/31 200 Bal. 2,200
McGraw-Hill/Irwin
Insurance Expense 1/31 200
© The McGraw-Hill Companies, Inc., 20
The The Concept Concept of of Depreciation Depreciation Depreciable Depreciable assets assets are are physical physical objects objects that that retain retain their their size size and and shape shape but but lose lose their their economic economic usefulness usefulness over over time. time.
Depreciation Depreciation is is the the systematic systematic allocation allocation of of the the cost cost of of aa depreciable depreciable asset asset to to expense. expense.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
The The Concept Concept of of Depreciation Depreciation The The portion portion of of an an asset’s asset’s utility utility that that is is used used up up must must be be expensed expensed in in the the period period used. used. Fixed Fixed Asset Asset (debit) (debit) On date when initial payment is made . . .
McGraw-Hill/Irwin
Cash Cash (credit) (credit)
The asset’s usefulness is partially consumed during the period.
Accumulated Accumulated Depreciation Depreciation (credit) (credit)
At end of period . . . Depreciation Depreciation Expense Expense (debit) (debit)
© The McGraw-Hill Companies, Inc., 20
Depreciation Depreciation Is Is Only Only an an Estimate Estimate On May 2, 2003, JJ’s Lawn Care Service purchased a lawn mower with a useful life of 50 months for $2,500 cash. Using the straight-line method, calculate the monthly depreciation expense. Depreciation Cost of the asset expense (per = Estimated useful life period)
McGraw-Hill/Irwin
$50 = $2,500 50
© The McGraw-Hill Companies, Inc., 20
Depreciation Depreciation Is Is Only Only an an Estimate Estimate JJ’s JJ’s Lawn Lawn Care Care Service Service would would make make the the following following adjusting adjusting entry. entry. GENERAL JOURNAL Date
Account Titles and Explanation
May 31 Depreciation Expense: Tools & Eq.
P RDebit
Credit
50
Accumulated Depreciation: Tools & Eq.
50
To record one month's depreciation.
Contra-asset Contra-asset
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Depreciation Depreciation Is Is Only Only an an Estimate Estimate JJ’s JJ’s $15,000 $15,000 truck truck is is depreciated depreciated over over 60 60 months months as as follows: follows: GENERAL JOURNAL Date
Account Titles and Explanation
May 31 Depreciation Expense: Truck Accumulated Depreciation: Truck
P R Debit
Credit
250 250
To record one month's depreciation.
$15,000 ÷÷ 60 months == $250 per month $15,000 60 months $250 per month © The McGraw-Hill Companies, Inc., 20 McGraw-Hill/Irwin
Accumulated Accumulated depreciation depreciation would would appear appear on on the the balance balance sheet sheet as as follows: follows:
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue End of Current Period Prior Periods
Transaction Transaction Collected Collected from from customers customers in in advance advance (creates (createsaa liability). liability).
McGraw-Hill/Irwin
Current Period
Future Periods
Adjusting AdjustingEntry Entry Recognize Recognizeportion portion earned earned as as revenue, revenue, and and Reduce Reducebalance balanceof of liability liability account. account.
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue
Examples Include: Airline Ticket Sales Sports Teams’ Sales of Season Tickets
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue $6,000 Rental Contract Coverage for 12 Months $500 Monthly Rental Revenue Jan. 1
Dec. 31
On On January January 1, 1, Webb Webb Co. Co. received received $6,000 $6,000 in in advance advance for for aa one-year one-year rental rental contract. contract.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue Initially, Initially, revenues revenues that that benefit benefit more more than than one one accounting accounting period period are are recorded recorded as as liabilities. liabilities. GENERAL JOURNAL Date Jan.
Account Titles and Explanation 1 Cash Unearned Rental Revenue
P R Debit
Credit
6,000 6,000
Collected $6,000 in advance for rent.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue Over Over time, time, the the revenue revenue is is recognized recognized as as itit is is earned. earned. GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
Credit
Monthly Adjusting Entry for Rent Revenue Jan. 31 Unearned Rental Revenue Rental Revenue
500 500
Rental revenue for January.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue Balance Balance Sheet Sheet
Income Income Statement Statement
Liability Liability for for future future periods. periods.
Revenue Revenue earned earned this this period. period.
Unearned Rental Revenue
1/31
500
McGraw-Hill/Irwin
1/1 6,000 Bal. 5,500
Rental Revenue 1/31 500
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses End of Current Period Prior Periods
McGraw-Hill/Irwin
Current Period
Adjusting AdjustingEntry Entry Recognize Recognizeexpense expense incurred, incurred, and and Record Record liability liabilityfor for future futurepayment. payment.
