Hhfa10 ch03 Student PPT

3-1
Copyright 2015 Pearson Education Inc. All rights reserved.
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
3
Learning Objective
1. Explain how accrual accounting differs from cashbasis accounting
3-2
EXPLAIN HOW ACCRUAL ACCOUNTING

DIFFERS FROM CASH-BASIS ACCOUNTING
Accrual Accounting
Records impact of
transactions when they occur
Required by Generally
Accepted Accounting
Principles (GAAP)
Ignores important information
Records:
Results in incomplete financial

statements
Only used by the smallest

businesses
3-3
Cash-Basis Accounting
Revenue when earned
Expenses when incurred
Records only cash

transactions
Cash receipts
Cash payments
LO 1

Accrual Accounting and Cash Flows
Accrual accounting records cash transactions, such as the
following:
3-4
Collecting cash from customers
Receiving cash from interest earned
Paying salaries, rent, and other expenses
Borrowing money
Paying off loans
Issuing stock
LO 1

Accrual Accounting and Cash Flow
Accrual accounting also records noncash transactions,
such as the following:
3-5
Sales on account
Purchases of inventory on account
Accrual of expenses incurred but not yet paid
Depreciation expense
Usage of prepaid rent, insurance, and supplies
Earning of revenue when cash was collected in advance
LO 1

The Time-Period Concept
3-6
Accounting information is reported at regular intervals.
The basic accounting period is one year.
Around 60% of large companies use the calendar year

from January 1 through December 31.
A fiscal year may end on a date other than December 31.
Companies also prepare financial statements for interim

periods of less than a year (month, quarter, semi-annual).
LO 1
3
Learning Objective
2. Apply the revenue and expense recognition
principles
3-7
APPLY THE REVENUE AND EXPENSE

RECOGNITION PRINCIPLES
The Revenue Principle
Deals with two issues:
1. When to record (recognize) revenue
2. What amount of revenue to record
Revenue is recognized when the business transfers promised

goods or services to a customer in an amount that reflects the cash
(or fair market value of other consideration) that the entity expects
to receive in exchange for those goods or services.
3-8
LO 2
The FASB and IASB have issued a joint standard that

provides a consistent, converged, and simplified way to
recognize revenue. The selling entity must:
(1) identify the contract with the customer;
(2) identify the separate performance obligations in the
contract;
(3) determine the transaction price;
(4) allocate the transaction price to the separate performance
obligations in the contract; and
(5) recognize revenue when (or as) the entity satisfies the
performance obligation.
3-9
LO 2

Exhibit 3-1 shows two situations that provide guidance on when to
record revenue for Starbucks Corporation.
Exhibit 3-1 | When to Record Revenue
3-10
LO 2

The Expense Recognition Principle
Includes two steps:
1. Identify all the expenses incurred during the accounting
period.
2. Measure the expenses and recognize them in the same
period in which any related revenues are earned.
3-11
LO 2

Exhibit 3-2 illustrates the expense recognition (sometimes referred
to as matching) principle.
Exhibit 3-2 | The Expense Recognition Principle
3-12
LO 2
(1) A customer pays Starbucks $250 on March 15 for coffee to be served at a

party in April. Has Starbucks earned revenue on March 15? When will
Starbucks earn the revenue?
(2) Starbucks pays $6,000 on July 1 for store rent for the next three months.
Has Starbucks incurred an expense on July 1?
Answers:
(1) No. Starbucks has received the cash but will not deliver the coffee until later.
Starbucks earns the revenue when it delivers the product to the customer and the
customer assumes control over it.
(2) No. Starbucks has paid cash for rent in advance. No expense has yet been
incurred because the company has not yet occupied the space. This prepaid rent is
an asset because Starbucks has acquired the use of a store location in the future.
3-13
Advance slide in presentation mode to reveal answers

