© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Chapter
4
THE ACCOUNTING
CYCLE:
Accruals and Deferrals
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
At the end of the
period, we need to
make adjusting entries
to ge...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Adjusting
entries are
needed whenever
revenue or expenses
affect ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Converting
assets to
expenses
Converting
assets to
expenses
Accru...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Prior Periods Current Period Future Periods
Transaction
Paid futu...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Examples Include:
Depreciation
Supplies
Expiring Insurance Polici...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Jan. 1 Dec. 31
$2,400 Insurance Policy
Coverage for 12 Months
$20...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
GENERAL JOURNAL
Date Account Titles and Explanation
P
R Debit Cre...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The costs are expensed as they are used to
generate revenue.
The ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Insurance Expense
1/31 200
Unexpired Insurance
1/1 2,400 1/31 200...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Depreciation is the systematic allocation
of the cost of a deprec...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The portion of an asset’s utility that is used
up must be expense...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
On May 2, 2003, JJ’s Lawn Care Service
purchased a lawn mower wit...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
JJ’s Lawn Care Service would make the
following adjusting entry.
...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
JJ’s $15,000 truck is depreciated over 60
months as follows:
JJ’s...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Accumulated depreciation would
appear on the balance sheet as
fol...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Prior Periods Current Period Future Periods
Transaction
Collected...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Examples Include:
Airline Ticket Sales
Sports Teams’ Sales of
Sea...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Jan. 1 Dec. 31
$6,000 Rental Contract
Coverage for 12 Months
$500...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
GENERAL JOURNAL
Date Account Titles and Explanation
P
R Debit Cre...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Over time, the revenue is recognized as it is
earned.
Over time, ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Rental Revenue
1/31 500
Unearned Rental Revenue
1/31 500 1/1 6,00...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Prior Periods Current Period Future Periods
Transaction
Liability...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Examples Include:
Interest
Wages and Salaries
Property Taxes
Hey,...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Monday,
May 29
Friday,
June 2
$3,000 Wages
Expense
On May 31, Web...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
GENERAL JOURNAL
Date Account Titles and Explanation
P
R Debit Cre...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Wages Expense
5/31 3,000
Wages Payable
5/31 3,000
Income Statemen...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Monday,
May 29
Friday,
June 2
$5,000 Weekly Wages
Let’s look at t...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The liability is extinguished when the debt is
paid.
The liabilit...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Prior Periods Current Period Future Periods
Transaction
Receivabl...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Examples Include:
Interest Earned
Work Completed But Not
Yet Bill...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Saturday,
Jan. 15
Tuesday,
Feb. 15
$170 Interest
Revenue
On Jan. ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
GENERAL JOURNAL
Date Account Titles and Explanation
P
R Debit Cre...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Interest Revenue
1/31 170
Interest Receivable
1/31 170
Income Sta...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Saturday,
Jan. 15
Tuesday,
Feb. 15
$320 Monthly Interest
$170 Int...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The receivable is collected in a future period.The receivable is ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
As a corporation earns taxable income, it
incurs income taxes exp...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Costs are matched with revenue
in two ways:
Costs are matched wit...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
An item is “material” if knowledge of the
item might reasonably i...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Journalize
transactions.
Post entries to
the ledger
accounts.
Pre...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
End of Chapter 4End of Chapter 4
Upcoming SlideShare
Loading in...5
×

Whbm04

498

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
498
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
69
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • 2
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 3
  • 4
  • Whbm04

    1. 1. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Chapter 4 THE ACCOUNTING CYCLE: Accruals and Deferrals
    2. 2. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements.
