Financial accounting one accruals and cash

Summarize the accounting process

1. 4-1
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The Accounting CycleThe Accounting Cycle
Accruals and DeferralsAccruals and Deferrals
Chapter 4

2. 4-2
Adjusting
entries are
needed whenever
revenue or expenses
affect more than one
accounting
period.
Every
adjusting
entry involves a
change in either a
revenue or expense
and an asset
or liability.
Adjusting EntriesAdjusting Entries

3. 4-3

Converting
assets to
expenses
 Accruing
unpaid
expenses
 Converting
liabilities to
revenue
 Accruing
uncollected
revenue
Types of Adjusting EntriesTypes of Adjusting Entries

4. 4-4
Prior PeriodsCurrent Period Future Periods
Transaction
Paid cash in
advance of
incurring
expense
(creates an
asset).
End of Current Period
Adjusting Entry
 Recognizes portion
of asset consumed
as expense, and
 Reduces balance of
asset account.
Converting Assets to ExpensesConverting Assets to Expenses

5. 4-5
Mar. 1 Feb.28
$18,000 Insurance Policy
Coverage for 12 Months
$1,500 Monthly Insurance Expense
On March 1, Overnight Auto Services
purchased a one-year insurance policy
for $18,000.
Converting Assets to ExpensesConverting Assets to Expenses

6. 4-6
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Mar.1Unexpired Insurance 18,000
Cash 18,000
Purchase a one-year insurance policy.
Initially, costs that benefit more than one
accounting period are recorded as assets.
Converting Assets to ExpensesConverting Assets to Expenses

7. 4-7
The costs are expensed as they are
used to generate revenue.
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Monthly Adjusting Entry for Insurance
Mar.31Insurance Expense 1,500
Unexpired Insurance 1,500
Adjusting entry to record insurance expense for March.
Converting Assets to ExpensesConverting Assets to Expenses

8. 4-8
Insurance Expense
3/311,500
Unexpired Insurance
3/118,000 3/311,500
Bal.16,500
Income Statement
Cost of assets
used this period to
generate revenue.
Balance Sheet
Cost of assets
that benefit
future periods.
Converting Assets to ExpensesConverting Assets to Expenses

9. 4-9
The Concept of DepreciationThe Concept of Depreciation
Depreciation is the systematic allocation of
the cost of a depreciable asset to expense.
Cash
(credit)
Fixed
Asset
(debit)
On date
when initial
payment is
made . . .
The asset’s
usefulness is
partially
consumed
during the
period.
At end of
period . . .
Depreciation
Expense
(debit)
Accumulated
Depreciation
(credit)

10. 4-10
On Jan. 22, 2015, Overnight Auto Service
purchased a building with a useful life
of 240 months for $36,000.
Using the straight-line method, calculate
the monthly depreciation expense.
$36,000
240
=$150/month $150/month
Depreciation
expense (per
period)
=
Cost of the asset
Estimated useful life
Depreciation Is Only an EstimateDepreciation Is Only an Estimate

11. 4-11
Overnight Auto Service would make the
following adjusting entry.
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebitCredit
Feb28Depreciation Expense: Building 150
Accumulated Depreciation: Building 150
To record one month's depreciation.
Contra-asset
Depreciation Is Only an EstimateDepreciation Is Only an Estimate

12. 4-12
Overnight depreciates its $12,000 of tools
and equipment over 60 months. Calculate
monthly depreciation and make the journal
entry.
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebitCredit
Feb28Depreciation Expense: Tools and Equipment 200
Accumulated Depreciation: Tools and Equipment 200
To record one month's depreciation.
$12,00060 months = $200 per month
Depreciation Is Only an EstimateDepreciation Is Only an Estimate

13. 4-13
We will assume that Overnight did not record any
depreciation expense in January because it
operated for only a small part of the month.
Depreciation Is Only an EstimateDepreciation Is Only an Estimate
Cost - Accumulated Depreciation = Book Value
December 31, 2015 Balance Sheet Presentation

14. 4-14
Prior PeriodsCurrent Period Future Periods
Transaction
Collect cash in
advance of
earning revenue
(creates a
liability).
End of Current Period
Adjusting Entry
 Recognizes portion
earned as revenue,
and
 Reduces balance of
liability account.
Converting Liabilities to RevenueConverting Liabilities to Revenue

15. 4-15
Dec. 1 Feb. 28
$3,000 Rental Contract
Coverage for 3 Months
$1,000 Monthly Rental Revenue
On December 1, Overnight received $3,000
in advance for a three-month rental contract.
Converting Liabilities to RevenueConverting Liabilities to Revenue

16. 4-16
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Dec1Cash 3,000
Unearned Rent Revenue 3,000
Collected $3,000 in advance for rent.
Initially, revenues that benefit more than one
accounting period are recorded as liabilities.

