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Adjusting Entries Horngren’s Accounting Lecture Six Lisa, Li 1

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ReviewDefine and apply Revenue recognition and matching principleRecord transactions into journals and post journal entries to the Ledger AccountsPrepare a trial balance Discover errors in recording transactions and correct them.

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Слайд 1Adjusting Entries
Horngren’s Accounting

Lecture Six
Lisa, Li

Adjusting EntriesHorngren’s Accounting Lecture Six Lisa, Li

Слайд 2 Review
Define and apply Revenue recognition and matching principle
Record transactions

into journals
and post journal entries to the Ledger Accounts
Prepare

a trial balance
Discover errors in recording transactions and correct them.


Accounting

ReviewDefine and apply Revenue recognition and matching principleRecord transactions into journals and post journal entries to

Слайд 3Homework: recording business transactions
1. April 1, Abdul(owner) starts business as

a trader by paying $10,000 into bank account.
2. April 2,

Abdul buys a motor vehicle for the business, and pay$2,000.
3. April 3,Abdul buy goods which he will re-sell in the normal course of trade for $3,000.
4. April 4, Abdul sells a quantity of the goods for $800,and pay the money into the bank.
5. April 7, a customer returns some goods and receives a refund of $40.
6. April 8, Abdul return some goods costing $100 to a supplier and receives a refund.

Accounting

7. April 10, Abdul buys another motor vehicle for the business and pay $4,000.
8. April 11, Tania lends the business $5,000,Abdul put the money into the bank account.
9. April 12, Abdul pays rent on a warehouse by cheque, $1,000.
10. April 14, Abdul subsets part of the warehouse and receives a cheque for $300 for the rent .this is paid into the bank.
11. April 15, Abdul pays wages by cheque,$1,200.

Identifying 11 transactions and Classifying different accounts
Recording the transaction into journals
Posting into the Ledger accounts

Homework: recording business transactions1. April 1, Abdul(owner) starts business as a trader by paying $10,000 into bank

Слайд 4Homework: recording business transactions
Accounting

Homework: recording business transactionsAccounting

Слайд 5Solutions: recording business transactions
Accounting

Solutions: recording business transactionsAccounting

Слайд 6Solutions: recording business transactions
Accounting

Solutions: recording business transactionsAccounting

Слайд 7The posting of purchase of office supplies on account for

$1,500 will be shown as:
Cash
Office Supplies
Accounts Payable
Office Supplies
Accounts Receivable
Office Supplies
Accounts

Payable

1,500

1,500

1,500

1,500

1,500

1,500

1,500

Office Supplies

1,500

Multiple Choices 2mins

The posting of purchase of office supplies on account for $1,500 will be shown as:CashOffice SuppliesAccounts PayableOffice

Слайд 8The detailed record of all increases and decreases that have

occurred in an individual asset, liability, or equity during a

specific period is called a(n):
balance sheet.
journal.
account.
trial balance.

Multiple Choices 2mins

The detailed record of all increases and decreases that have occurred in an individual asset, liability, or

Слайд 9Kevin Copies recorded a cash collection on account by debiting

Cash and crediting Accounts Payable. How will this error affect

the trial balance?
Assets will be understated
Liabilities will be overstated
Profits will be overstated
Equity will be understated

Multiple Choices 2mins

Kevin Copies recorded a cash collection on account by debiting Cash and crediting Accounts Payable. How will

Слайд 10Learning Objectives – Chapter 3
Cash Basis vs Accrual Basis Accounting
Apply

the time period concept, revenue recognition, and matching principles
Explain the

purpose of and journalize and post adjusting entries
Prepare an adjusted trial balance
Identify the impact of adjusting entries on the financial statements
use a worksheet to prepare the adjusted trial balance


Accounting

Learning Objectives – Chapter 3Cash Basis vs Accrual Basis AccountingApply the time period concept, revenue recognition, and

Слайд 11Learning Objective 1
Differentiate between cash basis accounting and accrual basis

accounting

Learning Objective 1Differentiate between cash basis accounting and accrual basis accounting

Слайд 12What is the Difference between Cash Basis Accounting & Accrual

Basis Accounting?
CASH BASIS
Revenue is recorded when Cash is received
Expenses are

recorded when Cash is paid
Not allowed under GAAP

ACCRUAL BASIS
Revenue is recorded when it is earned
Expenses are recorded when incurred
Generally used by larger businesses

An Accrual Basis approach recognizes that the recognition of revenues and expenses should not be affected by the timing of cash collections and disbursements. Rather revenues and expenses should be recognized when the underlying economic activities actually take place.