    3. 3. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Adjusting entries are needed whenever revenue or expenses affect more than one accounting period. Every adjusting entry involves a change in either a revenue or expense and an asset or liability. Adjusting EntriesAdjusting Entries
    4. 4. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Converting assets to expenses Converting assets to expenses Accruing unpaid expenses Accruing unpaid expenses Converting liabilities to revenue Converting liabilities to revenue Accruing uncollected revenues Accruing uncollected revenues Types of Adjusting EntriesTypes of Adjusting Entries
    5. 5. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Prior Periods Current Period Future Periods Transaction Paid future expenses in advance (creates an asset). Transaction Paid future expenses in advance (creates an asset). End of Current Period Adjusting Entry Recognize portion of asset consumed as expense, and Reduce balance of asset account. Adjusting Entry Recognize portion of asset consumed as expense, and Reduce balance of asset account. Converting Assets to ExpensesConverting Assets to Expenses
    6. 6. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Examples Include: Depreciation Supplies Expiring Insurance Policies Converting Assets to ExpensesConverting Assets to Expenses
    7. 7. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Jan. 1 Dec. 31 $2,400 Insurance Policy Coverage for 12 Months $200 Monthly Insurance Expense On January 1, Webb Co. purchased a one- year insurance policy for $2,400. On January 1, Webb Co. purchased a one- year insurance policy for $2,400. Converting Assets to ExpensesConverting Assets to Expenses
    8. 8. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Jan. 1 Unexpired Insurance 2,400 Cash 2,400 Purchase a one-year insurance policy. Initially, costs that benefit more than one accounting period are recorded as assets. Initially, costs that benefit more than one accounting period are recorded as assets. Converting Assets to ExpensesConverting Assets to Expenses
    9. 9. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The costs are expensed as they are used to generate revenue. The costs are expensed as they are used to generate revenue. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Monthly Adjusting Entry for Insurance Jan. 31 Insurance Expense 200 Unexpired Insurance 200 Insurance expense for January. Converting Assets to ExpensesConverting Assets to Expenses
    10. 10. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Insurance Expense 1/31 200 Unexpired Insurance 1/1 2,400 1/31 200 Bal. 2,200 Income Statement Cost of assets used this period to generate revenue. Income Statement Cost of assets used this period to generate revenue. Balance Sheet Cost of assets that benefit future periods. Balance Sheet Cost of assets that benefit future periods. Converting Assets to ExpensesConverting Assets to Expenses
    11. 11. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin 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. Depreciable assets are physical objects that retain their size and shape but lose their economic usefulness over time. Depreciable assets are physical objects that retain their size and shape but lose their economic usefulness over time. The Concept of DepreciationThe Concept of Depreciation
    12. 12. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The portion of an asset’s utility that is used up must be expensed in the period used. The portion of an asset’s utility that is used up must be expensed in the period used. Cash (credit) Cash (credit) Fixed Asset (debit) Fixed Asset (debit) On date when initial payment is made . . . The asset’s usefulness is partially consumed during the period. At end of period . . . Accumulated Depreciation (credit) Accumulated Depreciation (credit) Depreciation Expense (debit) Depreciation Expense (debit) The Concept of DepreciationThe Concept of Depreciation
    13. 13. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin On May 2, 2003, JJ’s Lawn Care Service purchased a lawn mower with a useful life of 50 months for $2,500 cash. Using the straight-line method, calculate the monthly depreciation expense. $2,500 50 =$50$50 Depreciation expense (per period) = Cost of the asset Estimated useful life Depreciation Is Only an EstimateDepreciation Is Only an Estimate
    14. 14. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin JJ’s Lawn Care Service would make the following adjusting entry. JJ’s Lawn Care Service would make the following adjusting entry. GENERAL JOURNAL Date Account Titles and Explanation P RDebit Credit May 31 Depreciation Expense: Tools & Eq. 50 Accumulated Depreciation: Tools & Eq. 50 To record one month's depreciation. Contra-assetContra-asset Depreciation Is Only an EstimateDepreciation Is Only an Estimate
