Professional Documents
Culture Documents
ADJUSTING THE
ACCOUNTS
Chapter
3-1
Timing Issues
Chapter
3-2
Timing Issues
Chapter
3-3
Timing Issues
Chapter
3-4
Timing Issues
Chapter
3-6
Timing Issues
GAAP relationships
in revenue and
expense recognition
Chapter
3-7
The Basics of Adjusting Entries
Chapter
3-8
The Basics of Adjusting Entries
Chapter
3-9
Types of Adjusting Entries
Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.
Chapter
3-10
Trial Balance
Trial Balance – Each account is analyzed to determine
whether it is complete and up-to-date.
Chapter
3-11
Adjusting Entries for Deferrals
OR
Unearned revenues.
Chapter
3-12
Adjusting Entries for “Prepaid Expenses”
Chapter
3-13
Adjusting Entries for “Prepaid Expenses”
Prepaid Expenses
Costs that expire either with the passage of time
or through use.
Chapter
3-14
Adjusting Entries for “Prepaid Expenses”
Chapter
3-15
Adjusting Entries for “Prepaid Expenses”
Chapter
3-16
Adjusting Entries for “Prepaid Expenses”
11,000
Chapter
3-17
Adjusting Entries for “Prepaid Expenses”
Depreciation
Buildings, equipment, and vehicles (long-lived
assets) are recorded as assets, rather than an
expense, in the year acquired.
Companies report a portion of the cost of a long-
lived asset as an expense (depreciation) during
each period of the asset’s useful life (Matching
Principle).
Chapter
3-18
Adjusting Entries for “Prepaid Expenses”
Equipment Cash
Debit Credit Debit Credit
24,000 24,000
Chapter
3-19
Adjusting Entries for “Prepaid Expenses”
Chapter
3-20
Adjusting Entries for “Prepaid Expenses”
Equipment 24,000
Accumulated Depreciation (100)
Net Equipment 23,900
Chapter
3-21
Adjusting Entries for “Unearned Revenues”
Chapter
3-22
Adjusting Entries for “Unearned Revenues”
Unearned Revenues
Company makes an adjusting entry to record the
revenue that has been earned and to show the
liability that remains.
Chapter
3-23
Adjusting Entries for “Unearned Revenues”
Chapter
3-25
Adjusting Entries for “Unearned Revenues”
16,000
Chapter
3-26
Adjusting Entries for Accruals
Made to record:
Revenues earned and
OR
Expenses incurred
Chapter
3-27
Adjusting Entries for “Accrued Revenues”
Chapter
3-28
Adjusting Entries for “Accrued Revenues”
Accrued Revenues
An adjusting entry serves two purposes:
Chapter
3-29
Adjusting Entries for “Accrued Revenues”
Illustration 3-13
Investments Cash
Debit Credit Debit Credit
300,000 300,000
Chapter
3-31
Adjusting Entries for “Accrued Revenues”
Chapter
3-32
Adjusting Entries for “Accrued Expenses”
Chapter
3-33
Adjusting Entries for “Accrued Expenses”
Accrued Expenses
An adjusting entry serves two purposes:
Chapter
3-34
Adjusting Entries for “Accrued Expenses”
Chapter
3-36
Adjusting Entries for “Accrued Expenses”
Chapter
3-37
Adjusting Entries for “Accrued Expenses”
Accrued Expenses
An adjusting entry serves two purposes:
Chapter
3-38
The Adjusted Trial Balance
Chapter
3-39
Preparing Financial Statements
Owner’s Statement
Balance Income
Equity of Cash
Sheet Statement
Statement Flows
Chapter
3-40
Preparing Financial Statements
Income Statement
Adjusted Trial Balance Debit Credit
Cash $ 50,000
Accounts receivable 35,000
Interest receivable 1,250 Income Statement
Prepaid insurance 11,000 For the Month Ended Jan. 31, 2008
Equipment 24,000
Revenues:
Accumulated depreciation $ 100
Investments 300,000 Sales $ 137,000
Accounts payable 20,000 Interest revenue 1,250
Interest payable 1,500 Rent revenue 8,000
Unearned revenue 16,000
Total revenue 146,250
Note payable 200,000
Austin, capital 40,000 Expenses:
Sales 137,000 Interest expense 1,500
Interest revenue 1,250 Depreciation expense 100
Rent revenue 8,000
Insurance expense 1,000
Interest expense 1,500
Depreciation expense 100 Total expenses 2,600
Insurance expense 1,000 Net income $ 143,650
$ 423,850 $ 423,850
Chapter
3-41
Preparing Financial Statements
Adjusted Trial Balance Debit Credit
Cash $ 50,000
Accounts receivable 35,000
Interest receivable 1,250
Prepaid insurance 11,000
Equipment 24,000
Accumulated depreciation
Investments 300,000
$ 100
Statement of
Accounts payable 20,000 Owner’s Equity
Interest payable 1,500 Statement of Owner's Equity
Unearned revenue 16,000
For the Month Ended Jan. 31, 2008
Note payable 200,000
Austin, capital 40,000
Sales 137,000 Austin, Capital, Jan. 1 $ 40,000
Interest revenue 1,250 + Net income 143,650
Rent revenue 8,000 - Drawings 0
Interest expense 1,500
Austin, Capital, Jan. 31 $ 183,650
Depreciation expense 100
Insurance expense 1,000
$ 423,850 $ 423,850
Chapter
3-42
Preparing Financial Statements
Balance Sheet Jan. 31, 2008
Adjusted Trial Balance Debit Credit
Cash $ 50,000 Assets
Accounts receivable 35,000 Cash $ 50,000
Interest receivable 1,250 Accounts receivable 35,000
Prepaid insurance 11,000
Interest receivable 1,250
Equipment 24,000
Accumulated depreciation $ 100
Prepaid insurance 11,000
Investments 300,000 Equipment 24,000
Accounts payable 20,000 Accum. Depreciation (100)
Interest payable 1,500 Investments 300,000
Unearned revenue 16,000
Total assets $ 421,150
Note payable 200,000
Austin, capital 40,000 Liabilities & Owner's Equity
Sales 137,000 Accounts payable $ 20,000
Interest revenue 1,250 Interst payable 1,500
Rent revenue 8,000
Unearned revenue 16,000
Interest expense 1,500
Depreciation expense 100
Note payable 200,000
Insurance expense 1,000 Austin, capital 183,650
$ 423,850 $ 423,850 Total liab. & equity $ 421,150
Chapter
3-43
Alternative Treatment of Prepaid
Expenses and Unearned Revenues
Chapter
3-44
Alternative Treatment for “Prepaid Expenses”
Chapter
3-45
Alternative Treatment for “Prepaid Expenses”
1,000
Chapter
3-46
Alternative Treatment for “Unearned Revenues”
Chapter
3-47
Alternative Treatment for “Unearned Revenues”
8,000
Chapter
3-48
Summary of Basic Relationships for Deferrals
Chapter
3-49