LO 2
3
Learning Objective
3. Adjust the accounts
3-14
ADJUST THE ACCOUNTS

Adjusting entries:
3-15
Journal entries made to ensure that revenues and

expenses are recognized in the proper accounting
period.
Generally made at the end of the accounting period.
Include at least one income statement account and one

balance sheet account.
LO 3
ADJUST THE ACCOUNTS

Which
Accounts
Need to Be
Updated
(Adjusted)?
Exhibit 3-3 gives
the unadjusted trial
balance of Freddys
Auto Service, Inc.
3-16
ADJUST THE ACCOUNTS

Categories of Adjusting Entries
Three basic categories:
3-17
Deferrals,
Depreciation, and
Accruals
A deferral is an
adjustment for payment of
an item or receipt of cash
in advance.
Deferrals are prepaid
expenses or unearned
revenue.
LO 3
ADJUST THE ACCOUNTS

3-18
Deferrals,
Depreciation, and
Accruals
Depreciation allocates
the cost of a plant asset to
expense over the assets
useful life.
LO 3
ADJUST THE ACCOUNTS

3-19
Deferrals,
Depreciation, and
Accruals
An accrual is the opposite

of a deferral. For an
accrued expense, the
company records
the expense before paying
cash. For an accrued
revenue, the company
records the revenue
before collecting cash.
LO 3
ADJUST THE ACCOUNTS

Prepaid Expenses
An expense paid in advance. Prepaid expenses are assets
because they provide a future benefit for the owner.
Cash Payment
BEFORE
Expense Recorded
Prepayments often occur in regard to:
3-20
Rent
Insurance
Supplies
Advertising
LO 3
Prepaid Expenses
Prepaid Rent. Suppose Freddys Auto Service, Inc. prepays
three months store rent ($3,000) on June 1. The entry for the
prepayment of three months rent is as follows:
A
1 Jun 1
2
Prepaid Rent ($1,000 x 3)
3,000
Cash
3,000
3
Prepaid Rent
Cash
Jun 1
Jun 1
3,000
3,000
3-21
LO 3
Prepaid Expenses
Prepaid Rent. Throughout June, Prepaid Rent carries the
balance of $3,000. At June 30, an adjusting entry is required to
transfer $1,000 ($3,000 3) from Prepaid Rent to Rent Expense.
A
1 Jun 30
2
Rent Expense
1,000
Prepaid Rent
1,000
3
Prepaid Rent
Rent Expense
Jun 1
Jun 30
Jun 30
Bal
3,000
1,000
1,000
3-22
LO 3
Prepaid Expenses
Supplies. On June 2, Freddys Auto Service paid cash of $700
for cleaning supplies:
A
1 Jun 2
2
B
Supplies
D
700
Cash
700
3
Supplies
Cash
Jun 2
Jun 2
700
700
3-23
LO 3
Prepaid Expenses
Supplies. A count at June 30 indicates that $400 of supplies
remain on hand. Freddy makes the following adjusting entry.
A
1 Jun 30
2
Supplies Expense
D
300
Supplies
300
3
Supplies
Supplies Expense
Jun 2
Jun 30
Jun 30
Bal
700
300
300
400
3-24
LO 3
At the beginning of the month, supplies were $5,000. During the

month, $7,000 of supplies were purchased. At months end, $3,000 of
supplies are still on hand. What is the
adjusting entry?
ending balance in the Supplies account?
Answer:
3-25
Advance slide in presentation mode to reveal answers

LO 3
Depreciation of Plant Assets

Plant assets
3-26
Long-lived tangible assets, such as land, buildings,

furniture, and equipment.
Recorded as an asset when purchased.
With the exception of land
Decline in usefulness.
Record depreciation expense over the assets useful life.
Depreciation is the process of allocating cost to expense

for a long-term plant asset.
LO 3

To illustrate, suppose that on June 3 Freddys Auto Service
purchased equipment on account for $24,000:
A
1 Jun 3
2
B
Equipment
24,000
Accounts Payable
24,000
3
Equipment
Accounts Payable
Jun 3
Jun 3
24,000
24,000
3-27
LO 3