    15. 15. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin JJ’s $15,000 truck is depreciated over 60 months as follows: JJ’s $15,000 truck is depreciated over 60 months as follows: GENERAL JOURNAL Date Account Titles and Explanation P RDebit 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 Depreciation Is Only an EstimateDepreciation Is Only an Estimate
    16. 16. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Accumulated depreciation would appear on the balance sheet as follows: Accumulated depreciation would appear on the balance sheet as follows:
    17. 17. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Prior Periods Current Period Future Periods Transaction Collected from customers in advance (creates a liability). Transaction Collected from customers in advance (creates a liability). End of Current Period Adjusting Entry  Recognize portion earned as revenue, and  Reduce balance of liability account. Adjusting Entry  Recognize portion earned as revenue, and  Reduce balance of liability account. Converting Liabilities to RevenueConverting Liabilities to Revenue
    18. 18. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Examples Include: Airline Ticket Sales Sports Teams’ Sales of Season Tickets Converting Liabilities to RevenueConverting Liabilities to Revenue
    19. 19. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Jan. 1 Dec. 31 $6,000 Rental Contract Coverage for 12 Months $500 Monthly Rental Revenue On January 1, Webb Co. received $6,000 in advance for a one-year rental contract. On January 1, Webb Co. received $6,000 in advance for a one-year rental contract. Converting Liabilities to RevenueConverting Liabilities to Revenue
    20. 20. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Jan. 1 Cash 6,000 Unearned Rental Revenue 6,000 Collected $6,000 in advance for rent. Initially, revenues that benefit more than one accounting period are recorded as liabilities. Initially, revenues that benefit more than one accounting period are recorded as liabilities. Converting Liabilities to RevenueConverting Liabilities to Revenue
    21. 21. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Over time, the revenue is recognized as it is earned. Over time, the revenue is recognized as it is earned. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Monthly Adjusting Entry for Rent Revenue Jan. 31 Unearned Rental Revenue 500 Rental Revenue 500 Rental revenue for January. Converting Liabilities to RevenueConverting Liabilities to Revenue
    22. 22. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Rental Revenue 1/31 500 Unearned Rental Revenue 1/31 500 1/1 6,000 Bal. 5,500 Income Statement Revenue earned this period. Income Statement Revenue earned this period. Balance Sheet Liability for future periods. Balance Sheet Liability for future periods. Converting Liabilities to RevenueConverting Liabilities to Revenue
    23. 23. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Prior Periods Current Period Future Periods Transaction Liability will be paid. Transaction Liability will be paid. End of Current Period Adjusting Entry  Recognize expense incurred, and  Record liability for future payment. Adjusting Entry  Recognize expense incurred, and  Record liability for future payment. Accruing Unpaid ExpensesAccruing Unpaid Expenses
    24. 24. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Examples Include: Interest Wages and Salaries Property Taxes Hey, when do we get paid? Accruing Unpaid ExpensesAccruing Unpaid Expenses
    25. 25. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Monday, May 29 Friday, June 2 $3,000 Wages Expense On May 31, Webb Co. owes wages of $3,000. Pay day is Friday, June 2. On May 31, Webb Co. owes wages of $3,000. Pay day is Friday, June 2. Wednesday, May 31 Accruing Unpaid ExpensesAccruing Unpaid Expenses
    26. 26. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit May 31 Wages Expense 3,000 Wages Payable 3,000 To accrue wages owed to employees. Initially, an expense and a liability are recorded. Initially, an expense and a liability are recorded. Accruing Unpaid ExpensesAccruing Unpaid Expenses
    27. 27. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Wages Expense 5/31 3,000 Wages Payable 5/31 3,000 Income Statement Cost incurred this period to generate revenue. Income Statement Cost incurred this period to generate revenue. Balance Sheet Liability to be paid in a future period. Balance Sheet Liability to be paid in a future period. Accruing Unpaid ExpensesAccruing Unpaid Expenses
    28. 28. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Monday, May 29 Friday, June 2 $5,000 Weekly Wages Let’s look at the entry for June 2.Let’s look at the entry for June 2. Wednesday, May 31 $2,000 Wages Expense $3,000 Wages Expense Accruing Unpaid ExpensesAccruing Unpaid Expenses
