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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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End of Chapter 4End of Chapter 4