2nd term adj entries ppt

Accrual Accounting Accrual Accounting ConceptsConcepts

Chapter 5Chapter 5

Recall:Recall: Time Period Assumption Time Period Assumption

Divides life of business into artificial time Divides life of business into artificial time periods: monthly, quarterly, yearlyperiods: monthly, quarterly, yearly

##11 Revenue Recognition Revenue Recognition

PrinciplePrinciple

Dictates that revenue be recognized Dictates that revenue be recognized in the accounting period in which it in the accounting period in which it is earned.is earned.

Considered earned when the service Considered earned when the service has been provided or when the has been provided or when the goods are delivered.goods are delivered.

##11 Revenue Recognition Revenue Recognition

PrinciplePrinciple

##11 Matching Principle Matching Principle

Requires that Requires that expensesexpenses be be recorded in the same period recorded in the same period in which the in which the revenuesrevenues they they helped produce are recorded.helped produce are recorded.

Differentiate Differentiate Cash Basis from Cash Basis from

Accrual Basis of Accounting Accrual Basis of Accounting

Cash BasisCash Basis

Revenue recorded only when cash is received.Revenue recorded only when cash is received.

Expenses recorded only when cash is paid.Expenses recorded only when cash is paid.

Cash Basis is not Cash Basis is not GAAPGAAP

GA

AP

What is GAAP?What is GAAP?

Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP) defines the standards Principles (GAAP) defines the standards by which accounting should be by which accounting should be performed.performed.

Includes the standards, conventions, Includes the standards, conventions, and rules accountants follow in and rules accountants follow in recording and summarizing recording and summarizing transactions, and in the preparation of transactions, and in the preparation of financial statementsfinancial statements. .

Accrual Basis AccountingAccrual Basis Accounting

• Follows both . . . Follows both . . .

• Revenue Recognition PrincipleRevenue Recognition Principle

• Matching PrincipleMatching Principle

Accrual Basis is GAAPAccrual Basis is GAAP

Revenue Realization Principle states that..Revenue Realization Principle states that..

• Revenue is recorded only when Revenue is recorded only when earned not when cash is receivedearned not when cash is received

Matching Principle states that…Matching Principle states that…

• Expense is recorded only when Expense is recorded only when incurred not when cash paidincurred not when cash paid

Why is this so important?Why is this so important?

Possible conclusions from the Cash Method?

Let’s ReviewLet’s Review

Which principle dictates that efforts (expenses) Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)?be recorded with accomplishments (revenues)?

a.a. Cost principle.Cost principle.

d.d. Revenue recognition principle.Revenue recognition principle.

c.c. Periodicity principle.Periodicity principle.

b.b. Matching principle.Matching principle.


a.a. Cost principle.Cost principle.

d.d. Revenue recognition principle.Revenue recognition principle.

c.c. Periodicity principle.Periodicity principle.

b.b. Matching principle.Matching principle.

Which principle dictates that efforts (expenses) Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)?be recorded with accomplishments (revenues)?


When would When would revenuerevenue be recorded for be recorded for the following scenario . . .the following scenario . . .

Ad agency is hired for a project in Ad agency is hired for a project in May, does work in June and is paid May, does work in June and is paid in July?in July?

The answer is June!The answer is June!


When would When would expensesexpenses be recorded for be recorded for this companion scenario . . .this companion scenario . . .

The Ad agency on this project incurs The Ad agency on this project incurs Php1,500 of expenses in May, Php1,500 of expenses in May, Php3,000 in June, and none in July?Php3,000 in June, and none in July?

The answer is June! Matching says The answer is June! Matching says the expenses should follow the the expenses should follow the revenue.revenue.


When would When would revenuerevenue be recorded for the be recorded for the following scenario . . .following scenario . . .

Sell plane ticket on September 1 for a Sell plane ticket on September 1 for a flight on October 15?flight on October 15?

The answer is October – when the The answer is October – when the service is provided!service is provided!


