financial&managerial accounting_15e williamshakabettner chap 4

8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 4

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Copyright © 2010 by The McGraw-Hill Companies, Inc. All McGraw-Hill/Irwin

The Accounting Cycle: The Accounting Cycle:

Accruals and DeferralsAccruals and Deferrals

Chapter 4



4-2

Adjusting

entries are

needed whenever

revenue or expenses

affect more than one

accountingperiod.

Every

adjusting

entry involves a

change in either a

revenue or expense

and an asset

or liability.

Adjusting EntriesAdjusting Entries



4-3

Prior Periods Current Period Future Periods

Transaction

Paid cash inadvance of incurringexpense

(creates anasset).

TransactionPaid cash inadvance of incurringexpense

(creates anasset).

End of Current Period

Adjusting Entry

Recognizes portionof asset consumedas expense, and

Reduces balance of asset account.

Adjusting Entry Recognizes portion

of asset consumedas expense, and

Reduces balance of asset account.

Converting Assets toConverting Assets to

ExpensesExpenses



4-4

The Concept of The Concept of

DepreciationDepreciation

Depreciation is the systematic allocation of the cost of a depreciable asset to expense.

Depreciation is the systematic allocation of the cost of a depreciable asset to expense.

Cash(credit)

Cash(credit)

FixedAsset(debit)

FixedAsset(debit)

On date

when initialpayment ismade . . .

The asset’susefulness is

partiallyconsumedduring the

period.

At end of

period . . .

DepreciationExpense(debit)

DepreciationExpense(debit)

AccumulatedDepreciation

(credit)

AccumulatedDepreciation

(credit)



4-6

JJ’s Lawn Care Service would make thefollowing adjusting entry.

JJ’s Lawn Care Service would make thefollowing adjusting entry.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

May 31 Depreciation Expense: Equipment 50

Accumulated Depreciation: Equipment 50

To record one month's depreciation.

Contra-asset

Contra-asset

Depreciation Is Only anDepreciation Is Only an

EstimateEstimate


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JJ’s $15,000 truck is depreciated over 60months. Calculate monthly depreciation and

make the journal entry.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

May 31 Depreciation Expense: Truck 250

Accumulated Depreciation: Truck 250

To record one month's depreciation.

$15,000÷

60 months = $250 per month$15,000 ÷ 60 months = $250 per month


EstimateEstimate



Accumulated depreciation wouldappear on the balance sheet as

follows:

Accumulated depreciation wouldappear on the balance sheet as

follows:


EstimateEstimate

Cost - Accumulated Depreciation = Book Value




TransactionCollect cash in

advance of earning revenue(creates aliability).


advance of

earning revenue(creates aliability).



earned as revenue,and Reduces balance of

liability account.


earned as revenue,

and Reduces balance of

liability account.

Converting Liabilities toConverting Liabilities to

RevenueRevenue




Transaction

Pay cash insettlement of liability.

TransactionPay cash in

settlement of liability.


Accruing Unpaid ExpensesAccruing Unpaid Expenses




Transaction

Collect cash insettlement of receivable.


settlement of receivable.


Adjusting Entry

Recognizes revenueearned but not yetrecorded, andRecords receivable.

Adjusting EntryRecognizes revenue

earned but not yetrecorded, andRecords receivable.

Accruing UncollectedAccruing Uncollected

RevenueRevenue



Costs are matched with revenuein two ways:

Costs are matched with revenuein two ways:

Direct association of costswith specific revenue

transactions.

Direct association of costswith specific revenue

transactions.

Systematic allocation of costsover the “useful life” of the

expenditure.

Systematic allocation of costsover the “useful life” of the

expenditure.

Adjusting Entries andAdjusting Entries and

Accounting PrinciplesAccounting Principles



Effects of the AdjustingEffects of the Adjusting

EntriesEntries

Adj



JJ's Law n Care Se rvice Adjusted Trial Balance

Ma y 31, 2009

Ca sh 3,925$

Accounts re ce iva ble 75

Tools & e quipm e nt 2,650

Accum . de pre cia tion: tools & e q. 50$

Truck 15,000 Accum . de pre cia tion: truck 250

Note s pa ya ble 13,000

Accounts pa ya ble 150

Ca pita l stock 8,000

Divide nds 200

Sa le s re ve nue 750

Ga soline e x pe nse 50

De pre cia tion e x p.: tools & e q. 50

De pre cia tion e x p.: truck 250

Tota l 22,200$ 22,200$

All balancesare taken from

the ledger

accounts onMay 31 after

preparing thetwo

depreciationadjustingentries.

Adjusted Trial BalanceAdjusted Trial Balance



End of Chapter 4End of Chapter 4

financial&managerial accounting_15e williamshakabettner chap 4

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