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Accounting I BA 104. Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems. Chapter 6 Adjusting deferrals and accruals Accounts . Study Objectives. Identify the major types of adjusting entries. Prepare adjusting entries for deferrals. Prepare adjusting entries for accruals.

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accounting i ba 104

Accounting IBA 104

Dr. Mohamed A. Hamada

Lecturer of Accounting Information Systems

Chapter 6

Adjusting deferrals and accruals Accounts

study objectives
Study Objectives
  • Identify the major types of adjusting entries.
  • Prepare adjusting entries for deferrals.
  • Prepare adjusting entries for accruals.
  • Describe the nature and purpose of an adjusted trial balance.
main features of adjustments
Main features of Adjustments
  • Adjusting entries are internal transactions—no new source document exists for the adjustment.
  • Adjusting entries are non-cash transactions—the Cash account will never be used in an adjusting entry.
  • Adjusting entries will always involve at least one income statement account and one balance sheet account.
case 1 pre paid expenses
Case 1 , pre-paid expenses

Journal Entry

  • Pre-paid expense (debit)
        • Cash (credit)

Adjusting Entry

  • Expense (debit) consumed amount in the period
            • Pre-paid expense (credit)
case 2 unearned revenues
Case 2 “Unearned Revenues”

Receipt of cash that is recorded as a liability because the revenue has not been earned.

Cash Receipt

Revenue Recorded

BEFORE

Unearned revenues often occur in regard to:

  • rent
  • airline tickets
  • school tuition
  • magazine subscriptions
  • customer deposits
adjusting entries for unearned revenues
Adjusting Entries for “Unearned Revenues”
  • Unearned revenues
    • are items that have been initially recorded as liabilities but are expected to become revenues over time or through the normal operations of the business.
    • These are deposits by customers for work to be done in the future.
    • EX: Unearned rent
unearned revenues example
Unearned RevenuesExample

On 1/10/98, the El-Ahram Gazette received $240 for a one-year subscription. The monthly subscription rate is $20.

GENERAL JOURNAL

1

Page:

Date

Description

PR

Debit

Credit

Prepare the proper initial journal entry.

unearned revenues example1
Unearned RevenuesExample

On 1/10/98, the El-Ahram Gazette received $240 for a one-year subscription. The monthly subscription rate is $20.

GENERAL JOURNAL

1

Page:

Date

Description

PR

Debit

Credit

1-Oct

Cash

240

Unearned Subscriptions

240

to record receipt of one-year

subscription payment

unearned revenues example2
Unearned RevenuesExample

The El-Ahram Gazette’s fiscal year-end is on 31/12/98 (three months later). Record the adjustment necessary at 31/12/98.

GENERAL JOURNAL

1

Page:

Date

Description

PR

Debit

Credit

Prepare the proper adjusting journal entry.

unearned revenues example3
Unearned RevenuesExample

The El-Ahram Gazette’s fiscal year-end is on 31/12/98 (three months later). Record the adjustment necessary at 31/12/98.

GENERAL JOURNAL

1

Page:

Date

Description

PR

Debit

Credit

31-Dec

Unearned Subscriptions

60

Subscription Revenue

60

to record recognition of three

months of subscription earned

$20

x

3 months = $60

slide15

Second

  • Adjusting entries for Accruals
adjusting entries for accruals
Adjusting Entries for Accruals
  • Made to record:
    • Revenues earned (Accrued Revenues)and
    • OR
    • Expenses incurred (Accrued Expenses)
  • in the current accounting period that have not been recognized through daily entries.
case 3 adjusting entries for accrued revenues
Case 3 : Adjusting Entries for “Accrued Revenues”

Revenues earned but not yet received in cash or recorded.

Adjusting entry results in:

Revenue Recorded

Cash Receipt

BEFORE

Accrued revenues often occur in regard to:

  • rent
  • interest
  • services performed
adjusting entries for accrued revenues
Adjusting Entries for “Accrued Revenues”

Accrued Revenues

An adjusting entry serves two purposes:

(1) It shows the receivable that exists, and

(2) It records the revenues earned.

slide19

Adjusting Entries for “Accrued Revenues”

Illustration: In October Pioneer Advertising Agency earned $200 for advertising services that had not been recorded.

Oct. 31

Accounts Receivable

200

Service Revenue

200

Illustration 3-14

accrued revenues example
Accrued RevenuesExample

On 31/12/97, First Bank owes your company $100 of interest on your account. You will receive the interest on 10/1/98.