Freddys equipment will remain useful for five years and then be
worthless. One way to compute the amount of depreciation for
each year is to divide the cost of the asset ($24,000 in our
example) by its expected useful life (five years). This procedure
called the straight-line depreciation methodgives annual
depreciation and monthly depreciation as follows:
Annual Depreciation
$24,000 5 years =
$4,800 per year
3-28
Monthly depreciation
$4,800 12 months =
$400 per month
LO 3

Depreciation expense for June is recorded as follows:
A
1 Jun 30 Depreciation Expense-Equipment

2
Accumulated Depreciation-Equipment
400
400
3
Equipment
Depreciation Expense-Equipment
Jun 3
Jun 30
Accumulated Depreciation24,000
Equipment
400
Jun 30
3-29
LO 3

The Accumulated Depreciation account
Shows the sum of all depreciation expense.
The balance increases over the assets life.
Is a contra asset account, a normal credit balance.
A contra account has two distinguishing characteristics:

1. It always has a companion account.
2. Its normal balance is opposite that of the companion
account.
3-30
LO 3

Book Value. Cost of the asset minus accumulated depreciation,
also known as carrying amount.
Exhibit 3-4 | Plant Assets on the Balance Sheet of Freddys Auto Service
3-31
LO 3
What will be the book value of Freddys equipment at the end of July?
Answer:
$24,000 $400 $400 = $23,200.
Exhibit 3-4 | Plant Assets on the Balance Sheet of Freddys Auto Service
3-32
Advance slide in presentation mode to reveal answer.

LO 3
3-33
Exhibit 3-5 | Starbucks Corporations

Reporting of Property, Plant, and
Equipment (Adapted, in millions)
LO 3
ADJUST THE ACCOUNTS

Accrued Expenses
Expenses incurred but not yet paid in cash.
Expense Recorded
BEFORE
Cash Payment
Accrued expenses often occur in regard to:
Salaries
Taxes
Interest
Rent
Recorded at the end of the period using an adjusting entry.
3-34
LO 3
Accrued Expenses
To illustrate, suppose Freddys Auto Service, Inc. pays its employee a
monthly salary of $1,800, half on the 15th and half on the last day of
the month. The following calendar for June has the paydays circled:
Assume that if a payday falls on a Sunday, Freddys pays the employee

on the following Monday.
3-35
LO 3
Accrued Expenses
During June, Freddys paid
its employees the first halfmonth salary of $900 and made the following entry:
A
1 Jun 15
2
B
Salary Expense
D
900
Cash
900
3
Salary Expense
Cash
Jun 15
Jun 15
900
900
3-36
LO 3
Accrued Expenses
Since the second half-month
amount of $900 will be paid
on July 1, Freddy makes an adjusting entry on June 30 as follows:
A
1 Jun 30
2
B
Salary Expense
D
900
Salaries Payable
900
3
Salary Expense
Jun 15
Jun 30
900
3-37900
Salary Payable
Jun 30
900
LO 3
ADJUST THE ACCOUNTS

Accrued Revenues
Revenue that has been earned but not yet collected is called an
accrued revenue.
Revenue Recorded
BEFORE
Cash Receipt
Accrued revenues often occur in regard to:
3-38
Services performed
Rent
Interest
LO 3
Accrued Revenues
Assume that FedEx hires Freddys on June 15. FedEx will pay
Freddys $600 monthly, with the first payment on July 15. During June,
Freddys will earn half a months fee for work done June 15 through
June 30. On June 30, Freddys makes the following adjusting entry:
A
1 Jun 30
B
Accounts Receivable
Accounts Receivable
2,200
Jun
30
300
D
300
Service Revenue
3-39
300
Service Revenue
7,000
Jun
30
300
LO 3
Suppose Freddys Auto Service, Inc. holds a note receivable

as an investment. At the end of June, $100 of interest revenue
has been earned. Journalize the accrued revenue adjustment
at June 30.
Answer:
3-40
Advance slide in presentation mode to reveal answer

