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Impact of Adjusted Entries
by Group 1
Fernando Casco-Downing, Katie
Fleming, Michael Kubik, Emily
Stone, Fei Wang
Chapter
3-1
Introduction
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Accounting Equation (A= L + SE)
Accounting Cycle
Accounting Concepts
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Chapter
3-2
Revenue
Expense
Revenue Recognition
Matching Principle
Types of Adjusted Entries
Examples of Adjusted Entries
Impact without entries
The Accounting Equation
Relationship among the assets, liabilities and
stockholders’ equity of a business:
Illustration 3-3
The equation must be in balance after every
transaction. For every Debit there must be a Credit.
Chapter
3-3
The Accounting Cycle
Illustration 3-6
Transactions
9. Reversing entries
1. Journalization
8. Post-closing trail balance
2. Posting
7. Closing entries
3. Trial balance
6. Financial Statements
Work
Sheet
5. Adjusted trial balance
Chapter
3-4
4. Adjustments
Adjusting Entries
Revenues - recorded in the period in which they
are earned.
Expenses - recognized in the period in which they
are incurred.
Adjusting entries - needed to ensure that the
revenue recognition and matching principles are
followed.
Chapter
3-5
Types of Adjusting Entries
Illustration 3-20
Prepayments
Accruals
1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.
3. Accrued Revenues.
Revenues earned but not
yet received in cash or
recorded.
2. Unearned Revenues.
Revenues received in cash
and recorded as liabilities
before they are earned.
4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or
recorded.
Chapter
3-6
Expedient Recording Method
Expedient
Records an expense upon payment of cash
before goods or services are consumed
Records revenue upon receipt of cash
before goods or services are provided
Chapter
3-7
Expedient General Entries
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.
Dec. 1
Cash
45,000
Service revenue
45,000
Service Revenue
Debit
Credit
45,000
45,000
Chapter
3-8
Cash
Debit
45,000
45,000
Credit
Adjusting Entries for “Unearned Revenues”
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.
Dec. 31
Service revenue
33,750
Unearned service revenue
Service Revenue
Debit
33,750
Credit
45,000
11,250
Chapter
3-9
(=45,000-45,000/4)
33,750
Unearned Service Revenue
Debit
Credit
33,750
33,750
Impact Without Adjusted Entries
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.
Dec. 31
Service revenue (SE)
33,750
Unearned service revenue (L)
Total
Assets
None
Chapter
3-10
(=45,000-45,000/4)
33,750
Total
Liab.
Stk.
Equity
Net
Income
Retained
Earning
Understate
33750
Overstate
33750
Overstate
33750
Overstate
33750
Standard Recording Method
Standard
Asset upon payment of cash
Liability upon receipt of cash
before goods or services are
provided
Chapter
3-11
Standard General Entries
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period.
Dec. 1
Cash
45,000
Unearned service revenue
Unearned Service Revenue
Debit
Credit
45,000
45,000
Chapter
3-12
45,000
Cash
Debit
45,000
45,000
Credit
Adjusting Entries for “Unearned Revenues”
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period.
Dec. 31
Unearned service revenue
11,250
Service revenue
Service Revenue
Debit
Credit
11,250
11,250
Chapter
3-13
11,250
Unearned Service Revenue
Debit
11,250
Credit
45,000
33,750
Expedient Vs. General
Expedient
Service Revenue
Debit
33,750
Unearned Service Revenue
Credit
Debit
45,000
Credit
33,750
11,250
33,750
General
Service Revenue
Debit
Credit
11,250
11,250
Chapter
3-14
Unearned Service Revenue
Debit
11,250
Credit
45,000
33,750
Adjusting Entries for “Prepaid Expenses”
Q2. On December 31, 2011, the company paid a local radio station $16,000
for 40 radio ads that were to be aired, 20 per month, throughout January and
February of 2012. Prepaid advertising was debited.
Dec. 31
Prepaid Advertising
16,000
Cash
16,000
Prepaid Advertising
Debit
16,000
16,000
Chapter
3-15
Credit
Cash
Debit
Credit
16,000
Adjusting Entries for “Accrued Expenses”
Q3. Employee salaries for the month of December 2011 totaling
$8,400 will be paid on January 5, 2012.
Dec. 31
Salaries expense
8,400
Salaries payable
Salaries Expense
Debit
8,400
8,400
Chapter
3-16
Credit
8,400
Salaries Payable
Debit
Credit
8,400
Adjusting Entries for “Accrued Expenses”
Q3. Employee salaries for the month of December 2011 totaling
$8,400 will be paid on January 5, 2012.
Dec. 31
Salaries expense(SE)
8,400
Salaries payable(L)
Chapter
3-17
8,400
Total
Assets
Total
Liab.
Stk.
Equity
Net
Income
Retained
Earning
None
Understate
8400
Overstate
8400
Overstate
8400
Overstate
8400
Adjusting Entries for “Accrued Expenses”
Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local
bank. A note was signed with principal and 6% interest to be paid on
September 1, 2012.
(Interest = 60,000 * 6% /12 *3)
Dec. 31
Interest expense
900
Interest payable
Interest Expense
Debit
900
Chapter
3-18
Credit
900
Interest Payable
Debit
Credit
900
Adjusting Entries for “Accrued Expenses”
Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local
bank. A note was signed with principal and 6% interest to be paid on
September 1, 2012.
(Interest = 60,000 * 6% /12 *3)
Dec. 31
Interest expense(SE)
900
Interest payable(L)
Chapter
3-19
900
Total
Assets
Total
Liab.
Stk.
Equity
Net
Income
Retained
Earning
None
Understate
900
Overstate
900
Overstate
900
Overstate
900
Adjusting Entries for “Accrued Expenses”
Q5.
On December 31, 2011, it was determined that $8,000 of the recorded
Accounts receivable would prove to be uncollectible.
Dec. 31
Bad Debt Expense
8,000
Allowance for Doubtful Accounts
Bad Debt Expense
Debit
8,000
Chapter
3-20
Credit
8,000
Allowance for Doubtful Accounts
Debit
Credit
8,000
Impact Without Adjusted Entries
Q5.
On December 31, 2011, it was determined that $8,000 of the recorded
Accounts receivable would prove to be uncollectible.
Dec. 31
Bad Debt Expense (SE)
8,000
Allowance for Doubtful Account (A)
Total
Assets
Overstated
8000
Chapter
3-21
8,000
Total
Liab.
Stk.
Equity
Net
Income
Retained
Earning
None
Overstated
8000
Overstated
8000
Overstated
8000
Impact Without Adjusted Entries
Total
Assets
Net
Income
Retained
Earning
Overstate
33750
Overstate
33750
None
None
None
Understate Overstate
8400
8400
Overstate
8400
Overstate
8400
Q4
None
Understate Overstate
900
900
Overstate
900
Overstate
900
Q5
Overstated
8000
Overstated
8000
Overstated
8000
Overstated
8000
Overstate Understate Overstate
Total
8000
43050
51050
Overstate
51050
Overstate
51050
Q1
None
Q2
None
Q3
Chapter
3-22
Total
Liab.
Stk.
Equity
Understate Overstate
33750
33750
None
None
None
Conclusion
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Accounting Concepts
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Standard Vs. Expedient Recording Method
Types of Adjusted Entries
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Prepayments : Prepaid Expense and Unearned
Revenue
Accruals: Accrued Rev. and Accrued Exp.
Impact without adjusted entries
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Chapter
3-23
Revenue and Expense
Revenue Recognition and Matching Principle
Overstated A, L, SE, NI, RE
Understated A, L, SE, NI, RE
Questions
Chapter
3-24