Financial Accounting
Chapter 4
Accruals and Prepayments
Original notes by:
COBY HARMON (2019 – Wiley)
MOHD.NIZAL HAMID et al. (2018 - Oxford)
Modified by: Norlida Mahussin
FST, USIM
This notes is used ONLY for SMW2033 Financial Accounting for Financial Mathematics and, Actuarial Science
and Risk Management program at FST USIM
in
earned basis
-
reverretire cash
yuklan
Learning Objective 1
Explain the Accrual Basis of
Accounting and the Reasons for
Adjusting Entries
Cashflow
statements
j
penting utl
pergeraunr
keluar masuk
duit
LO 1
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2
Periodicity Assumption
·
stateor
c
an organization can report its financial results
within certain designated periods of time. This
typically means that an entity consistently
reports its results and cash flows on a monthly,
quarterly, or annual basis.
Accountants divide the economic life of a business into
artificial time periods
generally asmal
month,
lcomlp. quarter,(or year.
time
designated period of
Jan.
•
•
LO 1
Feb.
.....
Mar.
Apr.
Quarterly and annual financial statements
• Prepared by most large companies
Reporting periods can be
• Calendar year from January 1 to
December 31
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Dec.
HELPFUL HINT
An accounting time
period
that is one year
long is
called a fiscal year.
3
Accrual-Basis and Revenue Recognition
revenue recognize bila
#
realized
&
earned
Revenue Recognition Principle
Recognize revenue in the
accounting period in which the
performance obligation is
v
satisfied.
-
not
when
cashis to
cesarean
no
Revenue Recognition
Satisfied
performance
obligation
generally accepted
accounting principle
what?
Revenue
3
Recognition?
definition
(GAAP) that identifies the
specific conditions in which
revenue is recognized and
determines how to account for
it.
when
Revenue is
recognized
&
has occurred
->product/service
~
LO 1
Critical event
has been delivered to cust
Bamount easily measurable
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Customer
requests
service
Cash
received
Revenue should be
recognized in the
accounting period in which
the service is performed.
4
Revenue Recognition
Step 1: Identify the contract
with customers.
A contract is an agreement between two parties that
creates enforceable rights or obligations. Sierra has a
contract with the Lewis family to provide guide
services.
Step 2: Identify the separate
performance obligations in
the contract.
Sierra has only one performance obligation—to
provide guide services. If Sierra also agreed to sell
the customer camping equipment, a separate
performance obligation is recorded for this promise.
Step 3: Determine the
transaction price.
The transaction price is the amount of consideration
that a company expects to receive from a customer
in exchange for transferring a good or service. The
ada
transaction price for Sierra is $1,500. mesti
value
TP
Step 4: Allocate the transaction
price to the separate Sp
performance obligations.
Sierra has only one performance obligation—to
provide guide services to the Lewis family.
Step 5: Recognize revenue
when each performance
obligation is satisfied.B
Sierra recognizes revenue of $1,500 for providing
guide services to the Lewis family when it satisfies its
performance obligation—the completion of the
guide trip.
IIDAR,
LO 1
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5
Accrual-Basis and Expense Recognition
Expense Recognition Principle
Expense Recognition
Companies recognize expenses in
the period in which they make
efforts (consume assets or incur
liabilities) to generate revenue.
incurred
Matching
Revenues
cost
Delivery
“Let the expenses
follow the revenues.”
generates
lmonths
LO 1
Advertising
Prepaid
-
bila
asset
( but
dhyana
-
expenses )
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Utilities
Expenses
6
Revenue and Expense Recognition
Periodicity Assumption
GAAP
Relationships
Economic life of business can be
divided into artificial time periods.
Revenue Recognition
Principle
Expense Recognition
Principle
Recognize revenue in the
accounting period in which the
performance obligation is satisfied.
Recognize expenses with revenues
in the period when the company
makes efforts to generate those
revenues.
Revenue and Expense Recognition
In accordance with generally
accepted accounting principles
(GAAP).