When would When would expensesexpenses be recorded for the be recorded for the following scenario . . .following scenario . . .

The airline pays pilot salaries on The airline pays pilot salaries on October 7October 7thth for the week ended for the week ended September 30th?September 30th?

The answer is September – the pilots The answer is September – the pilots provided labor services for September provided labor services for September flights during that month.flights during that month.

Now let’s discuss how Now let’s discuss how accounting makes this happenaccounting makes this happen

. . . . . .

Explain Why Adjusting Explain Why Adjusting Entries are Needed Entries are Needed

and and Identify the Major Types of Identify the Major Types of

Adjusting Entries Adjusting Entries

Adjusting EntriesAdjusting Entries

Trial balance is not up to date.Trial balance is not up to date. To produce accurate financial To produce accurate financial

statements, we record adjusting statements, we record adjusting entries . . .entries . . .

Revenues are recognized (Revenues are recognized (recordedrecorded) ) when they are when they are earned.earned.

Expenses are recognized (Expenses are recognized (recordedrecorded) ) when they are when they are incurredincurred (used up). (used up).

Adjusting EntriesAdjusting Entries

Adjusting entries ensure that Adjusting entries ensure that Revenue Recognition and Revenue Recognition and Matching Principles are Matching Principles are

followed!followed!

Types of Adjusting EntriesTypes of Adjusting Entries

Prepayments:Prepayments: Prepaid expenses:Prepaid expenses: Expenses paid in Expenses paid in cash and recorded as assets before they cash and recorded as assets before they are used or consumed. are used or consumed. (cash paid in (cash paid in advance)advance)

Unearned Revenues:Unearned Revenues: Cash Cash received and recorded as received and recorded as liabilities before revenue is liabilities before revenue is earned. earned. (cash received in (cash received in advance)advance)

Types of Adjusting EntriesTypes of Adjusting Entries

Accruals:Accruals: Accrued revenues:Accrued revenues: Revenues Revenues earned but not yet received in cash earned but not yet received in cash or recorded or recorded (someone owes us).(someone owes us).

Accrued expenses:Accrued expenses: Expenses Expenses incurred but not yet paid in cash incurred but not yet paid in cash or recorded or recorded (we owe someone (we owe someone else).else).

Prepare Adjusting Entries for Prepare Adjusting Entries for Prepayments – Prepayments – Prepaid ExpensesPrepaid Expenses

• Expenses paid in cash and recorded as Expenses paid in cash and recorded as assets before they are used or consumed. assets before they are used or consumed. (paid in advance)(paid in advance)

• Prepaid expenses expire with the passage Prepaid expenses expire with the passage of time of time OROR they are consumed they are consumed (used)(used)

• Time: rent, insuranceTime: rent, insurance

• Consumed: suppliesConsumed: supplies

Prepaid ExpensesPrepaid Expenses

Amount equals cost of goods or services used up or expired

If not adjusted, expenses would be understated and assets overstated

Prepaid Expenses -Prepaid Expenses - SuppliesSupplies

What is the entry when you What is the entry when you purchase supplies?purchase supplies?


GENERAL JOURNALGENERAL JOURNAL Debit Credit Debit Credit

Oct 5 Supplies 2,500Oct 5 Supplies 2,500 Cash 2,500Cash 2,500

Purchased Advertising SuppliesPurchased Advertising Supplies

SuppliesSupplies2,5002,500Oct 5Oct 5

CashCash2,5002,500Oct 5Oct 5

Supplies Supplies ExpenseExpense


What is the adjusting entry?What is the adjusting entry?