LO 3
ADJUST THE ACCOUNTS

Unearned Revenues
Receipt of cash before earning the revenue is recorded as a
liability called unearned revenues.
Cash Receipt
Revenue Recorded
BEFORE
Unearned revenues often occur in regard to:
3-41
Customer deposits
Magazine subscriptions
Airline tickets
Rent
LO 3
Unearned Revenues
Suppose Home Depot engages Freddys Auto Service, Inc. to perform
routine oil changes on Home Depot trucks, agreeing to pay Freddys
$400 monthly, beginning immediately. If Freddys collects the first
amount on June 15, then Freddys records this transaction as follows:
A
1 Jun 15
2
Cash
400
Unearned Service Revenue

Cash
400
Jun 15
Jun 15
400
400
3-42
LO 3
Unearned Revenues
The June 30 unadjusted trial balance lists Unearned Service Revenue
with a $400 credit balance. During the last 15 days of the month,
Freddys will earn one-half of the $400, or $200. On June 30, Freddys
makes the following adjustment:
A
1 Jun 30
2
B
200
Service Revenue
Service Revenue
3-43
7,000
Jun
30
Jun 30
300
200
Jun 30
Jun 15
200
Bal
400
LO 3
ADJUST THE ACCOUNTS

Exhibit 3-6 | Prepaid Adjustments
PREPAIDSCash First
Prepaid Expenses
First Pay cash and record an
asset:
Later Record an expense and

decrease the asset:
Prepaid Expense XXX

Cash
XXX
Expense XXX
Prepaid Expense
XXX
Unearned Revenues
3-44
First Receive cash and record

unearned revenue:
Later Record revenue and

decrease unearned revenue:
Cash XXX
Unearned Revenue
Unearned Revenue XXX

Revenue
XXX
XXX
LO 3
ADJUST THE ACCOUNTS

Exhibit 3-6 | Accrual Adjustments
ACCRUALSCash Later
Accrued Expenses
First Accrue expense and a
payable:
Later Pay cash and decrease the

payable:
Expense XXX
Payable
XXX
Payable
Cash
XXX
XXX
Accrued Revenues
3-45
First Accrue revenue and a

receivable:
Later Receive cash and decrease the

receivable:
Receivable XXX
Revenue
Cash XXX
Receivable
XXX
XXX
LO 3
ADJUST THE ACCOUNTS

Summary of the Adjusting Process
Two purposes of the adjusting process are to
measure income, and
update the balance sheet.
Therefore, every adjusting entry affects both of the following:
3-46
Revenue or expenseto measure income
Asset or liabilityto update the balance sheet
LO 3
Summary of Adjusting Process

Exhibit 3-7 | Summary of Adjusting Entries
3-47
LO 3
Summary of Adjusting Process

Freddys Auto Service, Inc. would make an additional adjusting entry to
accrue income tax expense and the related income tax payable as the
final adjusting entry of the period. Freddys Auto Service, Inc. accrues
income tax expense as follows:
A
1 Jun 30
2
B
Income Tax Expense
D
600
Income Tax Payable
600
3
The income tax accrual follows the pattern for accrued expenses.
3-48
LO 3
Exhibit 3-8 | The Adjusting Process of Freddys Auto Service, Inc.
3-49
LO 3
3-50
LO 3
ADJUST THE ACCOUNTS

The Adjusted Trial Balance
Summarizes all accounts and their final balances after
all adjusting entries have been journalized and posted.

Source for the preparation of the financial statements.
Income statement
Balance sheet
Statement of retained earnings
3-51
LO 3
Exhibit 3-9 | Trial Balance Worksheet
3-52
Illustration
Phoenix Equipment Rentals Company faced the following
situations. Journalize the adjusting entry needed at December
31, 2014, for each situation.
a. The business has interest expense of $1,200 that it must
pay early in January 2015.
A
1 Dec
31
B
Interest Expense
Interest Payable
1,200
1,200
2
3
3-53
LO 3
Illustration
Journalize the adjusting entry needed at December 31, 2014,
for each situation.
b. The unadjusted balance of the Supplies account is $3,200.
The total cost of supplies on hand is $1,500.
A
1 Dec
31
B
Supplies Expense
1,700
Supplies
1,700
2
3
3-54
Expense Recognized = $3,200 - $1,500 = $1,700

