Professional Documents
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B. Define the matching principle.
1. Matching principle—the accounting principle that states that revenue
earned during an accounting period should be offset by the expenses that were
incurred in earning that revenue. The principle that efforts (expenses) be
matched with accomplishments (revenues).
2. How to apply the matching principle—at the end of the accounting
period expenses and revenues must be examined to find out what amounts
belong to the period regardless of when the related cash payments and receipts
occur which means you will need to adjust both expenses and revenues in
order to apply the matching principle.
3. To determine Accrual Net Income:
All Recognized Revenues
All Matched Expenses
Recognized Revenues - Matched Expenses = Accurate net income for the period
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2. Deferrals—Expenses and revenues that have been recorded in the
current accounting period but are not incurred or earned until a future
period. To defer means to put off or to postpone. Thus a deferral is a putting
off or a postponement of revenue or an expense that has been recorded by a
routine journal entry but belongs to the future.
G. Define the Going Concern Concept—financial reports of a business are
prepared with the expectation that the business will remain in operation
indefinitely. Since this concept assumes that a business will continue indefinitely
into the future, by accruing expenses and revenues, it is understood that the
business has a future.
H. The Basics of Adjusting Entries:
1. Adjusting entries are entries made at the end of an accounting period
to ensure that the revenue recognition and matching principles are
followed.
2. Adjusting entries are required every time financial statements are
prepared and are dated as of the balance sheet date.
3. Adjusting entries are needed because:
a) Some events are not journalized daily because it is
inexpedient to do so. Examples are the consumption of supplies and
the earning of wages by employees.
b) Some costs are not journalized during the accounting period
because they expire with the passage of time rather than through
recurring daily transactions. Examples are equipment deterioration,
and rent and insurance expiring.
c) Some items may be unrecorded. An example of a utility bill
that will not be received and/or paid until the next accounting period.
I. Types of Adjusting Entries—refer to handout, page 5 and Illustration 3-2
—Categories of adjusting entries on page 93 of the textbook where the text
breaks the categories into two sections as follows:
1. Prepayments:
a) Prepaid Expenses—expenses paid in cash and recorded as assets
(or expenses as shown in the chapter appendix—alternative treatment of
prepaid expenses) before they are used or consumed. Depreciation of
plant assets falls into this category.
b) Unearned Revenues—cash received and recorded as liabilities
(or revenues as shown in the chapter appendix—alternative treatment of
unearned revenues) before revenue is earned.
2. Accruals:
a) Accrued Revenues—revenues earned but not yet received in
cash or recorded.
b) Accrued Expenses—expenses incurred but not yet paid in cash
or recorded.
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creates liabilities as shown in Illustration 3-16 on page 105 of the text.
Expenses that have been incurred but not yet recorded at the end of an accounting
period require an adjusting entry to recognize both the proper amount of expense
for the period on the income statement and the proper amount of liabilities on the
balance sheet. Accrued Expenses are also called Accrued Liabilities because accrued
expenses have not been paid as of the end of the period and thus represent a liability
of the firm. Helpful hint to remember what is done with Accruals: The “A” in
Accrual means add to expense or revenue as the adjusting entry will be adding to
expenses or to revenues.
3. An adjusting entry, such as one for an accrued expense, affects both the
income statement and the balance sheet (shown on Illustration 3-16 on
page 105) as it results in an increase (debit) to an expense account and an
increase (credit) to a liability account. In the case of an accrued expense
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such as accrued salaries, the income statement is affected because an
expense account (Salaries Expense) is debited; a balance sheet account is
affected because a liability account (Salaries Payable) is credited (see page
106 of the textbook).
5
Subtract the date of the note May -8
6
280 280
5. Affect if the adjusting entry for accrued expenses is OMITTED—refer to
the “ADJ-Accrued Expenses” entry on handout, page 16, chapter 3 of the
HANDOUT PACKET and page 105 of the textbook:
a. Expenses are understated as did not accrue the additional
expense of Interest Expense. The first line on the handout is showing the
balances in the accounts if fail to do the adjustment. Expenses are
showing a balance of $50 but the balance SHOULD BE (S/B) $60 as an
additional expense of $10 should have been accrued. Therefore expenses
are understated by $10 if the adjusting entry is omitted.