Oct. 31: Take inventory and it shows Oct. 31: Take inventory and it shows $1,000 of supplies still on hand$1,000 of supplies still on hand



Oct 31 Supplies Expense 1,500Oct 31 Supplies Expense 1,500 Supplies Supplies 1,5001,500

To record supplies usedTo record supplies used

SuppliesSupplies2,5002,500Oct 5Oct 5

CashCash2,5002,500Oct 5Oct 5

Supplies Supplies ExpenseExpense

Oct 31Oct 31 1,5001,5001,5001,500Oct 31Oct 31

Oct 31Oct 31 1,0001,000

Supplies ExpenseSupplies Expense

OctoberOctober

$1,500$1,500NovemberNovember

$1,800$1,800DecemberDecember

$1,410$1,410JanuaryJanuary

$1,425$1,425

FebruaryFebruary

$1,601$1,601MarchMarch

$1,435$1,435AprilApril

$1,530$1,530MayMay

$1,592$1,592

JuneJune

$1,622$1,622JulyJuly

$1,652$1,652AugustAugust

$1,427$1,427SeptemberSeptember

$1,557$1,557

Expense varies each month with usageExpense varies each month with usage

Prepaid Expenses -Prepaid Expenses - Insurance Insurance

What is the entry when you What is the entry when you purchase the insurance policy?purchase the insurance policy?

Prepaid Expenses -Prepaid Expenses - InsuranceInsurance


Oct 4 Prepaid Insurance 600Oct 4 Prepaid Insurance 600 Cash 600Cash 600

Purchased one-year fire insurance policy.Purchased one-year fire insurance policy.

600600Oct 4Oct 4CashCash

600600Oct 4Oct 4

Insurance Insurance ExpenseExpense

Prepaid Prepaid InsuranceInsurance



Oct. 31: You are at the end of the Oct. 31: You are at the end of the month. How much of the insurance month. How much of the insurance

policy has expired?policy has expired?

$600 / 12 months = $50 per month$600 / 12 months = $50 per month



Oct 31 Insurance Expense 50Oct 31 Insurance Expense 50 Prepaid Insurance 50Prepaid Insurance 50 To record expired insurance coverageTo record expired insurance coverage

600600Oct 4Oct 4CashCash

600600Oct 4Oct 4

Insurance Insurance ExpenseExpense

Oct 31Oct 31 50505050Oct 31Oct 31

Oct 31Oct 31 550550

Prepaid Prepaid InsuranceInsurance

Insurance ExpenseInsurance Expense

OctoberOctober

$50$50NovembNovemb

erer

$50$50

DecembDecemberer

$50$50

JanuaryJanuary

$50$50

FebruarFebruaryy

$50$50

MarchMarch

$50$50AprilApril

$50$50MayMay

$50$50

JuneJune

$50$50JulyJuly

$50$50AugustAugust

$50$50SeptemSeptem

berber

$50$50

Policy Expense is the same each monthPolicy Expense is the same each month

Depreciation ExpenseDepreciation Expense

OctoberOctober

$40$40NovembNovemb

erer

$40$40

DecembDecemberer

$40$40

JanuaryJanuary

$40$40

FebruarFebruaryy

$40$40

MarchMarch

$40$40AprilApril

$40$40MayMay

$40$40

JuneJune

$40$40JulyJuly

$40$40AugustAugust

$40$40SeptemSeptem

berber

$40$40

Let’s say expense is estimated at $480 per year Let’s say expense is estimated at $480 per year

DepreciationDepreciation


Oct 31 Depreciation Expense 40Oct 31 Depreciation Expense 40 Accumulated Depreciation 40Accumulated Depreciation 40

To record monthly depreciation of annual $480 estimateTo record monthly depreciation of annual $480 estimate

5,0005,000

Accumulated Accumulated DepreciationDepreciation

4040 4040Oct 31Oct 31

Depreciation Depreciation ExpenseExpense

Office Office EquipmentEquipment

Oct 2Oct 2 Oct 31Oct 31

Adjustment for DepreciationAdjustment for Depreciation

Accumulated Depreciation Depreciation Expense

Adjusting EntryCredit

Adjusting EntryDebit

Amount equals cost Amount equals cost of asset allocatedof asset allocated

to accounting periodto accounting period

CONTRA-ASSET CONTRA-ASSET ACCOUNTACCOUNT

EXPENSE EXPENSE ACCOUNTACCOUNT

Office equipmentOffice equipment $ 5,000 $ 5,000

Less: accumulated depreciationLess: accumulated depreciation 40 40

$4,960$4,960

Balance Sheet PresentationBalance Sheet Presentation

Book ValueBook Value

Accumulated depreciation Accumulated depreciation is a is a contra asset accountcontra asset account, , an offset against the fixed an offset against the fixed asset account.asset account.

