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4
ACCRUAL ACCOUNTING
CONCEPTS
4-3
Accrual Accounting Concepts
The Adjusted
The Basics of
Trial Balance Closing the Quality of
Timing Issues Adjusting
and Financial Books Earnings
Entries
Statements
.....
Jan. Feb. Mar. Apr. Dec.
Review Question
What is the periodicity assumption?
a. Companies should recognize revenue in the
accounting period in which it is earned.
b. Companies should match expenses with revenues.
c. The economic life of a business can be divided into
artificial time periods.
d. The fiscal year should correspond with the calendar
year.
Companies recognize
revenue in the accounting
period in which it is earned.
In a service enterprise,
revenue is considered to be
earned at the time the
service is performed.
Review Question
Which one of these statements about the accrual basis of
accounting is false?
a. Companies record events that change their financial
statements in the period in which events occur, even if
cash was not exchanged.
b. Companies recognize revenue in the period in which it is
earned.
c. This basis is in accord with generally accepted accounting
principles.
d. Companies record revenue only when they receive cash,
and record expense only when they pay out cash.
Review Question
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which
they are incurred.
b. revenues are recorded in the period in which they
are earned.
c. balance sheet and income statement accounts
have correct balances at the end of an accounting
period.
d. All of the above.
Accruals:
1. Accrued revenues: Revenues earned but
not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred
but not yet paid in cash or recorded.
SO 3 Explain why adjusting entries are needed, and
4-20
identify the major types of adjusting entries
Types of Adjusting Entries
Trial Balance –
Each account is
analyzed to
determine
whether it is
complete and up-
to-date.
Illustration 4-4
Prepaid expenses
OR
Unearned revenues.
Prepaid Expenses
Costs that expire either with the passage of time or
through use.
Depreciation
Buildings, equipment, and motor vehicles (long-lived
assets) are recorded as assets, rather than an
expense, in the year acquired.
Statement Presentation
Accumulated Depreciation-Equipment is a contra asset
account.
Summary
Illustration 4-10
Unearned Revenues
Adjusting entry to record the revenue that has been
earned and to show the liability that remains.
Summary
Illustration 4-13
Made to record:
Revenues earned and
OR
Expenses incurred
Accrued Revenues
Illustration 4-15
Summary
Illustration 4-16
rent taxes
interest salaries
Accrued Expenses
Summary
Illustration 4-22
4-53 SO 6 Describe the nature and purpose of the adjusted trial balance.
The Adjusted Trial Balance
4-54 SO 6
The Adjusted Trial Balance
Review Question
Which of the following statements is incorrect concerning the
adjusted trial balance?
a. An adjusted trial balance proves the equality of the total
debit balances and the total credit balances in the ledger
after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the
preparation of financial statements.
c. The adjusted trial balance lists the account balances
segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the adjusting
entries have been journalized and posted.
4-55 SO 6 Describe the nature and purpose of the adjusted trial balance.
Preparing Financial Statements
Retained
Income Balance
Earnings
Statement Sheet
Statement
4-56 SO 6 Describe the nature and purpose of the adjusted trial balance.
Preparing Financial Statements
Illustration 4-27
4-57
Preparing Financial Statements
Illustration 4-28
4-58
Closing the Books
Illustration 4-29
Illustration 4-30
2012
Illustration 4-31
4-61
Closing the Books
7. Prepare financial
4. Prepare a trial balance
statements
Illustration 4-27
4-67
SO 9
Adjusting Entries in an Automated World—
Using a Worksheet (Appendix)
Trial Balance –
Each account is
analyzed to
determine
whether it is
complete and up-
to-date.
Illustration 4-4
4-68
SO 10
Adjusting Entries in an Automated World—
Using a Worksheet (Appendix)
Adjusting
Journal
Entries
4-71
2. Enter the Adjustments in Adjustments Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500 (a) 1,500
Prepaid Insurance 600 (b) 50
Equipment 5,000
Adjustments Key:
Notes Payable 5,000 (a) Supplies Used.
Accounts Payable 2,500
Unearned Service Revenue 1,200 (d) 400 (b) Insurance Expired.
Common Stock 10,000 (c) Depreciation Expensed.
Retained Earnings -
Dividends 500 (d) Service Revenue Earned.
Service Revenue 10,000 (d) 400
(e) 200
(e) Service Revenue Accrued.
Salaries Expense 4,000 (g) 1,200 (f) Interest Accrued.
Rent 900
Totals 28,700 28,700 (g) Salaries Accrued.
Supplies Expense (a) 1,500
Insurance Expense (b) 50
Accumulated
Depreciation- Enter adjustment amounts, total
Equipment (c) 40
(c)
adjustments columns, and check
Depreciation Expense 40
Interest Expense (f) 50 for equality.
Accounts Receivable (e) 200
Interest Payable (f) 50
Salaries Payable (g) 1,200
Totals 3,440 3,440
Net income
Totals Add additional accounts as needed.
4-72 SO 10
3. Complete the Adjusted Trial Balance Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800
Common Stock 10,000 10,000
Retained Earnings -
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200
Rent 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500
Insurance Expense (b) 50 50
Accumulated
Depreciation-
Equipment (c) 40 40
Depreciation Expense (c) 40 40
Interest Expense (f) 50 50
Accounts Receivable (e) 200 200
Interest Payable (f) 50 50
Salaries Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190
Net income
Totals Total
the adjusted trial balance
4-73 columns and check for equality. SO 10
4. Extend Amounts to Financial Statement Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800
Common Stock 10,000 10,000
Retained Earnings -
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200 5,200
Rent 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated
Depreciation-
Equipment (c) 40 40
Depreciation Expense (c) 40 40 40
Interest Expense (f) 50 50 50
Accounts Receivable (e) 200 200
Interest Payable (f) 50 50
Salaries Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600
Net income
Totals Extend
all revenue and expense account
4-74 balances to the income statement columns. SO 10
4. Extend Amounts to Financial Statement Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800
Common Stock 10,000 10,000 10,000
Retained Earnings -
Dividends 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200 5,200
Rent 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated
Depreciation-
Equipment (c) 40 40 40
Depreciation Expense (c) 40 40 40
Interest Expense (f) 50 50 50
Accounts Receivable (e) 200 200 200
Interest Payable (f) 50 50 50
Salaries Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net income
Totals Extendall asset, liability, and equity account
4-75 balances to the balance sheet columns. SO 10
5. Total Columns, Compute Net Income (Loss)
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800
Common Stock 10,000 10,000 10,000
Retained Earnings -
Dividends 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200 5,200
Rent 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated
Depreciation-
Equipment (c) 40 40 40
Depreciation Expense (c) 40 40 40
Interest Expense (f) 50 50 50
Accounts Receivable (e) 200 200 200
Interest Payable (f) 50 50 50
Salaries Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net income 2,860 2,860
Totals Compute Net Income or Net Loss. 10,600 10,600 22,450 22,450
4-76
SO 10
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4-77