Continuation of Adjusting Entries

1. Continuation of Adjusting Entries March 2, 2012

2. Refresh your memory • State the Revenue Recognition and Matching principles • The accrual basis off accounting follows the principles above while the cash basis of accounting records revenue and expenses only when cash is received. Explain why cash basis of accounting could be misleading.

3. BE3-2

4. Unearned Revenues • Tracks revenues received in cash, but not yet earned • May also be called “deferred revenues” or “future revenues”

5. Example • Pioneer Advertising receives $1200 on Oct. 3 for advertising that will complete Dec 31 • Pioneer creates monthly records and must adjust on Oct 31 for $400 that has been earned

7. Accruals

8. Accrued Revenue • Revenue that has been earned but not yet received in cash or recorded at the statement date.

9. Example • Oct 3rd Pioneer Advertising earns $200 for advertising, but did not bill the clients until Nov • Adjustment made Oct 31

11. Accrued Expenses • Expenses incurred but not yet paid or recorded (Ex. Interest, rent, property tax, salaries, etc.) • Could also be called accrued liabilities

12. Example • Oct 2, Pioneer advertising signs a note to pay back $5000 due Jan 2 at a rate of 6% (simple interest).

13. 5000x6%x1/12 = $25 • This shows how much is owed at the end of the month • On Nov 2, 3 months have passed, so $75 (3x$25 = $75) will be owed in total.

15. Accrued Salaries • Pioneer pays employees every two weeks and $2000 worth of salaries accrue, but are not yet paid (until Nov 7) • The Oct 31st and Nov 7th records must account for this

17. Test your knowledge • Define contra account and net book value • Page 135 Brief Exercises 6-9