LO 3
Illustration
for each situation.
c. Salary expense is $7,000 per dayMonday through Friday
and the business pays employees each Friday. This year,
December 31 falls on a Wednesday.
A
1 Dec
31
Salary Expense
21,000
Salary Payable
21,000
2
3
3-55
Expense Recognized = $7,000 x 3 days = $21,000

LO 3
Illustration
for each situation.
d. On July 1, 2014, when the business collected $15,000 rent
in advance, it debited Cash and credited Unearned Rent
Revenue. The tenant was paying for one years rent.
A
1 Dec
31
B
Unearned Rent Revenue
7,500
Rent Revenue
7,500
2
3
3-56
Revenue Recognized = $15,000 x year = $7,500

LO 3
Illustration
for each situation.
e. Interest revenue of $900 has been earned but not yet
received.
A
1 Dec
31
B
Interest Receivable
Interest Revenue
D
900
900
2
3
3-57
LO 3
Illustration
for each situation.
f.
Equipment was purchased at the beginning of this year at a

cost of $50,000. The equipments useful life is five years.
There is no residual value. Record depreciation for this year.
A
1 Dec
31
B
Depreciation Expense
10,000
Accumulated Depreciation
10,000
2
3
3-58
Expense Recognized = $50,000 5 years = $10,000

LO 3
Illustration
for each situation.
f.
Equipment was purchased at the beginning of this year at a

cost of $50,000. Determine the equipments book value.
Phoenix Equipment Rental Equipment at December 31, 2014
Equipment
Less: Accumulated Depreciation
Book value of equipment
3-59
$ 50,000
10,000
$ 40,000
LO 3
3
Learning Objective
4. Construct the financial statements
3-60
CONSTRUCT
THE
FINANCIAL
STATEMENTS
The June
financial
statements of
Freddys Auto
Service, Inc. can
be prepared from
the adjusted trial
balance.
Exhibit 3-10 | Income Statement
Exhibit 3-11 | Statement of
Retained Earnings
3-61
CONSTRUCT THE FINANCIAL STATEMENTS
Exhibit 3-11 | Statement of

Retained Earnings
Exhibit 3-12 | Balance Sheet
LO 4
3-62
3
Learning Objective
5. Close the books
3-63
CLOSE THE BOOKS

Close Revenues
Debit each revenue account
Credit Retained earnings
Close Expenses
Credit each expense
Debit Retained earnings
account
Close Dividends
Debit Retained earnings
3-64
Credit Dividends
LO 5
Exhibit 3-9 | Trial Balance Worksheet
Accounts
and
Balances
to be
closed.
3-65
Exhibit 3-13 PANEL AJournalizing the Closing Entries
CLOSE
THE
BOOKS
Retained Earnings
Expenses
Dividends
4,600
3,200
3-66
Beginning balance
Revenues
18,800
Ending
7,500 balance
18,500
LO 5
CLOSE
THE
BOOKS
3-67
Exhibit 3-13 PANEL BPosting to the Accounts

LO 5
Illustration
Prepare the closing entries from the following selected
accounts from the records of Westmont Services Corporation at
December 31, 2014:
Cost of services sold
$28,600
Accumulated depreciation
82,200
Selling, general, and

administrative expenses 12,800
Retained earnings,
December 31, 2013
3-68
5,200
Service revenue
$63,800
8,200
Interest revenue
800
Dividends
600
Income tax expense
1,200
Accounts payable
2,400
LO 5
Illustration
Close Revenue Accounts
$28,600
82,200

administrative expenses
12,800
Retained earnings,
December 31, 2013
5,200
Service revenue
8,200
Interest revenue
800
Dividends
600
Income tax expense
1,200
Accounts payable
2,400
Account
Dec 31
$63,800
Debit
Credit
Service Revenue 63,800

