BSAD 221
Introductory Financial
Accounting
Donna Gunn, CA

Matching Principle
Revenues are recorded when earned.
Expenses are recorded when incurred.
Because transactions occur over time, ADJUSTMENTS are required at the end of each fiscal period to get the revenues and expenses into the “right” period .

Accounting Cycle
During the period:
•Analyze transactions.
•Record journal entries.
•Post amounts to general ledger
Close revenues, gains, expenses, and losses to
Retained Earnings.
At the end of the period:
•Adjust revenues and expenses
•Prepare financial statements
•Provide statements to users

• A listing of individual accounts, usually in financial statement order.
• Ending debit or credit balances are listed in two separate columns.
• Total debit account balances should equal total credit account balances.
DUCHARME, INC.
Unadjusted Trial Balance
December 31, 2011
Description
Cash
Accounts receivable
Inventory
Equipment
Accumulated amortization - equip.
Furniture and fixtures
Accumulated amortization – furn.&fix.
Accounts payable
Notes payable
Common shares
Retained earnings
Sales revenues
Cost of goods sold
Operating expenses
Totals
Debit Credit
$3,900
4,985
3,300
4,800
$1,440
6,600
2,200
2,985
4,000
10,000
1,760
35,000
27,500
6,300
$57,385 $57,385

Note that total debits = total credits

If total debits do not equal total credits on the trial balance, errors have occurred . . .
• in preparing balanced journal entries,
• in posting the correct dollar effects of a transaction,
• in computing ending balances in accounts,
• in copying ending balances from the ledger to the trial balance.

Adjusting Entries
DEFERRALS
Receipts of assets or payments of cash in advance of revenue or expense recognition.
ACCRUALS
Revenues earned or expenses incurred that have not been previously recorded.

Accruals
• Interest earned during the period
• Wages earned but not yet paid
Deferred
• Adjustments to unearned revenue

Deferred Revenue
On December 1, 2011, Tom’s Rentals received a cheque for $3,000, for the first four months’ rent from a new tenant.
The entry on December 1, 2011, to record the receipt of the prepaid rent payment would be . .
.

Deferred Revenue
On December 1, 2011, Tom’s Rentals received a cheque for $3,000, for the first four months’ rent from a new tenant.
The entry on December 1, 2011, to record the receipt of the prepaid rent payment would be . . .
Cash
Unearned Rent Revenue
$3,000
$3,000
This is a LIABILITY account

Deferred Revenue
Received cash for < 4-month prepayment of rent > rent
12/1/11 12/31/06
Year end
1/31/07 2/28/07 3/31/07
We must record the amount of rent EARNED during December.
Since the prepayment is for 4 months , we can assume that 1/4 of the rent will be earned each month.

Deferred Revenue
On December 31, 2011 , Tom’s Rentals must adjust the
Unearned Rent Revenue account to reflect that one month of rent revenue has been earned.
$3,000 × 1/4 = $750 per month.
Unearned rent revenue
Rent revenue
750
750
In effect, our obligation to let them occupy the space for a period of time has decreased because they used the space for one month.

Accrued Revenues

Accrued Revenues
On October 1, 2011, Webb, Inc. invests $10,000 for 6 months in a bond that pays 6% interest per year .
Webb will not receive the interest until the bond matures on March 31, 2012.
On December 31, 2011, Webb, Inc. must make an entry for the interest earned so far.

Accrued Revenues
On October 1, 2011, Webb, Inc. invests $10,000 for
6 months in a bond that pays 6% interest per year .
Webb will not receive the interest until the bond matures on March 31, 2012.
On December 31, 2011, Webb, Inc. must make an entry for the interest earned so far.
Interest Receivable
Interest Revenue
$10,000 x 6% x 3/12 = $150
150
150

Deferred Expenses
On January 1, 2011, Matrix, Inc. paid $3,600 for a 3-year fire insurance policy.
They are paying in advance for a resource they will use over a 3-year period.
The entry on January 1, 2011, to record the policy on Matrix’s books would appear as follows . . .

Deferred Expenses
On January 1, 2011, Matrix, Inc. paid $3,600 for a 3-year fire insurance policy. They are paying in advance for a resource they will use over a 3-year period.
The entry on January 1, 2011, to record the policy on
Matrix’s books would appear as follows . . .
Prepaid insurance
Cash
$3,600
$3,600
This is an
ASSET account

Deferred Expenses
Paid cash for insurance < 3-year insurance policy >
1/1/06 12/31/06
Year end
12/31/07
Year end
12/31/07
Year end
At the end of 2011, we determine how much of the “prepaid expense” has been used up during the period.
Since the policy is for 3 years , we can assume that 1/3 of the policy will expire each year.

Deferred Expenses
On December 31, 2011 , Tipton must adjust the Prepaid
Insurance account to reflect that 1 year of the policy has expired.
Insurance Expense
Prepaid Insurance
$1,200
$1,200
$3,600 × 1/3 = $1,200 per year.
In effect, the prepaid asset goes down ▼, while the expense goes up ▲.

Accrued Expenses
Recall that accrued expenses are expenses incurred in the current period but not billed or paid until the next accounting period.
Common examples are interest expense incurred on debt, wages expense owed to employees, and utilities expense.

Accrued Expenses
As of 12/27/11, Denton, Inc. had already paid
$1,900,000 in wages for the year. Denton pays its employees every Friday.
Year-end, 12/31/11, falls on a Wednesday. The employees have earned total wages of $50,000 for
Monday through Wednesday of the week ending
1/02/12.

As of 12/27/11, Denton, Inc. had already paid
$1,900,000 in wages for the year. Denton pays its employees every Friday.
Year-end, 12/31/11, falls on a Wednesday. The employees have earned total wages of $50,000 for
Monday through Wednesday of the week ending
1/02/12.
Wage Expense
Wage Payable
$50,000
$50,000

Accounting Estimates
– Amortization
– Bad debts
– Income taxes

Accounting Estimates
• Certain circumstances require adjusting entries to record accounting estimates.
• Examples include . . .
• Amortization
• Bad debts
• Income taxes
Let’s look at the adjustment for amortization expense.

Amortization
The accounting concept of amortization involves the systematic and rational allocation of the cost of a long-term asset to the multiple accounting periods during which it is used to generate revenue.
This is a “cost allocation” concept, not a “valuation” concept.

Amortization
The required journal entry includes a debit to
Amortization expense and a credit to an account called Accumulated amortization.
Date Description
Dec 31 Amortization Expense
Accumulated Amortization
Debit
$$$$
Credit
$$$$
This is called a Contra-Asset account.

Amortization - Example
At April 30, 2011, Van Houtte’s trial balance showed
Property and equipment of $313,900 ( all numbers in thousands ) and Accumulated amortization of $195,100.
For the period, Van Houtte needs to record an additional
$2,400 in amortization.
Amortization Expense $2,400
Accumulated Amortization $2,400

Accounting Cycle
During the period:
•Analyze transactions.
•Record journal entries.
•Post amounts to general ledger
Close revenues, gains, expenses, and losses to
Retained Earnings.
At the end of the period:
•Adjust revenues and expenses
•Prepare financial statements
•Provide statements to users