b. Liabilities are understated as did not accrue the additional
liability owed of Interest Payable. The first line on the handout is showing
the balances in the accounts if fail to do the adjustment. Liabilities are
showing a balance of $100 but the balance SHOULD BE (S/B) $110 as
an additional liability of $10 should have been accrued. Therefore
liabilities are understated by $10 if the adjusting entry is omitted.
c. Net income is overstated as did not accrue the additional
expense of Interest Expense which would reduce the amount of net
income as expenses decrease income and owner’s equity. The first line on
the handout is showing a net income of $50 ($100 Revenues - $50
Expenses) if fail to do the adjustment. When the accrued expense is
made the net income is $40 ($100 Revenues - $60 Expenses). Therefore
net income is overstated by $10 if the adjusting entry is omitted.
C. Describe other types of accrued expenses—the adjusting entry always
involves a debit to an expense and a credit to a liability.
1. To accrue rent that is owed but unpaid at the end of the accounting
period—debit Rent Expense and credit Rent Payable.
2. To accrue taxes that are owed but unpaid at the end of the accounting
period—debit Taxes Expense and credit Taxes Payable.
3. To accrue utilities that are owed but unpaid at the end of the
accounting period—debit Utilities Expense and credit Utilities Payable.
NOTE that the liability account used matches the expense account.
Accounts Payable could be used rather than Utilities Payable. See
ACCRUALS and Expenses, on handout, page 15, chapter 3 of the
HANDOUT PACKET. The example where a bill is received and paid
the next period shows that some expense will be debited and accounts
payable is credited. But since for the CB exam, the LIABILITY matches
the EXPENSE, they are done here as well.
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credited (see Illustration 3-11—Adjusting Entries for accrued revenues). Helpful hint
to remember what is done with Accruals: The “A” in Accrual means add to expense or
revenue as the adjusting entry will be adding to expenses or to revenues in this case.
Remember that the goal is to adhere to the revenue recognition principle—a business
earns (realizes) revenue when goods or services are sold to customers, even though
cash may not be collected until sometime in the future. Therefore, to make sure that the
correct amount of revenue is shown that is earned each fiscal year for the accrual basis
of accounting, some revenue may need to be accrued that has been earned but not yet
recorded. Adjusting entries to accrue revenue will affect both an income statement
(credit to a revenue) and a balance sheet (debit to a receivable) account (refer to the
top line on handout, page 15 and the comment at the bottom of handout, page 5,
chapter 3 of the HANDOUT PACKET—ALL adjusting entries effect one Income
Statement account and one Balance Sheet account.
A. Explain accrued rent revenue and the adjustment needed.
1. Accrued rent revenue—revenue earned but not yet received.
2. Steps to prepare the adjusting entry:
a. Calculate the amount of rent earned.
b. Prepare the adjusting entry—an adjusting entry for accrued
revenues results in an increase (debit) to an asset account and an
increase (credit) to a revenue:
General Journal Page 1
Date Account Title P.R. Debit Credit
2008 Adjusting Entries
Dec. 31 Rent Receivable 1,200.00
Rent Income 1,200.00
c. Post to the General Ledger where the Rent Receivable will be
shown under the current asset section on the Balance Sheet and Rent
Income account will be closed and its balance listed as nonoperating
revenue on the income statement:
Owner's
Assets = Liabilities + + Revenues - Expenses
Equity
Cash Rent Income
Dec.31 Adj.
1,200
Rent Receivable
Dec.31 Adj.
1,200
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Debit—Rent Expense 1,200
Credit—Rent Payable 1,200
4. Affect if the adjusting entry for accrued revenues is OMITTED—refer
to the “ADJ-Accrued Revenues,” on handout, page 16 chapter 3 of the
HANDOUT PACKET and page 104 of the textbook:
a. Revenues are understated as did not accrue the additional revenue
of Rent Income. The first line on the handout is showing the balances in
the accounts if fail to do the adjustment. Revenues are showing a
balance of $100 but the balance SHOULD BE (S/B) $110 as an additional
revenue of $10 should have been accrued. Therefore revenues are
understated by $10 if the adjusting entry is omitted.
b. Assets are understated as did not accrue the additional receivable
owed to the company of Rent Receivable. The first line on the handout is
showing the balances in the accounts if fail to do the adjustment.
Assets are showing a balance of $200 but the balance SHOULD BE (S/B)
$210 as an additional receivable of $10 should have been accrued.