Interest Revenue 800
Retained Earnings
3-69
64,600
LO 5
Illustration
Close Expense Accounts
$28,600
82,200

12,800
Retained earnings,
December 31, 2013
5,200
Service revenue
Retained Earnings
800
Dividends
600
Income tax expense
1,200
Accounts payable
2,400
Debit
Credit
50,800
Cost of Services Sold
28,600
Selling, General, and Admin. Expense
3-70
8,200
Interest revenue
Account
Dec 31
$63,800
Depreciation Expense
8,200
Income Tax Expense
1,200
12,800
LO 5
Illustration
Close Dividend Account
$28,600
82,200

12,800
Retained earnings,
December 31, 2013
5,200
Service revenue
Retained Earnings
Dividends
3-71
8,200
Interest revenue
800
Dividends
600
Income tax expense
1,200
Accounts payable
2,400
Account
Dec 31
$63,800
Debit
Credit
600
600
LO 5
Illustration
$28,600
82,200

12,800
Retained earnings,
December 31, 2013
5,200
Service revenue
$63,800
8,200
Interest revenue
800
Dividends
600
Income tax expense
1,200
Accounts payable
2,400
How much net income did Westmont Services earn during

2014?
$ 64,600
Total revenues
Total expenses
Net income
50,800
$ 13,800
3-72
LO 5
Illustration
Prepare a T-account for Retained Earnings to show the
December 31, 2014, balance of Retained Earnings.
Retained Earnings
3-73
Expenses
50,800
5,200
Dividends
600
64,600
Revenues
18,400
Dec. 31, 2014
Dec. 31, 2013
LO 5
Classifying Assets and Liabilities Based on

Their Liquidity
Cash is the most liquid asset.
Accounts receivable are relatively liquid because cash
collections usually follow quickly.

Inventory is less liquid because inventory must be sold.
Equipment and buildings are even less liquid because
these assets are not for sale.

Assets and liabilities are presented in order of liquidity.
3-74
LO 5

Their Liquidity
Currents Assets
Converted to cash, sold,
Long-Term Assets
Current Liabilities
Long-Term Liabilities
3-75
or consumed during the

next 12 months or within
the businesss normal
operating cycle if longer
than a year.
LO 5

Their Liquidity
Currents Assets
Land, Buildings, Furniture
and Fixtures, and

Equipment are plant
assets.
Long-Term Assets
Current Liabilities
Long-Term Investments,
3-76
Intangible Assets, and

Other Assets are also
long-term.
LO 5

Their Liquidity
Currents Assets
Debts that must be paid
within one year or within

the operating cycle if
longer than a year.
Long-Term Assets
Current Liabilities
Accounts Payable, Notes
3-77
Payable due within one

year, Salary Payable,
Unearned Revenue,
Interest Payable, and
Income Tax Payable are
current liabilities.
LO 5

Their Liquidity
Currents Assets
Long-Term Assets
Current Liabilities
All liabilities that are not
current are classified as

long-term liabilities.
Many notes payable are
long term.
3-78
LO 5
Format for the Financial Statements
3-79
Balance Sheet Formats
Report
Account
Income Statement Formats
Single-step
Multi-step
LO 5
Balance
Sheet
Report
Format
LO 5
3-80
Balance Sheet Account Format
3-81
LO 5
Income Statement Single-Step Format
3-82
Income tax expense may also be included with the expenses thus
eliminating the income before tax line.
LO 5
Income Statement Multiple-Step Format
3-83
3
Learning Objective
6. Analyze and evaluate a companys debt-paying
ability
3-84
Analyze and Evaluate a Companys

Debt-Paying Ability
Net Working Capital
Total current assets - Total current liabilities
To be considered sufficiently liquid, entities should
have a sufficient excess of current assets over

current liabilities.
3-85
LO 6

Debt-Paying Ability
Current Ratio
Total current assets Total current liabilities
Measures the companys ability to pay current
liabilities with current assets.

