Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
GLENCOE / McGraw-Hill Accruals, Deferrals, and the Worksheet Calculating and Recording Adjustments Section Objectives 1. Determine the adjustment for merchandise inventory, and enter the adjustment on the worksheet. 2. Compute adjustments for accrued and prepaid expense items, and enter the adjustments on the worksheet. 3. Compute adjustments for accrued and deferred income items, and enter the adjustments on the worksheet. The Accrual Basis of Accounting Page 430 QUESTION: What is the accrual basis? ANSWER: The accrual basis is a system of accounting by which all revenues and expenses are matched and reported on financial statements for the applicable period. Page 430 Financial statements usually are prepared using the accrual basis of accounting because it most nearly attains the goal of matching expenses and revenue in an accounting period. Page 430 Revenue is recognized when earned, not necessarily when the cash is received. Revenue is recognized when the sale is complete. A sale is complete when title to the goods passes to the customer or when the service is provided. For sales on account, revenue is recognized when the sale occurs even though the cash is not collected immediately. Page 430 Expenses are recognized when incurred or used, not necessarily when cash is paid. Each expense is assigned to the accounting period in which it helped to earn revenue for the business, even if cash is not paid at that time. This is often referred to as matching revenues and expenses. Page 430 Adjustment for Merchandise Inventory Page 431 Objective 1 Determine the adjustment for merchandise inventory, and enter the adjustment on the worksheet. Page 431 An asset account for merchandise inventory is maintained in the general ledger. Inventory All purchases of merchandise are debited to the Purchases account. Purchases All sales of merchandise are credited to the revenue account Sales. Sales Page 431 Notice that no entries are made directly to the Merchandise Inventory account during the accounting period. Consequently, when the trial balance is prepared at the end of the period, the Merchandise Inventory account still shows the beginning inventory for the period. Merchandise Inventory Purchases Sales Page 431 Adjustment for Merchandise Inventory At the end of each period a business determines the ending balance of the Merchandise Inventory account. The first step in determining the ending inventory is to count the number of units of each type of item on hand. As the merchandise is counted, the quantity on hand is entered on an inventory sheet. Page 431 QUESTION: What is an inventory sheet? ANSWER: An inventory sheet is a form used to list the quantity and type of goods a firm has in stock. Page 431 Based on a count taken on December 31, merchandise inventory for Modern Casuals totaled $46,000. Modern Casuals needs to adjust the Merchandise Inventory account to reflect the balance at the end of the year. The adjustment is made in two steps. Each step needs two general ledger accounts: Merchandise Inventory Income Summary Page 431 The first step is to remove beginning inventory from the books. Modern Casuals began the year with $51,500 in inventory. QUESTION: What is the amount of the first inventory adjustment? Beginning Inventory ANSWER: $51,500 Page 431 Adjustment for Beginning Inventory Which account is debited? For what amount? Which account is credited? For what amount? Page 431 Adjustment for Beginning Inventory Income Summary 51,500 Merchandise Inventory Bal. 51,500 51,500 Page 431 The next step is to place ending inventory on the books. Modern Casuals ended the year with $46,000 in inventory. QUESTION: What is the amount of the next inventory adjustment? Ending Inventory ANSWER: $46,000 Page 431 Adjustment for Ending Inventory Which account is debited? For what amount? Which account is credited? For what amount? Page 431 Adjustment for Ending Inventory Merchandise Inventory 46,000 Income Summary 46,000 Page 431 Objective 2 Compute adjustments for accrued and prepaid expense items, and enter the adjustments on the worksheet. Page 433 Adjustment for Loss from Uncollectible Accounts Page 433 Credit sales are made with the expectation that the customers will pay the amount due later. Sometimes the account receivable is never collected. Losses from uncollectible accounts are classified as operating expenses. Page 433 Under accrual accounting, the expense for uncollectible accounts is recorded in the same period as the related sale. The expense is estimated because the actual amount