4-1. 4-2 ACCRUAL ACCOUNTING CONCEPTS Accounting, Fourth Edition 4.

4-2

ACCRUAL ACCOUNTING CONCEPTS

Accounting, Fourth Edition

4

4-3

1. Explain the revenue recognition principle and the expense recognition principle.

2. Differentiate between the cash basis and the accrual basis of accounting.

3. Explain why adjusting entries are needed, and identify the major types of adjusting entries.

4. Prepare adjusting entries for deferrals.

5. Prepare adjusting entries for accruals.

6. Describe the nature and purpose of the adjusted trial balance.

7. Explain the purpose of closing entries.

8. Describe the required steps in the accounting cycle.

9. Understand the causes of differences between net income and cash provided by operating activities.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

4-4

Types of adjusting entries

Adjusting entries for deferrals

Adjusting entries for accruals

Summary of basic relationships

Timing IssuesTiming IssuesTiming IssuesTiming IssuesThe Basics of The Basics of

Adjusting Adjusting EntriesEntries

The Basics of The Basics of Adjusting Adjusting

EntriesEntries

The Adjusted The Adjusted Trial Balance Trial Balance and Financial and Financial StatementsStatements

The Adjusted The Adjusted Trial Balance Trial Balance and Financial and Financial StatementsStatements

Closing the Closing the BooksBooks

Closing the Closing the BooksBooks

Quality of Quality of EarningsEarningsQuality of Quality of EarningsEarnings

Revenue recognition principle

Expense recognition principle

Accrual versus cash basis of accounting

Preparing the adjusted trial balance

Preparing financial statements

Preparing closing entries

Preparing a post-closing trial balance

Summary of the accounting cycle

Earnings management

Sarbanes-Oxley

Accrual Accounting ConceptsAccrual Accounting ConceptsAccrual Accounting ConceptsAccrual Accounting Concepts

4-5

Generally a month, a quarter, or a year.

Fiscal year vs. calendar year

Accountants divide the economic life of a business into artificial time periods (Periodicity Assumption).

SO 1 Explain the revenue recognition principle SO 1 Explain the revenue recognition principle and the expense recognition principle.and the expense recognition principle.

Jan. Feb. Mar. Apr. Dec.. . . . .

Timing IssuesTiming IssuesTiming IssuesTiming Issues

4-6

What is the periodicity assumption?What is the periodicity assumption?

a.a. Companies should recognize Companies should recognize revenue in the accounting period in which it is earned.

b. Companies should match expenses with revenues.

c. The economic life of a business can be divided into artificial time periods.

d. The fiscal year should correspond with the calendar year.

Review QuestionReview Question



4-7


The Revenue Recognition Principle

Companies recognize

revenue in the accounting

period in which it is earned.

In a service enterprise,

revenue is considered to be

earned at the time the

service is performed.


4-8


Illustration: Assume Conrad Dry Cleaners cleans

clothing on June 30, but customers do not claim and pay

for their clothes until the first week of July. The journal

entries for June and July would be:


4-9


“Let the expenses follow the revenues.”


Illustration 4-1 (Partial)

4-10



Illustration 4-1 GAAPrelationships in revenueand expense recognition

4-11 Discussion on notes page.

4-12

Accrual-Basis Accounting

► Transactions recorded in the periods in which the

events occur.

► Revenues are recognized when earned, even if cash

was not received.

► Expenses are recognized when incurred, even if cash

was not paid.


Accrual versus Cash Basis of Accounting

SO 2 Differentiate between the cash basis SO 2 Differentiate between the cash basis and the accrual basis of accounting.and the accrual basis of accounting.

4-13

Cash-Basis Accounting

► Revenues are recognized only when cash is received.

► Expenses are recognized only when cash is paid.

► Prohibited under generally accepted accounting

principles (GAAP).



Accrual versus Cash Basis of Accounting

4-14


Illustration: Suppose that Fresh Colors paints a large building in 2011. In 2011, it incurs and pays total expenses (salaries and paint costs) of $50,000. It bills the customer $80,000, but does not receive payment until 2012.



4-15

Which one of these statements about the accrual basis of accounting is false?

a. Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged.

b. Companies recognize revenue in the period in which it is earned.

c. This basis is in accord with generally accepted accounting principles.

d. Companies record revenue only when they receive cash, and record expense only when they pay out cash.




4-17

Adjusting entries make it possible to report correct

amounts on the balance sheet and on the income

statement.

A company must make adjusting entries every time

it prepares financial statements.