Future Periods
Transaction Transaction Liability Liabilitywill will be bepaid. paid.
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses
Examples Include:
Hey, when do we get paid?
Interest Wages and Salaries Property Taxes
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses $3,000 Wages Expense
Monday, May 29
Wednesday, May 31
Friday, June 2
On On May May 31, 31, Webb Webb Co. Co. owes owes wages wages of of $3,000. $3,000. Pay Pay day day is is Friday, Friday, June June 2. 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses Initially, Initially, an an expense expense and and aa liability liability are are recorded. recorded. GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
May 31 Wages Expense
Credit
3,000
Wages Payable
3,000
To accrue wages owed to employees.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses Balance Balance Sheet Sheet
Income Income Statement Statement
Liability Liability to to be be paid paid in in aa future future period. period.
Cost Cost incurred incurred this this period period to to generate generate revenue. revenue.
Wages Payable 5/31 3,000
McGraw-Hill/Irwin
Wages Expense 5/31 3,000
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses $5,000 Weekly Wages $3,000 Wages Expense
Monday, May 29
$2,000 Wages Expense
Wednesday, May 31
Friday, June 2
Let’s Let’s look look at at the the entry entry for for June June 2. 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses The The liability liability is is extinguished extinguished when when the the debt debt is is paid. paid. GENERAL JOURNAL Date
Account Titles and Explanation
June 2 Wages Expense (for June) Wages Payable (accrued in May) Cash
P R Debit
Credit
2,000 3,000 5,000
Weekly payroll for May 29-June 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue End of Current Period Prior Periods
McGraw-Hill/Irwin
Current Period
Adjusting AdjustingEntry Entry Recognize Recognizerevenue revenue earned earned but butnot notyet yet recorded, recorded, and and Record Record receivable. receivable.
Future Periods
Transaction Transaction Receivable Receivable will will be be collected. collected.
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue
Examples Include: Interest Earned Work Completed But Not Yet Billed to Customer
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue $170 Interest Revenue
Saturday, Jan. 15
Monday, Jan. 31
Tuesday, Feb. 15
On On Jan. Jan. 31, 31, the the bank bank owes owes Webb Webb Co. Co. thth interest of $170. Interest is paid on the 15 interest of $170. Interest is paid on the 15 day day of of each each month. month.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue Initially, Initially, the the revenue revenue is is recognized recognized and and aa receivable receivable is is created. created. GENERAL JOURNAL Date
Account Titles and Explanation
Jan. 31 Interest Receivable Interest Revenue
P R Debit
Credit
170 170
To recognize interest revenue.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue Balance Balance Sheet Sheet Receivable Receivable to to be be collected collected in in aa future future period. period. Interest Receivable 1/31 170
McGraw-Hill/Irwin
Income Income Statement Statement Revenue Revenue earned earned this this period. period.
Interest Revenue 1/31 170
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue $320 Monthly Interest $170 Interest Revenue
Saturday, Jan. 15
$150 Interest Revenue
Monday, Jan. 31
Tuesday, Feb. 15
Let’s Let’s look look at at the the entry entry for for February February 15. 15.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue The The receivable receivable is is collected collected in in aa future future period. period.
GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
Feb. 15 Cash
Credit
320
Interest Revenue (for February)
150
Interest Receivable (accrued Jan. 31)
170
To record interest received.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Income Income Taxes Taxes Expense: Expense: The The Final Final Adjusting Adjusting Entry Entry As As aa corporation corporation earns earns taxable taxable income, income, itit incurs incurs income income taxes taxes expense, expense, and and also also aa liability liability to to governmental governmental tax tax authorities. authorities. GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
Dec. 31 Income Taxes Expense
Credit
780
Income Taxes Payable
780
Estimated income taxes applicable to taxable income earned in December.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Adjusting Adjusting Entries Entries and and Accounting Accounting Principles Principles Costs Costs are are matched matched with with revenue revenue in in two two ways: ways: Direct Direct association association of of costs costs with with specific specific revenue revenue transactions. transactions. Systematic Systematic allocation allocation of of costs costs over over the the “useful “useful life” life” of of the the expenditure. expenditure.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
The The Concept Concept of of Materiality Materiality An An item item is is “material” “material” ifif knowledge knowledge of of the the item item might might reasonably reasonably influence influence the the decisions decisions of of users users of of financial financial statements. statements. Many companies immediately charge the cost of immaterial items to expense.