LO 1
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7
Accrual versus Cash Basis Accounting (1 of 2)
Accrual-Basis Accounting
• Transactions recorded in the periods in which the
Cevents occur3
• Companies recognize revenues when they perform
services rather than when they receive cash /
• Expenses are recognized when incurred rather than
when paid recognize expenses to generate revenue
*
• In accordance with generally accepted accounting
principles (GAAP)
LO 1
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8
Accrual- versus Cash Basis Accounting (2 of 2)
Cash-Basis Accounting
• Revenues recognized when cash is received
• Expenses recognized when cash is paid
• Cash-basis accounting is not in accordance with
generally accepted accounting principles (GAAP)
LO 1
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9
how
statements
cash
-
Comparing Accrual- versus Cash Basis
2021
Activity
Accrual
basis
Cash
basis
2022
Purchased paint, painted
building, paid employees
Revenue
Expense
Net income
Received payment for work
€
&
done in 2021
R
$80,000
Revenue
50,000
Expense
$30,000 Cac:Hail Net Income
generate$0
Expense marred 50,000
✓
$0
0
$0
-
Revenue tan
Net loss
close
-
$(50,000)
Revenue
$80,000
Expense
0
Net income $80,000
-
-
↑
+ ve
LO 1
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10
Need for Adjusting Entries
• To ensure that the revenue recognition and expense
recognition principles are followed a
• Necessary because the trial balance may not contain
up-to-date and complete data • Required every time a company prepares financial
CR, EC
statements acc
SOPL & other comprehensive
• Will include one income statement account and one
balance sheet account
* PL-revenue, expenses
SOFP (A,
LO 1
L, OES
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SOIP-Asset, Liabilities,
· rver's equity-
11
Categories of Adjusting Entries
rese
Deferrals bayard
*
LO 1
Accruals
1. Prepaid Expenses. Expenses
paid in cash before they are
used or consumed.
1. Accrued Revenues.
Revenues for services
performed but not yet
received in cash or recorded.
2. Unearned Revenues.
Cash received before
services are performed.
2. Accrued Expenses.
Expenses incurred but not
yet paid in cash or recorded.
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12
Trial Balance
Sierra Corporation
Trial Balance
October 31, 2022
Debit
Subsequent
examples are
based on this
trial balance
from Chapter 3.
Cash
Supplies
Prepaid Insurance
Equipment
Notes Payable
Accounts Payable
Unearned Service Revenue
Common Stock
Retained Earnings
Dividends
Service Revenue
Salaries and Wages Expense
Rent Expense
$15,200
2,500
600
5,000
$ 5,000
2,500
1,200
10,000
0
500
10,000
4,000
900
$28,700
LO 1
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Credit
$28,700
13
Learning Objective 2
Prepare Adjusting Entries for Deferrals
LO 2
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14
Adjusting Entries for Deferrals
penangguan
Deferrals are costs or revenues that are recognized at a date
later than the point when cash was originally exchanged
-
Types of deferrals:
• Prepaid expenses
• Unearned revenues
Analyze
Adjusted
Trial
Balance
LO 2
Journalize
Financial
Statements
Post
Trial
Balance
Closing
Entries
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Journalize
and Post
AJEs
Post-Closing
Trial Balance
15
Prepaid Expenses
Payments of expenses that are recorded as an asset to
show the service or benefit the company will receive in
the future.
asset
=
cash
Cash Payment
BEFORE
Expense Recorded
Prepayments often occur in regard to
LO 2
• insurance
• rent
• supplies
• equipment
• advertising
• buildings
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16
Prepaid Expenses
• Expire either with the passage of time or through use
• Adjusting entry
▪
Increase (debit) to an expense account and
▪
Decrease (credit) to an asset account
dah guna
so debit
Asset
Unadjusted
Balance
LO 2
Expense
Credit
Adjusting
Entry (-)
Debit
Adjusting
Entry (+)
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17
Situation
1:
suppliespayable
2500
2500
apment
Supplies
(asset
O liability
Illustration:CSierra Corporation purchased supplies costing
I
prep
increase
debit
acc)
supplies
=
$2,500 on October 5. Sierra recorded the payment by
increasing (debiting) the asset Supplies.xThis account shows a
balance ofFadjusted
$2,500 in the October 31 trial balance. An cost of
inventory count at the close of business on October 31 supplies
used
reveals that $1,000 of supplies are still on hand.-@ 2500 1000
=
-
=1500
Oct. 31 Supplies Expense
Supplies
(To record supplies used)
S
recognized
end
at the
acC
of
period
LO 2
1,500
1,500
-
difference bet ween the balance in the supplies
(asset) account and the actual cost of supplies on
hand gives the supplies used (an expense) for that
period.
balance
-
actual
cost on
hand
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I
supplies used
L
(expense)
18
Adjustment for Supplies
The expense Supplies Expense is increased $1,500; the asset Supplies is
decreased $1,500.
