Chap4 Handout PDF

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Chapter 4: Accrual Accounting Concepts Revenue recognition principle – dictates that revenue be recognized in the accounting period in which _________________________ the service has been __________________; or the product has been ______________ Examples: On 5/1, a customer buys a plane ticket from Delta Airlines for a 6/15 flight. When is “revenue” recorded by Delta?

A customer drops of clothes at the dry cleaner on 8/18. The dry cleaner cleans the clothing on 8/20. The customer pays and picks up the clothes on 8/23. When is “revenue” recorded by the dry cleaner?

Matching principle – requires that expenses be recorded in the same period in which the __________ ____________ are recorded.

 Efforts (______________) matched with results (______________) Example:

Suppose that on May 1, a company renewed its insurance coverage by paying the $12,000 premium on a one-year insurance policy. What is the insurance expense for May?__________

********************************************************************************** Adjusting Entries – needed to ensure that the revenue recognition and matching principles are followed - classified as:________________________; or ________________________ ********************************************************************************** A. Deferrals 1. prepaid expenses – expenses paid in ___________ and recorded as ___________ until they are used or consumed 2. unearned revenues – revenues received in ___________ and recorded as ___________ before they are earned Chap 4: pg 1 of 12

Deferrals – Examples of Adjusting Entries: ► Prepaid Expense – costs that expire through the passage of _________ or ___________ ▪ Prepaid insurance On October 4, Sierra had paid $600 for a one-year insurance policy (covers October thru September of next year.) Original Entry:

Adjusting Entry:

T-Accounts:

Cash

Prepaid Insurance

Insurance Expense

▪ Supplies On October 5, Sierra had bought $2,500 of supplies on account. On October 31, Sierra still had $1,000 of supplies on hand. Original Entry:

Adjusting Entry:

T-Account: Accounts Payable

Chap 4: pg 2 of 12

Supplies

Supplies Expense

▪ Depreciation – the process of allocating the cost of long-term assets to the years they are used On October 2, Sierra had bought equipment for $5,000 cash. Assume that Sierra thinks they can sell the equipment for $200 at the end of 10 years. Calculate annual depreciation 

Original Entry:

Adjusting Entry:

T-Account: Cash

Equipment

Accumulated Depreciation

Depreciation Expense

Note: “Accumulated Depreciation” – a contra asset account (works against another asset account to reduce it)

► Unearned Revenue On October 2, Sierra had received $1,200 cash in advance from a customer, for work to be done in the future. As of October 31, Sierra had earned $400 of that money. Original Entry:

Adjusting Entry:

T-Account:

Chap 4: pg 3 of 12

Cash

Unearned Revenue

Revenue

B. Accruals 1. accrued revenues – revenues ______________ but not yet _______________ 2. accrued expenses – expenses ___________ but not yet _____________

Accruals – Examples of Adjusting Entries: ► Accrued Revenues On October 31, Sierra earned $200 for services not yet billed to clients. Adjusting Entry:

On November 10, the customer pays their bill.

►Accrued Expenses ▪ Salaries On October 26, Sierra had paid its employees $4,000 and the next payday is November 9. Assume that there 3 more work days in the month of October, and that Sierra owes $1,200 to employees for those three days. Adjusting Entry:

▪ Interest On October 1, Sierra had signed a 3-month 12% $5,000 note at the bank. Assume that all interest is due at maturity. Adjusting Entry:

************************************************************************************ Note: Adjusting Journal Entries never affect ______________ Adjusting Journal Entries always affect one _________ account and one __________ account ************************************************************************************ Chap 4: pg 4 of 12

Continuing T-Accounts from Chapter 3 Lecture Handout  Post AJE from Chapter 4 Lecture Cash ------------------------15,200 | | | | |

Accounts Receivable -------------------------| | | |

Equipment ---------------------------------------------5,000 | | | |

Accum Depreciation ---------------------------

Accounts Payable ------------------------| 2,500 | | |

Interest Payable ------------------------| | | |

Salaries Payable ---------------------| | | |

Common Stock ------------------------| 10,000 | | |

Retained Earnings ------------------------| 0 | | |

Dividends ---------------------500 | | | |

Revenue ------------------------| 10,000 | | |

Depreciation Expense ------------------------| | | |

Insurance Expense ---------------------| | | |

Rent Expense ------------------------900 | | | |

Salary Expense ------------------------4,000 | | | |

Supplies Expense ------------------------| | | |

Chap 4: pg 5 of 12

Supplies ---------------------2,500 | | | |

Prepaid Insurance ---------------------600 | | | |

Notes Payable

| | | |

| 5,000 | | |

Unearned Revenue --------------------| 1,200 | | |

Interest Expense ---------------------| | | |

Sierra Corporation Unadjusted Trial Balance October 31 Debit Credit 15,200

Cash

Adjusted Trial Balance October 31 Debit Credit

Accounts Receivable Supplies

2,500

Prepaid Insurance

600

Equipment

5,000

Accum Dep – Equip Note Payable

5,000

Accounts Payable

2,500

Interest Payable Salaries Payable Unearned Revenue

1,200

Common Stock

10,000

Retained Earnings

0

Dividends

500

Revenue

10,000

Depreciation Expense Insurance Expense Interest Expense Rent Expense

900

Salary Expense

4,000

Supplies Expense Totals

Chap 4: pg 6 of 12

28,700

28,700

Post-Closing Trial Balance October 31 Debit Credit

Sierra Corporation Income Statement For the Month Ended October 31 Revenue: Expenses:

