1 Copyright © 2013 McGraw-Hill Ryerson Limited LO4 Differentiate between the different types of adjusting journal entries and understand their purposes. LO5 Analyze transactions and economic events, record them using journal entries, post entries to T-accounts, and prepare and use the trial balance to prepare financial statements. LO6 Explain the purpose of journal entries and describe how to prepare them. Learning Objectives

2 Transactional vs. Adjusting entries  Transactional-triggered by exchanges with another entity.  Adjusting-entries to accrual accounting system not triggered by exchanges with outside entity. Copyright © 2013 McGraw-Hill Ryerson Limited LO4

3 Adjusting Entries Recorded at end of accounting period. Four types of adjusting entries: ▫Deferred/prepaid expense ▫Deferred revenue ▫Accrued expense/liability ▫Accrued revenue/asset Copyright © 2013 McGraw-Hill Ryerson Limited LO4

4 Tips on Adjusting Entries Required because revenues and expenses can be recognized at times other than cash exchange Associated with transactional entry Only required in preparing statements One balance sheet account and one income statement account Never involve cash Copyright © 2013 McGraw-Hill Ryerson Limited LO4

5 Prepaid Expense Assets that benefit more than one accounting period Future benefits consumed as time passes Example: insurance policies Copyright © 2013 McGraw-Hill Ryerson Limited LO4

6 Deferred Revenue Payments received in advance No revenue recognized on receipt of cash Revenue recognized on supply of goods or services Unearned revenue – the liability recorded when cash is received before is revenue recognized Copyright © 2013 McGraw-Hill Ryerson Limited LO4

7 Accrued Expense Liability recognized before invoice received Economic event is consuming the goods or services Transferred to accounts payable or paid when invoice received Example: accrued wages payable Copyright © 2013 McGraw-Hill Ryerson Limited LO4

8 Accrued Revenue Revenue recognized before cash received or invoice issued ▫Interest revenue ▫Project revenues Revenue earned but no exchange with another entity Example: interest or royalty revenues Copyright © 2013 McGraw-Hill Ryerson Limited LO4

9 Closing Entries Balance sheet accounts are permanent accounts Income statement accounts are temporary accounts Closing entries “close” temporary accounts Occurs at end of accounting period Balance transferred to retained earnings or owners’ equity Copyright © 2013 McGraw-Hill Ryerson Limited LO4,6