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Topic: Accounting Cycle

Learning outcomes:
 Explain how the timeliness, matching, and
recognition GAAP require the recording of
adjusting entries.
 Explain the use of and prepare the adjusting
WEEK2: ADM 2500 entries required for prepaid expenses,
ADJUSTING ENTRIES & depreciation, unearned revenues, accrued
revenues, and accrued expenses.
ACCOUNTING CYCLE  Identify and explain the steps in the accounting
cycle.
 Prepare an adjusted trial balance and use it to
prepare financial statements.

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ELEMENTS OF FINANCIAL FINANCIAL STATEMENTS (OBJECTIVES AND LINKAGE

REPORTING (FROM LEVEL 2 OF THE WITH EACH OTHER: LEVEL 1 OF CONCEPTUAL
FRAMEWORK)
CONCEPTUAL FRAMEWORK)
Revenues minus A detailed A list of assets A detailed
expenses= Net and liabilities at account of
Revenue--an economic benefit generated Income [we
accounting of
Owners’ end of a cash position
from the normal course of business. apply Rev.
Recg. and
Equity (how
reporting
period.
and cash
activities over a
__frequently generated Matching this equity Objective: to period of time.
principle here balance has report financial Objective:
Expenses -- an economic sacrifices caused to know the
operating
been position at the Enhance

due to the normal course of business. performance for

changed
over a period
end of the
reporting period
informativeness
of financial
__frequently incurred. a period of time reporting

Assets –probable future economic benefits

Liabilities –probable future economic
sacrifices Income Statement of Balance Cash flow
Statement changes in
Equity– owners/shareholders’ interests (Claim) Sheet Statement
Equity
into the business.
Net Income Updated Updated balances of A further breakdown
balance of OE assets and liabilities of cash balance

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DEBITS/CREDITS GOLDEN RULE ACCOUNTING CYCLE

STEPS (manual records):
We
Revenues Normal bal.
CR DR 1. Analyze transaction completed
Credit
2. Journalize (journal entries) last week
3. Post (T-accounts)
Normal bal. DR CR 4. Trial balance (unadjusted)
Expenses Debit This week’s
5. Adjusting entries (at the end of yr) focus
6. Trial Balance (adjusted)
Normal bal. DR CR 7. Financial Statements (4 statements)
Assets Debit 8. Closing Entries
9. Post-closing trial balance
Liabilities Normal bal. CR DR
Credit
Question: How do these steps differ if we are using
computerized accounting software?
Owners Normal bal. CR DR Same….but computer handles 3, 4, 6, 7, 8, and 9
Equity Credit

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EXAMPLE: GLORIOUS GLASS CO EXAMPLE: GLORIOUS GLASS CO _

We will analyze and journalize the first month’s transactions for a new SOME CONVENTIONS
business and then do the rest of the accounting cycle
The journal entry :
This is a similar example to Tops in Topiary but with a little added
complexity and more conciseness in the transaction descriptions
Dr Cash… 4,000 (+ Assets)
Cr Owners Equity…. 4,000 (+ OE)
Transaction #1:

1. the owner invests $4,000 Notes:

1. Debits come first
The journal entry: 2. Credits come after all debits and are
indented to the right
Dr Cash… 4,000 3. Orders within debits/credits do not
Cr Owners Equity…. 4,000 matter
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EXAMPLE: GLORIOUS GLASS CO EXAMPLE: GLORIOUS GLASS CO

_POSTING
1. the owner invests $4,000
The journal entry:
2. Pays the landlord three months rent
Dr Cash… 4,000 $750
Cr Owners Equity…. 4,000 Dr Prepaid rent (+A)… 750
Cr Cash (-A)………………750
Cash Owners’ Equity
1. 4,000 1. 4,000 Cash Prepaid Rent
1. 4,000 2. 750
2. 750

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EXAMPLE: GLORIOUS GLASS CO EXAMPLE: GLORIOUS GLASS CO

1. the owner invests $4,000
2. Pays the landlord three months rent $750 1. the owner invests $4,000
2. Pays the landlord three months rent $750
3. Pays for a furnace (needed to melt 3. Pays for a furnace (needed to melt the sand to make
the sand to make the glass) $2,000 the glass) $2,000
Dr Furnace (+A)….. 2,000 4. Pays for supplies $1,000
Cr Cash (-A)…………….. 2,000 Dr Supplies (+A)…. 1,000
Cash Furnace
Cr Cash (-A)……………..1,000
Cash
1. 4,000 3. 2,000 Supplies
1. 4,000
2. 750 4. 1,000
2. 750
3. 2,000
3. 2,000
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4. 1,000