Basic
Analysis
Equation
Analysis
=
Supplies
=
Supplies Expense
-$1,500
=
-$1,500
Supplies Expense
Supplies
(To record supplies used)
Supplies
Oct. 5
Oct. 31
Liabilities
+
Stockholders’ Equity
Debits increase expenses: debit Supplies Expense $1,500.
Credits decrease assets: credit Supplies $1,500.
Oct. 31
Journal
Entry
LO 2
Assets
(1)
Debit-Credit
Analysis
Posting
to
Ledger
-
- OF
You hand
1,500
SOPU
P
Supplies Expense
2,500 Oct. 31 Adj. 1,500
Bal. 1,000
1,500
↓
supplies
Oct. 31
Adj. 1,500
Oct. 31
Bal. 1,500
usedoctober
In
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19
must
be
paid
in
②4
advance, often
O,
Insurance
prepaid
1 year
Companies purchase insurance
to protect themselves from
losses caused by fire, theft,
and unforeseen accidents.
insurance
Illustration: On October 4, Sierra Corporation paid $600 for a
one-year fire insurance policy. Coverage began on October 1.
Sierra recorded the payment by increasing (debiting) Prepaid
Insurance. This account shows a balance of $600 in the
October 31 trial balance. Insurance of $50 ($600 ÷ 12)
expires each month.
Oct. 31 Insurance Expense
Prepaid Insurance
(To record expired insurance)
~
debit
50
prepaid insurance
when its
LO 2
50
paid
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20
Adjustment for Insurance
Equation
Analysis
=
Prepaid Insurance
=
Insurance Expense
-$50
=
-$50
(1)
+
Oct. 31
Journal
Entry
Insurance Expense
Prepaid Insurance
(To record insurance expired)
50
50
Prepaid Insurance
Oct. 4
600 Oct. 31
Oct. 31
after
Stockholders’ Equity
Debits increase expenses: debit Insurance Expense $50.
Credits decrease assets: credit Prepaid Insurance $50.
Debit-Credit
Analysis
Insurance Expense
Adj. 50
Oct. 31
Adj. 50
7
Oct. 31
Bal. 50
Bal. 550
adjustment,
↓
X
PI shows bal 550
N
M
cost that supplies to the
months of ins. coverage
Copyright ©2019
which represent
LO2
Liabilities
The expense Insurance Expense is increased $50; the asset Prepaid
Insurance is decreased $50.
Basic
Analysis
Posting
to
Ledger
Assets
remaining
11
11x50
=
550,
at the
so,
same time,
that's
why
bal
wena
IE: insurance
do
(expenses).
John Wiley & Son, Inc.
understated
cost;
digunaked pada
adjustment. If not, It will
oct
be
PI is overstated (profit)
21
Amortization
(other terms)
Depreciation
-
private companies
cost of
long-lived, non-current
asset
• Buildings, equipment, and motor vehicles (assets that
provide service for many years) are recorded as
assets, rather than an expense, on the date acquired
historical cost
• Depreciation is the process of allocating the cost of
length of service
an asset to expense over its Cuseful life ( of depreciable
a
asset
• Depreciation does not attempt to report the actual
change in the value of the asset
-
▪
An allocation concept, not a valuation concept
land Casset);
·
LO 2
has
unlimited useful
life,
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it is
NOT
DEPRECIATED
22
annual
Depreciation
depreciation
expense
cost
-
useful
life
Illustration: For Sierra Corporation, assume that depreciation
on the equipment is $480 a year, or $40 per month.
acc
Asset
I contra
Oct. 31 Depreciation Expense
Accumulated Depreciation
(To record depreciation)
40
40
Accumulated Depreciation is called a contra asset account.
LO 2
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23
Adjustment for Depreciation (1 of 2)
Basic
Analysis
The expense Depreciation Expense is increased $40; the contra asset
Accumulated Depreciation—Equipment is increased $40.
represents the cumulative total of the depreciation expense since
the asset was purchased, less any reductions when assets are sold.
Assets
Equation
Analysis
Journal
Entry
LO2
Liabilities
Accumulated
Depreciation—Equipment =
-$40
Debit-Credit
Analysis
=
+
increateentrestatetears
Stockholders’ Equity
Depreciation Expense
=
-$40
Debits increase expenses: debit Depreciation Expense $40. Credits
increase contra assets: credit Accumulated Depreciation—
Equipment $40.