Most successful businesses operate with current
ratios between 1.20 and 1.50.
3-86
LO 6
How Do Transactions Affect the Ratios?

Current Ratio
a. Issued stock and received cash of $50 million.
A
1
2
Cash
D
50
Common Stock
50
Cash, a current asset, affects the current ratio as follows:
Before
3-87
After
LO 6

Debt-Paying Ability
Debt Ratio
Total liabilities Total assets
Indicates the proportion of a companys assets that is
financed with debt.

Measures a businesss ability to pay both current and
long-term debts (total liabilities).

A low debt ratio is safer than a high debt ratio.
3-88
LO 6
How Do Transactions Affect the Ratios?

Debt Ratio
a. Issued stock and received cash of $50 million.
A
1
2
Cash
D
50
Common Stock
50
Cash, a current asset, affects the debt ratio as follows:
Before
3-89
After
LO 6

Debt-Paying Ability
Do These Transactions Affect the Ratios?
b. Paid cash to purchase buildings for $20 million.
c. Made a $30 million sale on account to a grocery chain.
d. Collected the account receivable, $30 million.
e. Accrued expenses at year end, $40 million.
f.
Recorded depreciation, $80 million.
g. Earned interest revenue and collected cash, $40

million.
3-90
LO 6
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3-91

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Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

EXPLAIN HOW ACCRUAL ACCOUNTING

Ignores important information

Results in incomplete financial

Only used by the smallest

Revenue when earned

Expenses when incurred

Copyright 2015 Pearson Education Inc. All rights reserved.

Records only cash

EXPLAIN HOW ACCRUAL ACCOUNTING

Collecting cash from customers

Receiving cash from interest earned

Paying salaries, rent, and other expenses

Paying off loans

Copyright 2015 Pearson Education Inc. All rights reserved.

EXPLAIN HOW ACCRUAL ACCOUNTING

Purchases of inventory on account

Accrual of expenses incurred but not yet paid

Usage of prepaid rent, insurance, and supplies

Earning of revenue when cash was collected in advance

Copyright 2015 Pearson Education Inc. All rights reserved.

EXPLAIN HOW ACCRUAL ACCOUNTING

Accounting information is reported at regular intervals.

The basic accounting period is one year.

Around 60% of large companies use the calendar year

A fiscal year may end on a date other than December 31.

Companies also prepare financial statements for interim

Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

APPLY THE REVENUE AND EXPENSE

Revenue is recognized when the business transfers promised

Copyright 2015 Pearson Education Inc. All rights reserved.

The FASB and IASB have issued a joint standard that

Copyright 2015 Pearson Education Inc. All rights reserved.

APPLY THE REVENUE AND EXPENSE

Copyright 2015 Pearson Education Inc. All rights reserved.

APPLY THE REVENUE AND EXPENSE

Copyright 2015 Pearson Education Inc. All rights reserved.

APPLY THE REVENUE AND EXPENSE

Copyright 2015 Pearson Education Inc. All rights reserved.

(1) A customer pays Starbucks $250 on March 15 for coffee to be served at a

Advance slide in presentation mode to reveal answers

Copyright 2015 Pearson Education Inc. All rights reserved.

ADJUST THE ACCOUNTS

Journal entries made to ensure that revenues and

Generally made at the end of the accounting period.

Include at least one income statement account and one

Copyright 2015 Pearson Education Inc. All rights reserved.

ADJUST THE ACCOUNTS

ADJUST THE ACCOUNTS

Copyright 2015 Pearson Education Inc. All rights reserved.

ADJUST THE ACCOUNTS

Copyright 2015 Pearson Education Inc. All rights reserved.

ADJUST THE ACCOUNTS

An accrual is the opposite

Copyright 2015 Pearson Education Inc. All rights reserved.

ADJUST THE ACCOUNTS

Prepayments often occur in regard to:

Copyright 2015 Pearson Education Inc. All rights reserved.

Prepaid Rent ($1,000 x 3)

Copyright 2015 Pearson Education Inc. All rights reserved.