Includes one income statement account and one

balance sheet account.

The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries

SO 3 SO 3 Explain why adjusting entries are needed, and Explain why adjusting entries are needed, and identify the major types of adjusting entriesidentify the major types of adjusting entries

4-18

Revenues - recorded in the period in which they are

earned.

Expenses - recognized in the period in which they

are incurred.

Adjusting entries - needed to ensure that the

revenue recognition and expense recognition

principles are followed.



4-19

Adjusting entries are made to ensure that:

a. expenses are recognized in the period in which they are incurred.

b. revenues are recorded in the period in which they are earned.

c. balance sheet and income statement accounts have correct balances at the end of an accounting period.

d. All of the above.




4-20

Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries

Illustration 4-3Categories of adjusting entries


Deferrals:1. Prepaid expenses: Expenses paid in cash

and recorded as assets before they are used or consumed.

2. Unearned revenues: Cash received and reported as liabilities before revenue is earned.

Accruals:1. Accrued revenues: Revenues earned but

not yet received in cash or recorded.2. Accrued expenses: Expenses incurred

but not yet paid in cash or recorded.

4-21

Trial BalanceTrial Balance –

Each account is

analyzed to

determine

whether it is

complete and up-

to-date.

Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries


Illustration 4-4

4-22

Deferrals are either:

Prepaid expenses

OR

Unearned revenues.

Adjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for Deferrals

SO 4 Prepare adjusting entries for deferrals.SO 4 Prepare adjusting entries for deferrals.

4-23

Payment of cash, that is recorded as an asset because Payment of cash, that is recorded as an asset because service or benefit will be received in the future.service or benefit will be received in the future.

Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”

insuranceinsurance

suppliessupplies

advertisingadvertising

Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE

rentrent

equipmentequipment

buildingsbuildings

Prepayments often occur in regard to:Prepayments often occur in regard to:


4-24

Prepaid Expenses

Costs that expire either with the passage of time or

through use.

Adjusting entry results in an increase (a debit) to an

expense account and a decrease (a credit) to an asset

account.



4-25


Adjusting entries for prepaid expenses

Increases (debits) an expense account and

Decreases (credits) an asset account.


Illustration 4-5

4-26

Illustration: Sierra Corporation purchased supplies costing $2,500

on October 5. Sierra recorded the purchase by increasing (debiting)

the asset Supplies. This account shows a balance of $2,500 in the

October 31 trial balance. An inventory count at the close of business

on October 31 reveals that $1,000 of supplies are still on hand.

Supplies 1,500

Supplies Expense 1,500Oct. 31



Illustration 4-6 (Partial)($2,500 – 1,000 = $1,500)

4-27

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.

Prepaid Insurance 50

Insurance Expense 50Oct. 31




4-28

Depreciation

Buildings, equipment, and motor vehicles (long-lived

assets) are recorded as assets, rather than an

expense, in the year acquired.

Companies report a portion of the cost of a long-lived

asset as an expense (depreciation) during each period

of the asset’s useful life.

Depreciation does not attempt to report the actual

change in the value of the asset.



4-29

Illustration: For Sierra Corporation, assume that depreciation on

the office equipment is $480 a year, or $40 per month.

Accumulated Depreciation-Equipment 40

Depreciation Expense 40Oct. 31




4-30

Statement Presentation

Accumulated Depreciation-Equipment is a contra asset

account.

Appears just after the account it offsets (Equipment) on

the balance sheet.



Illustration 4-9

4-31



SummaryIllustration 4-10

4-32

Receipt of cash that is recorded as a liability because the revenue has not been earned.

Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”

rent

airline tickets

Cash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFORE

magazine subscriptions

customer deposits

Unearned revenues often occur in regard to:


4-33

Unearned Revenues

Adjusting entry to record the revenue that has been

earned and to show the liability that remains.

Adjusting entry results in a decrease (a debit) to a

liability account and an increase (a credit) to a revenue

account.



4-34 SO 4 Prepare adjusting entries for deferrals.SO 4 Prepare adjusting entries for deferrals.

Adjusting entries for unearned revenues

Decrease (a debit) to a liability account and

Increase (a credit) to a revenue account.


Illustration 4-11



Illustration: Sierra Corporation received $1,200 on October 2 from

R. Knox for guide services for multi-day trips expected to be

completed by December 31. Unearned Service Revenue shows a

balance of $1,200 in the October 31 trial balance. From an evaluation

of the service Sierra performed for Knox during October, the company

determines that it has earned $400 in October.