Oct. 31
Depreciation Expense
Accumulated Depreciation—
Equipment
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40
40
24
Adjustment for Depreciation
Oct. 31
Journal
Entry
(2 of 2)
Depreciation Expense
40
Accumulated Depreciation—
Equipment
40
Faster
Posting
to
Ledger
Equipment
Oct. 2
Oct. 31
adjust
ooÑ%°
so PL
Depreciation Expense
5,000
Oct. 31
Adj. 40
Bal. 5,000
Oct. 31
Bal. 40
so F- p
Accumulated Depreciation—Equipment
Oct. 31
Adj. 40
Oct. 31
Bal. 40
E-
-NeFhÉ
Value
ILLUSTRATION 4.9
LO2
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25
Reporting Depreciation
• Accumulated Depreciation
• A contra asset account with a normal credit balance
• Offsets the related asset account on the balance
sheet *offset against asset acc
• Book value is the difference between the cost of any
depreciable asset and its accumulated depreciation
Equipment
Less: Accumulated depreciation—equipment
I
LO 2
the purpose of depreciation is not to state an asset's value, but to allocate its cost over time.
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$5,000
40
$4,960
26
expenses
2.
Prepaid Expenses
as
paid
assets
in
recorded
cash
before
they
used.
Accounting for Prepaid Expenses
Examples
rInsurance,
supplies,
-advertising, rent,
depreciation ·
LO 2
Reason for
Adjustment
Accounts
Before
Adjustment
Adjusting
Entry
Prepaid expenses
originally recorded
in asset accounts
have been used.
Assets
overstated.
Expenses
understated.
Dr. Expenses
Cr. Assets
or Contra
Assets
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27
Unearned Revenues
cash receive
in
advance
rent
a
=>magazine
cust
subscript
deposit
Receipt of cash before the service is performed is
recorded as a liability—unearned revenue. f
will
provide
in
future.
Cash Receipt
BEFORE
Revenue Recorded
Unearned revenues often occurs in regard to:
LO 2
• Rent
• Magazine subscriptions
• Airline tickets
• Customer deposits
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28
t
ree
opposi
t
e
Unearned Revenues
• Adjusting entry is made to record the revenue for
services performed during the period and to show
the liability that remains at the end of the period
• Results in a decrease (debit) to a liability account and
an increase (credit) to a revenue account
Liability
Debit
Adjusting
Entry (-)
LO 2
Revenue
Unadjusted
Balance
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Credit
Adjusting
Entry (+)
29
Unearned Revenues
Illustration: Sierra Corporation received $1,200 on October 2
from R. Knox for advertising services expected to be
completed by December 31. Unearned Service Revenue
shows a balance of $1,200 in the October 31 trial balance.
Analysis reveals that the company performed $400 of
services in October.
Oct. 31 Unearned Service Revenue
Service Revenue
LO 2
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400
400
30
Adjustment for Unearned Revenue
Basic
Analysis
The liability Unearned Service Revenue is decreased $400; the revenue
Service Revenue is increased $400.
Assets
=
Liabilities
Unearned
= Service Revenue
Equation
Analysis
=
Debit-Credit
Analysis
Journal
Entry
Unearned Service Revenue
Service Revenue
Adj. 400 Oct. 2
Oct. 31
LO 2
+$400
Debits decrease liabilities: debit Unearned Service Revenue $400.
Credits increase revenues: credit Service Revenue $400.
Oct. 31
Oct. 31
Service Revenue
-$400
Unearned Service Revenue
Posting
to
Ledger
+ Stockholders’ Equity
400
400
Service Revenue
1,200
Bal. 800
L
Oct. 3
10,000
31
Adj. 400
Oct. 31 Bal. 10,400
At the same time, Ser vice Revenue shows total
After adjustment, the liability Unearned Revenue shows a
balance of $800, which represents the remaining advertising
revenue earned in October of $10,000.
31
Copyright
©2019
services expected to be performed
in the
future.John Wiley & Son, Inc.
receatare
ae
Unearned Revenue Cash
*
Accounting for Unearned Revenues
Examples
Reason for
Adjustment
Rent,
magazine
subscriptions,
customer
deposits for
future service
Unearned revenues
recorded in liability
accounts are now
recognized as
revenue for services
performed.