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EXAMPLE: GLORIOUS GLASS CO EXAMPLE: GLORIOUS GLASS CO

1. the owner invests $4,000 1. the owner invests $4,000
2. Pays the landlord three months rent $750 2. Pays the landlord three months rent $750
3. Pays for a furnace (needed to melt the sand to make the glass)
3. Pays for a furnace (needed to melt the sand to make $2,000
the glass) $2,000 4. Pays for supplies $1,000
4. Pays for supplies $1,000 5. Purchases Fuel on account $700
5. Purchases Fuel on account $700 6. Cash Sales $5,000
Dr Fuel Supply (+A)…. 700 Dr Cash (+A) … 5,000
Cr Revenue (+R, +OE) ……5,000
Cr Accounts Payable (+L)… 700
Cash Revenue
Fuel Supply Accounts Payable 1. 4,000 6. 5,000
5. 700 5. 700 2. 750
3. 2,000
4. 1,000
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6. 5,000

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EXAMPLE: GLORIOUS GLASS CO EXAMPLE: GLORIOUS

1. the owner invests $4,000 GLASS CO
2. Pays the landlord three months rent $750 Dr Accounts Receivable (+A).. 25,000
3. Pays for a furnace (needed to melt the sand to make the glass) Cr Revenue (+R, +OE)………….25,000
$2,000
4. Pays for supplies $1,000
5. Purchases Fuel on account $700 Accounts Receivable Revenue
6. Cash Sales $5,000
7. 25,000 7. 25,000
7. Credit Sales $25,000

*Why credit “Revenue” instead of “Sales” or “Sales Revenue”?

1. Synonyms in accounting
2. Importance of using the exact wording specified in the
Chart of Accounts (or the exam question)

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EXAMPLE: GLORIOUS EXAMPLE: GLORIOUS

GLASS CO GLASS CO
1. the owner invests $4,000
2. Pays the landlord three months rent $750 Dr Cash (+A)… 6,000
3. Pays for a furnace (needed to melt the sand to make the glass)
$2,000
Cr Accounts Receivable (-A)…6,000
Cash Accounts Receivable
4. Pays for supplies $1,000
5. Purchases Fuel on account $700 1. 4,000 7. 25,000
6. Cash Sales $5,000
2. 750 8. 6,000
7. Credit Sales $25,000
8. Collects from Customers $6,000 3. 2,000
4. 1,000
6. 5,000
8. 6,000

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EXAMPLE: GLORIOUS EXAMPLE: GLORIOUS GLASS CO

1. the owner invests $4,000 GLASS CO Dr Cash (+A)… 3,000
2. Pays the landlord three months rent $750
3. Pays for a furnace (needed to melt the sand to make the glass) Cr Unearned Revenue (+L).. 3,000
$2,000
4. Pays for supplies $1,000
5. Purchases Fuel on account $700 Cash Unearned Revenue
6. Cash Sales $5,000
7. Credit Sales $25,000 1. 4,000 9. 3,000
8. Collects from Customers $6,000 2. 750
9. Receives advances from 3. 2,000
customers $3,000 4. 1,000
6. 5,000
8. 6,000
9. 3,000
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EXAMPLE: GLORIOUS GLASS CO EXAMPLE: GLORIOUS GLASS CO

1. the owner invests $4,000 Dr Accounts Payable (-L)… 700
2. Pays the landlord three months rent $750
3. Pays for a furnace (needed to melt the sand to make the glass) Cr Cash (-A)………………….700
$2,000
4. Pays for supplies $1,000 Cash Accounts Payable
5. Purchases Fuel on account $700
6. Cash Sales $5,000 1. 4,000 5. 700
7. Credit Sales $25,000 2. 750 10. 700
8. Collects from Customers $6,000
9. Receives advances from customers $3,000 3. 2,000

