4-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A....
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Transcript of 4-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A....
4-1
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
The Accounting CycleThe Accounting CycleAccruals and DeferralsAccruals and Deferrals
Chapter 4
4-2
Adjusting
entries are
needed whenever
revenue or expenses
affect more than oneaccounting
period.
Every adjusting
entry involves achange in either a
revenue or expense and an asset
or liability.
Adjusting EntriesAdjusting Entries
4-3
Converting assets to expenses
Converting assets to expenses
Accruing unpaid
expenses
Accruing unpaid
expenses
Converting liabilities to
revenue
Converting liabilities to
revenue
Accruing uncollected
revenue
Accruing uncollected
revenue
Types of Adjusting EntriesTypes of Adjusting Entries
4-4
Prior Periods Current Period Future Periods
TransactionPaid cash in advance of incurring expense
(creates an asset).
TransactionPaid cash in advance of incurring expense
(creates an asset).
End of Current Period
Adjusting Entry Recognizes portion of asset consumed as expense, and Reduces balance of asset account.
Adjusting Entry Recognizes portion of asset consumed as expense, and Reduces balance of asset account.
Converting Assets to Converting Assets to ExpensesExpenses
4-5
The Concept of The Concept of DepreciationDepreciationDepreciation 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)
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 . . .
Depreciation Expense (debit)
Depreciation Expense (debit)
Accumulated Depreciation
(credit)
Accumulated Depreciation
(credit)
4-6
Prior Periods Current Period Future Periods
TransactionCollect cash in
advance of earning revenue
(creates a liability).
TransactionCollect cash in
advance of earning revenue
(creates a liability).
End of Current Period
Adjusting Entry Recognizes portion earned as revenue, and Reduces balance of liability account.
Adjusting Entry Recognizes portion earned as revenue, and Reduces balance of liability account.
Converting Liabilities to Converting Liabilities to RevenueRevenue
4-7
Prior Periods Current Period Future Periods
TransactionPay cash in
settlement of liability.
TransactionPay cash in
settlement of liability.
End of Current Period
Accruing Unpaid ExpensesAccruing Unpaid Expenses
4-8
Prior Periods Current Period Future Periods
TransactionCollect cash in settlement of receivable.
TransactionCollect cash in settlement of receivable.
End of Current Period
Adjusting EntryRecognizes revenue earned but not yet recorded, andRecords receivable.
Adjusting EntryRecognizes revenue earned but not yet recorded, andRecords receivable.
Accruing Uncollected Accruing Uncollected RevenueRevenue
4-9
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 ExplanationPR 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 Accruing Income Taxes Expense: The Final Expense: The Final Adjusting EntryAdjusting Entry
4-10
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 Adjusting Entries and Accounting PrinciplesAccounting Principles
4-11
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
Light bulbs
Many companies immediately charge
the cost of immaterial items to
expense.
The Concept of MaterialityThe Concept of Materiality
4-12
Effects of the Adjusting Effects of the Adjusting EntriesEntries
Adjustment Revenue ExpensesNet
Income Assets LiabilitiesOwners' Equity
Type IConverting Assets to Expenses No effect Increase Decrease Decrease No effect DecreaseType IIConverting Liabilities to Revenue Increase No effect Increase No effect Decrease IncreaseType IIIAccruing Unpaid Expenses No effect Increase Decrease No effect Increase DecreaseType IVAccruing Uncollected Revenue Increase No effect Increase Increase No effect Increase
Income Statement Balance Sheet
4-13
JJ's Lawn Care Service Adjusted Trial Balance
May 31, 2011Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accum. depreciation: tools & eq. 50$ Truck 15,000 Accum. depreciation: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depreciation exp.: tools & eq. 50 Depreciation exp.: truck 250 Total 22,200$ 22,200$
All balances are taken from
the ledger accounts on May 31 after
preparing the two
depreciation adjusting entries.
Adjusted Trial BalanceAdjusted Trial Balance
4-14
End of Chapter 4End of Chapter 4