LO 2
Accounts
Before
Adjustment
Liabilities
overstated.
Revenues
understated.
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Adjusting
Entry
Dr. Liabilities
Cr. Revenues
32
DO IT! 2: Adjusting Entries Deferrals (1 of 5)
The ledger of Hammond Inc. on March 31, 2022, includes these selected accounts
before adjusting entries are prepared.
Debit
Credit
Prepaid Insurance
$ 3,600
Supplies
2,800
Equipment
25,000
Accumulated Depreciation—Equipment
$5,000
Unearned Service Revenue
9,200
An analysis of the accounts shows the following.
1. Insurance expires at the rate of $100 per month. IE
PE
2. Supplies on hand total $800. KSE
DE
3. The equipment depreciates $200 a month. 2 AD
4. During March, services were performed for $4,000 of the unearned service
revenue reported.
↑USR
SR
Prepare the adjusting entries for the month of March.
-
LO 2
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33
DO IT! 2: Adjusting Entries Deferrals (2 of 5)
The ledger of Hammond Inc. on March 31, 2022, includes these selected accounts
before adjusting entries are prepared.
Debit
Credit
Prepaid Insurance
$ 3,600
Supplies
2,800
Equipment
25,000
Accumulated Depreciation—Equipment
$5,000
Unearned Service Revenue
9,200
C
1. Insurance expires at the rate of $100 per month.
Oct. 31 Insurance Expense
Prepaid Insurance
LO 2
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100
100
34
DO IT! 2: Adjusting Entries Deferrals (3 of 5)
The ledger of Hammond Inc. on March 31, 2022, includes these selected accounts
before adjusting entries are prepared.
Debit
Credit
Prepaid Insurance
$ 3,600
Supplies
2,800
Equipment
25,000
Accumulated Depreciation—Equipment
$5,000
Unearned Service Revenue
9,200
C
-
-
2. Supplies on hand totaled $800.
bal TB
2800
-
-
Oct. 31 Supplies Expense
Supplies
LO 2
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or
hand: SE
800
=
2000
2,000-
2,000
r
35
DO IT! 2: Adjusting Entries Deferrals (4 of 5)
The ledger of Hammond Inc. on March 31, 2022, includes these selected accounts
before adjusting entries are prepared.
Debit
Credit
Prepaid Insurance
$ 3,600
Supplies
2,800
Equipment
25,000
Accumulated Depreciation—Equipment
$5,000
Unearned Service Revenue
9,200
-
3. The equipment depreciates $200 a month.
Oct. 31 Depreciation Expense
Accumulated Depreciation……..Equipment
LO 2
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200
200
36
DO IT! 2: Adjusting Entries Deferrals (5 of 5)
The ledger of Hammond Inc. on March 31, 2022, includes these selected accounts
before adjusting entries are prepared.
Debit
Credit
Prepaid Insurance
$ 3,600
Supplies
2,800
Equipment
25,000
Accumulated Depreciation—Equipment
$5,000
Unearned Service Revenue
9,200
C
4. During March, services were performed for $4,000 of the
unearned service revenue reported.
Oct. 31 Unearned Service Revenue
Service Revenue
LO 2
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4,000
4,000
37
Learning Objective 3
Prepare Adjusting Entries for Accruals
LO 3
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38
ASE
accrual:
revenues
record
*
earned/
Adjusting Entries for Accruals
expenses
incurred
Accruals are made to record
v
• Revenues for services performed but not yet
recorded at the statement date
• Expenses incurred but not yet paid or recorded at the
statement date
Analyze
Adjusted
Trial
Balance
LO 3
Journalize
Financial
Statements
Post
Trial
Balance
Closing
Entries
Copyright ©2019 John Wiley & Son, Inc.
Journalize
and Post
AJEs
Post-Closing
Trial Balance
39
extra
Unlike prepayments, accruals have not been
notes:
↓
recognized through daily entries and thus are not yet
reflected in the accounts.
Until an accrual adjustment is made, the revenue
account (and the related asset account), or the
expense account (and the related liability account), is
understated.
Thus, adjusting entries for accruals will increase
both a statement of financial position account and
an income statement account.
Accrued Revenues
earned
Revenues for services performed but not yet received in
cash or recorded.