Therefore assets are understated by $10 if the adjusting entry is omitted.
c. Net income is understated as did not accrue the additional revenue
of Rent Income which would increase the amount of net income as
revenues increase income and owner’s equity. The first line on the
handout is showing a net income of $50 ($100 Revenues - $50 Expenses)
if fail to do the adjustment. When the accrued revenue is made the net
income is $60 ($110 Revenues - $50 Expenses). Therefore net income is
understated by $10 if the adjusting entry is omitted.
B. Describe other types of Accrued Revenue:
1. In Chapter 9 Notes Receivable are covered and should be considered
as the mirror image of Notes Payable. Calculations of due date and interest
are identical for notes payable and notes receivable and where one company’s
interest expense is another company’s interest income. To accrue interest
income:
a. Calculate interest earned from the date of the note until the
end of the accounting period—P x R x T.
b. Record the adjusting entry:
Debit—Interest Receivable
Credit—Interest Income
2. Any unbilled revenues such as fees earned or sales made but where
the cash has not yet been received needs to be accrued to accounts
receivable. Normally the name of the receivable account will match the
name of the revenue account as shown in the above examples (i.e. Rent
Receivable/Rent Income; Interest Receivable/Interest Income, etc.) unless
the revenue is for the regular income for the business (see example for
Pioneer Advertising Agency—page 104). See section 4 Accrued Revenues
on handout, page 16, chapter 3 of the HANDOUT PACKET. With the
example of fees earned, but not yet recorded with the example shown:
Debit—Accounts Receivable
Credit—Fees Earned
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IV. Summary of Accruals—refer to handout, page 4 (3-19)—ILLUSTRATION
3-4: ACCRUAL RELATIONSHIPS” section 3:
A. Accruals ALWAYS Add—the “A” in accrual means Add. You always Add
to expense or Add to revenue (bringing in something not yet recorded into
the present) and you ALWAYS Add to the Balance Sheet (liabilities or assets
and Add to the Income Statement (expenses or revenues).
B. The adjustment for accruals usually (unless you are accruing the service or
sales revenue for the normal operations of the business in which case
accounts receivable is the account) ALWAYS creates a balance sheet account.
C. Accruals can ALWAYS be reversed (see APPENDIX, chapter 4 of the
textbook: Reversing Entries—pages 169-171). This point is a key one before
going on to deferrals, which can only SOMETIMES BE REVERSED. The
RULE TO MASTER: Whenever an adjusting entry creates a Balance Sheet
account (liability or asset) reversal is possible and desirable as well so that the
adjusting entry into the created account WILL NOT BE FORGOTTEN. As
shown on page 107, when the salaries are paid on November 9, the debit to
Salaries Payable must be made along with the amount for Salaries Expense.
But the amount in Salaries Payable is often FORGOTTEN and the entire
amount of $4,000 in this example is debited to Salaries Expense.
Refer to HOMEWORK PROBLEM BE3-7 to prepare accrued adjusting entries:
Date Account Name Debit Credit
Dec. 31 Interest Expense 400
Interest Payable ?
31 Accounts Receivable ?
Service Revenue 1,500
31 Salaries ? ?
Salaries Payable ?
A. Explain the entries needed when deferred expenses are first recorded as assets.
1. Define deferred expense—advance payment for goods or services that
benefit more than one accounting period. Deferred expenses are actually
Prepaid expenses (supplies, prepaid insurance, prepaid rent, prepaid
advertising, etc.). Deferred expenses have already been paid, but will
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benefit future periods. To match (Matching principle) revenue and
expenses properly, a part of the deferred expense must be “put off” into
the future (part that has future benefit) and part must be recognized in the
current period (part that has been used or expired). Be Careful with the
word, “Expense,” as many students get confused thinking that the
account must be an Expense account but the usual transaction is to
record the amounts paid for expenses paid in advance as an asset NOT
AN EXPENSE. If the prepayment will become an expense in one year or
less, then the prepaid expense account is listed under the “Current
Asset” section of the Balance Sheet. If the prepayment will become an
expense longer than one year, it is shown in the “Other Asset” section
(long-term section) of the Balance Sheet as a Deferred charge.