10. Pay creditors on account $700 4. 1,000 And if we post all

6. 5,000 these journal
8.
9.
6,000
3,000
entries to T
21 10. 700 accounts: 22

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AJE 1

AJE 2 AJE 3
AJE: Depreciation

AJE 3

AJE 2 AJE 1
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ADJUSTING ENTRIES
THE “HOLY GRAIL” OF
Adjust the account balances ACCOUNTING:
to achieve:
a proper matching of costs THE PURSUIT OF MATCHING
and expenses with revenue
each period
At period end before financials can be
prepared:
• Deferred costs and revenues on the B/S may
need potential allocation to the I/S
• Revenues earned and costs incurred but not
yet set up must be properly accrued

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DEFERRED COST EXAMPLE

THE KEY SLIDE IN CHAPTER 4
• If three months rent is paid on the first of the month
and is initially recorded as an asset

Accrue Defer Aug 1: Dr Prepaid Rent

Cr Cash
$ 750
$ 750

• and the rent for the month is $250 then the

• recognize expense or • put off recognizing adjusting entry is:
revenue in the current expense or revenue
Aug 31: Dr Rent expense $ 250
period
Cr Prepaid Rent $ 250
• cash is exchanged in a • cash has already been
future period exchanged Sep 30: Dr Rent expense $ 250
Cr Prepaid Rent $ 250
Oct 31: Dr Rent expense $ 250
Cr Prepaid Rent $ 250
If you understand this slide you understand adjusting
entries….study it carefully! This is an application of Matching principle 28

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DEFERRED REVENUE EXAMPLE ACCRUED REVENUE

• If a deposit from a customer was initially recorded • Rent revenue from the tenant is collected
as a liability in the first week of the following month.
Sep 1: Dr Cash $3,000 The monthly rent is $1500.
Cr Unearned Revenue $3,000

• At the end of each month:

• and a third of it was earned during the period
then the adjusting entry is:
Aug 31 Dr Rent Receivable 1500
Cr Rent Revenue 1500
Sep 30 Dr Unearned Revenue $ 1,000
Cr Revenue $ 1,000
Sept 7 Dr Cash 1500
Oct 31 Dr Unearned Revenue $ 1,000
Cr Rent Receivable 1500
Cr Revenue $ 1,000
Nov 30 Dr Unearned Revenue $ 1,000
Cr Revenue $ 1,000
This is an application of Revenue
This is an application of Revenue Recognition
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Recognition
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ACCRUED EXPENSE DEPRECIATION

Telephone bill is received at the end of Classic example of an adjusting entry
each month and the payment is due by Any asset with multi-period utility to create revenue
the 15th of the following month. The streams is initially recorded on the Balance Sheet as an
monthly telephone bill is $ 100. asset (unexpired benefit)
• At the end of each month: Each period some of that utility is consumed and we must
Aug 31 Dr Telephone/Utility exp 100 recognize this by transferring part of it from the Balance
Cr Telephone/Utility payable 100 Sheet asset (the place for unexpired costs with future utility) to
the Income Statement as expense (where we send expired
costs)
Sept 15 Dr Telephone/Utility payable 100
Journal entry:
Cr Cash 100
DR Depreciation Expense
CR Accumulated depreciation
This is an application of matching To comply with historical cost principle and full disclosure, instead of directly
principle decreasing the value of the asset, an accumulated dep A/C is created as a contra-
asset A/C
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600 INCOME STATEMENT GLORIOUS GLASS

Income Statement Revenue 30,000

Minus Expenses 1,400
500 250 Supplies 600
Fuel 500
Accumulated Depreciation
50
Rent 250
Depreciation 50
= Net Income (or net loss) 28,600
250
Depreciation Expense
50 500 600
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STATEMENT OF RETAINED EARNINGS 600

GLORIOUS GLASS
Opening Balance 0 Balance Sheet: A = L+OE
- Dividends 0
500 250
+ Net Income 28,600
= Ending Balance 28,600 Accumulated Depreciation
50

250
Depreciation Expense
50 500 600
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CASH FLOW STMT IS ALSO A “PROOF” OF

BALANCE SHEET GLORIOUS GLASS CO. CASH

Assets Liabilities Opening Balance Cash

Cash 13,550 AP 0
AR 19,000 Advances from + – Change in cash for the period
Supplies 400 custom. 3,000
Fuel 200 Equity = Ending Balance Cash
Prepaid Rent 500 OE 4,000
Furnace 2,000 Retained As we will see in Chapter 12 when we learn how to actually prepare the cash
flow statement, everything in the statement actually comes from the Cash
Accum.Deprec. (50) earn. 28,600 ledger account…the cash flow statement is nothing more than a reformatted
cash ledger account with cash flows grouped to make them more meaningful
Total Assets 35,600 Tot.L+OE 35,600
Note that you only need to know how to read a Cash Flow Statement for now.
On the final exam, you will be asked to prepare one