Converting Liabilities to RevenueConverting Liabilities to Revenue

17. 4-17
Over time, the revenue is recognized
as it is earned.
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Monthly Adjusting Entry for Rent Revenue
Dec31Unearned Rent Revenue 1,000
Rental Revenue 1,000
Adjusting entry to record rental revenue for December.
Converting Liabilities to RevenueConverting Liabilities to Revenue

18. 4-18
Rental Revenue
12/311,000
Unearned Rental Revenue
12/311,000 12/13,000
Bal.2,000
Income Statement
Revenue earned
this period.
Balance Sheet
Liability for
future periods.
Converting Liabilities to RevenueConverting Liabilities to Revenue

19. 4-19
Prior PeriodsCurrent Period Future Periods
Transaction
Pay cash in
settlement of
liability.
End of Current Period
Accruing Unpaid ExpensesAccruing Unpaid Expenses

20. 4-20
Monday,
Dec. 30
Friday,
Jan. 3$1,950 Wages
Expense
On Dec. 31, Overnight owes wages of
$1,950. Payday is Friday, Jan. 3.
Tuesday,
Dec. 31
Accruing Unpaid ExpensesAccruing Unpaid Expenses

21. 4-21
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Dec31Wages Expense 1,950
Wages Payable 1,950
Adjusting entry to accrue wages owed to employees.
Initially, an expense and a liability are
recorded.
Accruing Unpaid ExpensesAccruing Unpaid Expenses

22. 4-22
Wages Expense
12/311,950
Wages Payable
12/313,000
Income Statement
Cost incurred this
period to generate
revenue.
Balance Sheet
Liability to be
paid in a future
period.
Accruing Unpaid ExpensesAccruing Unpaid Expenses

23. 4-23
Monday,
Dec. 30
Friday,
Jan. 3
$2,397 Weekly Wages
Let’s look at the entry for Jan. 3.
Tuesday,
Dec. 31
$447 Wages
Expense
$1,950 Wages
Expense
Accruing Unpaid ExpensesAccruing Unpaid Expenses

24. 4-24
The liability is extinguished when the
debt is paid.
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Jan3Wages Expense (for Jan.) 447
Wages Payable (accrued in Dec.) 1,950
Cash 2,397
Weekly payroll for Dec. 30 - Jan. 3.
Accruing Unpaid ExpensesAccruing Unpaid Expenses

25. 4-25
Prior PeriodsCurrent Period Future Periods
Transaction
Collect cash in
settlement of
receivable.
End of Current Period
Accruing Uncollected RevenueAccruing Uncollected Revenue

26. 4-26
Dec. 15 Jan. 15
$750 Repair
Service
Revenue
On Dec. 31, Airport Shuttle owes Overnight
half of it maintenance agreement. The one-
month fee of $1,500 is to be paid is to be paid
on the 15
th
day of January.
Dec. 31
Accruing Uncollected RevenueAccruing Uncollected Revenue

27. 4-27
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Dec31Accounts Receivable 750
Repair Service Revenue 750
Adjusting entry to record accrued service revenue.
Initially, the revenue is recognized and
a receivable is created.
Accruing Uncollected RevenueAccruing Uncollected Revenue

28. 4-28
Repair Service Revenue
12/31750
Accounts Receivable
12/31750
Income Statement
Revenue earned
this period.
Balance Sheet
Receivable to
be collected in a
future period.
Accruing Uncollected RevenueAccruing Uncollected Revenue

29. 4-29
Dec. 15 Jan. 15
$1,500 Monthly Interest
$750 Service
Revenue
Let’s look at the entry for January 15.
Dec. 31
$750 Service
Revenue
Accruing Uncollected RevenueAccruing Uncollected Revenue

30. 4-30
The receivable is collected in a future
period.
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Jan15Cash 1,500
Repair Service Revenue (for Jan.) 750
Accounts Receivable (accrued Dec. 31) 750
To record cash collected for monthly maintenance fee.
Accruing Uncollected RevenueAccruing Uncollected Revenue

31. 4-31
As a corporation earns taxable income, it
incurs income taxes expense, and also a
liability to governmental tax authorities.
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Dec.31Income Taxes Expense 4,020
Income Taxes Payable 4,020
Adjusting entry to record income taxes accrued in December.
Accruing Income Taxes Expense: Accruing Income Taxes Expense:
The Final Adjusting EntryThe Final Adjusting Entry

32. 4-32
Costs are matched with revenue
in two ways:
 Direct association of costs
with specific revenue
transactions.
 Systematic allocation of costs
over the “useful life” of the
expenditure.
Adjusting Entries and Accounting Adjusting Entries and Accounting
PrinciplesPrinciples

33. 4-33
An item is “material” if knowledge of the
item might reasonably influence the
decisions of users of financial statements.
Supplies
Light bulbs
Many companies
immediately charge
the cost of
immaterial items to
expense.
The Concept of MaterialityThe Concept of Materiality

34. 4-34
Effects of the Adjusting EntriesEffects of the Adjusting Entries
Adjustment RevenueExpenses
Net
IncomeAssetsLiabilities
Owners'
Equity
Type I
Converting Assets to ExpensesNo effectIncreaseDecreaseDecreaseNo effectDecrease
Type II
Converting Liabilities to RevenueIncreaseNo effectIncreaseNo effectDecreaseIncrease
Type III
Accruing Unpaid Expenses No effectIncreaseDecreaseNo effectIncreaseDecrease
Type IV
Accruing Uncollected RevenueIncreaseNo effectIncreaseIncreaseNo effectIncrease
Income Statement Balance Sheet

35. 4-35
 After these
adjustments are
posted to the
ledger,
Overnight’s
ledger accounts
will be up-to-
date (except for
the balance in
the Retained
Earnings
account).

36. 4-36
End of Chapter 4End of Chapter 4