Service Revenue 400

Unearned Service Revenue 400Oct. 31




Illustration 4-13

Summary

4-38

Made to record:

Revenues earned and

OR

Expenses incurred

in the current accounting period that have not been recognized through daily entries.

Adjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for Accruals

SO 5 Prepare adjusting entries for accruals.SO 5 Prepare adjusting entries for accruals.

4-39

Revenues earned but not yet received in cash or Revenues earned but not yet received in cash or recorded.recorded.

Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”

rentrent

interestinterest

services performedservices performed

BEFORE

Accrued revenues often occur in regard to:Accrued revenues often occur in regard to:

Cash ReceiptCash ReceiptRevenue RecordedRevenue Recorded

Adjusting entry results in:Adjusting entry results in:


4-40

Accrued Revenues

An adjusting entry serves two purposes:

(1) Shows the receivable that exists, and

(2) Records the revenues earned.



4-41

Adjusting entries for accrued revenues

Increases (debits) an asset account and

Increases (credits) a revenue account.



Illustration 4-14

4-42

Illustration: In October, Sierra Corporation earned $200 for

guide services that were not billed to clients before October 31.

Service Revenue 200

Accounts Receivable 200Oct. 31



Illustration 4-15

4-43




4-44

Expenses incurred but not yet paid in cash or recorded.Expenses incurred but not yet paid in cash or recorded.

Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”

BEFORE

Accrued expenses often occur in regard to:Accrued expenses often occur in regard to:

Cash PaymentCash PaymentExpense RecordedExpense Recorded

taxestaxes

salariessalaries

Adjusting entry results in:Adjusting entry results in:


rentrent

interestinterest

4-45

Accrued Expenses

An adjusting entry serves two purposes:

(1) Records the obligations, and

(2) Recognizes the expenses.



4-46

Adjusting entries for accrued expenses

Increases (debits) an expense account and

Increases (credits) a liability account.



Illustration 4-17

4-47



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%.

Interest Payable 50

Interest Expense 50Oct. 31


Illustration 4-18

4-49



Illustration 4-20

Illustration: Sierra Corporation last paid salaries on October 26;

the next payment of salaries will not occur until November 9. The

employees receive total salaries of $2,000 for a five-day work

week, or $400 per day. Thus, accrued salaries at October 31 are

$1,200 ($400 × 3 days).

4-50



Illustration: Sierra Corporation last paid salaries on October 26;

the next payment of salaries will not occur until November 9. The

employees receive total salaries of $2,000 for a five-day work

week, or $400 per day. Thus, accrued salaries at October 31 are

$1,200 ($400 x 3 days).

Salaries Payable 1,200

Salaries Expense 1,200Oct. 31

Illustration 4-21

4-51




4-52

Summary of Basic RelationshipsSummary of Basic RelationshipsSummary of Basic RelationshipsSummary of Basic Relationships


4-53

After all adjusting entries are journalized and posted the

company prepares another trial balance from the ledger

accounts (Adjusted Trial Balance).

The adjusted trial balance’s purpose is to prove the

equality of debit balances and credit balances in the

ledger.

The adjusted trial balance is the primary basis for the

preparation of the financial statements.

The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance

SO 6 Describe the nature and purpose of the adjusted trial balance.SO 6 Describe the nature and purpose of the adjusted trial balance.

4-54


SO 6SO 6

4-55

Which of the following statements is incorrect concerning the adjusted trial balance?

a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.

b. The adjusted trial balance provides the primary basis for the preparation of financial statements.

c. The adjusted trial balance lists the account balances segregated by assets and liabilities.

d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.




4-56

Financial statements are prepared directly from the Adjusted Trial Balance.

Financial statements are prepared directly from the Adjusted Trial Balance.

Balance Sheet

Income Statement

Retained Earnings

Statement

Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements


4-57


Illustration 4-27

4-58


Illustration 4-28

4-59

At the end of the accounting period, companies transfer the

temporary account balances to the permanent

stockholders’ equity account—Retained Earnings.

Closing the BooksClosing the BooksClosing the BooksClosing the Books

SO 7 Explain the purpose of closing entries.SO 7 Explain the purpose of closing entries.

Illustration 4-29

4-60

In addition to updating Retained Earnings to its correct

ending balance, closing entries produce a zero balance in

each temporary account.



Illustration 4-30

4-61


Illustration 4-31

2012

4-62


SO 7 Explain the purpose SO 7 Explain the purpose of closing entries.of closing entries.

