k4e Ppt - Ch04 - Complete File

8/14/2019 k4e Ppt - Ch04 - Complete File

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Financial Accounting:Tools for Business Decision Making, 4th Ed.

Kimmel, Weygandt, Kieso

CHAPTER 4

Prepared by

Ellen L. Sweatt

Georgia Perimeter College


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Chapter 4

ACCRUALACCRUAL

ACCOUNTINGACCOUNTINGCONCEPTSCONCEPTS


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Chapter 4Accrual Accounting Concepts

Explain the revenue recognition principleand the matching principle.

Differentiate between the cash basis andthe accrual basis of accounting.

Explain why adjusting entries are needed

and identify the major types of adjustingentries.

Prepare adjusting entries for prepayments.


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Chapter 4Accrual Accounting Concepts

Prepare adjusting entries for accruals.

Describe the nature and purpose of the

adjusted trial balance. Explain the purpose of closing entries.

Describe the required steps in the accountingcycle.


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Time Period Assumption...Divides the economic life of a

business into artificial time

periods

WHY?to provide immediate

feedback on how the

business is doing.

111


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Time Period Assumption...Generally a month, a quarter, or ayear.

An accounting time period that starts on January 1and ends December 31 is called a calendar year.

An accounting time period that is oneyear long is called a fiscal year.


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Revenue Recognition

Principle... Dictates that revenue be recognized

in the accounting period in which itis earned.

Is considered earned

when the service has been provided or

when the goods are delivered.


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Matching Principle...Requires that expensesbe

recorded in the same periodin which the revenues they

helped produce are recorded.


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ReviewReview

a.a. Cost Principle.Cost Principle.

b.b. Matching PrincipleMatching Principle

c.c. Periodicity PrinciplePeriodicity Principle

d.d. Revenue Recognition PrincipleRevenue Recognition Principle

Which principle dictates that efforts (expenses)Which principle dictates that efforts (expenses)

be recorded with accomplishments (revenues)?be recorded with accomplishments (revenues)?


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ReviewReview

a.a. Cost Principle.Cost Principle.

b.b. Matching PrincipleMatching Principle

c.c. Periodicity PrinciplePeriodicity Principle

d.d. Revenue Recognition PrincipleRevenue Recognition Principle

Which principle dictates that efforts (expenses)Which principle dictates that efforts (expenses)

be recorded with accomplishments (revenues)?be recorded with accomplishments (revenues)?


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When wouldWhen would revenuerevenue be recorded for thebe recorded for the

following scenario . . .following scenario . . .

Ad agency is hired for a project in May,Ad agency is hired for a project in May,does the work in June and is paid indoes the work in June and is paid in

July?July?

JuneJune

ReviewReview


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ReviewReviewWhen wouldWhen would expensesexpenses be recorded for thisbe recorded for thiscompanion scenario ?companion scenario ?

The Ad agency on this project incursThe Ad agency on this project incurs$1,500 of expenses in May, $3,000 in June,$1,500 of expenses in May, $3,000 in June,

and none in July?and none in July?

The answer is June! MatchingThe answer is June! Matching

says the expenses should followsays the expenses should follow

the revenue.the revenue.


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ReviewReviewWhen wouldWhen would revenuerevenuebe recorded for thebe recorded for thefollowing scenario . . .following scenario . . .

Sell plane ticket on September 1 for aSell plane ticket on September 1 for a

flight on October 15?flight on October 15?

The answer is October when theThe answer is October when theservice is provided!service is provided!


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ReviewReviewWhen wouldWhen would expensesexpenses be recorded for thebe recorded for thefollowing scenario . . .following scenario . . .

The airline pays pilot salaries on October 7The airline pays pilot salaries on October 7thth

for the week ended September 30th?for the week ended September 30th?

The answer is September the pilotsThe answer is September the pilots

provided labor services for Septemberprovided labor services for September

flights during that month.flights during that month.


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Cash Basis

Revenue recorded only when cash is received.Expense recorded only when cash is paid.

112

GAA

P


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Accrual Basis AccountingAdheres to the:

Revenue RecognitionPrinciple Revenuerecorded only when earned,not when cash is received Matching Principle

Expense recorded onlywhen incurred, not when cash

paid


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Accrual Basis adheres to..

GenerallyAcceptedAccounting

Principles


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Types of Adjusting Entries

Prepayments: Prepaid expenses: Expenses paid in cash and

recorded as assets before they are used orconsumed.

Unearned Revenues: Cash received andrecorded as liabilities before revenue is earned.

Accruals: Accrued revenues: Revenues earned but not yet

received in cash or recorded. Accrued expenses: Expenses incurred but not

yet paid in cash or recorded.


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Prepayments

PREPAID EXPENSES - Costs thatexpire either with the passage of

time or through use.

UNEARNED REVENUES- money has

been received before the goods orservices are provided.


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You can start with the trialbalance to find information to

adjust prepayments.

Si C i


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Sierra CorporationTrial Balance

October 31, 2007

Debit CreditCash $15,200

Advertising Supplies 2,500

Prepaid Insurance 600

Office Equipment 5,000Notes Payable $ 5,000

Accounts Payable 2,500

Unearned Service Revenue 1,200

Common Stock 10,000

Dividends 500

Service Revenue 10,000

Salaries Expense 4,000

Rent 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


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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 5Cash 2,500Oct 5

Advertising

Supplies

Expense

Supplies


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An inventory on October 31 reveals that $1,000 osupplies remain on hand; therefore $1,500 ofsupplies have been used. ($2,500 - $1,000) =$1,500


Oct 5 Supplies Expense 1,500

Supplies

1,500

To record advertising supplies consumed

2,500Oct 5Cash

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


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Prepaid Expenses

On October 1 the company paid $600 for a 1-yeainsurance policy. Coverage began October 1.


