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Acct 310 Accounting ReviewPart II
Rick Hayes, Ph.D., CPACalifornia State University L.A.
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Sierra CorporationTrial Balance
October 31, 2007
Debit Credit Cash $15,200Advertising Supplies 2,500Prepaid Insurance 600Office Equipment 5,000Notes Payable $ 5,000Accounts Payable 2,500Unearned Service Revenue 1,200Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Rent Expense 900 $28,700 $28,700
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Prepaid ExpensesPrepaid Expenses
Amount equals cost of goods or services used up or expired
If not adjusted, expenses would be understated and assets overstated
On October 5 the company paid $2,500
for advertising supplies.
GENERAL JOURNAL Debit Credit
Oct 5 Supplies 2,500 Cash 2,500
Purchased advertising supplies
Advertising Supplies2,500Oct 5
Cash2,500Oct 5
Advertising Supplies Expense
Supplies
An inventory on October 31 reveals that $1,000 of supplies remain on hand; therefore $1,500 of supplies have been used. ($2,500 - $1,000) =$ 1,500
GENERAL JOURNAL Debit Credit
Oct 5 Supplies Expense 1,500 Supplies 1,500
To record advertising supplies consumed
2,500 Oct 5 Cash
2,500Oct 5
Advertising
Supplies Expense
Supplies
1,500Oct 311,500Oct 31
Advertising Supplies
Bal. 1,000
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Oct $1,500
Mar $1,435
Apr $1,510
May $1,592
Feb $1,601
Nov $1,800
Dec $1,410
Jan $1,425
June $1,652
July $1,621
Aug $1,427
Sept $1,555
Supplies expense is based on usage... so different amounts appear each month
Supplies Expense
Prepaid Expenses
On October 1 the company paid $600 for a 1-year insurance policy. Coverage began October 1.
GENERAL JOURNAL Debit Credit
Oct 1 Prepaid Insurance 600 Cash 600
Purchased one-year policy effective October 1
Prepaid Insurance
600Oct 1
Cash600Oct 1
Insurance Expense
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Insurance Policy
1 Year $ 600
Oct $50
Mar $50
Apr $50
May $50
Feb $50
Nov $50
Dec $50
Jan $50
June $50
July $50
Aug $50
Sept $50
Prepaid ExpensesOn October 31st, $50 ($600/12 months)
of the insurance was used-up or expired.
GENERAL JOURNAL Debit Credit
Oct 31 Insurance Expense 50
Prepaid Insurance 50
Record insurance expense for the month
Prepaid Insurance
600Oct 1
Cash600Oct 1
Insurance Expense
50 Oct 3150 Oct 31
550
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How do you apply the Matching Principle to the cost of a long lived asset ?
Depreciation
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Allocates the cost of an asset to expense over its useful life – MATCHING PRINCIPLE
Is an estimate
Depreciation is ALLOCATION of cost- not VALUATION(Current Replacement Cost)
We’re not attempting to reflect the actual change in value of an asset!
Depreciation
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Office Equipment
Depreciation= $480/year
Oct $40
Mar $40
Apr $40
May $40
Feb $40
Nov $40
Dec $40
Jan $40
June $40
July $40
Aug $40
Sept $40
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GENERAL JOURNAL Debit Credit
Oct 31 Depreciation Expense 40
Accumulated Depreciation-Office Equip 40
To record monthly depreciation Accumulated depreciation is a
contra asset account - an offset against the fixed asset account.
Accumulated Depreciation-
Office Equipment40Oct 31
Office Equipment5,000Oct 2
Depreciation Expense
40 Oct 31
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Office equipment $ 5,000
Less : accumulated depreciation 40
$4,960
Balance Sheet Presentation
Book Value or Carrying Value
Unearned RevenuesReceived on Oct. 2 $1,200 for advertising services expected to be completed by Dec 31.
Unearned Service RevenueCash
1,200Oct 21,200Oct 2
Service Revenue
GENERAL JOURNAL Debit Credit
Oct 2 Cash 1,200
Unearned Service Revenue 1,200
Collected money for work to be performed by Dec 31.
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Unearned RevenuesDuring October $400 of the revenue was
earned.
Unearned Service RevenueCash
1,200Oct 2
Service Revenue
1,200Oct 2
GENERAL JOURNAL Debit Credit
Oct 31 Unearned Service Revenue 400
Service Revenue 400
To record revenue earned
Oct. 31 400 Oct. 31 400
800Bal
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Accruals
•Revenue has been earned, but not collected.
•Expenses have been incurred, but not yet paid.
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Accrued Revenues
Revenues earned but not yet received in cash or recorded at the statement date.
Accrued Revenues
Earned $200 for advertising services to clients in October, but they were not billed until after October 31st.
GENERAL JOURNAL Debit Credit
Oct 31 Accounts Receivable 200
Service Revenue 200
Accounts Receivable
200Oct 31
Service Revenue
200Oct 31
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Accrued Expenses
Expenses incurred but not yet paid or recorded at the statement date.
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The adjusted trial balance is used to prove the equity of total debit balances and total credit balances after the adjusting entries have been made.
Financial statements (except Cash Flow Statement) can be easily prepared from the adjusted trial balance.
Adjusted Trial Balance11 6
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Closing the Books
Closing entries transfer the temporary account balances to the stockholders’ equity account...
and reduce the balances in the temporary accounts to zero.
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Temporary Permanent
All revenues accounts All asset accounts
All expense accounts All liability accounts
DividendsStockholders’ equity
accounts
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Close Temporary Accounts Only
Zero balance Zero balance after closing after closing
entries!entries!
Do not close!Do not close!
The Closing Process
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The Accounting Cycle11 8
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Required Steps in the Accounting
Cycle
