Download Financial Accounting: A Critical Approach - McGraw

Learning Objectives
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.
Copyright © 2013 McGraw-Hill Ryerson Limited
1
LO4
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
2
LO4
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
3
LO4
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
4
LO4
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
5
LO4
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
6
LO4
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
7
LO4
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
8
LO4,6
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
9