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c. The third box shows the closing entry that closes the balance of
the expense account to the income summary which then becomes part
of owner’s equity for the net income or net loss of the company.
d. The fourth box addresses the concept of whether a reversing
entry will be considered or not (Reversing entries are introduced in
the Appendix, chapter 4 of the textbook). NOTE that no reversing
entry will be made. Recall the RULE TO MASTER: Whenever an
adjusting entry creates a Balance Sheet account (liability or asset)
reversal is possible. When a deferred or prepaid expense is initially
recorded as an asset, the adjusting process will create an expense
account that is closed in the normal closing routine at the end of the
fiscal year. Since NO ASSET or LIABILITY account was created
during the adjustment, there is no support for a reversing entry.
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the assets’ useful life, rather than treating the cost of an asset as an
expense in the year of purchase. TYPICAL STUDENT
MISCONCEPTION: in accounting for depreciation, students often
think of depreciation in the economic sense. That is, they view it as a
valuation process used to record the decline in the value of an asset. In
accounting, depreciation has nothing to do with value. It refers only
to the allocation of an asset’s cost over its estimated useful life. As time
passes, the usefulness of assets will decline, and eventually they will no
longer serve their original purpose so the accounting system, must,
therefore, reflect the fact that the equipment and furniture will
gradually wear out or become obsolete and will have to be replaced.
b. Describe the straight-line method of computing depreciation—
a popular method of calculating depreciation that yields the same
amount of depreciation for each full period an asset is used. When
calculating the amount of the adjustment for straight-line depreciation,
you should always calculate a yearly amount first, then a monthly
amount. See example on page 99 of the textbook.
c. Describe the contra-account Accumulated Depreciation. The
depreciation adjustment is not reflected directly in the asset account.
Accumulated Depreciation is a contra asset account—an account
whose balance is opposite (offset against) the asset to which it relates.
Since asset accounts have debit balances, contra asset accounts (the
opposite of assets) have credit balances. Contra means opposite or
against like in the words contradiction, contraband, and contrary
(similar to what drawing and expenses do to owner’s equity).
Depreciation is recorded in the Accumulated Depreciation account ,
rather than directly in the asset account, so as to maintain both the
asset account showing the original (or historical) cost of the asset
and the Accumulated Depreciation account showing how much the
asset has depreciated (the total cost that has expired to date). This is
especially needed when the asset is sold to determine any gain or loss
on the sale of the asset. The questions that must be answered on the
tax return are:
1. What was the original cost of the asset? (the amount is
found in the asset account)
2. What is the total depreciation that has been taken on
the asset? (the amount is found in the accumulated
depreciation account)
3. How much was the asset sold for?
4. What is the gain or loss on sale?
The use of a contra account provides disclosure of both the
original cost of the equipment and the total cost that has expired
to date.
Refer to the example of the allocation process for the purchase of a truck over the
truck’s useful life and the calculation of book value (explained below) on the
handout, page 2 (3-17)—ILLUSTRATION 3-2: DEPRECIATION.
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The following example illustrates the process of allocating expired (deferred)
prepayments to expenses:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
Office Supplies Office Supplies Exp.
125 45 USED 45
150
275
230
Prepaid Insur. Insurance Expense
240 20 USED (EXPIRED) 20
220
Office Equip.
3,000
Acc.Dep-Off Eq USED (ALLOCATED) Depr.Exp.-Off. Eq.
50 50
Office Furn.
2,000
Acc.Dep-Off Furn Depr.Exp.-Off.Furn.
USED (ALLOCATED)
30 30
d. Every adjusting entry affects both the balance sheet and the income
statement. For example, the adjustment for depreciation, the debit is to
Depreciation Expense (an income statement account) and the credit is to
accumulated depreciation (a balance sheet account).
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DPR Expense- Equipment Accum. DPR- Equipment
5,000 ?
Balance Sheet
Equipment 30,000
Less: Accumulated depreciation ? 25,000
7. Explain the entries needed when deferred expenses are first recorded as
expenses. (See APPENDIX Alternative Treatment of Prepaid Expenses
and Unearned Revenues—pages 115-118 and pages 10-11 handouts
(ILLUSTRATION 3-9—PREPAYMENTS—ALTERNATIVE
TREATMENT and ILLUSTRATION 3-2—ALTERNATIVE
TREATMENTS OF PREPAID EXPENSES AND UNEARNED
REVENUE). End-of-the-year adjustments are different for the two
methods. Refer to handout, page 13, chapter 3, FIGURE 17-1 of the
HANDOUT PACKET—Comparison of Methods for Recording
Prepaid Expenses—and the second column, “Recorded as Expense:”
a. The first box shows the initial recording when the cash was
paid. There are two ways to initially record deferred or prepaid
expenses (1) as assets or (2) as expenses. Both methods yield the
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identical results on the income statement and the balance sheet. A
question usually arises at this point as to WHY would this entry be
initially recorded as an EXPENSE and believe it or not, from an
auditor’s perspective, this is the METHOD that I have observed is
the MORE COMMON method done in practice. Some of the
reasons are:
i. The entry was made by an inexperienced or not
properly educated bookkeeper who believes that any time an
expenditure is made; IT MUST BE AN EXPENSE because
money has been spent and anytime money is spent, it is an
expense with that thinking.
