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4-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA.

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Presentation on theme: "4-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA."— Presentation transcript:

1 4-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2012 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Accounting Cycle Accruals and Deferrals Chapter 4

2 4-2 Adjusting entries are needed whenever revenue or expenses affect more than one accounting period. Every adjusting entry involves a change in either a revenue or expense and an asset or liability. Adjusting Entries

3 4-3 Converting assets to expenses Accruing unpaid expenses Converting liabilities to revenue Accruing uncollected revenue Types of Adjusting Entries

4 4-4 Prior PeriodsCurrent PeriodFuture Periods Transaction Paid cash in advance of incurring expense (creates an asset). Transaction Paid cash in advance of incurring expense (creates an asset). End of Current Period Adjusting Entry Recognizes portion of asset consumed as expense, and Reduces balance of asset account. Adjusting Entry Recognizes portion of asset consumed as expense, and Reduces balance of asset account. Converting Assets to Expenses

5 4-5 The Concept of Depreciation Depreciation is the systematic allocation of the cost of a depreciable asset to expense. Cash (credit) Fixed Asset (debit) On date when initial payment is made... The assets usefulness is partially consumed during the period. At end of period... Depreciation Expense (debit) Accumulated Depreciation (credit)

6 4-6 Prior PeriodsCurrent PeriodFuture Periods Transaction Collect cash in advance of earning revenue (creates a liability). Transaction Collect cash in advance of earning revenue (creates a liability). End of Current Period Adjusting Entry Recognizes portion earned as revenue, and Reduces balance of liability account. Adjusting Entry Recognizes portion earned as revenue, and Reduces balance of liability account. Converting Liabilities to Revenue

7 4-7 Prior PeriodsCurrent PeriodFuture Periods Transaction Pay cash in settlement of liability. Transaction Pay cash in settlement of liability. End of Current Period Adjusting Entry Recognizes expense incurred, and Records liability for future payment. Adjusting Entry Recognizes expense incurred, and Records liability for future payment. Accruing Unpaid Expenses

8 4-8 Prior PeriodsCurrent PeriodFuture Periods Transaction Collect cash in settlement of receivable. Transaction Collect cash in settlement of receivable. End of Current Period Adjusting Entry Recognizes revenue earned but not yet recorded, and Records receivable. Adjusting Entry Recognizes revenue earned but not yet recorded, and Records receivable. Accruing Uncollected Revenue

9 4-9 As a corporation earns taxable income, it incurs income taxes expense, and also a liability to governmental tax authorities. Accruing Income Taxes Expense: The Final Adjusting Entry

10 4-10 Costs are matched with revenue in two ways: Direct association of costs with specific revenue transactions. Systematic allocation of costs over the useful life of the expenditure. Adjusting Entries and Accounting Principles

11 4-11 An item is material if knowledge of the item might reasonably influence the decisions of users of financial statements. Supplies Light bulbs Many companies immediately charge the cost of immaterial items to expense. The Concept of Materiality

12 4-12 Effects of the Adjusting Entries

13 4-13 All balances are taken from the ledger accounts on May 31 after preparing the two depreciation adjusting entries. Adjusted Trial Balance

14 4-14 End of Chapter 4


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