Accounting Principle

31
Financial Accounting Chapter-1 ACCOUNTING: Accounting is an information system which provides information to its interested users making useful economic decision. Accounting= Asset + liability + owner equity +income +expense This five things is all about accounting FINANCIAL STATEMENT: In accounting there are five financial statements. These are:- 1. Statement of financial position/Balance sheet 2. Statement of comprehensive income/Income Statement 3. Statement of cash flow/Cash flow 4. Statement of change in owners’ equity/Change in equity 5. Note to the financial statement Statement of financial position /Balance Sheet (Within Point of time) = Asset + liability + owner equity Statement of comprehensive income/Income Statement (Within Period of time) =Loss + Profit +Investment Statement of cash flow/Cash flow= Operating + Investment +Financing Statement of change in owners’ equity/Change in equity = Earning Share BASIC ACCOUNTING EQUATION: The Accounting Equation Measures the resources of the business, and the various claims against those resources o Assets of the business - claims against the assets ASSETS= LIABILITIES(External claim) + OWER'S EQUITY(Internal / Insider claim) The basis for preparing the statement of financial position (Balance Sheet) ELEMENTS OF THE ACCOUNTING EQUATION: Assets Liabilities Owner’s Equity Income Expenses All are parts of OE but shown separately Drawings The business activities (Transactions) one or more of these element, therefore also affect the financial statement. THE ACCOUNTING EQUATION ASSETS= LIABILITIES + OWER'S EQUITY Page 1 of 31

description

Accounting Principle Weygandt Kieso Kimmel 9e problem solved

Transcript of Accounting Principle

Page 1: Accounting Principle

Financial Accounting

Chapter-1

ACCOUNTING:Accounting is an information system which provides information to its interested users making useful economic decision.Accounting= Asset + liability + owner equity +income +expenseThis five things is all about accounting

FINANCIAL STATEMENT:In accounting there are five financial statements. These are:-

1. Statement of financial position/Balance sheet2. Statement of comprehensive income/Income Statement3. Statement of cash flow/Cash flow4. Statement of change in owners’ equity/Change in equity 5. Note to the financial statement

Statement of financial position /Balance Sheet (Within Point of time) = Asset + liability + owner equity Statement of comprehensive income/Income Statement (Within Period of time) =Loss + Profit +Investment Statement of cash flow/Cash flow= Operating + Investment +Financing Statement of change in owners’ equity/Change in equity = Earning Share BASIC ACCOUNTING EQUATION:The Accounting Equation

Measures the resources of the business, and the various claims against those resourceso Assets of the business - claims against the assets

ASSETS= LIABILITIES(External claim) + OWER'S EQUITY(Internal / Insider claim) The basis for preparing the statement of financial position (Balance Sheet)

ELEMENTS OF THE ACCOUNTING EQUATION: Assets Liabilities Owner’s Equity Income Expenses All are parts of OE but shown separately Drawings

The business activities (Transactions) one or more of these element, therefore also affect the financial statement.THE ACCOUNTING EQUATION

ASSETS= LIABILITIES + OWER'S EQUITY(External claim) (Internal / Insider claim

Uses of FundOwns/Control

Sources of fundOwes

DEBIT(dr) CREDIT(cr)

EXPLAIN OWNER’S EQUITY:

The Equity section of the accounting equation can be expanded to analyze the effects of income (revenue) and expenses -determines net profit/loss for the period.

Reported on the Income Statement Net profit/loss is than added to the entity’s equity on the Balance Sheet.