GENERAL JOURNAL

1

Page:

Date

Description

PR

Debit

Credit

Prepare the proper adjusting journal entry.

accrued assets revenues example
Accrued Assets/RevenuesExample

On 31/12/97, First Bank owes your company $100 of interest on your account. You will receive the interest on 10/1/98.

GENERAL JOURNAL

1

Page:

Date

Description

PR

Debit

Credit

31-Dec

Interest Receivable

100

Interest Revenue

100

to record interest earned but

not yet received

adjusting entries for accrued expenses
Adjusting Entries for “Accrued Expenses”

Expenses incurred but not yet paid in cash or recorded.

Adjusting entry results in:

Expense Recorded

Cash Payment

BEFORE

Accrued expenses often occur in regard to:

  • rent
  • interest
  • taxes
  • salaries
adjusting entries for accrued expenses1
Adjusting Entries for “Accrued Expenses”

Accrued Expenses

An adjusting entry serves two purposes:

(1) It records the obligations, and

(2) It recognizes the expenses.

accrued liabilities expenses example
Accrued Liabilities/Expenses Example

At 31/12/97, your company owes $400 of interest to Big Corp. You will not actually pay the interest until 10/1/98.

GENERAL JOURNAL

1

Page:

Date

Description

PR

Debit

Credit

Prepare the proper adjusting journal entry.

accrued liabilities expenses example1
Accrued Liabilities/Expenses Example

At 12/31/97, your company owes $400 of interest to Big Corp. You will not actually pay the interest until 1/10/98.

GENERAL JOURNAL

1

Page:

Date

Description

PR

Debit

Credit

31-Dec

Interest Expense

400

Interest Payable

400

to recognize interest owed to

Big Corporation

slide26

Adjusting Entries for “Accrued Expenses”

Illustration: Pioneer Advertising Agency signed a three-month note payable in the amount of $5,000 on October 1. The note requires Pioneer to pay interest at an annual rate of 12%.

Oct. 31

Interest expense

50

Interest payable

50

Illustration 3-18

accounting cycle the adjusted trial balance
Accounting cycle , The Adjusted Trial Balance

After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance).

After adjusted trial balance is prepared, this should be Followed by preparing the financial statements

.

slide29

The Adjusted Trial Balance

Review Question

Which of the following statements is incorrect concerning the adjusted trial balance?

  • An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
  • The adjusted trial balance provides the primary basis for the preparation of financial statements.
  • The adjusted trial balance lists the account balances segregated by assets and liabilities.
  • The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
adjusting journal entries question
Adjusting Journal EntriesQuestion

On 10/1/98, BeeBee Inc. pays $3,600 for a 12-month insurance policy. What kind of transaction would this be called?

a. Accrued Liability

b. Prepaid Expense

c. Accounting Estimate

d. Unearned Revenue

adjusting journal entries question1
Adjusting Journal EntriesQuestion

On 10/1/98, BeeBee Inc. pays $3,600 for a 12-month insurance policy. What kind of transaction would this be called?

a. Accrued Liability

b. Prepaid Expense

c. Accounting Estimate

d. Unearned Revenue

adjusting journal entries question2
Adjusting Journal EntriesQuestion

The last day of 1998 is on a Thursday. CeeCee Inc. will pay its employees on Friday. What kind of adjusting entry is required?

a. Accrued Liability

b. Accrued Asset

c. Accounting Estimate

d. Unearned Revenue

adjusting journal entries question3
Adjusting Journal EntriesQuestion

The last day of 1998 is on a Thursday. CeeCee Inc. will pay its employees on Friday. What kind of adjusting entry is required?

a. Accrued Liability

b. Accrued Asset

c. Accounting Estimate

d. Unearned Revenue

preparing financial statements
Preparing Financial Statements

Financial Statements are prepared directly from the Adjusted Trial Balance.

Balance Sheet

Income Statement

Owner’s Equity Statement

preparing financial statements1
Preparing Financial Statements

Illustration 3-25 Preparation of the income

statement and owner’s

equity statement from the

adjusted trial balance

slide37

Example : The ledger of Ale, Inc. on March 31, 2010, includes the following selected accounts before adjusting entries.

An analysis of the accounts shows the following:

1. Insurance expires at the rate of $300 per month.

2. Supplies on hand total $900.

3. The office equipment depreciates $500 per month.

4. 2/5 of the unearned revenue was earned in March.

Prepare the adjusting entries for the month of March.