ii. There is actually a conceptual reason for recording this
type of expenditure initially as an expense especially dealing
with the expenditure for supplies. If it is believed that all of
the supplies would be used by the end of the accounting period,
then it would be wise to initially record the amount as an
expense because then it would not be necessary to make an
adjusting entry at the end of the accounting period. This
reasoning does not make sense, though, when paying for an
insurance policy because you would know at the time of the
payment if the policy would totally expire or not by the end of
the accounting period. But if most of the policy will be
expired, then it could be initially recorded as an expense.
b. The second box shows the adjusting entry that transfers the
amount of the expenditure that is unexpired (insurance in the
example) to an asset account.
c. The third box shows the closing entry that closes the balance of
the expense account to the income summary which then becomes
part of owner’s equity for the net income or net loss of the
company.
d. The fourth box addresses the concept of whether a reversing
entry will be considered or not. . Recall the RULE TO MASTER:
Whenever an adjusting entry creates a Balance Sheet account
(liability or asset) reversal is possible and desirable as well so that
the adjusting entry into the created account WILL NOT BE
FORGOTTEN. Since an asset account had been created in the
adjusting process (prepaid insurance in the example), a reversing
entry is needed to return the prepayment to an expense in the next
accounting period.
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adjusting process to record correct expenses incurred and revenues
earned. With deferred expenses and deferred revenues, not all
adjusting entries can be reversed as can be done with accrued
expenses and accrued revenues. Another liability called unearned
(deferred) revenue that does not have the word, "payable," with the name of the
account but it is a liability (a debt owed by the company) as it originates from
receiving cash in advance before a revenue (income earned from carrying out the
activities of a firm) is performed. The reason that this account is a liability is
that a service or sale must be made requiring a performance in the future (a
liability as a debt of performance is owed) or the money must be refunded (a
liability as a debt owed) if the job is not done.
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balance of $100 but the balance SHOULD BE (S/B) $110 as additional
revenue of $10 should have been recorded. Therefore revenues are
understated by $10 if the adjusting entry is omitted.
b. Liabilities are overstated as did not adjust the portion of the
unearned revenue that has now been earned and should be transferred to
a revenue account. The first line on the handout is showing the balances
in the accounts if fail to do the adjustment. Liabilities are showing a
balance of $100 but the balance SHOULD BE (S/B) $90 as a liability
should have been reduced by $10 for the portion earned. Therefore
liabilities are overstated by $10 if the adjusting entry is omitted.
c. Net income is understated as did not record the additional
revenue that had been earned where revenues increase income and
owner’s equity. The first line on the handout is showing a net income of
$50 ($100 Revenues - $50 Expenses) if fail to do the adjustment.
When the additional revenue is recorded the net income is $60 ($110
Revenues - $50 Expenses). Therefore net income is understated by
$10 if the adjusting entry in omitted.
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when the cash is received whether all the subscriptions will be sent or
not by the end of the accounting period. But if most of the
subscriptions will be sent, then it could be initially recorded as
revenue since the interim financial statements would be showing
closer to revenue that will be or has been earned.
2. The second box shows the adjusting entry that transfers the
revenues unearned (unearned subscriptions in the example) to a
liability account.
3. The third box shows the closing entry that closes the balance of the
revenue account to the income summary which then becomes part of
owner’s equity for the net income or net loss of the company. (Closing
entries are covered in chapter 4 of the textbook).
4. The fourth box addresses the concept of whether a reversing entry
will be considered or not. Recall the RULE TO MASTER: Whenever an
adjusting entry creates a Balance Sheet account (liability or asset)
reversal is possible and desirable as well so that the adjusting entry into
the created account WILL NOT BE FORGOTTEN. When a deferred or
unearned revenue is initially recorded as revenue, the adjusting process
will create or increase a liability account (some unearned revenue
account—unearned subscriptions income in the example) and since a
liability account had been created or increased in the adjusting process,
a reversing entry is needed to return the prepayment to revenue in the
next accounting period.