of uncollectible accounts is not known until later periods. The estimated expense is debited to an account named Uncollectible Accounts Expense. Page 433 Several methods exist for estimating the expense for uncollectible accounts. Modern Casuals uses the percentage of net credit sales method. The rate used is based on the company's past experience with uncollectible accounts and management's assessment of current business conditions. Page 433 Modern Casuals estimates that 0.75 percent of net credit sales will be uncollectible. Net credit sales for the year were $100,000. The estimated expense for uncollectible accounts is $750 ($100,000 x 0.0075). Page 433 The entry to record the expense for uncollectible accounts includes a credit to a contra asset account, Allowance for Doubtful Accounts. This account appears on the balance sheet as follows. Accounts Receivable Allowance for Doubtful Accounts Net Accounts Receivable $32,000 (750) $31,250 Page 433 Adjustment for Uncollectible Accounts Which account is debited? For what amount? Which account is credited? For what amount? Page 431 Adjustment for Uncollectible Accounts Uncollectible Accounts Expense 750 Allowance for Doubtful Accounts 750 Page 431 QUESTION: Why doesn’t Uncollectible Accounts Expense increase when a customer’s account is written off? ANSWER: The expense was already recorded based on the estimate. Page 434 Adjustments for Depreciation Page 434 QUESTION: What is property, plant, and equipment? ANSWER: Property, plant, and equipment are long-term assets that are used in the operation of a business and that are subject to depreciation. Page 434 EXCEPTION: Land is not depreciated. Page 434 Adjustments for Accrued Expenses Page 435 QUESTION: What are accrued expenses? ANSWER: Accrued expenses are expense items that relate to the current period but have not yet been paid and do not yet appear in the accounting records. Page 435 Modern Casuals makes adjustments for three types of accrued expenses: Accrued Accrued Accrued salaries payroll taxes interest on notes payable Because accrued expenses involve amounts that must be paid in the future, the adjustment for each item is a debit to an expense account and a credit to a liability account. Page 435 Adjustment for Accrued Salaries From December 28 to January 3, the firm hired several part-time clerks for the year-end sale. Through December 31, 2004, these employees earned $1,500. The part-time salaries expense has not been recorded because the employees will not be paid until January 3, 2005. Page 435 Adjustment for Accrued Salaries Which account is debited? For what amount? Which account is credited? For what amount? Page 435 Adjustment for Accrued Salaries Salaries Expense – Sales 1,500 Salaries Payable 1,500 Page 436 Accrued Payroll Taxes Payroll taxes are not legally owed until the salaries are paid. Businesses that want to match revenue and expenses in the appropriate period make adjustments to accrue the employer's payroll taxes even though the taxes are technically not yet due. Page 436 Accrued Payroll Taxes None of the part-time clerks employed by Modern Casuals have reached the social security wage base limit. The entire $1,500 of accrued salaries is subject to the employer's share of social security and Medicare taxes. Page 436 The accrued employer's payroll taxes are: Social security tax $1,500 x 0.0620 = $ 93.00 Medicare tax Total accrued payroll taxes 1,500 x 0.0145 = 21.75 $114.75 Page 436 Adjustment for Accrued Payroll Taxes Which account is debited? For what amount? Which accounts are credited? For what amounts? Page 436 Adjustment for Accrued Payroll Taxes Payroll Taxes Expense 114.75 Social Security Tax Payable 93.00 Medicare Tax Payable 21.75 Page 436 The entire $1,500 is also subject to unemployment taxes. The accrued unemployment taxes are: Federal unemployment tax $1,500 x 0.008 State unemployment tax Total accrued taxes $1,500 x 0.054 = $ 12.00 = 81.00 $ 93.00 Page 436 Adjustment for Accrued Payroll Taxes Which account is debited? For what amount? Which accounts are credited? For what amounts? Page 436 Adjustment for Accrued Payroll Taxes Payroll Taxes Expense Federal Unemp. Tax Payable State Unemp. Tax Payable 93.00 12.00 81.00 Page 436 Accrued Interest on Notes Payable On December 1, 2004, Modern Casuals issued a twomonth note for $2,000, with annual interest of 12 percent. Modern Casuals will pay the interest when the note matures on February 1, 2005. However, the interest expense is incurred day by day and should be allocated to each fiscal period involved in order to obtain a complete and accurate