Revenue Recorded
BEFORE
Accrued revenues occur for
• Interest earned
• Services performed
• Rent rentals
LO 3
Cash Receipt
recevabENROInte
·
·
record revenue
more
earn
been
thathas
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40
Accrued Revenues
• Adjusting entry records the receivable that exists and
records the revenues for services performed
• Adjusting entry:
▪ Increases an asset account with a debit
▪ Increases a revenue account with a credit
Asset
Revenue
Debit
Adjusting
Entry (+)
LO 3
Credit
Adjusting
Entry (+)
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41
Accrued Revenues
Illustration: In October Sierra Corporation performed
services worth $200 that were not billed to clients on or
AReV
before October 31.
Oct. 31 Accounts Receivable rustinTr
200
Service Revenue
200
On November 10, Sierra receives cash of $200 for the
services performed.
cust venting
Nov. 10 Cash
Accounts Receivable
LO 3
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200
200
42
Adjustment for Accrued Revenue
Basic
Analysis
The asset Accounts Receivable is increased $200; the revenue Service
Revenue is increased $200.
Equation
Analysis
Debit-Credit
Analysis
Assets
=
Accounts Receivable
=
Service Revenue
+$200
=
+$200
Accounts Receivable
Service Revenue
Accounts Receivable
Posting
to
Ledger
LO 3
+
Stockholders’ Equity
Debits increase assets: debit Accounts Receivable $200.
Credits increase revenues: credit Service Revenue $200.
Oct. 31
Journal
Entry
Liabilities
Oct. 31
Adj. 200
Oct. 31
Bal. 200
200
200
Service Revenue
Oct. 3
31
31
10,000
400
Adj. 200
Oct. 31 Bal. 10,600
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43
Accrued Revenues
Accounting for Accrued Revenues
Examples
Interest,
rent, services
LO 3
Reason for
Adjustment
Services performed
but not yet received
in cash or recorded.
Accounts
Before
Adjustment
Adjusting
Entry
Assets
Dr. Assets
understated. Cr. Revenues
Revenues
understated.
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44
Accrued Expenses
Expenses incurred but not yet paid in cash or recorded.
Expense Recorded
BEFORE
Cash Payment
Accrued expenses are often recognized for
• Rent
• Taxes -property
Incone
~
• Interest
LO 3
• Salaries
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45
Accrued Expenses
①
a
• Adjusting entry records the obligation and recognizes
the expense
▪
Increase an expense account with a debit
▪
Increase a liability account with a credit
Expense
Liability
Debit
Adjusting
Entry (+)
LO 3
Credit
Adjusting
Entry (+)
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46
IEap.
Accrued Interest
I Payable
Illustration: Sierra Corporation signed a three-month note
payable in the amount of $5,000 on October 1. The note
requires Sierra to pay interest at an annual rate of 12%.
Face Value
Annual
Time in Terms
of Note
x Interest Rate x of One Year =
$5,000
x
12%
x
1/12
Oct. 31 Interest Expense
Interest Payable
LO 3
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=
Interest
$50
50
50
47
Adjustment for Accrued Interest
Basic
Analysis
The expense Interest Expense is increased $50; the liability Interest
Payable is increased $50.
Assets
Equation
Analysis
Debit-Credit
Analysis
Journal
Entry
Posting
to
Ledger
LO 3
=
Liabilities
+ Stockholders’ Equity
=
Interest Payable
Interest Expense
=
+$50
-$50
Debits increase expenses: debit Interest Expense $50.
Credits increase liabilities: credit Interest Payable $50.
Oct. 31
Interest Expense
Interest Payable
(To record interest on notes payable)
Interest Expense
50
50
Interest Payable
Oct. 31
Adj. 50
Oct. 31
Adj. 50
Oct. 31
Bal. 50
Oct. 31
Bal .50
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48
Accrued Salaries
Illustration: Sierra Corporation paid salaries and wages on
October 26; the next payment of salaries C
will not occur until
November 9. The employees receive total salaries of $2,000
for a five-day work week, or $400 per day.
-
-
LO 3
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49
Adjustment for Accrued Salaries
The expense Salaries and Wages Expense is increased $1,200; the
liability Salaries and Wages Payable is increased $1,200.
Basic
Analysis
Assets
=
Liabilities
Salaries and Wages
=
Payable
Equation
Analysis
=
+$1,200
Journal
Entry
Oct. 31
Salaries and Wages Expense
Salaries and Wages Payable
Salaries and Wages Expense
LO 3
Salaries and Wages
Expense
-$1,200
Debits increase expenses: debit Salaries and Wages Expense $1,200.