What is the Difference between Cash Basis Accounting & Accrual Basis Accounting?CASH BASISRevenue is recorded when Cash

Слайд 13Learning Objective 2
Define and apply the time period concept, revenue

recognition, and matching principles

Learning Objective 2Define and apply the time period concept, revenue recognition, and matching principles

Слайд 14Review：The Time Period Concept
Assumes that a business’s activities can be

sliced into small segments and that financial statements can be

prepared for specific time periods, such as a month, quarter, or year.
Any twelve month period is referred to as a fiscal year.

Accounting

Review：The Time Period ConceptAssumes that a business’s activities can be sliced into small segments and that

Слайд 15Review： Revenue Recognition Principle
Revenue should be recorded when it is

EARNED.
A good has been delivered or a service has been

performed.

The earnings process is complete.
(warehouse?)

The amount of revenues must represent the actually selling price.

If a $200 item is discounted to $100, then the revenue is $100.

Accounting

Review： Revenue Recognition PrincipleRevenue should be recorded when it is EARNED.A good has been delivered or a

Слайд 16Review：The Matching Principle
All expenses are recorded when they are incurred

during the period
Expenses are matched against the revenues for that

period.

Eg. Cash sales of $1,000, and suppose these good sold by the company cost $700.

Accounting

Review：The Matching PrincipleAll expenses are recorded when they are incurred during the periodExpenses are matched against the

Слайд 17Learning Objective 3
Explain the purpose of and journalize and post

adjusting entries

Learning Objective 3Explain the purpose of and journalize and post adjusting entries

Слайд 18Part of the Accounting Process
© 2k015 Pearson Education, Limited.
4-
Analyze &

journalize transactions
Post journal entries to ledger accounts
Prepare unadjusted trial balance
Journalize

and post adjusting entries

Start with beginning account balances

Prepare the worksheet (optional)

Part of the Accounting Process© 2k015 Pearson Education, Limited.4-Analyze & journalize transactionsPost journal entries to ledger accountsPrepare

Слайд 193-
The initial trial balance that comes from the General Ledger

is referred to as an Unadjusted Trial Balance. Because of the

Time Period Concept, Revenue Recognition Principle, and Matching Principle some adjustments are needed.
3-The initial trial balance that comes from the General Ledger is referred to as an Unadjusted Trial

Слайд 203-
Accounting
For example, the Office Supplies account shows $500 at

the end of December. If a count of the actual supplies

on hand shows that some supplies have been used, we will need to adjust the account.
3-Accounting For example, the Office Supplies account shows $500 at the end of December. If a

Слайд 21Adjusting Journal Entries
Each Adjusting Journal Entry will adjust a balance

sheet account and an income statement account.

P162-163
Adjusting Journal EntriesEach Adjusting Journal Entry will adjust a balance sheet account and an income statement account.

Слайд 22 An adjusting entry is the entry made at

the end of accounting period that is used to record

revenues to the period in which they are earned and expenses to the period in which they occur. Adjusting entry also update the asset and liability accounts.

Adjusting Entry

*including depreciation

Adjustments

Accounting

An adjusting entry is the entry made at the end of accounting period that is

Слайд 23
Journalizing and Posting
Accounting

Journalizing and PostingAccounting

Слайд 24Prepaid Rent Example
In Transaction #10 (see Chapter 2), on December

1, Smart Touch Learning prepaid 3 months rent of $3,000

($1,000 x 3 months). Paying rent in advance gives us the right to use the property for 3 months (in this case). By the end of December, 1/3 of that right has been used.

3-

© 2k015 Pearson Education, Limited.

Prepaid Rent ExampleIn Transaction #10 (see Chapter 2), on December 1, Smart Touch Learning prepaid 3 months

Слайд 25Prepaid Rent Example
To adjust the Prepaid Rent account, we need

to reduce it by 1/3, and we need to show

the rent expense related to the December revenues.

3-

© 2k015 Pearson Education, Limited.

Prepaid Rent ExampleTo adjust the Prepaid Rent account, we need to reduce it by 1/3, and we

Слайд 26Prepaid Insurance
On 12/1/2019, FastForward paid $2,400 for

insurance for 2-years (24-months, December 2019 through November 2021). FastForward

recorded the expenditure as Prepaid Insurance on 12/31/2019.
What adjustment is required?