picture of expenses. Page 437 The accrued interest expense amount is determined by using the interest formula: Principal x Rate x Time $2,000 x 0.12 x 1/12 = $20 The fraction 1/12 represents one month, which is 1/12 of a year. Date of note: December 1, 2004 Expense for 2004 = 1 month (Dec.1 - 31) Page 437 Adjustment for Accrued Interest on Notes Payable Which account is debited? For what amount? Which account is credited? For what amount? Page 437 Adjustment for Accrued Interest on Notes Payable Interest Expense 20 Interest Payable 20 Page 437 Adjustments for Prepaid Expenses Page 437 QUESTION: What are prepaid expenses? ANSWER: Prepaid expenses (also called deferred expenses) are expenses that are paid for and recorded before they are used, such as rent or insurance. Page 437 Modern Casuals makes adjustments for three types of prepaid expenses: Prepaid supplies Prepaid insurance Prepaid interest on notes payable Page 437 Adjustment for Prepaid Interest on Notes Payable On November 1, 2004, Modern Casuals borrowed $9,000 from its bank and signed a three-month note at an annual interest rate of 10 percent. The bank deducted the entire amount of interest in advance. Page 438 Adjustment for Prepaid Interest on Notes Payable QUESTION: What is the amount of interest prepaid for three months? $9,000 x 0.10 x 3/12 Principal x Rate x Time ANSWER: = $225 Page 438 The interest expense for 1 month is $75: $225 3 months = $75 OR $9,000 x 10% x 1/12 = $75 QUESTION: What is the interest expense for 2004? $ 75 X 2 2 months (November and December) ANSWER: $150 Page 437 Adjustment for Prepaid Interest on Notes Payable Which account is debited? For what amount? Which account is credited? For what amount? Page 438 Adjustment for Prepaid Interest on Notes Payable Interest Expense 150 Prepaid Insurance Bal. 225 150 Page 438 Adjustments for Accrued Income Page 439 Objective 3 Compute adjustments for accrued and deferred income items, and enter the adjustments on the worksheet. Page 439 QUESTION: What is accrued income? ANSWER: Accrued income is income that has been earned but not yet received and recorded. Page 439 On December 31, 2004, Modern Casuals had two types of accrued income: Accrued interest on notes receivable Accrued commission on sales tax Page 439 Accrued Interest on Notes Receivable On November 1, 2004, Modern Casuals accepted from a customer a four-month, 12 percent note for $1,200. The interest income is recorded when it is received, which is normally when the note matures. However, interest income is earned day by day. At the end of the period, an adjustment is made to recognize interest income earned but not yet received or recorded. Page 440 The amount of earned interest income is determined by using the interest formula: Principal x Rate x Time $1,200 x 0.12 x 2/12 = $24 The fraction 1/12 represents one month, which is 1/12 of a year. Date of note: November 1, 2004 Income for 2004 = 2 months (Nov.1 – Dec. 31) Page 440 Adjustment for Accrued Interest on Notes Receivable Which account is debited? For what amount? Which account is credited? For what amount? Page 440 Adjustment for Accrued Interest on Notes Receivable Interest Receivable 24 Interest Income Bal. 136 24 Page 440 Adjustments for Unearned Income Page 440 QUESTION: What is unearned income? ANSWER: Unearned income (also called deferred income) is income received before it is earned. Page 440 Under the accrual basis of accounting, only income that has been earned appears on the income statement. Modern Casuals has no unearned income. Page 440 Unearned Income Items include: Subscription income Management fees Rental income Legal fees Architectural fees Construction fees Advertising income Page 441 R E V I E W Complete the following sentences: Financial statements are usually prepared using accrual basis of accounting because it most the ____________ nearly attains the goal of matching expenses and revenue in an accounting period. inventory sheet lists the quantity of each An ______________ type of goods a firm has in stock. The one item classified as property, plant, and equipment that is not subject to land depreciation is ____. R E V I E W Complete the following sentences: Accrued expenses are expense items that relate ________________ to the current period but have not yet been paid and do not yet appear in the accounting records. Accrued income is the income that has been _______________ earned but not yet received. Unearned income is the income received ________________ before it is earned. Thank You for using College Accounting, Tenth Edition Price • Haddock • Brock