15 ? ?
19
Service Revenue 6,100
Insurance Expense
1/2 1,800
Cash
1/15 ? 1,800 1/2
1,700 1 /10
Supplies Expense
1/10 ?
Service Revenue
? /15
Adjusting Entries
Jan. 31 Prepaid ? ($150 x 11 months) ?
Insurance Expense ?
31 ? ?
Supplies Expense 800
31 Service ? (Hint:6100-2500)
Unearned Revenue ?
Prepaid Insurance
1/31 ?
Insurance Expense
1/2 ? ? 1/31
Bal. 150
Supplies
1/31 ?
Supplies Expense
1/10 ? ? 1/31
Bal. 900
Unearned Revenue
? 1/31
Service Revenue
1/31 ? ? 1/15
2,500 Bal.
Insurance expense 150
Supplies expense ?
Service revenue 2,500
Prepaid insurance ?
Supplies 800
Unearned revenue ?
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3. The third column shows the account balances before adjustment.
4. The fourth column gives the general type of adjusting entry that
needs to be made.
B. Refer to handout, page 6—Explanation which explains the types of adjusting
entries as the textbook categorizes adjusting entries into four types as shown
in Illustration 3-9, p.100; Illustration 3-12, p.101; Illustration 3-15, p. 104;
and Illustration 3-21, p. 107 of the text.
C. Refer to handout, page 7 (3-21)—ILLUSTRATION 3-6: EXAMPLES OF
ADJUSTING ENTRIES to complete the practice exercise there and compare
your answers to the answers shown on the bottom of the handout.
D. Refer to handout, page 8 (3-22)—ILLUSTRATION 3-7: POSTING OF
ADJUSTING ENTRIES and review the adjusting entries in the example,
how they are posted to the appropriate accounts, and then how the final
balances in the accounts are determined after they have been posted.
31 Utilities ? ?
Utilities ? 520
31 Depreciation ? ?
Accum. ?--Dental ? 400
31 Interest ? ?
Interest ? ?
31 Insurance ? ?
Prepaid ? 100
31 Depreciation ? ?
? Deprec.--Office ? ?
21
Service ? ?
31 ? Receivable ?
? Revenue 300
31 ? Expense ?
? Payable ?
31 Salaries ? ?
Salaries ? 1,500
22
June 30 Supplies ? 631 ?
Supplies 126 ?
($2,000 - $600)
30 Utilities ? 732 ?
Utilities ? 244 150
30 Insurance ? 722 ?
Prepaid ? 130 ?
$3,000 ÷ 12 months)
30 Salaries ? 726 ?
Salaries ? 212 ?
30 ?Expense 711 ?
Accum.?--Office Equip. 158 ?
($15,000 ÷ 60 months)
30 Accounts ? 112 ?
Service ? 400 1,000
Following is the partial General Ledger to follow these examples:
GENERAL LEDGER
Cash No. 101
Date Explanation Ref Debit Credit Balance
2008
June 30 Balance √ 7,150
23
Prepaid Insurance No. 130
Date Explanation Ref Debit Credit Balance
2008
June 30 Balance √ 3,000
30 Adjusting J3 250 2,750
Office Equipment No. 157
Date Explanation Ref Debit Credit Balance
2008
Balance
June 30 √ 15,000
Accum. Depr- Office Equipment No. 158
Date Explanation Ref Debit Credit Balance
2008
June 30 Adjusting J3 250 250
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1. The income statement is the first prepared from the revenue and
expense accounts where the numbers are entered from the adjusted trial
balance with the adjusted account balances.
2. The owner’s equity statement is derived from the owner’s capital
and drawing accounts and the net income (loss) from the income
statement.
3. The balance sheet is then prepared from the asset and liability
accounts and the ending owner’s capital from the owner’s equity
statement.
Refer to HOMEWORK PROBLEM BE3-9 to prepare an income statement:
HARMONY COMPANY
Income Statement
For the Year Ended ? 31, 2008
Revenues:
Service revenue $?
Expenses:
? expense $16,000
Rent ? ?
?? 2,000
? expense ?
? expense ?
Total expenses ?