McGraw-Hill/Irwin
Lightbulbs Supplies
© The McGraw-Hill Companies, Inc., 20
Effects of the Adjusting Entries
Journalize transactions.
Post entries to the ledger accounts.
Prepare trial balance.
Recall Recall from from the the accounting accounting cycle cycle discussed discussed in in Chapter Chapter 3, 3, that that after after the the adjusting adjusting entries entries are are made, made, an an adjusted adjusted trial trial balance balance is is prepared. prepared.
McGraw-Hill/Irwin
Make end-ofyear adjustments.
Prepare adjusted trial balance.
© The McGraw-Hill Companies, Inc., 20
McGraw-Hill/Irwin
End End of of Chapter Chapter 44
© The McGraw-Hill Companies, Inc., 20
4
McGraw-Hill/Irwin
THE ACCOUNTING CYCLE: Accruals and Deferrals
© The McGraw-Hill Companies, Inc., 20
At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Adjusting Adjusting Entries Entries Adjusting entries are needed whenever revenue or expenses affect more than one accounting period.
McGraw-Hill/Irwin
Every adjusting entry involves a change in either a revenue or expense and an asset or liability.
© The McGraw-Hill Companies, Inc., 20
Types Types of of Adjusting Adjusting Entries Entries ❶ ❶ Converting Converting assets assets to to expenses expenses
❷ ❷ Converting Converting liabilities liabilities to to revenue revenue
❸ ❸ Accruing Accruing unpaid unpaid expenses expenses
❹ ❹ Accruing Accruing uncollected uncollected revenues revenues
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses End of Current Period Prior Periods
Transaction Transaction Paid Paid future future expenses expensesin in advance advance (creates (createsan an asset). asset).
McGraw-Hill/Irwin
Current Period
Future Periods
Adjusting AdjustingEntry Entry ❶ ❶ Recognize Recognize portion portion of ofasset assetconsumed consumed
as as expense, expense, and and ❷ ❷ Reduce Reducebalance balanceof of asset account. © The McGraw-Hill Companies, Inc., 20 asset account.
Converting Converting Assets Assets to to Expenses Expenses
Examples Include: Depreciation Supplies Expiring Insurance Policies
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses $2,400 Insurance Policy Coverage for 12 Months $200 Monthly Insurance Expense
Jan. 1
Dec. 31
On On January January 1, 1, Webb Webb Co. Co. purchased purchased aa oneoneyear year insurance insurance policy policy for for $2,400. $2,400.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses Initially, Initially, costs costs that that benefit benefit more more than than one one accounting accounting period period are are recorded recorded as as assets. assets. GENERAL JOURNAL Date Jan.
P R Debit
Account Titles and Explanation 1 Unexpired Insurance
Credit
2,400
Cash
2,400
Purchase a one-year insurance policy.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses The The costs costs are are expensed expensed as as they they are are used used to to generate generate revenue. revenue. GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
Credit
Monthly Adjusting Entry for Insurance Jan. 31 Insurance Expense Unexpired Insurance
200 200
Insurance expense for January.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Assets Assets to to Expenses Expenses Balance Balance Sheet Sheet
Income Income Statement Statement
Cost Cost of of assets assets that that benefit benefit future future periods. periods.
Cost Cost of of assets assets used used this this period period to to generate generate revenue. revenue.
Unexpired Insurance 1/1 2,400 1/31 200 Bal. 2,200
McGraw-Hill/Irwin
Insurance Expense 1/31 200
© The McGraw-Hill Companies, Inc., 20
The The Concept Concept of of Depreciation Depreciation Depreciable Depreciable assets assets are are physical physical objects objects that that retain retain their their size size and and shape shape but but lose lose their their economic economic usefulness usefulness over over time. time.
Depreciation Depreciation is is the the systematic systematic allocation allocation of of the the cost cost of of aa depreciable depreciable asset asset to to expense. expense.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
The The Concept Concept of of Depreciation Depreciation The The portion portion of of an an asset’s asset’s utility utility that that is is used used up up must must be be expensed expensed in in the the period period used. used. Fixed Fixed Asset Asset (debit) (debit) On date when initial payment is made . . .
McGraw-Hill/Irwin
Cash Cash (credit) (credit)
The asset’s usefulness is partially consumed during the period.
