Accounting - part-II

Introduction
 Accounting Equation (A= L + SE)

 Accounting Cycle
 Accounting Concepts
 Revenue
 Expense
 Revenue Recognition
 Matching Principle
 Types of Adjusted Entries
 Examples of Adjusted Entries
 Impact without entries
Chapter
3-1
The Accounting Equation
Relationship among the assets, liabilities and

stockholders’ equity of a business:
Illustration 3-3
The equation must be in balance after every

transaction. For every Debit there must be a Credit.
Chapter
3-2
The Accounting Cycle
Illustration 3-6
Transactions
9. Reversing entries 1. Journalization
8. Post-closing trail balance 2. Posting
7. Closing entries 3. Trial balance
Work
6. Financial Statements Sheet 4. Adjustments
5. Adjusted trial balance
Chapter
3-3
Adjusting Entries
Revenues - recorded in the period in which they

are earned.
Expenses - recognized in the period in which they

are incurred.
Adjusting entries - needed to ensure that the

revenue recognition and matching principles are
followed.
Chapter
3-4
Types of Adjusting Entries
Illustration 3-20
Prepayments Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.
2. Unearned Revenues. 4. Accrued Expenses.

Revenues received in cash Expenses incurred but not
and recorded as liabilities yet paid in cash or
before they are earned. recorded.
Chapter
3-5
Expedient Recording Method
Expedient
Records an expense upon payment of cash
before goods or services are consumed
Records revenue upon receipt of cash

before goods or services are provided
Chapter
3-6
Expedient General Entries
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.
Dec. 1 Cash 45,000

Service revenue 45,000
Service Revenue Cash

Debit Credit Debit Credit
45,000 45,000
45,000
45,000
Chapter
3-7
Adjusting Entries for “Unearned Revenues”
was credited.
Dec. 31 Service revenue 33,750 (=45,000-45,000/4)
Unearned service revenue 33,750
Service Revenue Unearned Service Revenue

33,750 45,000 33,750
11,250
33,750
Chapter
3-8
Impact Without Adjusted Entries

was credited.
Dec. 31 Service revenue (SE) 33,750 (=45,000-45,000/4)
Unearned service revenue (L) 33,750
Total Total Stk. Net Retained

Assets Liab. Equity Income Earning
Understate Overstate Overstate Overstate
33750 33750 33750 33750
None
Chapter
3-9
Standard Recording Method
Standard
Asset upon payment of cash

Liability upon receipt of cash
before goods or services are
provided
Chapter
3-10
Standard General Entries
services to be rendered equally over a four-month period.
Dec. 1 Cash 45,000

Unearned service revenue 45,000
Unearned Service Revenue Cash

45,000 45,000
45,000
45,000
Chapter
3-11
Adjusting Entries for “Unearned Revenues”
services to be rendered equally over a four-month period.
Dec. 31 Unearned service revenue 11,250

Service revenue 11,250

11,250 11,250 45,000
11,250
33,750
Chapter
3-12
Expedient Vs. General
Expedient
33,750 45,000 33,750
11,250
33,750
General
11,250 11,250 45,000
11,250
33,750
Chapter
3-13
Adjusting Entries for “Prepaid Expenses”
Q2. On December 31, 2011, the company paid a local radio station $16,000
for 40 radio ads that were to be aired, 20 per month, throughout January and
February of 2012. Prepaid advertising was debited.
Dec. 31 Prepaid Advertising 16,000

Cash 16,000
Prepaid Advertising Cash

16,000 16,000
16,000
Chapter
3-14
Adjusting Entries for “Accrued Expenses”
Q3. Employee salaries for the month of December 2011 totaling

$8,400 will be paid on January 5, 2012.
Dec. 31 Salaries expense 8,400

Salaries payable 8,400
Salaries Expense Salaries Payable

8,400 8,400
8,400
Chapter
3-15
Q3. Employee salaries for the month of December 2011 totaling