Net income $10,600
Refer to HOMEWORK EXERCISE E3-10 to prepare an income statement:
BENNING CO.
Income Statement
For the Month Ended July 31, 2008
Revenues:
Service revenue ($5,500 + $500) $?
Expenses:
Wages ? ($2,300 + $300) $?
? expense ($1,200 - $200) ?
Utilities ? ?
? expense 400
? expense ?
Total expenses 4,750
Net income $?
Refer to HOMEWORK PROBLEM BE3-10 to prepare an owner’s equity
statement:
HARMONY ?
Owner's Equity ?
For the ? Ended December 31, ?
S. Harmony, capital, January 1 $15,600
Add: Net income ?
?
Less: Drawings 6,000
S. Harmony, capital, December 31 $?
25
Refer to HOMEWORK PROBLEM P3-3A that requires preparation of adjusting
entries, financial statements, and to determine the months of a note outstanding.
Below are partial financial statements with check figures to check the accuracy of
your adjusting entries and some help with the time of the note:
FERNETTI ADVERTISING AGENCY
Income Statement
For the Year Ended December 31, 2008
Revenues:
Advertising revenue (Hint $62,700 Cr.-$58,600 Cr.= $4100: Cr. Rev.; Dr. A/R, 2500 + Dr.
Unearn. Rev.; Cr. Rev., 1600)) $62,700
Expenses:
Salaries expense (Hint: $11300 Dr.-$10000 Dr.= $1300 Dr. Exp.; Cr. Payable) $11,300
Depreciation expense (Hint: $6000 Dr. Bal.= $6000 Dr. Exp.; Cr. Acc/Depr) ?
Rent expense (Hint: $4000 - $4000 = no adjusting entry made) 4,000
Art Supplies expense (Hint: $3600 Dr. bal. = $3600 Dr. Exp.; Cr. Art Sup.) ?
Insurance expense (Hint: $850 Dr. Bal. =$850 Dr. Exp.; Cr. Prepaid Ins.) 850
Interest expense (Hint: $500 Dr.-$350 Dr. = $150 Dr. Exp.; Cr. Int.Payable) ?
Total expenses 26,250
Net income $?
Form for the Owner's Equity Statement:
FERNETTI ADVERTISING AGENCY
Owner's Equity Statement
For the Year Ended December 31, 2008
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Unearned advertising fees ?
Salaries payable ?
Interest payable ?
Total liabilities 17,050
Owner's equity:
J. Fernetti, capital ?
Total liabilities and owner's equity $67,000
(1) If the note has been outstanding 6 months, what is the annual interest rate on that
note?
(Explain with computations)
I=PxRxT
$150 = $ 5,000 x R x ½
$150 = $2,500R
R= $150/ ? = ? %.
(2) If the company paid $12,500 in salaries in 2008, what was the balance in Salaries
Payable, on December 31, 2007:
Salaries Expense, 2008 = $11,300 – Salaries Payable 12/31/08, $1,300 = $10,000.
Total salaries paid, 2008 = $12,500 - $10,000 = Salaries Payable 12/31/07
(b) Using the consolidated financial statements of PepsiCo and related information,
identify items that may result in adjusting entries for accruals:
Accrual adjusting entries were probably made for accounts ? and other current ?
interest expense, and income taxes ?
(c ) Using the Selected Financial Data and 5-Year Summary, what has been the trend since
1998 for net income?
As indicated in the 5-Year Summary, the trend in net income has been ? (Hint:
Positive or Negative). In every year since 2001 (except for ?), net income has ?
(Hint: increased or decreased) In 2001 net income was $? million and in 2005 it was
$? million.
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Refer to HOMEWORK PROBLEM BYP3-2 to determine the following amounts:
PepsiCo Coca-Cola
Net increase (decrease) in property, plant, and
equipment (net) from 2004 to 2005. $532,000,000 ($305,000,000)
2. It is customary for adjusting entries to be dated as of the balance sheet date although the
entries are prepared at a later date. Cathi did nothing unethical by ??????????.
(c ) Can Cathi accrue revenues and defer expenses and still be ethical?
Cathi can accrue revenues and defer expenses through the preparation of adjusting entries
and be ethical so long as the entries reflect economic reality. So she needs to make sure that
she is matching the ?????? in the same accounting period. Intentionally misrepresenting
the company's financial condition and its results of operations is ? (it is also illegal).
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