Week 4 Notes
Week 4 Notes ACCT 2110 - 002
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This 4 page Class Notes was uploaded by Cheyenne Hunt on Thursday February 4, 2016. The Class Notes belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth Miller in Winter 2016. Since its upload, it has received 19 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.
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Date Created: 02/04/16
Feb 8 Completing the Accounting Cycle Requires: o Adjusting journal entries o Preparation of financial statements from the adjusted accounts o Closing the temporary accounts Accrual v. Cash Basis of Accounting Cash basis accounting- revenue is recorded when cash is received, regardless of when it is actually earned (violated marching principle and revenue recognition principle) Accrual basis accounting-required by GAAP; transactions are recorded when they occur; superior to cash basis accounting because it links income measurement to selling Adjusting Journal Entries All adjusting entries will affect at least one income statement account and one balance sheet account Cash is never affected by adjustments Revenue is normal credit balance, expense is normal credit balance Accrued revenues- previously unrecorded revenues that have been earned,, but not received (debit=receivable, credit=revenue) Accrued expenses- previously unrecorded expenses that have been incurred, but not paid (debit=expense, credit=payable) Deferred revenues- liabilities arising from the receipt of unearned revenue (debit=unearned revenue, credit=revenue) Deferred expenses- assets arising from a prepaid expense (debit=expense, credit=asset or contra-asset) Example 1: Porter Properties, Inc. rented office space to Tiger Travel Agency on November 1, 2013 for $5,000 per month. Porter requires Tiger Travel to make a rental payment at the end of every 3 months. No payment was made on November 1. Dec 31, 2013 Accounts Receivable 10,000 Rent Revenue 10,000 Jan 31, 2014 Cash 15,000 Accounts Receivable 10,000 Rent Revenue 5,000 Example 2: Porter Properties, Inc. paid its clerical employees every 2 weeks. Employees work 5 days a week for a total of 10 work days every 2 weeks. Total wages for 10 days is $50,000. Also assume that December 1, 2013 is 4 days into a 10-day pay period. Dec 31 2013 Salaries Expense 20,000 Salaries Payable 20,000 Jan 10 2014 Salaries Expense 30,000 Salaries Payable 20,000 Cash 50,000 Feb 10 Example 3: Porter Properties, Inc. rented office space to Tiger Travel Agency on November 1, 2013 for $5,000 per month. Tiger Travel pays its entire 3-month rental in advance, Porter has agreed to reduce the monthly rental rate to $4,500. Tiger Travel agrees and pays Porter $13,500. Nov 1 2013 Cash 13,500 Unearned Revenue 13,500 Dec 31 2013 Unearned Revenue 9,000 Rent Revenue 9,000 Example 4: Porter Properties, Inc. has $4,581 of office supplies on November 1, 2013. On November 10, Porter purchased $12,365 worth of office supplies. At the end of the year, the balance in the Supplies account was $16,946. A count of office supplies on hand indicated that $3,263 of office supplies remained. Nov 10 2013 Supplies 12,365 Cash 12,365 Dec 31 2013 Supplies Expense 13,683 Supplies 13,683 Depreciation The process of allocating the cost of these assets as expense to each period Required an adjustment (deferred expense) to recognize the expense incurred during the period and reduce the long-lived asset The unused portion of a long-lived asset is reported on the balance sheet Example: Jan 1 2014 Property 450,000 Cash 450,000 Jan 31 2013 Depreciation Expense 15,000 Accumulated Depreciation 15,000 Contra Accounts Accounts that have a balance opposite of the balance in the related account Normal credit balance Example-= accumulated depreciation Effects of Adjusting Entries on the Financial Accounting Equation Asset Liabiliti Stockholders’ Revenu Expens s es Equity es es Accumulated ---------- ---------- Revenue -- -- Accumulated -------- ---------- Expense - -- Deferred Revenue -------- ---------- - -- Deferred Expense ---------- ---------- -- -- Feb 12 Practice Problems 1. HiTech’s trial balance shows a balance of $6,500 in the Supplies account. However, an inventory count at the close of business on March 31 determined that supplies on hand were $1,200. Mar 31 2014 Supplies Expense 5,300 Supplies 5,300 2. Trial balance shows a balance of $1,200 in the Prepaid Insurance account for a six-month insurance policy purchased on March 1. The expired portion of the insurance is $200. Mar 31 2014 Insurance Expense 200 Prepaid Insurance 200 3. Trial balance shows that $4,500 of equipment was purchased. Depreciation expense for the equipment is $125 per month. Mar 31 2014 Depreciation Expense 125 Accumulated Depreciation 125
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