4-63

The purpose of the post-closing trial balance is to prove

the equality of the permanent account balances that the

company carries forward into the next accounting period.

Preparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial Balance

All temporary accounts will have zero balances.


4-64

Summary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting Cycle

1. Analyze business transactions1. Analyze business transactions

2. Journalize the transactions

2. Journalize the transactions

6. Prepare an adjusted trial balance

6. Prepare an adjusted trial balance

7. Prepare financial statements

7. Prepare financial statements

8. Journalize and post closing entries

8. Journalize and post closing entries

9. Prepare a post-closing trial balance

9. Prepare a post-closing trial balance

4. Prepare a trial balance4. Prepare a trial balance

3. Post to ledger accounts3. Post to ledger accounts

5. Journalize and post adjusting entries:Deferrals/Accruals

5. Journalize and post adjusting entries:Deferrals/Accruals

SO 8 Describe the required steps in the accounting cycle.SO 8 Describe the required steps in the accounting cycle.

Illustration 4-33Required steps in theaccounting cycle

4-65

Quality of Earnings – company provides full and transparent

information.

Earnings Management - the planned timing of revenues,

expenses, gains, and losses to smooth out bumps in net income. Companies may manage earnings by:

Quality of EarningsQuality of EarningsQuality of EarningsQuality of Earnings

SO 8 Describe the required steps in the accounting cycle.SO 8 Describe the required steps in the accounting cycle.

one-time items to prop up earnings numbers.

inflate revenue numbers in the short-run.

improper adjusting entries.

As a result of the Sarbanes-Oxley Act, many companies are trying to improve the quality of their financial reporting.

4-66

Sierra Corporation’s income statement shows net income of $2,860. Net income and net cash provided by operating activities often differ.

Keep an Eye on CashKeep an Eye on CashKeep an Eye on CashKeep an Eye on Cash

SO 9 SO 9 Understand the causes of differences between Understand the causes of differences between net net income and cash provided by operating income and cash provided by operating activities.activities.

Net income on a cash basis is

referred to as “Net cash

provided by operating

activities.”

The statement of cash flows,

reports net cash provided by

operating activities.

Illustration 4-27

4-67

The difference for Sierra is $2,840 ($5,700 - $2,860). The following summary shows the causes of this difference.

Keep an Eye on CashKeep an Eye on CashKeep an Eye on CashKeep an Eye on Cash

SO 9 SO 9

4-68

Trial BalanceTrial Balance –

Each account is

analyzed to

determine

whether it is

complete and up-

to-date.

SO 10SO 10

Illustration 4-4

Adjusting Entries in an Automated World— Adjusting Entries in an Automated World— Using a Worksheet (Appendix)Using a Worksheet (Appendix)Adjusting Entries in an Automated World— Adjusting Entries in an Automated World— Using a Worksheet (Appendix)Using a Worksheet (Appendix)

4-69SO 10 Describe the purpose and the SO 10 Describe the purpose and the

basic form of a worksheet.basic form of a worksheet.

Adjusting Entries in an Automated World— Adjusting Entries in an Automated World— Using a Worksheet (Appendix)Using a Worksheet (Appendix)Adjusting Entries in an Automated World— Adjusting Entries in an Automated World— Using a Worksheet (Appendix)Using a Worksheet (Appendix)

4-70

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Supplies 2,500 Prepaid Insurance 600 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Service Revenue 1,200 Common Stock 10,000 Retained Earnings - Dividends 500 Service Revenue 10,000

Salaries Expense 4,000 Rent 900

Totals 28,700 28,700

Balance SheetAdjusted Income

Trial Balance Adjustments Trial Balance Statement

1. Prepare a Trial Balance on the Worksheet1. Prepare a Trial Balance on the Worksheet1. Prepare a Trial Balance on the Worksheet1. Prepare a Trial Balance on the Worksheet

Trial balance amounts come directly from ledger accounts.

Include all accounts with balances.

SO 10 Describe the purpose and the basic form of a worksheet.SO 10 Describe the purpose and the basic form of a worksheet.