DEFINATIONS:

Page 1 of 26

Page 2: Accounting Principle

Financial Accounting

1. ASSETS :- Resources having the following characteristics Expected future economic benefit Business has exclusive right of control of the benefit Arises from a past transaction or event Reliable monetary measurement

You must be able to apply these characteristics to given items to determine whether they arc 'assets' of a business.Some assets are physical/tangible in nature (Inventory, Land, Vehicle) others are Intangible (legal rights. goodwill)2. LIABILITIES: -They are a current/ present obligation of the business, settlement of which normally results in an outflow of economic benefits from the business to

An external Party The result from a past event

The Basic concept of liabilities is a debt payable lo a party outside of the business - an external claim - usually for goods/service supplied, or loans made to the business. Include accounts payable, loans, accrued expenses or expenses payable, unearned revenue, mortgages, etc

3. OWNWR’S EQUITY:- It is known as equity or capital The owners net claim against the business assets.

ASSET-LIABILITIES= OWNER’S EQUITYThe Components of Owners Equity:

1. The owners investment & withdrawals2. The profit earned/Net income.(Revenue-Expense)

Statement of Changes in OE for a sole trader: Balance of capital at start of period plus additional capital injections made by owner plus net profit for the Period (or minus net loss for the Period) minus drawings made by owner equals balance of capital at end of period.

4. REVENUE/INCOME: The purpose of business is to increase OE (to increase the owner's wealth). This is achieved through profitable trading and earning income that

Increases economic benefits of the business Takes the form of asset inflows or enhancements; or decreases in liabilities. Result in an Increase in OE.

5. EXPENSE

Decrease economic benefits of business. Take the form of outflows/depletion of assets (such as cash), or incurrence of liabilities.

o They usually represent assets that have been used up during the period They cause the owner's equity to decrease Excludes distributions to the owners

The types of expenses incurred will also depend on the nature of the business.

Examples includes: cost of goods, salaries and wages, insurance, electricity, postage, telephone, rent, advertising etc.6. DRAWINGS

Amounts taken from the business by the owner Usually for personal use Could be cash or other assets withdrawn The opposite of owner investments, so they reduce OE.

EFFECT OF TRANSACTIONS ON ACCOUNTING EQUATION Every transaction will lead to a dual or twofold effect Leads to Double Entry Accounting

Page 2 of 26

Page 3: Accounting Principle

Financial Accounting

Rules for Entry into Accounts - Debits and Credits End Result - Accounting Equation must balance after each transaction

TRANSACTION SCALESThe scales balance because the assets ($ 100,000) equal the liabilities ($25,000) Plus owner's equity ($75,000)

EXAMPLE:

Flonas FlowersBalance Sheet as at 1st January

Assts LiabilitiesCash 27,000 Bank Loan 20,000Delivery Van 58,000 Accounts Payable 5,000Inventory 15,000 Owners equity(Flonas capital) 75,000

100000 100000

EFFECT OF TRANSACTIONS ON ACCOUNTING EQUATION EXAMPLE:1. Owners invest Cash Tk -15,000/-

Assts Liabilities Owners equity+Cash Tk15,000/- +Owners capita Tk-15,000

2. Paid rent on premises Tk-6,000/-Assts Liabilities Owners equity

-Cash Tk 6,000 + Prepaid rent Tk-6,000

3. Purchasing supplies Tk-700 with cashAssts Liabilities Owners equity

-Cash Tk 700 + Supplies Tk-700

4. Purchasing Inventory Tk-1,620 on credit.Assts Liabilities Owners equity

+Inventory Tk-1,620 + Account Payable Tk-1,620

5. Purchasing Store equipment worth Tk-2,200 with cash 1,000/- & 1,200 credit.Assts Liabilities Owners equity

-Cash Tk-1,000 + Store Equipment Tk-2,200 + Account Payable Tk-1,200Summary of the above transaction on Flonas Flowers:

Assts Liabilities Owners equity100,000 25,000 75,000+1,5000 +15000

-6,000+6,000-700+700

+1,620 +1,620-1,000+2,200 +1,200117,8201620 27,820 +90,000

EFFECT OF TRADING:

Flonas FlowersBalance Sheet as at 1st January

Assts Liabilities

Page 3 of 26

Page 4: Accounting Principle

Financial Accounting

Cash 34,300 Bank Loan 20,000Prepaid Rent 6,000 Accounts Payable 7,820Supplies 700 Owners equity(Flonas capital) 90,000Store Equipment 2,200Delivery Van 58,000Inventory 16,620

117820 117820

EXPANDED ACCOUNTING EQUATION

ASSEST= LIABILITY+ OWNERS’S CAPITAL+ (Income-Expense-Drawing)