Accumulated Accumulated Depreciation Depreciation (credit) (credit)
At end of period . . . Depreciation Depreciation Expense Expense (debit) (debit)
© The McGraw-Hill Companies, Inc., 20
Depreciation Depreciation Is Is Only Only an an Estimate Estimate On May 2, 2003, JJ’s Lawn Care Service purchased a lawn mower with a useful life of 50 months for $2,500 cash. Using the straight-line method, calculate the monthly depreciation expense. Depreciation Cost of the asset expense (per = Estimated useful life period)
McGraw-Hill/Irwin
$50 = $2,500 50
© The McGraw-Hill Companies, Inc., 20
Depreciation Depreciation Is Is Only Only an an Estimate Estimate JJ’s JJ’s Lawn Lawn Care Care Service Service would would make make the the following following adjusting adjusting entry. entry. GENERAL JOURNAL Date
Account Titles and Explanation
May 31 Depreciation Expense: Tools & Eq.
P RDebit
Credit
50
Accumulated Depreciation: Tools & Eq.
50
To record one month's depreciation.
Contra-asset Contra-asset
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Depreciation Depreciation Is Is Only Only an an Estimate Estimate JJ’s JJ’s $15,000 $15,000 truck truck is is depreciated depreciated over over 60 60 months months as as follows: follows: GENERAL JOURNAL Date
Account Titles and Explanation
May 31 Depreciation Expense: Truck Accumulated Depreciation: Truck
P R Debit
Credit
250 250
To record one month's depreciation.
$15,000 ÷÷ 60 months == $250 per month $15,000 60 months $250 per month © The McGraw-Hill Companies, Inc., 20 McGraw-Hill/Irwin
Accumulated Accumulated depreciation depreciation would would appear appear on on the the balance balance sheet sheet as as follows: follows:
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue End of Current Period Prior Periods
Transaction Transaction Collected Collected from from customers customers in in advance advance (creates (createsaa liability). liability).
McGraw-Hill/Irwin
Current Period
Future Periods
Adjusting AdjustingEntry Entry Recognize Recognizeportion portion earned earned as as revenue, revenue, and and Reduce Reducebalance balanceof of liability liability account. account.
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue
Examples Include: Airline Ticket Sales Sports Teams’ Sales of Season Tickets
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue $6,000 Rental Contract Coverage for 12 Months $500 Monthly Rental Revenue Jan. 1
Dec. 31
On On January January 1, 1, Webb Webb Co. Co. received received $6,000 $6,000 in in advance advance for for aa one-year one-year rental rental contract. contract.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue Initially, Initially, revenues revenues that that benefit benefit more more than than one one accounting accounting period period are are recorded recorded as as liabilities. liabilities. GENERAL JOURNAL Date Jan.
Account Titles and Explanation 1 Cash Unearned Rental Revenue
P R Debit
Credit
6,000 6,000
Collected $6,000 in advance for rent.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue Over Over time, time, the the revenue revenue is is recognized recognized as as itit is is earned. earned. GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
Credit
Monthly Adjusting Entry for Rent Revenue Jan. 31 Unearned Rental Revenue Rental Revenue
500 500
Rental revenue for January.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Converting Converting Liabilities Liabilities to to Revenue Revenue Balance Balance Sheet Sheet
Income Income Statement Statement
Liability Liability for for future future periods. periods.
Revenue Revenue earned earned this this period. period.
Unearned Rental Revenue
1/31
500
McGraw-Hill/Irwin
1/1 6,000 Bal. 5,500
Rental Revenue 1/31 500
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses End of Current Period Prior Periods
McGraw-Hill/Irwin
Current Period
Adjusting AdjustingEntry Entry Recognize Recognizeexpense expense incurred, incurred, and and Record Record liability liabilityfor for future futurepayment. payment.
Future Periods
Transaction Transaction Liability Liabilitywill will be bepaid. paid.
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses
Examples Include:
Hey, when do we get paid?
Interest Wages and Salaries Property Taxes
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses $3,000 Wages Expense
Monday, May 29
Wednesday, May 31
Friday, June 2
On On May May 31, 31, Webb Webb Co. Co. owes owes wages wages of of $3,000. $3,000. Pay Pay day day is is Friday, Friday, June June 2. 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses Initially, Initially, an an expense expense and and aa liability liability are are recorded. recorded. GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
May 31 Wages Expense
Credit
3,000
Wages Payable
3,000
To accrue wages owed to employees.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses Balance Balance Sheet Sheet
Income Income Statement Statement
Liability Liability to to be be paid paid in in aa future future period. period.