##44 Prepare Adjusting Entries for Prepare Adjusting Entries for

Prepayments – Prepayments – Unearned Unearned RevenuesRevenues

Cash received and recorded as Cash received and recorded as liabilities before revenue is liabilities before revenue is earned. earned. (cash received in (cash received in advance)advance)

Earned when services are Earned when services are providedprovided

Rent, magazine subscriptions, Rent, magazine subscriptions, customer depositscustomer deposits

Unearned RevenuesUnearned Revenues

Amount equals price of services performed or goods delivered

If not adjusted, revenues would be understated and liabilities overstated


What is the entry when you are What is the entry when you are paid in advance for services?paid in advance for services?



Oct 2 Cash Oct 2 Cash 1,200 1,200 Unearned Revenue Unearned Revenue 1,2001,200

To record customer payment received in advance of servicesTo record customer payment received in advance of services

1,2001,200

RevenueRevenueUnearned Unearned RevenueRevenueCashCash

Oct 2Oct 2 Oct 2Oct 2 1,2001,200 Oct 3Oct 3 10,00010,000



Oct. 31: Some of the work has been Oct. 31: Some of the work has been performed, $400 has been earnedperformed, $400 has been earned



Oct 31 Unearned Revenue 400Oct 31 Unearned Revenue 400 Revenue Revenue 400 400

To record revenue earnedTo record revenue earned

1,2001,200

RevenueRevenue 10,00010,000 400400Oct 31Oct 31

Unearned Unearned RevenueRevenueCashCash

Oct 2Oct 2 Oct 3Oct 3Oct 2Oct 2 1,2001,200

Oct 31Oct 31 800800 Oct 31Oct 31 400400Oct 31Oct 31 10,40010,400

##55 Prepare Adjusting Entries for Prepare Adjusting Entries for Accruals – Accruals – Accrued RevenuesAccrued Revenues

Accrued revenuesAccrued revenues: revenues earned but not : revenues earned but not yet received in cash or recorded at the yet received in cash or recorded at the statement date statement date

Adjusting entry is required to show the Adjusting entry is required to show the receivable that exists at the balance sheet datereceivable that exists at the balance sheet date

Accrued RevenuesAccrued Revenues

Amount equals price of services performed

If not adjusted, revenues would be understated and assets understated


What is the adjusting entry for What is the adjusting entry for $200 of services performed but $200 of services performed but not billed before October 31?not billed before October 31?



Oct 31 Accounts Receivable Oct 31 Accounts Receivable 200200 Service Revenue Service Revenue 200 200

To record revenue earned but not billedTo record revenue earned but not billed

200200

Service Service RevenueRevenue

Accounts Accounts ReceivableReceivable

Oct 31Oct 31

Oct 31Oct 31 200200

Oct 3Oct 3 10,00010,000Oct 31Oct 31 400400

Oct 31Oct 31 10,60010,600

##55 Prepare Adjusting Entries for Prepare Adjusting Entries for Accruals – Accruals – AccruedAccrued ExpensesExpenses

Accrued expenses:Accrued expenses: expenses incurred but not yet expenses incurred but not yet paid in cash or recorded at the statement datepaid in cash or recorded at the statement date

Adjusting entry is required to show the payable Adjusting entry is required to show the payable that exists at the balance sheet datethat exists at the balance sheet date

Accrued ExpensesAccrued Expenses

Amount equals cost of expense incurred

If not adjusted, expenses would be understated and liabilities understated

Where is the Where is the interest expense interest expense

for this note?for this note?