EFFECT OF TRANSACTIONS ON EXPNADED ACCOUNTING EQUATION EXAMPLE:1. Selling goods which cost Tk-135 for cash Tk-300

Assts Liabilities Owners equity+Cash Tk 300 – Inventory Tk 135 +Sales Revenue Tk 300 – Cost of goods sold expenseTk-135

2. Purchasing goods on credit for TK-4,320/-Assts Liabilities Owners equity

+Inventory Tk 4,320 +Accounts Payable Tk4,320

3. Owners withdraw Tk-50 cash for personal issue.Assts Liabilities Owners equity

-Cash Tk50 -Drawings Tk50

SUMMARY OF STUDY OBJECTIVES

1. Explain what accounting is. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users.

2. Identify the users and uses of accounting. The major users and uses of accounting are as follows: a. Management uses accounting information in planning, controlling, and evaluating business

operations.b. Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of

accounting data. c. Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the

basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, labor unions, and economic planners.

3. State the accounting equation, and define its components. The basic accounting equation is:

Assets = Liabilities + Owner’s Equity Assets are resources owned by a business. Liabilities are creditor ship claims on total assets. Owner’s equity is the ownership claim on total assets. The expanded accounting equation is:

Assets =Liabilities + Owner’s Capital -Owner’s Drawings + Revenues - Expenses Owner’s capital is assets the owner puts into the business. Owner’s drawings are the assets the owner withdraws for personal use. Revenues are increases in assets resulting from income - earning activities. Expenses are the costs of assets consumed in the process of earning revenue.

EXAMPLES

Page- 20 Type Example No:- 1    

1. The owner invested $25,000 cash in the business.2. The company purchased $7,000 of office equipment on credit.

Page 4 of 26

Page 5: Accounting Principle

Financial Accounting

3. The company received $8,000 cash in exchange for services performed.4. The company paid $850 for this month’s rent.5. The owner withdrew $1,000 cash for personal use.

Page- 20 Type Example No:- 1    Presented below is selected information related to Flanagan Company at

December 31, 2010. Flanagan reports financial information monthly.

Office Equipment $10,000 Utilities Expense $ 4,000

Cash 8,000 Accounts Receivable 9,000

Service Revenue 36,000 Wages Expense 7,000

Rent Expense 11,000 Notes Payable 16,500

Accounts Payable 2,000 Drawings 5,000

(a) Determine the total assets of Flanagan Company at December 31, 2010.

(b) Determine the net income that Flanagan Company reported for December 2010.

(c) Determine the owner’s equity of Flanagan Company at December 31, 2010.

Page 5 of 26

Page 6: Accounting Principle

Financial Accounting

Page- 26-27 Type Example No:- 1    Joan Robinson opens her own law office on July 1, 2010. During the first month of operations, the following transactions occurred.1. Joan invested $11,000 in cash in the law practice.2. Paid $800 for July rent on office space.3. Purchased office equipment on account $3,000.4. Provided legal services to clients for cash $1,500.5. Borrowed $700 cash from a bank on a note payable.6. Performed legal services for client on account $2,000.7. Paid monthly expenses: salaries $500, utilities $300, and telephone $100.8. Joan withdraws $1,000 cash for personal use.Instructions(a) Prepare a tabular summary of the transactions.(b) Prepare the income statement, owner’s equity statement, and balance sheet at July 31for Joan Robinson, Attorney.

Page 6 of 26

Page 7: Accounting Principle

Financial Accounting

PROBLEMS: SET - A P1-1A

Page 7 of 26

Page 8: Accounting Principle

Financial Accounting

Barone’s Repair Shop was started on May 1 by Nancy Barone. A summary of May transactions is presented below.1. Invested $10,000 cash to start the repair shop.2. Purchased equipment for $5,000 cash.3. Paid $400 cash for May office rent.4. Paid $500 cash for supplies.5. Incurred $250 of advertising costs in the Beacon News on account.6. Received $5,100 in cash from customers for repair service.7. Withdrew $1,000 cash for personal use.8. Paid part-time employee salaries $2,000.9. Paid utility bills $140.10. Provided repair service on account to customers $750.11. Collected cash of $120 for services billed in transaction (10).Instructions(a) Prepare a tabular analysis of the transactions, using the following column headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, N. Barone Capital; N. Barone, Drawings; Revenues, and Expenses.(b) From an analysis of the owner’s equity columns, compute the net income or net loss for May.Solution:-