Oct 1 Prepaid Insurance 600

Cash 600

Purchased one-year policy effective October 1

Prepaid

Insurance600Oct 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


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Prepaid Expenses

On October 31st, $50 ($600/12months) of the insurance was used-up

or expired.


Oct 31 Insurance Expense 50

Prepaid Insurance

50

Record insurance expense for the month

Prepaid

Insurance600Oct 1

Cash600Oct 1

Insurance

Expense50Oct 3150Oct 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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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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Oct 31 Depreciation Expense 40

Accumulated Depreciation-Office Equip 40

To record monthly depreciation

Accumulated depreciation is acontra asset account - an offset

against the fixed asset account.

Accumulated

Depreciation-

Office Equipment40Oct 31

Office Equipment5,000Oct 2

Depreciation

Expense 40Oct 31


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Office equipment $ 5,000

Less : accumulated depreciation 40

$4,960

Balance Sheet Presentation

Book Value orCarrying Value


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Unearned RevenuesReceived on Oct. 2 $1,200 for advertising

services expected to be completed byDec 31.

Unearned Service

RevenueCash

1,200Oct 21,200Oct 2

Service

Revenue


Oct 2 Cash 1,200

Unearned Service Revenue 1,200

Collected money for work to beperformed by Dec 31.

115


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Unearned RevenuesDuring October $400 of the revenue was

earned.

Unearned Service

RevenueCash

1,200Oct 2

Service

Revenue

1,200Oct 2


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.

115


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Accrued Revenues

Revenues earned but not yet

received in cash or recorded at thestatement date.

Accrued Revenues


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Accrued Revenues

Earned $200 for advertising services to

clients in October, but they were notbilled until after October 31st.


Oct 31 Accounts Receivable 200

Service Revenue 200

Accounts

Receivable200Oct 31

Service

Revenue 200Oct 31


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Accrued Expenses

Expenses incurred but not yet paid

or recorded at the statement date.

Interest expense is the cost a


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Formula for Computing Interest

*

Face Value

of Note Interest

Time

in term of

One Year

Annual

Interest

Rate

$ 5,000 X 12% 1/12 = $50

Interest expense is the cost acompany incurs to use money:Information needed to compute interest expense:

7 face value of note7 interest rate (always expressed in annual rate)

7 the length of time note is outstanding


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Interest Expense Interest Payable

Oct 31 50 Oct 31 50


Oct 31 Interest Expense 50

Interest Payable 50

Accrue interest expense for the month

Accrued Interest

A d S l i S l i P id f


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Accrued Salaries - Salaries Paid for

after the Service Has Been Performed.

d l i


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Salaries Expense Salaries PayableOct 31 1,200 Oct 31 1,200


Oct 31 Salaries Expense 1,200Salaries Payable 1,200

Accrue salary expense for the month

Accrued Salaries

6


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The adjusted trial balance is used to

prove the equity of total debit balances

and total credit balances after theadjusting entries have been made.

Financial statements (except Cash Flow

Statement) can be easily prepared from

the adjusted trial balance.

Adjusted Trial Balance

116


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Closing the Books

Closing entries transfer the temporary

account balances to the stockholdersequity 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

Cl T A t


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Close Temporary AccountsOnly

Zero balanceZero balance

after closingafter closingentries!entries!

Do not close!Do not close!


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The Closing Process


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The Accounting Cycle

118

R i d


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RequiredSteps in

theAccounting Cycle


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ReviewReview

Which isWhich is notnota temporary account?a temporary account?a.a.Salaries expenseSalaries expense

b.b.Service revenueService revenue

c.c.Accounts ReceivableAccounts Receivabled.d.DividendsDividends


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ReviewReview

Which isWhich is notnota temporary account?a temporary account?a.a.Salaries expenseSalaries expense

b.b.Service revenueService revenue

c.c.Accounts ReceivableAccounts Receivabled.d.DividendsDividends

ReviewReview


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ReviewReview

Which account will have a zeroWhich account will have a zerobalance after closing entries?balance after closing entries?

a.a.Service RevenueService Revenueb.b.Advertising SuppliesAdvertising Supplies

c.c.Prepaid InsurancePrepaid Insurance

d.d.Accumulated DepreciationAccumulated Depreciation

ReviewReview


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ReviewReview

Which account will have a zeroWhich account will have a zerobalance after closing entries?balance after closing entries?

a.a.Service RevenueService Revenueb.b.Advertising SuppliesAdvertising Supplies

c.c.Prepaid InsurancePrepaid Insurance

d.d.Accumulated DepreciationAccumulated Depreciation


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ReviewReview

Which types of accounts will appearWhich types of accounts will appear

in the post-closing trial balance?in the post-closing trial balance?

a.Temporary accounts

b.Accounts shown in the income statement

c.Permanent accountsd.All of the above


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ReviewReview

Which types of accounts will appearWhich types of accounts will appear

in the post-closing trial balance?in the post-closing trial balance?

a.Temporary accounts

b.Accounts shown in the income statement

c.Permanent accountsd.All of the above


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Copyright 2007 John Wiley & Sons, Inc. All rights

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k4e Ppt - Ch04 - Complete File