Interest expense has Interest expense has not been recorded yet not been recorded yet for this period, so we for this period, so we need an adjustment!need an adjustment!

Accrued Expenses - InterestAccrued Expenses - Interest


Oct. 31: Signed $5,000 note on Oct. 1Oct. 31: Signed $5,000 note on Oct. 1stst with annual interest rate of 12%with annual interest rate of 12%

Use formula to calculate interest:Use formula to calculate interest:

Accrued InterestAccrued Interest


Oct 31 Interest Expense Oct 31 Interest Expense 50 50 Interest Payable Interest Payable 50 50

To record interest on notes payableTo record interest on notes payable

5050

Interest Interest PayablePayable

Interest Interest ExpenseExpense

Oct 31Oct 31 Oct 31Oct 31 5050

Accrued Expenses - SalariesAccrued Expenses - Salaries


Oct. 31: Employees are paid every two weeks. Oct. 31: Employees are paid every two weeks. There are 3 days of October that will not be paid There are 3 days of October that will not be paid until November. Wages are $2,000 for 5 days until November. Wages are $2,000 for 5 days

Accrued SalariesAccrued Salaries


Oct 31 Salaries Expense Oct 31 Salaries Expense 1,200 1,200 Salaries Payable Salaries Payable 1,200 1,200

To record accrued salaries ( $400 a day To record accrued salaries ( $400 a day timestimes 3 days ) 3 days )

4,0004,000

Salaries Salaries PayablePayable

Salaries Salaries ExpenseExpense

Bal.Bal. Oct 31Oct 31 1,2001,200Oct 31Oct 31

Oct 31Oct 31

1,2001,200

5,2005,200

Summary of Adjusting EntriesSummary of Adjusting Entries

Note that each adjusting entry affects at least one Note that each adjusting entry affects at least one balance sheet account and at least one income balance sheet account and at least one income

statement account!statement account!

##66 Describe the nature and Describe the nature and purpose of the purpose of the Adjusted Trial Adjusted Trial

BalanceBalance Prepared after adjusting Prepared after adjusting entries journalized and entries journalized and postedposted

Shows balances of all Shows balances of all accountsaccounts

See the adjusting journal See the adjusting journal entry changes on next entry changes on next slide. . .slide. . .

Adjusted Trial BalanceAdjusted Trial Balance

Purpose is to Purpose is to prove the equalityprove the equality of total debit balances and total of total debit balances and total credit balances after the credit balances after the adjusting entries have been adjusting entries have been made.made.

Financial statements are Financial statements are prepared from the adjusted trial prepared from the adjusted trial balancebalance

##77 Explain the Purpose of Explain the Purpose of

Closing Entries Closing Entries Closing entries transfer the Closing entries transfer the

temporary accounting temporary accounting balances to the permanent balances to the permanent stockholders’ equity account stockholders’ equity account – Retained Earnings.– Retained Earnings.

Close Temporary Accounts Close Temporary Accounts OnlyOnly

Zero balance Zero balance after closing after closing

entries!entries!

Do not close!Do not close!

Closing EntriesClosing Entries

At the start of the next period, temporary account At the start of the next period, temporary account balances are zero so you can accumulate data balances are zero so you can accumulate data

separately from data in prior periods.separately from data in prior periods.

##8 8 Describe the required steps in the Describe the required steps in the

Accounting Cycle Accounting Cycle

Steps are performed in Steps are performed in sequence and are repeated in sequence and are repeated in each accounting period . . .each accounting period . . .


Which is Which is notnot a temporary account?a temporary account?

a.a. Salaries expense.Salaries expense.

d.d. Dividends.Dividends.

c.c. Accounts receivable.Accounts receivable.

b.b. Service revenue.Service revenue.


Which is Which is notnot a temporary account?a temporary account?

a.a. Salaries expense.Salaries expense.

d.d. Dividends.Dividends.

c.c. Accounts receivable.Accounts receivable.

b.b. Service revenueService revenue


Which account will have a zero balance Which account will have a zero balance after closing entries?after closing entries?

a.a. Service Revenue.Service Revenue.

d.d. Accumulated Depreciation.Accumulated Depreciation.

c.c. Prepaid Insurance.Prepaid Insurance.

b.b. Advertising Supplies.Advertising Supplies.


