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Chapter 4

by: JillianRing

Chapter 4 ACG 2021

GPA 3.7
Financial Accounting
Ronald Pierno

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About this Document

Chapter 4 notes with highlighted definitions and examples.
Financial Accounting
Ronald Pierno
Class Notes
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This 7 page Class Notes was uploaded by JillianRing on Monday September 28, 2015. The Class Notes belongs to ACG 2021 at Florida State University taught by Ronald Pierno in Summer 2015. Since its upload, it has received 38 views. For similar materials see Financial Accounting in Accounting at Florida State University.


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Date Created: 09/28/15
Chapter 4 Accrual Accounting Concepts Adjusting Closing Entries Adjusting Entries ensure that the correct amounts are on the balance sheets and the income statement 0 Two categories for adjusting entries I Accrual 1 Accrued revenues revenues for services preformed but not yet received in cash or recorded 2 Accrued expenses expenses incurred but not yet paid in cash or recorded I Deferrals 1 Prepaid Expenses expenses paid in cash before the were used or consumed 2 Unearned revenues cash received before services are preformed Example Prepaid Rent Companies pay rent in advance 0 Cash is paid purchases an asset prepaid rent Recognition of the expense Passing of the time to which the rent applies March 15L IR amp Co paid 1500 for prepaid rent On March 31 Rent expense is recorded when the time of the rent has passed Used upquot on month s worth of rent exp Assets Liabilities Com Stk RE 500 Pre Rent 500 Rent Exp ournal Entry Rent Expense 500 Prepaid Rent 500 Rent Exp Prepaid Rent 500 Beg Bal 15ool 500 End Bal 500 End Bal 1000I Prepaid Rent 1500 beginning of the moth quotUsed upquot on month of rent 500 Rent Expense Subtract from total amount paid 1500500 1000 1000 left from prepaid rent Same application for Supplies Expense Accruing Interest Expense 0 Money is borrowed interest is charged for the use of that money I Interest Expense using of that money over time I Recording interest expense would happened when company pays the interest either all of it or some of it Example IR amp Co has a 6month 6000 note payable at 10 given on March 1 Both interest and principal will be paid at maturity September 1 Income statement needs to show the interest expense incurred in March even though cash has not been paid Interest principal x rate x time or can be divided by total time rate is per yearquot Interest 6000 x 10 x 112 50 Interest 6000 x 10 50 12 Interest Expense and interest payable will each be 50 Assets Liabilities Com Stk RE 50 Int Pay 50 Int Exp ournal Entry Interest Expense 50 Interest Payable 50 Accrued 50 of interest expense for March Interest Exp Interest Payable 50 50 End Bal 50 50 End Bal Accruing Salary Expense 0 Salary expense common exp that need to be accrued before financial statements are prepared I Need to be accrued before financial statements because employees may have done some work but have not yet been paid Example IR amp Co hired an employee on Monday March 30th at 500 per week NOT a financial transaction The salary for the week beginning on Monday March 30 will not be paid until Friday April 3 0 March Income Statement show expense for March 30 and 31 Monday Tuesday 0 April Income Statement show expenses for April 1 2 and 3 Wednesday Thursday and Friday Weekly Payroll 500 100 per day March 31 the company should accrue 200 of salary expense March Expense Assets Liabilities ComStk RE 200 Sal Pay 200 Sal Exp lournal Entry Salary Expense 200 Salaries Payable 200 Salary Exp Salaries Payable 200 200 End Bal 200 200 End Bal Depreciation when a company buys an asset that is used in the business eg equipment buildings vehicles computers etc and it will be used for more than one year the cost must be expensed over the accounting periods that assets will be used Depreciation Expense portion of cost allocated to any one accounting period 0 Nothing to do with value of asset Depreciation Expense cost of asset useful life how many years intended to use asset Example IR amp Co bought equipment on March 1St for 600 with a useful life of 5 years Depreciation expense 600 5 years 120 Month income statement 120 12 10 monthly depreciation expense Accumulated Depreciation the total depreciation expense taken to date Contraaccount a contraasset Assets Liabilities ComStk RE 10 Acc Dep 10 Dep Exp Accumulated Depreciation rt thereby 1 net asset book value iournal Entry Depreciation Expense 10 Accumulated Depreciation 10 Accrued 10 of depreciation exp For March Depr Exp Accum Depr 10 10 End Bal 10 10 End Bal Balance Sheet always shows the original cost of the asset less accumulated depreciation Assets Equipment 600 Less Acc Dep m 590 value of equipment after depreciation Adjusted Trial Balance after all adjusting entries company prepares another trial balance from ledger accounts Debit credit balances in ledger Then prepare Financial Statements List of total accounts with debit credit balances new adjusted balances should be included Financial Statements are prepared directly from the Adjusted Trial Balance Income Statement Retained Earnings Statement Balance Sheet Closing Entries at the end of the accounting period AFTER financial statements companies prepare closing entries 1 Update Retained Earnings account 2 Close the temporary accounts balances transferred to the permanent stockholders equity account Retained Earnings Temporary Permanent Closed Not Closed 1 All revenue accounts 1 All aSS taCC0unt8 2 A11 expense accounts 2 All 11ab111ty accounts 3 Dividends 3 Stockholders Equity accounts Closing entries produce zero balance in each temporary account Balancing entries for ReV Exp are made to the Income Summary account Dividends balancing entry is made directly to Retained Earnings Rev Exp only keep track of transactions for one accounting period need to be zero at the end of period open for the beginning of the next period Revenues amp Expenses 1 Income Summary 1 Retained Earnings ReV Exp close to Income Summary Income Summary closed to Retained Earnings Effectively transfers Net Income to Retained Earnings Revenue Revenue accounts are DEBITED reducing them to 0 Income Summary is CREDITED by same amount rt balance Normal credit balance Sales Revenue Income Summary 2200 Bal 2200 2200 0 Expenses Expense accounts are CREDITED reducing them to 0 Income Summary is DEBITED by same amount 1 balance Income Summary resulting balance NET INCOME transferred to Retained EarningS Income Summary 528 2200 Retained Earnings 223 3275 500 225 w 490 135 490 490 Dividends Dividends accounts is CREDITED reduces to 0 Retained Earnings is DEBITED 1 balance Dividends Retained Earnings Bal 50 3275 Feb 28 Bal 490 50 50 0


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