Cost Cost incurred incurred this this period period to to generate generate revenue. revenue.
Wages Payable 5/31 3,000
McGraw-Hill/Irwin
Wages Expense 5/31 3,000
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses $5,000 Weekly Wages $3,000 Wages Expense
Monday, May 29
$2,000 Wages Expense
Wednesday, May 31
Friday, June 2
Let’s Let’s look look at at the the entry entry for for June June 2. 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Unpaid Unpaid Expenses Expenses The The liability liability is is extinguished extinguished when when the the debt debt is is paid. paid. GENERAL JOURNAL Date
Account Titles and Explanation
June 2 Wages Expense (for June) Wages Payable (accrued in May) Cash
P R Debit
Credit
2,000 3,000 5,000
Weekly payroll for May 29-June 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue End of Current Period Prior Periods
McGraw-Hill/Irwin
Current Period
Adjusting AdjustingEntry Entry Recognize Recognizerevenue revenue earned earned but butnot notyet yet recorded, recorded, and and Record Record receivable. receivable.
Future Periods
Transaction Transaction Receivable Receivable will will be be collected. collected.
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue
Examples Include: Interest Earned Work Completed But Not Yet Billed to Customer
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue $170 Interest Revenue
Saturday, Jan. 15
Monday, Jan. 31
Tuesday, Feb. 15
On On Jan. Jan. 31, 31, the the bank bank owes owes Webb Webb Co. Co. thth interest of $170. Interest is paid on the 15 interest of $170. Interest is paid on the 15 day day of of each each month. month.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue Initially, Initially, the the revenue revenue is is recognized recognized and and aa receivable receivable is is created. created. GENERAL JOURNAL Date
Account Titles and Explanation
Jan. 31 Interest Receivable Interest Revenue
P R Debit
Credit
170 170
To recognize interest revenue.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue Balance Balance Sheet Sheet Receivable Receivable to to be be collected collected in in aa future future period. period. Interest Receivable 1/31 170
McGraw-Hill/Irwin
Income Income Statement Statement Revenue Revenue earned earned this this period. period.
Interest Revenue 1/31 170
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue $320 Monthly Interest $170 Interest Revenue
Saturday, Jan. 15
$150 Interest Revenue
Monday, Jan. 31
Tuesday, Feb. 15
Let’s Let’s look look at at the the entry entry for for February February 15. 15.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 20
Accruing Accruing Uncollected Uncollected Revenue Revenue The The receivable receivable is is collected collected in in aa future future period. period.
GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
Feb. 15 Cash
Credit
320
Interest Revenue (for February)
150
Interest Receivable (accrued Jan. 31)
170
To record interest received.
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Accruing Accruing Income Income Taxes Taxes Expense: Expense: The The Final Final Adjusting Adjusting Entry Entry As As aa corporation corporation earns earns taxable taxable income, income, itit incurs incurs income income taxes taxes expense, expense, and and also also aa liability liability to to governmental governmental tax tax authorities. authorities. GENERAL JOURNAL Date
P R Debit
Account Titles and Explanation
Dec. 31 Income Taxes Expense
Credit
780
Income Taxes Payable
780
Estimated income taxes applicable to taxable income earned in December.
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Adjusting Adjusting Entries Entries and and Accounting Accounting Principles Principles Costs Costs are are matched matched with with revenue revenue in in two two ways: ways: Direct Direct association association of of costs costs with with specific specific revenue revenue transactions. transactions. Systematic Systematic allocation allocation of of costs costs over over the the “useful “useful life” life” of of the the expenditure. expenditure.
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The The Concept Concept of of Materiality Materiality An An item item is is “material” “material” ifif knowledge knowledge of of the the item item might might reasonably reasonably influence influence the the decisions decisions of of users users of of financial financial statements. statements. Many companies immediately charge the cost of immaterial items to expense.
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Effects of the Adjusting Entries
Journalize transactions.
Post entries to the ledger accounts.
Prepare trial balance.
Recall Recall from from the the accounting accounting cycle cycle discussed discussed in in Chapter Chapter 3, 3, that that after after the the adjusting adjusting entries entries are are made, made, an an adjusted adjusted trial trial balance balance is is prepared. prepared.
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Make end-ofyear adjustments.
Prepare adjusted trial balance.
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End End of of Chapter Chapter 44
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