Accounting

Prepaid Insurance On 12/1/2019, FastForward paid $2,400 for insurance for 2-years (24-months, December 2019 through

Слайд 27Prepaid Insurance
On 12/1/2019, FastForward paid $2,400 for

insurance for 2-years (24-months, December 2019 through November 2021). FastForward

recorded the expenditure as Prepaid Insurance on 12/31/2019.
What adjustment is required?

Accounting

Prepaid Insurance On 12/1/2019, FastForward paid $2,400 for insurance for 2-years (24-months, December 2019 through

Слайд 28 Depreciation (plant Assets)
plant assets are long-lived, tangible assets

used in the operation of a business. As a business

uses these assets, their value and usefulness decline.
Plant Assets need to depreciates, such as buildings equipment, furniture, and automobiles. The contra asset account used is Accumulated Depreciation—(asset’s name)
Land has an infinite life; Under Generally Accepted Accounting Principles, we never depreciate Land. (p163)
Plant assets, with the exception of land, are depreciated over their useful lives.

Accounting

Depreciation (plant Assets) plant assets are long-lived, tangible assets used in the operation of a business.

Слайд 29Depreciation(plant Assets)
Depreciation is usually defined as the periodic, systematic allocation

of the cost of a long-lived tangible asset to expense

over its estimated useful life.
The accounts used are:
Depreciation Expense(E)-I/S
Accumulated Depreciation
(-A, contra-asset account )-B/S

3-

© 2k015 Pearson Education, Limited.

Accumulated Depreciation is a contra-asset.
- Has a credit balance
- Appears in the Asset section of the Balance Sheet

Depreciation(plant Assets)Depreciation is usually defined as the periodic, systematic allocation of the cost of a long-lived tangible

Слайд 30Depreciation (plant Assets)
Depreciation is the process of allocating the cost

of a plant asset over its useful life in a

systematic and rational manner.
Straight-line Method: a depreciation method that allocates an equal amount of depreciation each year.





Accounting

Residual Value (salvage value) is the amount we expect to receive for the asset when we dispose of it at the end of its useful life.

Depreciation (plant Assets)Depreciation is the process of allocating the cost of a plant asset over its useful

Слайд 31Depreciation Example
Assume that, on December 2, Smart Touch Learning received

a contribution of furniture with a market value of $18,000

from Sheena Bright. At the end of December, Smart Touch Learning will need to record depreciation for the use of the furniture, assuming it has a 5 year useful life.

3-

© 2k015 Pearson Education, Limited.

Depreciation ExampleAssume that, on December 2, Smart Touch Learning received a contribution of furniture with a market

Слайд 32Depreciation Example
Using the straight-line method of computing depreciation, Smart Touch

Learning will need to record $300 of depreciation for December.


3-

© 2k015 Pearson Education, Limited.

Depreciation ExampleUsing the straight-line method of computing depreciation, Smart Touch Learning will need to record $300 of

Слайд 33Depreciation Example
Recording the entry requires the use of two accounts:

Depreciation Expense and Accumulated Depreciation.
3-
© 2k015 Pearson Education, Limited.

Depreciation ExampleRecording the entry requires the use of two accounts: Depreciation Expense and Accumulated Depreciation.3-© 2k015 Pearson

Слайд 34Prepaids: common Prepaid Expenses
Prepaid Insurance
Prepaid rent
Depreciation
(plant Assets)
Office supplies used

Prepaids: common Prepaid ExpensesPrepaid Insurance Prepaid rentDepreciation(plant Assets)Office supplies used

Слайд 35NetSolutions estimates the depreciation on its office equipment to be

$50 for the month of December.
16
17
18
19
Accumulated Depreciation—
Office Equipment 50 00
Dec.

31 50

19

Depreciation Expense

Dec. 31 50

Accumulated Depreciation—Office Equipment

19

53

53

Accounting

NetSolutions estimates the depreciation on its office equipment to be $50 for the month of December.16171819Accumulated Depreciation—

Слайд 36NetSolutions’ balance sheet would show the office equipment at cost,

less the accumulated depreciation.
Office equipment $1,800
Less accumulated

depreciation 50 $1,750

Book value

Accounting

NetSolutions’ balance sheet would show the office equipment at cost, less the accumulated depreciation. Office equipment $1,800