4-71

Illustration 4-24General journal showing adjusting entries

Adjusting Journal Entries

Using a WorksheetUsing a WorksheetUsing a WorksheetUsing a Worksheet

2012

4-72

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Supplies 2,500 1,500 Prepaid Insurance 600 50 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Service Revenue 1,200 400 Common Stock 10,000 Retained Earnings - Dividends 500 Service Revenue 10,000 400

200 Salaries Expense 4,000 1,200 Rent 900

Totals 28,700 28,700

Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation- Equipment 40 Depreciation Expense 40 Interest Expense 50 Accounts Receivable 200 Interest Payable 50 Salaries Payable 1,200

Totals 3,440 3,440

Net incomeTotals



(a)(b)

(d)(e)

(c)

(f)(g)

(d)

(g)

(a)(b)

(c)(f)(e)

2. Enter the Adjustments in Adjustments Columns2. Enter the Adjustments in Adjustments Columns2. Enter the Adjustments in Adjustments Columns2. Enter the Adjustments in Adjustments Columns

Enter adjustment amounts, total adjustments columns, and check

for equality.

Add additional accounts as needed.

Adjustments Key:

(a) Supplies Used.(b) Insurance Expired.(c) Depreciation Expensed.(d) Service Revenue Earned.(e) Service Revenue Accrued.(f) Interest Accrued.(g) Salaries Accrued.

SO 10SO 10

4-73

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Service Revenue 1,200 400 800 Common Stock 10,000 10,000 Retained Earnings - Dividends 500 500 Service Revenue 10,000 400 10,600

200 Salaries Expense 4,000 1,200 5,200 Rent 900 900

Totals 28,700 28,700

Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation- Equipment 40 40 Depreciation Expense 40 40 Interest Expense 50 50 Accounts Receivable 200 200 Interest Payable 50 50 Salaries Payable 1,200 1,200

Totals 3,440 3,440 30,190 30,190

Net incomeTotals



3. Complete the Adjusted Trial Balance Columns3. Complete the Adjusted Trial Balance Columns3. Complete the Adjusted Trial Balance Columns3. Complete the Adjusted Trial Balance Columns

Total the adjusted trial balance columns and check for equality. SO 10SO 10

(d)

(g)

(a)(b)

(c)(f)(e)

(a)(b)

(d)(e)

(c)

(f)(g)

4-74

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Service Revenue 1,200 400 800 Common Stock 10,000 10,000 Retained Earnings - Dividends 500 500 Service Revenue 10,000 400 10,600 10,600

200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900

Totals 28,700 28,700

Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation- Equipment 40 40 Depreciation Expense 40 40 40 Interest Expense 50 50 50 Accounts Receivable 200 200 Interest Payable 50 50 Salaries Payable 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600

Net incomeTotals



Extend all revenue and expense account balances to the income statement columns.

4. Extend Amounts to Financial Statement Columns4. Extend Amounts to Financial Statement Columns4. Extend Amounts to Financial Statement Columns4. Extend Amounts to Financial Statement Columns

SO 10SO 10

(d)

(g)

(a)(b)

(c)(f)(e)

(a)(b)

(d)(e)

(c)

(f)(g)

4-75

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Service Revenue 1,200 400 800 800 Common Stock 10,000 10,000 10,000 Retained Earnings - Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600


Totals 28,700 28,700

Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation- Equipment 40 40 40 Depreciation Expense 40 40 40 Interest Expense 50 50 50 Accounts Receivable 200 200 200 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590

Net incomeTotals



4. Extend Amounts to Financial Statement Columns4. Extend Amounts to Financial Statement Columns4. Extend Amounts to Financial Statement Columns4. Extend Amounts to Financial Statement Columns

Extend all asset, liability, and equity account balances to the balance sheet columns. SO 10SO 10

(d)

(g)

(a)(b)

(c)(f)(e)

(a)(b)

(d)(e)

(c)

(f)(g)

4-76

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Service Revenue 1,200 400 800 800 Common Stock 10,000 10,000 10,000 Retained Earnings - Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600


Totals 28,700 28,700

Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation- Equipment 40 40 40 Depreciation Expense 40 40 40 Interest Expense 50 50 50 Accounts Receivable 200 200 200 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590

Net income 2,860 2,860 Totals 10,600 10,600 22,450 22,450



5. Total Columns, Compute Net Income (Loss)5. Total Columns, Compute Net Income (Loss)5. Total Columns, Compute Net Income (Loss)5. Total Columns, Compute Net Income (Loss)

Compute Net Income or Net Loss.

SO 10SO 10

(d)

(g)

(a)(b)

(c)(f)(e)

(a)(b)

(d)(e)

(c)

(f)(g)

4-77

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4-1. 4-2 ACCRUAL ACCOUNTING CONCEPTS Accounting, Fourth Edition 4.

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