_____________ _______________ _______________ _______________ _______________ _______________ _______________ _____________

_______________________ _______________________ _______________________ _______________________ _______________________ _______________________ Total Expenses

Net Income:

_____________ Sierra Corporation Statement of Retained Earnings For the Month Ended October 31

Beginning Retained Earnings Plus: Net Income Less: Dividends Retained Earnings, Ending

Assets __________________ __________________ __________________ __________________ __________________ __________________

Total Assets

Chap 4: pg 7 of 12

______________ ______________ ______________ ______________

Sierra Corporation Balance Sheet October 31 Liabilities and Stockholders’ Equity Liabilities: __________ __________________ ___________ __________ __________________ ___________ __________ __________________ ___________ __________ __________________ ___________ ________ __________________ ___________ ________ __________ Total Liabilities ___________

__________

Stockholders’ Equity: __________________ __________________ Total SHE

___________ ___________ ___________

Total Liabilities & Stockholders’ Equity

___________

************************************************************************************* Terminology: Balance sheet accounts referred to as _________________ accounts Income statement accounts referred to as _________________ accounts Dividend account also considered a ___________________ account

Closing Entries (purpose is to “zero out” all temporary accounts): ▪ Income statement accounts are closed to ________________________ which is then closed to ____________________ ▪ Dividend account is closed directly to ________________________

Post-Closing Trial Balance – contains only ________ accounts

Chap 4: pg 8 of 12

Class Problem (Adjusting & Closing Processes) Death Valley Resort opened for business on June 1 with eight air-conditioned units. Its trial balance before adjustment on August 31 is presented below: Death Valley Resort Trial Balance August 31, 2018 Cash Supplies Prepaid Insurance Land Buildings Equipment Accounts Payable Unearned Rent Revenue Mortgage Payable Common Stock Dividends Rent Revenue Salary Expense Utilities Expense Maintenance Expense

Debit 24,600 5,300 5,400 40,000 132,000 36,000

Credit

6,500 6,800 120,000 100,000 4,000 80,000 53,000 9,400 3,600 313,300

313,300

Other Data: 1. Insurance expires at the rate of $500 per month. 2. A count of supplies on August 31 shows $900 of supplies on hand. 3. Annual depreciation is $6,600 on buildings and $4,000 on equipment. 4. Unearned rent of $4,000 was earned prior to August 31. 5. Salaries of $600 were unpaid at August 31. 6. Rentals of $1,600 were due from tenants at August 31. (Use Accounts Receivable) 7. The mortgage interest rate is 6% per year. (The mortgage was taken out August 1.) Required: (a) Enter August 31st unadjusted balances into the ledger (Use T-accounts.) (b) Prepare the adjusting journal entries necessary on August 31st for the 3-month period June 1st – August 31st. (c) Post the adjusting journal entries. (d) Prepare the adjusted trial balance at August 31st. (e) Prepare the Income Statement and Statement of Retained Earnings for the quarter ended August 31st, and the Balance Sheet at August 31st. (f) Prepare the closing entries on August 31st. (g) Post the closing journal entries. (g) Prepare the post-closing trial balance at August 31st.

Chap 4: pg 9 of 12

Adjusting Journal Entries 1.

5.

2.

6.

3.

7.

4.

Death Valley Resort Adjusted Trial Balance August 31, 2018 Debit Cash Accounts Receivable Supplies Prepaid Insurance Land Buildings Accum Dep – Buildings Equipment Accum Dep – Equipment Accounts Payable Unearned Rent Revenue Salaries Payable Interest Payable Mortgage Payable Common Stock Dividends Retained Earnings Rent Revenue Salary Expense Utilities Expense Maintenance Expense Insurance Expense Supplies Expense Depreciation Expense Interest Expense

Chap 4: pg 10 of 12

Credit

Death Valley Resort Income Statement For the Quarter Ended August 31, 2018 Revenue: Expenses:

_____________ _______________ _______________ _______________ _______________ _______________ _______________ _______________ _____________

_______________________ _______________________ _______________________ _______________________ _______________________ _______________________ _______________________ Total Expenses

Net Income:

_____________ Death Valley Resort Statement of Retained Earnings For the Quarter Ended August 31, 2018

Beginning Retained Earnings Plus: Net Income Less: Dividends Retained Earnings, Ending

Assets __________________ __________________ __________________ __________________ __________________ __________________ __________________ __________________ __________________

Total Assets Chap 4: pg 11 of 12

________ ________ ________ ________

______________ ______________ ______________ ______________ Death Valley Resort Balance Sheet August 31, 2018 Liabilities and Stockholders’ Equity Liabilities: __________ __________________ ___________ __________ __________________ ___________ __________ __________________ ___________ __________ __________________ ___________ __________________ ___________ Total Liabilities ___________ __________ Stockholders’ Equity: __________ __________________ ___________ __________________ ___________ Total SHE ___________

__________

Total Liabilities & Stockholders’ Equity

___________

Closing Journal Entries 1.

2.

3.

4.

Death Valley Resort Post-Closing Trial Balance August 31, 2018 Debit Cash Accounts Receivable Supplies Prepaid Insurance Land Buildings Accum Dep – Buildings Equipment Accum Dep – Equipment Accounts Payable Unearned Rent Revenue Salaries Payable Interest Payable Mortgage Payable Common Stock Retained Earnings

Chap 4: pg 12 of 12

Credit...