Слайд 37Fitness First has a new client who prepays $600 for

a package of six training sessions. Fitness First had provided

four training sessions as of year end. Which of the following amounts should Fitness First report on its income statement?
Service Revenue of $400
Service Revenue of $600
Unearned service revenue of $400
Unearned service revenue of $600

Multiple Choices 2mins

Fitness First has a new client who prepays $600 for a package of six training sessions. Fitness

Слайд 38Try it Question
Journalizing and posting the adjusting entries of Smart

Touch Learning.
a. Prepaid rent expired, $1000
b. Supplies used, $400
c. Depreciation

on furniture, $300
d. on July 1, purchased a building with $180,000. At the end of December, record depreciation for the use of the building, assuming it has a 60 years useful life, and no residual value at the end of its life…

Accounting

Try it QuestionJournalizing and posting the adjusting entries of Smart Touch Learning.a. Prepaid rent expired, $1000b. Supplies

Слайд 39a. Prepaid rent expired, $1,000
Answers
3-

a. Prepaid rent expired, $1,000Answers 3-

Слайд 40b. Supplies used, $400

Answers
3-

b. Supplies used, $400Answers3-

Слайд 41c. Depreciation on furniture, $300
Answers
3-

c. Depreciation on furniture, $300Answers3-

Слайд 42d. On July 1, purchased a building with $180,000. At

the end of this year, record depreciation for the use

of the building, assuming it has a 60 years useful life, and no residual value at the end of its life…

Answers

Straight-Line Depreciation = ( Cost - Residual Value ) ÷Useful Life
= ( $180,000 - $0 ) ÷ 60 Years = 3,000
this year depreciation exp = 3,000 ÷ 6/12 = 1,500

d. On July 1, purchased a building with $180,000. At the end of this year, record depreciation

Слайд 43Prepaid Expenses(A) or Expense ?
Other prepaid expenses, such as Prepaid

Rent, are accounted for exactly as Insurance and Supplies.
We

should note that some prepaid expenses are both paid for and fully used up within a single period.
For example, a company may pay monthly rent on the first day of each month. This payment creates a prepaid expense on the first day of the month that fully expires by the end of the month.
In these special cases, we can record the cash paid with a debit to the expense account instead of an asset account.

Accounting

Prepaid Expenses(A) or Expense ?Other prepaid expenses, such as Prepaid Rent, are accounted for exactly as Insurance

Слайд 44Unearned Revenue Example
On December 21, a law firm engages Smart

Touch Learning to provide e-learning services for the next 30

days, paying $600 in advance.

3-

© 2k015 Pearson Education, Limited.

Unearned Revenue ExampleOn December 21, a law firm engages Smart Touch Learning to provide e-learning services for

Слайд 45Unearned Revenue Example
Smart Touch Learning is obligated to perform the

services. During the last 10 days of the month, 1/3

of the services are performed.

3-

© 2k015 Pearson Education, Limited.

Unearned Revenue ExampleSmart Touch Learning is obligated to perform the services. During the last 10 days of

Слайд 46Unearned Revenues
On December 26, 2009, FastForward agrees to provide consulting

services to a client for a fixed fee of $3,000

for 60 days. On this date, the client pays the entire consulting fee in advance. FastForward makes the following entry:

Accounting

Unearned RevenuesOn December 26, 2009, FastForward agrees to provide consulting services to a client for a fixed

Слайд 47Unearned Revenues
On December 26, 2009, FastForward agrees to provide consulting

services to a client for a fixed fee of $3,000

for 60 days. On this date, the client pays the entire consulting fee in advance. FastForward makes the following entry:

Accounting

Unearned RevenuesOn December 26, 2009, FastForward agrees to provide consulting services to a client for a fixed

Слайд 48On December 31, earns some of the 5-days of consulting

fees.
Each day that passes results in consulting fees of

$50
($3,000 ÷ 60).

Unearned Revenues

Accounting

On December 31, earns some of the 5-days of consulting fees. Each day that passes results in

Слайд 49Unearned revenue is essentially a(n):

net income.
net loss.
liability.
asset.
Multiple Choices

2mins
Unearned revenue is essentially a(n):net income.net loss.liability.asset.Multiple Choices

Слайд 50Which of the following are the two basic categories of

adjusting entries?

Net income and net loss
Expenses and revenues
Prepaids and accruals
Cash

and noncash

Multiple Choices 2mins

Which of the following are the two basic categories of adjusting entries?Net income and net lossExpenses and

Слайд 51Keep up the good work !
C U next Tuesday!

Keep up the good work !C U next Tuesday!

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