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Introduction

 Accounting Equation (A= L + SE)


 Accounting Cycle
 Accounting Concepts
 Revenue
 Expense
 Revenue Recognition
 Matching Principle
 Types of Adjusted Entries
 Examples of Adjusted Entries
 Impact without entries
Chapter
3-1
The Accounting Equation

Relationship among the assets, liabilities and


stockholders’ equity of a business:
Illustration 3-3

The equation must be in balance after every


transaction. For every Debit there must be a Credit.

Chapter
3-2
The Accounting Cycle
Illustration 3-6
Transactions

9. Reversing entries 1. Journalization

8. Post-closing trail balance 2. Posting

7. Closing entries 3. Trial balance

Work
6. Financial Statements Sheet 4. Adjustments

5. Adjusted trial balance

Chapter
3-3
Adjusting Entries

Revenues - recorded in the period in which they


are earned.

Expenses - recognized in the period in which they


are incurred.

Adjusting entries - needed to ensure that the


revenue recognition and matching principles are
followed.

Chapter
3-4
Types of Adjusting Entries

Illustration 3-20

Prepayments Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.

2. Unearned Revenues. 4. Accrued Expenses.


Revenues received in cash Expenses incurred but not
and recorded as liabilities yet paid in cash or
before they are earned. recorded.

Chapter
3-5
Expedient Recording Method

Expedient
Records an expense upon payment of cash
before goods or services are consumed

Records revenue upon receipt of cash


before goods or services are provided

Chapter
3-6
Expedient General Entries
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.

Dec. 1 Cash 45,000


Service revenue 45,000

Service Revenue Cash


Debit Credit Debit Credit
45,000 45,000
45,000
45,000

Chapter
3-7
Adjusting Entries for “Unearned Revenues”
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.

Dec. 31 Service revenue 33,750 (=45,000-45,000/4)

Unearned service revenue 33,750

Service Revenue Unearned Service Revenue


Debit Credit Debit Credit
33,750 45,000 33,750

11,250
33,750

Chapter
3-8
Impact Without Adjusted Entries

Q1 : On December 1, 2011, Johnson received a $45,000 payment for


services to be rendered equally over a four-month period. Service revenue
was credited.

Dec. 31 Service revenue (SE) 33,750 (=45,000-45,000/4)

Unearned service revenue (L) 33,750

Total Total Stk. Net Retained


Assets Liab. Equity Income Earning
Understate Overstate Overstate Overstate
33750 33750 33750 33750
None

Chapter
3-9
Standard Recording Method

Standard

Asset upon payment of cash


Liability upon receipt of cash
before goods or services are
provided

Chapter
3-10
Standard General Entries
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period.

Dec. 1 Cash 45,000


Unearned service revenue 45,000

Unearned Service Revenue Cash


Debit Credit Debit Credit
45,000 45,000
45,000
45,000

Chapter
3-11
Adjusting Entries for “Unearned Revenues”
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period.

Dec. 31 Unearned service revenue 11,250


Service revenue 11,250

Service Revenue Unearned Service Revenue


Debit Credit Debit Credit
11,250 11,250 45,000

11,250
33,750

Chapter
3-12
Expedient Vs. General
Expedient
Service Revenue Unearned Service Revenue
Debit Credit Debit Credit
33,750 45,000 33,750
11,250
33,750

General
Service Revenue Unearned Service Revenue
Debit Credit Debit Credit
11,250 11,250 45,000

11,250
33,750
Chapter
3-13
Adjusting Entries for “Prepaid Expenses”
Q2. On December 31, 2011, the company paid a local radio station $16,000
for 40 radio ads that were to be aired, 20 per month, throughout January and
February of 2012. Prepaid advertising was debited.

Dec. 31 Prepaid Advertising 16,000


Cash 16,000

Prepaid Advertising Cash


Debit Credit Debit Credit
16,000 16,000

16,000
Chapter
3-14
Adjusting Entries for “Accrued Expenses”

Q3. Employee salaries for the month of December 2011 totaling


$8,400 will be paid on January 5, 2012.

Dec. 31 Salaries expense 8,400


Salaries payable 8,400

Salaries Expense Salaries Payable


Debit Credit Debit Credit
8,400 8,400

8,400
Chapter
3-15
Adjusting Entries for “Accrued Expenses”

Q3. Employee salaries for the month of December 2011 totaling


$8,400 will be paid on January 5, 2012.

Dec. 31 Salaries expense(SE) 8,400


Salaries payable(L) 8,400

Total Total Stk. Net Retained


Assets Liab. Equity Income Earning

Understate Overstate Overstate Overstate


None 8400 8400 8400 8400

Chapter
3-16
Adjusting Entries for “Accrued Expenses”

Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local
bank. A note was signed with principal and 6% interest to be paid on
September 1, 2012.
(Interest = 60,000 * 6% /12 *3)
Dec. 31 Interest expense 900
Interest payable 900

Interest Expense Interest Payable


Debit Credit Debit Credit
900 900

Chapter
3-17
Adjusting Entries for “Accrued Expenses”

Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local
bank. A note was signed with principal and 6% interest to be paid on
September 1, 2012.
(Interest = 60,000 * 6% /12 *3)
Dec. 31 Interest expense(SE) 900
Interest payable(L) 900

Total Total Stk. Net Retained


Assets Liab. Equity Income Earning

Understate Overstate Overstate Overstate


None 900 900 900 900

Chapter
3-18
Adjusting Entries for “Accrued Expenses”

Q5. On December 31, 2011, it was determined that $8,000 of the recorded
Accounts receivable would prove to be uncollectible.

Dec. 31 Bad Debt Expense 8,000


Allowance for Doubtful Accounts 8,000

Bad Debt Expense Allowance for Doubtful Accounts

Debit Credit Debit Credit


8,000 8,000

Chapter
3-19
Impact Without Adjusted Entries

Q5. On December 31, 2011, it was determined that $8,000 of the recorded
Accounts receivable would prove to be uncollectible.

Dec. 31 Bad Debt Expense (SE) 8,000


Allowance for Doubtful Account (A) 8,000

Total Total Stk. Net Retained


Assets Liab. Equity Income Earning

Overstated Overstated Overstated Overstated


8000 None 8000 8000 8000

Chapter
3-20
Impact Without Adjusted Entries

Total Total Stk. Net Retained


Assets Liab. Equity Income Earning
Understate Overstate Overstate Overstate
Q1 None 33750 33750 33750 33750

Q2 None None None None None


Understate Overstate Overstate Overstate
Q3 None 8400 8400 8400 8400
Understate Overstate Overstate Overstate
Q4 None 900 900 900 900
Overstated Overstated Overstated Overstated
Q5 8000 None 8000 8000 8000
Overstate Understate Overstate Overstate Overstate
Total 8000 43050 51050 51050 51050

Chapter
3-21
Conclusion

 Accounting Concepts
 Revenue and Expense
 Revenue Recognition and Matching Principle
 Standard Vs. Expedient Recording Method
 Types of Adjusted Entries
 Prepayments : Prepaid Expense and Unearned
Revenue
 Accruals: Accrued Rev. and Accrued Exp.
 Impact without adjusted entries
 Overstated A, L, SE, NI, RE
 Understated A, L, SE, NI, RE
Chapter
3-22
Questions

Chapter
3-23