Chapter 3! The Adjusting Entry Unit 1 Test (cover chapter 1 to 4) will occur on Friday September 26!

 Accrual Accounting means recording revenues and expenses when they happen, regardless of whether cash is received or paid.  Cash basis Accounting means recording transactions only when cash is received or paid.  In reality, nobody uses cash basis accounting any more. Accrual Accouning

 The Time Period Concept ensures that the Comparability objective in accounting is met.  This means that reporting period must be consistent such as one year, one month or one quarter  Some revenues and expenses occur continuously, and accrural accounting require accounting clerks to record them as they happen.  Accounting clerks make entries only when there is source document. Financial Statement Comparability

 There are many different types of adjusting entries accountants make at the end of the fiscal period :  Prepaid Expense  Prepaid Insurance  Accrued Revenue  Supplies adjustment (Accrued Expense)  Unearned Revenue  Late-Arriving Purchase Invoice (Accrued Expenses) Adjusting Entry

 Insurance premium is paid for assets (building, equipment or car) to protect against fire, theft etc….  We use : “ Prepaid Insurance ” (= asset) account is used to record  Journal Entry: Purchase July 1Prepaid Insurance 2400 Bank2400 Paid for annual insurance premium Prepaid Insurance

 Insurance premium is paid for assets (building, equipment or car) to protect against fire, theft etc…. Adjustment on Dec 31, 2013 Insurance Expense1200 Prepaid Insurance1200 Adjusting Insurance premium Prepaid Insurance

 An expense is paid in advance to benefit more than one accounting period.  Any current asset costs will be used up in the near future.  Example: Prepaid Insurance, Licenses, Rent and Advertising  Oct 1 you paid $5000 for radio ads which will go on for 5 months.  Oct 1Prepaid Advertising 5000 Bank5000 Prepaid Expenses

Dec 31, you will make an adjusting entry: Advertising Expense3000 Prepaid Advertising (asset)3000 Adjusting Entry for prepaid advertising Prepaid Expenses

 Some Revenues are earned but not yet received in cash or recorded at the statement date.  Accrued revenues may accumulate (or accrue) with the passage of time, as happens with interest revenue and rent revenue.  An adjusting entry is required for two purposes: to record the accurate revenue and to record increase in AR or NR. Accrued Revenue

 In October, Pioneer Advertising Agency earned $200 (they performed their service) in fees for adverting services that were not billed to clients until November.  Because these services have not been billed, they have not been recorded. Accrued Revenue

 The following adjusting entry is made on October 31: Oct 31 AR200 Service Revenue200 To accrue revenue earned but not billed  On November 10, Pioneer receives $200 cash for the services they performed in October. Accrued Revenue

 On November 10, Pioneer receives $200 cash for the services they performed in October: JE Nov 10 Cash 200 AR200 Received $200 from Oct revenue Invoice#156 Accrued Revenue

 BMO’s perspective : Park Accounting borrowed $50,000 at 5% interest on September 1, 2014 which is due August 31, What kind of JE is made on September 1, 2014? Sept 1 Loan Receivable $50,000 Bank $50,000 Accrued Revenue

 Adjusting Entry that BMO has to make on December 31, 2014?  (5% * * 4 months / 12 months = 1667) Dec 31, 2014 Interest Receivable $1667 Interest Revenue$1667 Accrued Revenue

 JE on August ? Aug 31 Cash$52500 Loan Receivable $50000 Interest Receiable $1667 Interest Revenue$833 Accrued Revenue

 Expenses incurred not yet paid or recorded but at the statement date are called “accrued expenses.”  Interest, Rent, Property Tax and salaries can be accrued expenses.  For example, Park Accounting would make a JE on September Sep 1 Cash$50,000 Loan Payable$50,000 Accrued Expense

 For example, Park Accounting would make a JE on September Sep 1 Cash$50,000 Loan Payable$50,000  On December 31, Park would make the following Adjusting Entry: Dec 31 Interest Expense$1667 Interest Payable $1667 Accrued Expense

 Park Accounting would make a JE on August 31, 2014, as they pay back the loan with interest. Aug 31 Interest Expense$833 Loan Payable$50000 Interest Payable$1667 Cash$52500 Accrued Expense

P137 E3-2, E3-3 (except d, e and i), E3-6 P142 P3-4 Classwork / Homework