ACCT 2010 Chapter 4
ACCT 2010 Chapter 4 ACCT 2010 (Accounting, Dr. Kohlmeyer)
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ACCT 2010 (Accounting, Dr. Kohlmeyer)
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This 5 page Class Notes was uploaded by Catherine Feeney on Wednesday September 23, 2015. The Class Notes belongs to ACCT 2010 (Accounting, Dr. Kohlmeyer) at Clemson University taught by Dr. Kohlmeyer in Fall 2015. Since its upload, it has received 56 views. For similar materials see Financial Concepts in Accounting at Clemson University.
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Date Created: 09/23/15
Chapter 4 Cash is not always received in the period in which the company earns the related revenue likewise cash is not always paid in the period in which the company incurs the related expense In these situations adjustments are made to the accounting records at the end of the period to ensure assets and liabilities are reported at appropriate amounts Revenues are recorded when earned the revenue recognition principle Expenses are recorded in the same period as the revenues to which they relate the expense recognition or matching principle Assets are reported at amounts representing economic benefits that remain at the end of the current period Liabilities are reported at amounts owed at the end of the current period that will require a future sacrifice of resources Companies wait until the end of the accounting period to adjust their accounts because daily adjustments would be costly and timeconsuming 2 Types of Attachments 1 deferrals and 2 accruals The word defer means to postpone until later In accounting we say an expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period Deferral adjustments are used to decrease balance sheet accounts and increase corresponding income statement accounts Each deferral adjustment involves one asset and one expense account or one liability and one revenue account Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period Accrual adjustments are used to record revenue or expenses when they occur prior to receiving or paying cash and to adjust corresponding balance sheet accounts After analyzing the necessary adjustments in Step 1 they are recorded using adjusting journal entries in Step 2 and then summarized in the accounts in Step 3 An adjusted trial balance is prepared to ensure total debits still equal total credits after having posted the adjusting journal entries to the accounts The expense recognition principle requires an adjustment be made to report the cost of supplies used up this month as an expense to match against revenues The expense recognition principle matching indicates that when equipment is used to generate revenues in the current period part of its cost should be transferred to an expense account in that period This process is referred to as depreciation so an income statement account named Depreciation Expense reports the cost of equipment use in the current period On the balance sheet we reduce the amount reported for equipment but we don39t take the amount of depreciation directly out of the Equipment account Rather a contraaccount is created to keep track of all the depreciation recorded against the equipment This contraaccount named Accumulated Depreciation is like a negative asset account that is subtracted from the Equipment account in the assets section of the balance sheet 1 Accumulated Depreciation is a balance sheet account and Depreciation Expense is an income statement account 2 By recording depreciation in Accumulated Depreciation distinct from the Equipment account you can report both the original cost of equipment and a running total of the amount that has been depreciated 3 The normal balance in a contraaccount is always the opposite of the account it offsets 4 The amount of depreciation depends on the method used for determining it When you do the adjustments the quot xquot expense is always the debit Then you credit the orginal debit Example Dr Supplies 200 asset cr cash 200 asset then if you use 50 dollars of supplies Dr supplies expense 50 Credit supplies 50 Example 2 We own a house and renting it out They pay us 12000 for year 1000 a month So they are prepaying but we haven t earned it yet Dr Cash 12000 asset Cr Unearned Revenue 12000 liability Then in june 3lst they now have lived there for 6months so we need to adjust for the 6000 that we actually earned Dr Unearned Revenue 6000 Cr Rent Revenue 6000 Accural adjusting revenues Deferral Adjustment expenses Deferral Example We bought 1600 in supplies on Sept lst Dr Supplies 1600 Cr Cash 1600 On september 3lst we need to adjust because we have used supplies Only 400 dollars left So we used 1200 Dr Supplies expense 1200 Cr Supplies 1200 We Deferred this adjustment to September 3lst Analyze is putting it in your accounting equation Record is a journal entry Summary is your T account Expenses increase as a debit on the left even though you are still subtracting that expense from revenue Because you continue to accumulate expenses Accrual Example Example Pizza place provided 40 dollars of pizza on the last day of September 30th with payment to be received in October We are PROVIDING but not receiving PAYMENT So they will owe us money account receivable We gave them a service Service pizza Revenue Account receivable is an asset Service revenue is stock holders equity Dr Account Receivable 40 Cr Pizza Revenue 40 Adjusting Entries is about 40 of the exam Must know Dividends is never an expense it is a reduction of stockholders equity The company is deciding to gives out shares to stockholders If you are closing out dividends you would be closing it out to retained earnings Dividends are on the statement of retained earnings Revenues and Expenses are temporary accounts Examples Page 162 exhibit 8 Exercise 14 Page 188 Wages for the last three days of December amounting to 310 were not recorded or paid Dr Salaries and wages expense 310 cr salaries and wages payable 310 The 400 telephone bill for December 2015 has not been recorded or paid Dr Utilities Expense 400 Cr Account Payable 400 Depreciation of equipment amounting to 23000 for 2015 was not recorded Dr Depreciation expense 23000 cr accum depriation equitmnent 23 000 Interest of 500 was not recorded on the note payable by Dyer Inc Dr lntrest Expense 500 cr insteersst payable 500 The Rental Revenue account includes 4000 of revenue to be earned in January 2016 Dr Rent Revenue 40000 Cr Unearned Revenue 4000 Supplies costing 600 were used during 2015 but this has not yet been recorded Dr Supplies Expense 600 Cr Supplies 600 The income tax expense for 2015 is 7000 but it won 39t actually be paid until 2016 Dr Income Tax Expense 7000 Cr Income Tax Payable 7000
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