Credits increase liabilities: credit Salaries and Wages Payable $1,200.
Debit-Credit
Analysis
Posting
to
Ledger
+ Stockholders’ Equity
1,200
1,200
Salaries and Wages Payable
Oct. 26
31
4,000
Adj. 1,200
Oct. 31
Adj. 1,200
Oct. 31
Bal. 5,200
Oct. 31
Bal. 1,200
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50
Accrued Expenses
ILLUSTRATION 4.23
Accounting for accrued expenses
Accounting for Accrued Expenses
Examples
Interest,
rent, salaries
LO 3
Reason for
Adjustment
Accounts
Before
Adjustment
Expenses have
been incurred but
not yet paid in
cash or recorded.
Expenses
Dr. Expenses
understated. Cr. Liabilities
Liabilities
understated.
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Adjusting
Entry
51
Summary of Adjustments
Type of Adjustment Accounts Before Adjustment Adjusting Entry
Prepaid expenses
LO 3
Assets overstated.
Expenses understated
Dr. Expense
Cr. Assets or
Contra Assets
Unearned revenues Liabilities overstated.
Revenues understated.
Dr. Liabilities
Cr. Revenues
Accrued revenues
Assets understated.
Revenues understated.
Dr. Assets
Cr. Revenues
Accrued expenses
Expenses understated.
Liabilities understated.
Dr. Expenses
Cr. Liabilities
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52
DO IT! 3: Adjusting Entries Accruals (1 of 3)
Micro Computer Services began operations on August 1, 2022. At
the end of August 2022, management prepares monthly financial
statements. The following information relates to August.
O
1. At August 31, the company owed its employees $800 in
ET salaries and wages that will be paid on September 1.
P
2. On August 1, the company borrowed $30,000 from a local
bank on a 15-year mortgage. The annual interest rate is 10%.
400 x 109x Ye: 250
TEE
3. Revenue for services performed but unrecorded for August
totaled $1,100.
Prepare the adjusting entries needed at August 31, 2022.
LO 3
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53
both situation
accrued
Exp
DO IT! 3: Adjusting Entries Accruals (2 of 3)
Prepare the adjusting entries needed at August 31, 2022.
C
1. At August 31, the company owed its employees $800 in
salaries and wages that will be paid on September 1.
berapa
is
company ored dgn employee
Aug. 31 Salaries and Wages Expense
Salaries and Wages Payable
800
800
2. On August 1, the company borrowed $30,000 from a local
bank on a 15-year mortgage. The annual interest rate is 10%.
Aug. 31 Interest Expense
Interest Payable
LO 3
250
70
x10%XY2
Copyright ©2019 John Wiley & Son, Inc.
250
=
(time in
terms of
1 years
250
54
DO IT! 3: Adjusting Entries Accruals (3 of 3)
Prepare the adjusting entries needed at August 31, 2022.
3. Revenue for services performed but unrecorded for August
totaled $1,100.
Aug. 31 Accounts Receivable
Service Revenue
↑
Accrued
LO 3
1,100
1,100
Revenue
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55
Learning Objective 4
Prepare an Adjusted Trial
Balance and Closing Entries
LO 4
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56
Nature of the Adjusted Trial Balance
• Prepared after adjusting entries are journalized and
posted
• Proves equality of debit and credit balances
• Basis for the preparation of financial statements
Analyze
Analyze
Adjusted
Trial
Balance
LO 4
Journalize
Journalize
Prepare
Financial
Statements
Post
Trial
Balance
Closing
Entries
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Journalize and
Post AJEs
Post-Closing
Trial Balance
57
Sierra Corporation
Adjusted
Trial Balance
with
Adjusted
Accounts
Highlighted
LO 4
Adjusted Trial Balance
October 31, 2022
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation—Equipment
Notes Payable
Accounts Payable
Unearned Service Revenue
Salaries and Wages Payable
Interest Payable
Common Stock
Retained Earnings
Dividends
Service Revenue
Salaries and Wages Expense
Supplies Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense
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Debit
$15,200
200
1,000
550
5,000
Credit
$
40
5,000
2,500
800
1,200
50
10,000
0
500
10,600
5,200
1,500
900
50
50
40
$30,190
$30,190
58
Preparing Financial Statements
Financial Statements are prepared directly from the
Adjusted Trial Balance.
