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Chapter 4. Adjusting the Accounts. 4-1 Guidelines to Report Revenue and Expenses. Time Period Assumption Economic life of business can be divided into artificial time periods. Revenue Recognition Principle Revenue recognized in the accounting period in which it is earned.

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Presentation Transcript
chapter 4

Chapter 4

Adjusting the Accounts

4 1 guidelines to report revenue and expenses
4-1 Guidelines to Report Revenue and Expenses

Time Period Assumption

Economic life of business

can be divided into

artificial time periods

Revenue Recognition

Principle

Revenue recognized in

the accounting period in

which it is earned

Matching Principle

Expenses matched with

revenues in the period

when efforts are expended

to generate revenues

4 2 depreciation
4-2 Depreciation

PREPAYMENT

ASSET

EXPENSE

Cost of

Truck

$15,000

2008

2009

2010

1/1/08

12/31/08

12/31/09

12/31/10

Entry:

Truck 15,000

Cash 15,000

Depreciation

Expense

5,000

ASSET

Accumulated

Depreciation

5,000

Depreciation

Expense

5,000

EXPENSE

Accumulated

Depreciation

5,000

CONTRA ASSET

Depreciation

Expense

5,000

Accumulated

Depreciation

5,000

4 3 prepayment relationships
4-3 Prepayment Relationships

PREPAYMENTS

Benefits More Than One

Accounting Period

RECORD AS ASSET

RECORD AS LIABILITY

Initial

Entry

Adjusting

Entry

Benefits Consumed or

Earned in Current Period

4 4 accrual relationships
4-4 Accrual Relationships

ACCRUALS

Expense or Revenue

Not Yet Recorded

RECORD EXPENSE

RECORD REVENUE

Adjusting

Entry

Subsequent

Entry

4 5 types of adjusting entries
4-5 Types of Adjusting Entries

Each adjusting entry affects a balance sheet

account and an income statement account.

4 6 examples of adjusting entries
4-6 Examples of Adjusting Entries

Instructions: For each entry indicate the name of the account

debited and the account credited.

4 7 posting of adjusting entries
4-7 Posting of Adjusting Entries

The following unadjusted accounts and related balances are provided at September 30:

Instructions: Open T-accounts and post the adjusting entries indicated from the following data:

  • Supplies on hand, $200.
  • Revenue earned but not accrued, $900.
  • Unearned revenue earned by not recorded, $400.
  • Salary owed to employees, $700.
  • Depreciation of $200 is recognized.
4 9 prepayment alternative treatment
4-9 Prepayment—Alternative Treatment

PREPAYMENTS

Benefits More Than One

Accounting Period

RECORD AS EXPENSE

RECORD AS REVENUE

Initial

Entry

Adjusting

Entry