    29. 29. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The liability is extinguished when the debt is paid. The liability is extinguished when the debt is paid. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit June 2 Wages Expense (for June) 2,000 Wages Payable (accrued in May) 3,000 Cash 5,000 Weekly payroll for May 29-June 2. Accruing Unpaid ExpensesAccruing Unpaid Expenses
    30. 30. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Prior Periods Current Period Future Periods Transaction Receivable will be collected. Transaction Receivable will be collected. End of Current Period Adjusting Entry Recognize revenue earned but not yet recorded, and Record receivable. Adjusting Entry Recognize revenue earned but not yet recorded, and Record receivable. Accruing Uncollected RevenueAccruing Uncollected Revenue
    31. 31. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Examples Include: Interest Earned Work Completed But Not Yet Billed to Customer Accruing Uncollected RevenueAccruing Uncollected Revenue
    32. 32. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Saturday, Jan. 15 Tuesday, Feb. 15 $170 Interest Revenue On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the 15th day of each month. On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the 15th day of each month. Monday, Jan. 31 Accruing Uncollected RevenueAccruing Uncollected Revenue
    33. 33. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Jan. 31 Interest Receivable 170 Interest Revenue 170 To recognize interest revenue. Initially, the revenue is recognized and a receivable is created. Initially, the revenue is recognized and a receivable is created. Accruing Uncollected RevenueAccruing Uncollected Revenue
    34. 34. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Interest Revenue 1/31 170 Interest Receivable 1/31 170 Income Statement Revenue earned this period. Income Statement Revenue earned this period. Balance Sheet Receivable to be collected in a future period. Balance Sheet Receivable to be collected in a future period. Accruing Uncollected RevenueAccruing Uncollected Revenue
    35. 35. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Saturday, Jan. 15 Tuesday, Feb. 15 $320 Monthly Interest $170 Interest Revenue Let’s look at the entry for February 15.Let’s look at the entry for February 15. Monday, Jan. 31 $150 Interest Revenue Accruing Uncollected RevenueAccruing Uncollected Revenue
    36. 36. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The receivable is collected in a future period.The receivable is collected in a future period. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Feb. 15 Cash 320 Interest Revenue (for February) 150 Interest Receivable (accrued Jan. 31) 170 To record interest received. Accruing Uncollected RevenueAccruing Uncollected Revenue
    37. 37. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin As a corporation earns taxable income, it incurs income taxes expense, and also a liability to governmental tax authorities. As a corporation earns taxable income, it incurs income taxes expense, and also a liability to governmental tax authorities. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Dec. 31 Income Taxes Expense 780 Income Taxes Payable 780 Estimated income taxes applicable to taxable income earned in December. Accruing Income Taxes Expense: The Final Adjusting Entry Accruing Income Taxes Expense: The Final Adjusting Entry
    38. 38. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Costs are matched with revenue in two ways: Costs are matched with revenue in two ways:  Direct association of costs with specific revenue transactions.  Direct association of costs with specific revenue transactions.  Systematic allocation of costs over the “useful life” of the expenditure.  Systematic allocation of costs over the “useful life” of the expenditure. Adjusting Entries and Accounting Principles Adjusting Entries and Accounting Principles
    39. 39. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin An item is “material” if knowledge of the item might reasonably influence the decisions of users of financial statements. An item is “material” if knowledge of the item might reasonably influence the decisions of users of financial statements. Supplies Lightbulbs Many companies immediately charge the cost of immaterial items to expense. The Concept of MaterialityThe Concept of Materiality
    40. 40. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Make end-of- year adjustments. Prepare adjusted trial balance. Recall from the accounting cycle discussed in Chapter 3, that after the adjusting entries are made, an adjusted trial balance is prepared. Recall from the accounting cycle discussed in Chapter 3, that after the adjusting entries are made, an adjusted trial balance is prepared. Effects of the Adjusting Entries
    41. 41. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin End of Chapter 4End of Chapter 4
    1. A particular slide catching your eye?

      Clipping is a handy way to collect important slides you want to go back to later.

    ×