Chapter 9 Accounting for Notes Payable, Prepaid Expenses an Accrued Expenses.

Chapter 9Chapter 9

Accounting for Notes Payable, Accounting for Notes Payable, Prepaid Expenses an Accrued Prepaid Expenses an Accrued

ExpensesExpenses

NoteNote

• Note is a promise to a person or Note is a promise to a person or institution that you will pay them institution that you will pay them back on a certain date, at a certain back on a certain date, at a certain time. time.

Borrowing money with a note Borrowing money with a note payable.payable.

Cash Receipt Journal

Date Account TitleDocNo.

PostRef

General

AcctRec

Credit

SalesCredit

Sales TaxPayable

SalesDiscount

Debit

CashDebit

DebitCredit Debit Credit

2-Mar Notes Payable R143 1500 1500

Determining the Maturity Determining the Maturity DateDate

• Use the knuckle drill to determine Use the knuckle drill to determine the datethe date

Paying a Note PayablePaying a Note Payable

•We owe the bank some money plus a little bit more – that additional amount is called interest.•When we pay the additional money it is an expense to use

• We put it into an account called interest expense

•When we receive the money it is income• We put it into a account called interest income

Paying the note back…….Paying the note back…….

Principle x Rate x Time = Interest Owed1500 10% 180/360 75

Cash Payments Journal

Date Account TitleCKNO

PostRef

GeneralAccounts Pay

DebitCashCreditDebit Credit

Aug 29 Notes Payable 359 1500 1575

Interest Expense 75

Section 9-2Section 9-2

• Prepaid ExpensePrepaid Expense– Expenses paid in one fiscal period but Expenses paid in one fiscal period but

not reported as expense until a later not reported as expense until a later fiscal period.fiscal period.•SuppliesSupplies

•Prepaid InsurancePrepaid Insurance

•AdvertisingAdvertising

• Income TaxesIncome Taxes

Prepaid ExpensesPrepaid Expenses

• May be recorded initially as a asset May be recorded initially as a asset or expense.or expense.

• Prepaid Expenses are assets until Prepaid Expenses are assets until they are used.they are used.

Lets see if we can make sense Lets see if we can make sense of this.of this.

Using it as recorded as an asset (the way we have been doing it since last year)

Supplies- Sales Cash

1000 1000

When we record it as an Expense here is what happensSupplies Expense - Sales Cash

1000 1000This amount represents the amount of the beginning sales supplies inventory plus the total amount of all sales supplies bought during the fiscal period.

When we do adjusting When we do adjusting entriesentries

Supplies- Sales

1000

The old way

Supplies Expense - Sales

800200 200

This amount represents how much is left in inventory

This represents how much it has changed.

The new way- we go back into the warehouse and take a physical count of what we have and we find out that there is $800 in supplies left here is what we need to do….


1000

Supplies- Sales

800800

200

When this entry occurs we have created a balance in an account that did not previously have a balance and it requires a reversing entry at the beginning of the next year.

Closing EntriesClosing EntriesIncome Summary Supplies Expense - Sales

200 2002000

OLD WAY

New Way


1000

Supplies- Sales

800 adj800 adj

200

When we do an adjusting entry that creates a balance in a Asset or Liability account that did not previously have a balance we have to do a reversing entry after the closing entry.

Income Summary

200 clos200 clos0

Reversing EntryReversing Entry

Supplies- Sales

800 adj

Because we had a adjusting entry that put a balance in an asset account we must put the expense account where it was before we did the adjusting entry.

Supplies Expense- Sales

800 rev0

800 rev

General Journal Page 1

Date Account Title Doc No Post Ref Debit Credit

Reversing Entries

Jan 1 Supplies Expense - Sales 800

Supplies - Sales 800

9-3 Accrued Expenses9-3 Accrued Expenses

• Expenses incurred in one fiscal Expenses incurred in one fiscal period but not paid until a later fiscal period but not paid until a later fiscal period.period.– Accrued Interest ExpenseAccrued Interest Expense– Accrued Salary ExpenseAccrued Salary Expense– Accrued Employer Payroll Taxes Accrued Employer Payroll Taxes

ExpenseExpense– Accrued Federal Income Tax ExpenseAccrued Federal Income Tax Expense

Journalizing Accrued Interest Journalizing Accrued Interest ExpenseExpense

• We received money from the bank on We received money from the bank on a 60 day, 10% note payable for a 60 day, 10% note payable for 7,500 on December 167,500 on December 16thth..

• So we have to determine how much So we have to determine how much interest was accrued in the first 15 interest was accrued in the first 15 days of this note.days of this note.

Here is where we are at……Here is where we are at……

We issued a note to the bank saying that we would pay an amount

Dec16th

Dec31st

31.25

Journalizing Accrued Interest ExpenseJournalizing Accrued Interest ExpensePrinciple x Rate x Time = InterestPrinciple x Rate x Time = Interest75007500 10% 15/360 = $31.25 10% 15/360 = $31.25

$125.00

$93.75

Journalizing the adjusting entry Journalizing the adjusting entry at the end of the year.at the end of the year.



Adjusting Entries

Dec 31 Interest Expense 31.25

Interest Payable 31.25

Interest Expense Interest Payable

31.25 adj 31.25 adj

Remember that this created a balance in a Asset or Liability account that did not previously have one. So at the beginning of next year we have to do a reversing entry.



Reversing Entries

Jan 1 Interest Payable 31.25

Interest Expense 31.25



Reversing Entries

Jan 1 Interest Payable 31.25

Interest Expense 31.25

Interest Expense Interest Payable

1.31.25 adj 1. 31.25 adj

2. 31.25 clo

Income Summary

2. 31.25 clo

2. 0

3. 31.25 rev3. 31.25 rev

Payment of the note when it is Payment of the note when it is due.due.

So on February 13th the note is due. We must record the payment of the money and show how it effects our interest expense account.

Interest Expense

31.25

Cash Payments Journal

Date Account TitleCKNO Post Ref

GeneralAccountsPay Debit

Cash CreditDebit Credit

Feb 13 Notes Payable 359 7500 7625

Interest Expense 125

125

93.75Which is the amount we figured to be remaining after the beginning of the year.

If our pay period rolls over into the If our pay period rolls over into the next year, we can record those next year, we can record those expenses in this years books and pay expenses in this years books and pay them next year.them next year.We would adjust our payroll accounts this way. Remember that we are recording them as expenses but we are not paying them and using our liability accounts to hold what we owe until next year.



Adjusting Entries

Salary Expense - Administrative 750

Salary Expense - Sales 850

Salary Expense - Warehouse 450

Salaries Payable 1560

Employee Inc. Tax Payable 326

Social Security Tax Payable 133.25

Medicare Tax Payable 30.75

Reversing EntriesReversing Entries


Date Account TitleDocNo

Post Ref Debit Credit

Reversing Entries

Salaries Payable 1560

Employee Inc. Tax Payable 326

Social Security Tax Payable 133.25

Medicare Tax Payable 30.75

Salary Expense - Administrative 750

Salary Expense - Sales 850

Salary Expense - Warehouse 450

Other entriesOther entries

• There are examples of There are examples of – Payroll Tax ExpensePayroll Tax Expense– Federal Income Tax Expense Federal Income Tax Expense

– At the end of the chapter that you will At the end of the chapter that you will also need.also need.

Problems Problems

• 9-1,2,3,49-1,2,3,4

Chapter 9 Accounting for Notes Payable, Prepaid Expenses an Accrued Expenses.

Documents

Transcript of Chapter 9 Accounting for Notes Payable, Prepaid Expenses an Accrued Expenses.