Date

Assets Liabilities Owner's Equity

Cash + Account

Receivable+

Supplies +

Equipment

Note Payable

+

Accounts Payable +

N.Barone capital -

N. Barone Drawing +

Revenue -Expens

es

1 10,000           10,000      2 -5,000     5,000            3 -400                 -4004 -500   500              5           250       -2506 5,100               5,100  7 -1,000             -1,000    8 -2,000                 -2,0009 -140                 -14010   750             750  

11 120 -120                

Total 6,180 630 500 5,000 250 10,000 -1,000 5,850 -2,790

Total Assets 12,310     

Income StatementMonth End-May 2010

Revenues Service Revenue 5,100 Service Revenue 750

Total Revenue= 5,850

Expenses Office Rent 400

Advertising Expenses 250 Employees salary 2,000 Utilities Expenses 140

Total Expenses= 2,790

Net Income= 3,060

P1-4A

Page 8 of 26

Page 9: Accounting Principle

Financial Accounting

Mark Miller started his own delivery service, Miller Deliveries, on June 1, 2010.The following transactions occurred during the month of June.

June 1 Mark invested $10,000 cash in the business.2 Purchased a used van for deliveries for $12,000. Mark paid $2,000 cash and signed a note payable for

the remaining balance.3 Paid $500 for office rent for the month.5 Performed $4,400 of services on account.9 Withdrew $200 cash for personal use.12 Purchased supplies for $150 on account.15 Received a cash payment of $1,250 for services provided on June 5.17 Purchased gasoline for $100 on account.20 Received a cash payment of $1,500 for services provided.23 Made a cash payment of $500 on the note payable26 Paid $250 for utilities29 Paid for the gasoline purchased on account on June 17.30 Paid $1,000 for employee salaries.

Instructions(a) Show the effects of the previous transactions on the accounting equation using the following format.

Date

Assets Liabilities Owner's Equity

Cash + Account

Receivable+

Supplies +

DeliveryVan

Note Payable +

Accounts Payable +

M.Miller,capital -

M. Miller,Drawing + Revenue -

Expenses

(b) Prepare an income statement for the month of June.(c) Prepare a balance sheet at June 30, 2010.

Solution:-

Date

Assets Liabilities Owner's Equity

Cash + Account

Receivable+

Supplies +

DeliveryVan

Note Payable +

Accounts Payable +

M.Millercapital -

M. Miller,Drawing + Revenue -

Expenses

1 10,000           10,000    2 -2,000     12,000 10,000         -5003 -500                  5   4,400             4,400  9 -200             -200    12     150     150        15 1,250 -1,250                17           100       -10020 1,500               1,500  23 -500       -500          26 -250                 -25029 -100         -100        

30 -1,000                 -1,000

Total 8,200 3,150 150 12,000 9,500 150 10,000 -200 5,900 -1,850

23,500 23,500

Income Statement   Balance SheetMonth End-June 2010 Month End-June 2010

Revenues AssetsService Revenue 4,400 Cash 8,200Service Revenue 1,500 Account Receivable 3,150

Total Revenue= 5,900 Supplies 150

Expenses Delivery Van 12,000Office Rent 500 Total Assets= 23,500

Page 9 of 26

Page 10: Accounting Principle

Financial Accounting

Utilities Expenses 250 LiabilitiesEmployees salary 1,000 Note Payable 9,500Utilities Expenses 100 Accounts Payable 150

Total Expenses= 1,850 Total Liabilities= 9,650

Net Income= 4,050 Owners Equity

M. Rodriguez, capital 10,000M. Rodriguez Drawings -200

Net Income 4,050Total Owners equity= 13,850

Total Liabilities & Owners Equity 23,500

P1-4B

Michelle Rodriguez started her own consulting firm, Rodriguez Consulting, on May 1, 2010.The following transactions occurred during the month of May.

