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The Accounting Cycle:The Accounting Cycle:Accruals and DeferralsAccruals and Deferralsotaleem.blogspot.comotaleem.blogspot.comfor more presentation(follow me)for more presentation(follow me)

Chapter 4

4-2

Adjusting entries are

needed whenever revenue or expenses affect more than one

accounting period.

Every adjusting

entry involves achange in either a

revenue or expense and an asset

or liability.

Adjusting EntriesAdjusting Entries

4-3

Types of Adjusting EntriesTypes of Adjusting EntriesConverting asset to expenses

(i.e Supplies, Unexpired Insurance) Converting liabilities to revenue

(i.e Unearned revenue to revenue earned) Accruing unpaid expenses

(i.e Interest Exp./Salary Exp. To Interest/Salary Payable)

Accruing uncollected revenue (i.e A/R or Interest Receivable to Service

Rev. Earned or interest Receivable)

4-4

Converting Assets to Converting Assets to ExpensesExpenses

An adjusting entries to convert an asset to expense consists of debit to an expense account and credit to an asset account.

Prepaid Expenses It always be assets, becoming

expenses only as service and goods are used up.(i.e Shop Supplies and Insurance policies)

4-5

Prior Periods Current Period Future Periods

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.

Converting Assets to Converting Assets to ExpensesExpenses

4-6

The Concept of The Concept of DepreciationDepreciationDepreciation is the systematic allocation of the cost of a depreciable asset to expense.

Cash (credit)

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)

Accumulated Depreciation

(credit)

4-7

On May 2, 2009, 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.

$2,50050

=$50$50

Depreciationexpense (per

period)= Cost of the asset

Estimated useful life

Depreciation Is Only an Depreciation Is Only an EstimateEstimate

4-8

JJ’s Lawn Care Service would make the following adjusting entry.

GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

May 31 Depreciation Expense: Equipment 50Accumulated Depreciation: Equipment 50

To record one month's depreciation.

Contra-asset

Depreciation Is Only an Depreciation Is Only an EstimateEstimate

4-9

JJ’s $15,000 truck is depreciated over 60 months. Calculate monthly depreciation and

make the journal entry.

GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

May 31 Depreciation Expense: Truck 250Accumulated Depreciation: Truck 250

To record one month's depreciation.

$15,00060 months = $250 per month

Depreciation Is Only an Depreciation Is Only an EstimateEstimate

4-10

Accumulated depreciation would appear on the balance sheet as

follows:

Depreciation Is Only an Depreciation Is Only an EstimateEstimate

Cost - Accumulated Depreciation = Book Value

4-11

Prior Periods Current Period Future Periods

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.

Converting Liabilities to Converting Liabilities to RevenueRevenue

4-12

Converting Liabilities to Converting Liabilities to RevenueRevenueAmount collected from customer in

advance are recorded by debiting the cash account and crediting an unearned revenue(deferred revenue) account.

For Examples:AdvanceTicketing for Travel and sports match

4-13

Prior Periods Current Period Future Periods

TransactionPay cash in

settlement of liability.

End of Current Period

Accruing Unpaid ExpensesAccruing Unpaid Expenses

4-14

Accruing Unpaid ExpensesAccruing Unpaid ExpensesIt recognizes expenses that will

be paid in future. (interest on borrowing, wages expense etc)

Adjusting entry consists of a debit to an expense account and credit to a liability account.

Examples:Accrual of Wages or salaries Expenses.Accrual of Interest Expenses.

4-15

Prior Periods Current Period Future Periods

TransactionCollect cash in settlement of receivable.

End of Current Period

Adjusting EntryRecognizes revenue earned but not yet recorded, andRecords receivable.

Accruing Uncollected Accruing Uncollected RevenueRevenue

4-16

Accruing Uncollected Accruing Uncollected RevenueRevenueA revenue accrual is necessary when

revenue has been earned in the current accounting period but the cash will not be collected until the next period. Examples of revenue accruals include interest earned on investments or loans made to others, and work completed but not yet billed to the customer.

In the adjusting entry we will record a receivable, an asset account, and recognize the revenue earned.

4-17

Costs are matched with revenue in two ways:

Direct association of costs with specific revenue

transactions.

Systematic allocation of costs over the “useful life” of the

expenditure.

Adjusting Entries and Adjusting Entries and Accounting PrinciplesAccounting Principles

4-18

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

4-19

JJ's Lawn Care Service Adjusted Trial Balance

May 31, 2009Cash 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

4-20

End of Chapter 4End of Chapter 4