Which types of accounts will appear in the Which types of accounts will appear in the post-closing trial balance?post-closing trial balance?

a.a. Permanent accounts.Permanent accounts.

d.d. None of the above. None of the above.

c.c. Accounts shown in income statement. Accounts shown in income statement.

b.b. Temporary accounts. Temporary accounts.

•Some of the amounts on the trial balance are out of date.

Adjusting entriesAdjusting entries

1.1. Actual amount of repair supplies Actual amount of repair supplies showed a balance of P850.showed a balance of P850.

Repair Supplies

1,500

Repair Supplies

1,500

Adjusting entries

850 What the What the balance balance should beshould be

What the balance “should be” is What the balance “should be” is determined from someone counting determined from someone counting the supplies that remain in the the supplies that remain in the business at the end of the yearbusiness at the end of the year

Repair Supplies

1,500

Adjusting entries

850

650

The required adjustmentThe required adjustment

Repair Supplies Used

0

Adjusting entries

650 What the balance What the balance should beshould be

What the balance “should be” is What the balance “should be” is the amount of supplies “used up” the amount of supplies “used up” during the yearduring the year

1.1. Repair supplies used (Dr)Repair supplies used (Dr) 650650

Repair supplies (Cr)Repair supplies (Cr) 650650

Adjusting entries


What is the entry when you What is the entry when you purchase equipment?purchase equipment?


Following the matching principle, the Following the matching principle, the cost of assets with long lives must be cost of assets with long lives must be allocated over their useful livesallocated over their useful lives

As we use the asset, we recognize a As we use the asset, we recognize a portion of its cost as expense: portion of its cost as expense: depreciationdepreciation

Depreciation expense is an estimateDepreciation expense is an estimate It is an allocation of cost, NOT It is an allocation of cost, NOT

valuationvaluation

2.2. Repair tools are depreciated at 10% Repair tools are depreciated at 10% per annum.per annum.

P1200 x .10 = 120P1200 x .10 = 120

(Original cost x depreciation p.a.)(Original cost x depreciation p.a.)

Adjusting entries

2.2. Depreciation-toolsDepreciation-tools 120120

Accumulated DepreciationAccumulated Depreciation120120

Adjusting entries

Straight-Line Method of DepreciationStraight-Line Method of Depreciation

D=(Cost - Salvage Value) / number of D=(Cost - Salvage Value) / number of year year

Adjusting entries

Where:

D= depreciation

Cost = original cost

Salvage value = scrap value (the amount wherein the asset

can be sold after its useful life)

No. of Yrs = estimated number of useful life

3.3. Given:Given:

n=5 yrs (F&F); 10yrs (service truck)n=5 yrs (F&F); 10yrs (service truck)

c=6,500 (F&F); 20,000(service truck)c=6,500 (F&F); 20,000(service truck)

Adjusting entries

F&F:

6,500/5yrs = P1,300 per yr

1,300 x 4/12 = P433

a. Depreciation-F&F (Dr) 433

Accum. Dep.-F&F (Cr) 433

Service truck:Service truck:

20,000 / 10 = P2,000 p.a.20,000 / 10 = P2,000 p.a.

2,000 x 4/122,000 x 4/12 = P666= P666

Adjusting entries

b. Depreciation-Service Truck (Dr) 666

Accum. Dep.-Servie Truck (Cr) 666



Oct 2 Office Equipment 5,000Oct 2 Office Equipment 5,000 Cash 5,000Cash 5,000

To record purchase of office equipmentTo record purchase of office equipment

5,0005,000Oct 2Oct 2CashCash

5,0005,000Oct 2Oct 2

Depreciation Depreciation ExpenseExpense

Office Office EquipmentEquipment

2nd term adj entries ppt

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