May 1 Michelle invested $7,000 cash in the business.2 Paid $900 for office rent for the month.3 Purchased $600 of supplies on account.5 Paid $125 to advertise in the County News.9 Received $4,000 cash for services provided.12 Withdrew $1,000 cash for personal use.15 Performed $6,400 of services on account.17 Paid $2,500 for employee salaries.20 Paid for the supplies purchased on account on May 3.23 Received a cash payment of $4,000 for services provided on account on May 15.26 Borrowed $5,000 from the bank on a note payable.29 Purchased office equipment for $3,100 on account.30 Paid $175 for utilities.

Instructions(a) Show the effects of the previous transactions on the accounting equation using the following format.

Date

Assets Liabilities Owner's Equity

Cash + Account

Receivable+

Supplies +

Office Equipme

nt

Note Payable +

Accounts Payable +

M.Rodriguez,,capital -

M. Rodriguez,,Drawing +

Revenue -Expen

ses

(b) Prepare an income statement for the month of May.(c) Prepare a balance sheet at May 31, 2010.

Solution:-

Date For May

Assets Liabilities Owner's Equity

Cash +

Account Receivabl

e+

Supplies+

Office Equipm

ent

Note Payable

+

Accounts Payable

+

M. Rodriguez,

capital -

M. Rodriguez Drawings

+

Revenue -

Expenses

1 7,000           7,000    2 -900                 -9003     600     600        5 -125                 -1259 4,000               4,000  12 -1,000             -1,000    15   6,400             6,400  17 -2,500                 -2,50020 -600         -600        

Page 10 of 26

Page 11: Accounting Principle

Financial Accounting

23 4,000 -4,000                26 5,000       5,000          29 3,100 3,10030 -175                 -175

Total 14,700 2,400 600 3,100 5,000 3,100 7,000 -1,00010,40

0-3,700

20,800 20,800

               

Income Statement   Balance SheetMonth End-May 2010   Month End-May 2010

Revenues   AssetsService Revenue 4,000 Cash 14,700Service Revenue 6,400 Account Receivable 2,400

Total Revenue= 10,400 Supplies 600

Expenses Service Revenue 3,100Office Rent 900 Total Assets= 20,800

Advertising Expenses 125 LiabilitiesEmployees salary 2,500 Note Payable 5,000Utilities Expenses 175 Accounts Payable 3,100

Total Expenses= 3,700 Total Liabilities= 8,100

Net Income= 6,700 Owners Equity

M. Rodriguez, capital 7,000M. Rodriguez Drawings (1,000)

Net Income 6,700Total Owners equity= 12,700

Total Liabilities & Owners Equity 20,800

Chapter-2

Identify the basic steps in the recording process. The basic steps in the recording process are:(a) Analyze each transaction for its effects on the accounts, (b) Enter the transaction information in a journal, (c) Transfer the journal information to the appropriate accounts in the ledger.

Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) Provides a chronological record of transactions, and (c) Prevents or locates errors because the debit and credit amounts for each entry can be easily compared.

Debits and Credits

Page 11 of 26

Page 12: Accounting Principle

Financial Accounting

-:Tabular summary compared to account form:-

JOURNALIZING

Illustration 2-13 shows the technique of journalizing, using the first two transactions of Softbyte. On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash. The number J1 indicates that these two entries are recorded on the first page of the journal. Illustration 2-13 shows the standard form of journal entries for these two transactions. (The boxed numbers correspond to explanations in the list below the illustration.)

Page 12 of 26

Page 13: Accounting Principle

Financial Accounting

The LedgerThe entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the information about changes in specific account balances.

Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and owner’s equity accounts, as shown in Illustration

EXAMPLES:

Page 13 of 26

Page 14: Accounting Principle

Financial Accounting

Page 14 of 26

Page 15: Accounting Principle

Financial Accounting

Page 15 of 26

Page 16: Accounting Principle

Financial Accounting

Page 16 of 26

Page 17: Accounting Principle

Financial Accounting

Page 17 of 26

Page 18: Accounting Principle

Financial Accounting

Summary Illustration of Journalizing and Posting

Page 18 of 26

Page 19: Accounting Principle

Financial Accounting

Page 19 of 26

Page 20: Accounting Principle

Financial Accounting

Exercise:

General Journal J1Date

2010 OctAccount title & Explanation Ref. Debit Credit

1

Cash 101 20,000  

Owners Capital (Bob invest cash in business)

301   20,000

2Rent Expense 401 1,000  

Cash (Paid store rent sep-10)

101   1,000

3

Equipments 104 25,000  Cash Note Payable (Purchased Washers & Dryers on cash & note payable)

101 201

 10,000 15,000

4Prepaid Insurance 105 1,200  

Cash ( Paid 1 Year accidental insurance policy) 101   1,200

10Advertising Expense 203 200  

Account Payable(Advertising Bill) 202   200

20Owners Withdrawal 204 700  

Cash ( Bobs Withdraw for personal use) 101   700

30Cash 101 6,200  

Service Revenue (Cash received laundry service provided)

205   6,200

General Ledger

Cash No : 101

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

1 Cash (Bob invest cash in business) J1 20,000   20,000

2 Cash (Paid store rent sep-10) J1   1,000 19,000

3 Cash(Purchased Washers & Dryers on cash ) J1   10,000 9,000

Page 20 of 26

Page 21: Accounting Principle

Financial Accounting

4 Cash( Paid 1 Year accidental insurance policy) J1   1,200 7,800

20 Cash( Bobs Withdraw for personal use) J1   700 7,100

30 Cash received laundry service provided J1 6,200   13,300

Equipments No : 104

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

3Purchased Washers & Dryers on cash & note payable)

J1 25,000   25,000

         

Prepaid Insurance No : 105

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

4 Paid 1 Year accidental insurance policy J1 1,200   1,200

         

Note Payable No : 201

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

3Purchased Washers & Dryers on cash & note payable

J1   15,000 15,000

         

Account Payable No : 202

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

10 Advertising Bill J1   200 200

         

Advertising Expense No : 203

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

10 Advertising Expense J1 200   200

         

Owners Withdrawal No : 204

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

20 Bobs Withdraw for personal use J1 700   700

         

Service Revenue No : 205

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

30 Service Revenue J1   6,200 -6,200

         

Owners Capital No : 301

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

Page 21 of 26

Page 22: Accounting Principle

Financial Accounting

1 Bob invest in business J1   20,000 -20,000

         

Rent Expense No : 401

Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance

2 Paid store rent sep-10 J1 1,000   1,000

Trail Balance30-Sep-12

Account title Debit CreditCash 13,300  

Equipments 25,000  Prepaid Insurance 1,200  

Note Payable   15,000Account Payable   200

Advertising Expense 200  Owners Withdrawal 700  

Service Revenue   6,200Owners Capital   20,000Rent Expense 1,000  

  41,400 41,400

Chapter-3Explain the accrual basis of accounting. Accrual-basis accounting means that companies record events that change a company’s financial statements in the periods in which those events occur, rather than in the periods in which the company receives or pays cash.

Explain the reasons for adjusting entries. Companies make adjusting entries at the end of an accounting period. Such entries ensure that companies record revenues in the period in which they are earned and that they recognize expenses in the period in which they are incurred.

Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals to record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period.

Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Companies make adjusting entries for accruals to record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries.Adjusting Entries

Deferrals1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.2. Unearned Revenues. Cash received and recorded as liabilities before revenue is earned.Accruals1. 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.

Examples:

Page 22 of 26

Page 23: Accounting Principle

Financial Accounting

Adjusting Entries for Accruals

Examples-1

Page 23 of 26

Page 24: Accounting Principle

Financial Accounting

Preparing the Adjusted Trial Balance

Page 24 of 26

Page 25: Accounting Principle

Financial Accounting

Examples-2

Page 25 of 26

Page 26: Accounting Principle

Financial Accounting

Summary of Additional Adjustment Relationships

Page 26 of 26