$8,400 will be paid on January 5, 2012.
Dec. 31 Salaries expense(SE) 8,400

Salaries payable(L) 8,400


None 8400 8400 8400 8400
Chapter
3-16
Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local
bank. A note was signed with principal and 6% interest to be paid on
September 1, 2012.
(Interest = 60,000 * 6% /12 *3)
Dec. 31 Interest expense 900
Interest payable 900
Interest Expense Interest Payable

900 900
Chapter
3-17
Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local
bank. A note was signed with principal and 6% interest to be paid on
September 1, 2012.
(Interest = 60,000 * 6% /12 *3)
Dec. 31 Interest expense(SE) 900
Interest payable(L) 900


None 900 900 900 900
Chapter
3-18
Q5. On December 31, 2011, it was determined that $8,000 of the recorded
Accounts receivable would prove to be uncollectible.
Dec. 31 Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000
Bad Debt Expense Allowance for Doubtful Accounts

8,000 8,000
Chapter
3-19
Q5. On December 31, 2011, it was determined that $8,000 of the recorded
Accounts receivable would prove to be uncollectible.
Dec. 31 Bad Debt Expense (SE) 8,000

Allowance for Doubtful Account (A) 8,000

Overstated Overstated Overstated Overstated

8000 None 8000 8000 8000
Chapter
3-20

Q1 None 33750 33750 33750 33750
Q2 None None None None None

Q3 None 8400 8400 8400 8400
Q4 None 900 900 900 900
Overstated Overstated Overstated Overstated
Q5 8000 None 8000 8000 8000
Overstate Understate Overstate Overstate Overstate
Total 8000 43050 51050 51050 51050
Chapter
3-21
Conclusion
 Accounting Concepts
 Revenue and Expense
 Revenue Recognition and Matching Principle
 Standard Vs. Expedient Recording Method
 Types of Adjusted Entries
 Prepayments : Prepaid Expense and Unearned
Revenue
 Accruals: Accrued Rev. and Accrued Exp.
 Impact without adjusted entries
 Overstated A, L, SE, NI, RE
 Understated A, L, SE, NI, RE
Chapter
3-22
Questions
Chapter
3-23

Accounting - part-II

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Introduction

 Accounting Equation (A= L + SE)

Relationship among the assets, liabilities and

The equation must be in balance after every

9. Reversing entries 1. Journalization

8. Post-closing trail balance 2. Posting

7. Closing entries 3. Trial balance

5. Adjusted trial balance

Revenues - recorded in the period in which they

Expenses - recognized in the period in which they

Adjusting entries - needed to ensure that the

2. Unearned Revenues. 4. Accrued Expenses.

Records revenue upon receipt of cash

Dec. 1 Cash 45,000

Service Revenue Cash

Dec. 31 Service revenue 33,750 (=45,000-45,000/4)

Unearned service revenue 33,750

Service Revenue Unearned Service Revenue

Q1 : On December 1, 2011, Johnson received a $45,000 payment for

Dec. 31 Service revenue (SE) 33,750 (=45,000-45,000/4)

Unearned service revenue (L) 33,750

Total Total Stk. Net Retained

Asset upon payment of cash

Dec. 1 Cash 45,000

Unearned Service Revenue Cash

Dec. 31 Unearned service revenue 11,250

Service Revenue Unearned Service Revenue

Dec. 31 Prepaid Advertising 16,000

Prepaid Advertising Cash

Q3. Employee salaries for the month of December 2011 totaling

Dec. 31 Salaries expense 8,400

Salaries Expense Salaries Payable

Q3. Employee salaries for the month of December 2011 totaling

Dec. 31 Salaries expense(SE) 8,400

Total Total Stk. Net Retained

Understate Overstate Overstate Overstate

Interest Expense Interest Payable

Total Total Stk. Net Retained

Understate Overstate Overstate Overstate

Dec. 31 Bad Debt Expense 8,000

Bad Debt Expense Allowance for Doubtful Accounts

Debit Credit Debit Credit

Dec. 31 Bad Debt Expense (SE) 8,000

Total Total Stk. Net Retained

Overstated Overstated Overstated Overstated

Total Total Stk. Net Retained

Q2 None None None None None

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