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Problem Solving
PART 2: HANDS ON PRACTICE
• Problem solving from the end of book chapter

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PRACTICE PROBLEM 3 - ADJUSTING ENTRIES

PRACTICE PROBLEM 3 - ADJUSTING ENTRIES
For the unrelated accounts given below, the current balances and the balances they Account Title Current Balance Adjusted
should have after adjusting entries have been posted are indicated.
Account Title Current Balance Adjusted Balance Balance
(1) Supplies on Hand $940 $410
(2) Depreciation Expense-Building 600 800
(1) Supplies on Hand $940 $410
(3) Utilities Payable - 325
(4) Insurance Expense 560 640
(5) Wages Payable - 750
(6) Unearned Service Fees 850 400
(7) Accumulated Depreciation-Equipment 770 825 (1) Dr Supplies Expense 530
(8) Prepaid Rent 900 600
(9) Unearned Commissions Revenue 480 200 Cr Supplies on Hand 530
(10) Prepaid Advertising - 500
(11) Interest Receivable - 100

REQUIRED To record supplies used during the period.

For each item listed, prepare the most probable general journal entry (including an
explanation) for each adjustment.

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PRACTICE PROBLEM 3 - ADJUSTING ENTRIES PRACTICE PROBLEM 3 - ADJUSTING ENTRIES

Account Title Current Balance Adjusted Balance Account Title Current Balance Adjusted Balance
(2) Depreciation Expense-Building 600 800 (3) Utilities Payable - 325

Dr Depreciation Expense-Building 200 Dr Utilities Expense 325

Cr Accumulated Depreciation – Building 200 Cr Utilities Payable 325

To record depreciation on building for the period. To record estimated utilities expense for the period.

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PRACTICE PROBLEM 3 - ADJUSTING ENTRIES PRACTICE PROBLEM 3 - ADJUSTING ENTRIES

Account Title Current Balance Adjusted Balance Account Title Current Balance Adjusted Balance
(4) Insurance Expense 560 640 (5) Wages Payable - 750

Dr Insurance Expense 80 Dr Wages Expense 750

Cr Prepaid Insurance 80 Cr Wages Payable 750

To record insurance expired during the year. To record accrued wages at the end of the period.

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PRACTICE PROBLEM 3 - ADJUSTING ENTRIES PRACTICE PROBLEM 3 - ADJUSTING ENTRIES

Account Title Current Balance Adjusted Balance Account Title Current Balance Adjusted Balance
(6) Unearned Service Fees 850 400 (7) Accumulated Depreciation-Equipment 770 825

Dr Unearned Service Fees 450 Dr Depreciation Expense-Equipment 55

Cr Service Fees 450 Cr Accumulated Depreciation-Equipment 55

To record portion of advance payments for services To record depreciation on equipment for the period.
earned
during the period.

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PRACTICE PROBLEM 3 - ADJUSTING ENTRIES PRACTICE PROBLEM 3 - ADJUSTING ENTRIES

Account Title Current Balance Adjusted Balance Account Title Current Balance Adjusted Balance
(8) Prepaid Rent 900 600 (9) Unearned Commissions Revenue 480 200

Dr Rent Expense 300 Dr Unearned Commission Revenue 280

Cr Prepaid Rent 300 Cr Commissions Revenue 280

To record rent expense for the period. To record commissions revenue received in advance
that was earned during the period.

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PRACTICE PROBLEM 3 - ADJUSTING ENTRIES PRACTICE PROBLEM 3 - ADJUSTING ENTRIES

Account Title Current Balance Adjusted Balance Account Title Current Balance Adjusted Balance
(10) Prepaid Advertising - 500 (11) Interest Receivable - 100

Dr Prepaid Advertising 500 Dr Interest Receivable 100

Cr Advertising Expense 500 Cr Interest Income 100

To record advertising prepaid at the end of the To record accrued interest income at the end of the
period, originally debited to expense. period.

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•
PART 3 OF THE LIVE
CLASS
The End of
Lecture 2
On Chapter 4 (Adjusting
Entries)

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