Income
Statement
profit
I
loss
LO 4
Retained
Earnings
StatementI
changes
in
equity
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Balance
Sheet
&
financial
position
59
Preparing Statements from the Trail Balance
LO 4
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60
Preparing the Balance Sheet
LO4
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61
Closing the Books
At the end of the accounting period, the company makes
the accounts ready for the next period.
Analyze
Adjusted
Trial
Balance
LO 4
Journalize
Financial
Statements
Post
Closing
Entries
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Trial
Balance
Adjusting
Entries
Post-Closing
Trial
Balance
62
Temporary and Permanent Accounts
REP
LO 4
ALOE
TEMPORARY
These accounts are closed
PERMANENT
These accounts are not closed
All revenue accounts
All asset accounts
All expense accounts
All liability accounts
Dividends
Stockholders’ equity
accounts
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63
Nature of Closing Entries
• Closing entries formally recognize in the ledger the
net income
retained earnings
transfer of
owner's
->
drawin
• Net income (or net loss) to retained earnings
• Owner’s drawings to retained earnings
RCB
• Produce a zero balance in each C
temporary account.
-
• Generally journalized and posted only at end of the
annual accounting period
-
-
LO 4
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64
Preparing Closing Entries
Revenue
Accounts
Income
Summary
Expense
Accounts
Retained
Earnings
Dividends
LO 4
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65
Close Revenue and Expense Accounts
GENERAL JOURNAL
Date
Account Titles and Explanations
2022 Service Revenue
Income Summary
Oct. 31
(To close revenue account)
31 Income Summary
Salaries and Wages Expense
Supplies Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense
(To close expense accounts)
LO 4
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Ref.
Debit
10,600
Credit
10,600
7,740
5,200
1,500
900
50
50
40
66
Close Income Summary and Dividends
GENERAL JOURNAL
Date
Account Titles and Explanations
2022
Oct. 31 Income Summary
Retained Earnings
(To close net income)
31 Retained Earnings
Dividends
(To close dividends)
LO 4
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Ref.
Debit
Credit
2,860
2,860
500
500
67
Posting of Closing Entries
LO 4
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68
Summary of the Accounting Cycle
1. Analyze business transactions
LO 4
9. Prepare a post-closing trial
balance
2. Journalize the transactions
8. Journalize and post closing
entries
3. Post to ledger accounts
7. Prepare financial
statements
4. Prepare a trial balance
6. Prepare an adjusted trial
balance
5. Journalize and post
adjusting entries
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69
Learning Objective 6
Compare the Procedures for Adjusting
Entries Under GAAP and IFRS
LO 6
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70
A Look at IFRS
Similarities
• Companies applying IFRS also use accrual-basis accounting
to ensure
C that they record transactions that change a
company’s financial statements in the period in which
events occur.
• Similar to GAAP, cash-basis accounting isX
not in accordance
with IFRS.
• IFRS also divides the economic life of companies into
artificial time periods.
↓ Under both GAAP and IFRS, this is
referred to as the periodicity assumption.
• The general revenue recognition principle required by GAAP
that is used in this text is the same as that used under IFRS.
---
- -
. . .
- -
LO 6
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71
A Look at IFRS
Similarities
• Revenue recognition fraud is a major issue in U.S. financial
reporting. The same situation occurssoftware
inL
countries
Susing
Bran NU
dutch
Nu
dutch grower- Ahold
IFRS.
NEC
electronics
-
2par
-
• As evidenced by revenue recognition breakdowns at Dutch
software company Baan NV , Japanese electronics giant
NEC , and Dutch grocer Ahold NV
Differences
• Under IFRS, revaluation (using fair value) of items such as
land and buildings is permitted. IFRS allows depreciation
based on revaluation of assets, which is not permitted
under GAAP.
C
G
-
-
FRS v
*
LO 6
GAAP
x
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72
A Look at IFRS
Differences
• The terminology used for revenues and gains, and expenses and
losses, differs somewhat between IFRS and GAAP.
①
• Income under IFRS includes both revenues, which arise Q
during the normal course of operating activities, and gains,
which arise from activities outside of the normal sales of
goods and services.
• Under0GAAP income refers to the 2
net difference between
revenues and expenses.C
• Under IFRS, expenses include both those costs incurred in the
normal course of operations as well as losses that are not part
of normal operations. This is in contrast to GAAP, which defines
each separately.
LO 6
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73