Ch 4: The Accounting Cycle; Reporting Financial Results Adjusting Entries done each period to assign the appropriate amount

t of revenues & expenses - Needed whenever transistors affect revenue or expenses of more than one accounting period Types of Adjusting Entries 1 Entries to apportion recorded costs - amount debited to an asset account and adjusts entry made to transfer an appropriate portion of costs from asset to expense. a.) depreciation A) Depreciation systematic allocation of a depreciable asset to expense over assets useful life Depreciable-asset physical objects, which retain there shape and size but wear out or become obsolete over time e.g. land & building land does not wear out depreciation is an estimate used to match the revenue or expenses and requires adjusting entries every period non-cash expense depreciation methods most common is statement/ledger depreciation expense = cost of asset USEFUL life depreciation expense Accumulated depreciation contra asset account b.) Prepaid expenses Assets that become expenses as used e.g. insurance, rent, and supplies. Supplies dr supplies expense estimate of amount used cr. shop supplies Insurance dr insurance expense cr unexpired insurance As used

2. Entries to apportion unearned revenue collections for services to be rendered for future periods - amants collected in advance are not revenue until they are earned unearned revenue = deferred revenue liability because of obligation to perform future services when cash received dr. cash cr. rent revenue earned Rent is a very common example 3. Entries to record Unrecorded Expenses - recognizes expenses that will be paid in future transactions a) eg. salaries of employees & interest salary & wage expense salary & wages payable cash Note payable Interest expense Interest payable period amount interest accrued that amount unpaid at end of period amount borrowed

4. Entries to record unrecorded revenue - Revenue earned during current period but not yet billed to customers or recorded e.g. some services performed but more likely to occur later & then billed Dr. A/R Cr Repair Service Revenue DR Cash or A/R CR repair Service Rev. Income Taxes for income & losses Expense refund B) Corporate Income Tax recognized by corporations in the periods in which taxable income is earned use an adjusting entry taxable x tax rate = one tax expense income amt revenue to recognite but not yet billed entry to record collection of accrued revenue

conforms with tax laws income tax expense income tax payable Income tax is shown separate form other expenses because paying tax does not help produce revenue Revenue Expense IBIT Income tax net income Income tax Expense or Income tax payable/ Income tax payable income tax benefit Income tax payable cash Materiality relative importance of an item or even - If knowing of the item might reasonable influence the decision of users of financial statements Closing Temporary Accounts Balance sheet accounts permanent or real accounts Income statements & Dividend accounts temporary or nominal accounts Closing entries made to close all temporary accounts into retained earnings to update retained earnings Revenue & expense accounts are closed at the end of each accounting period by transferring balances to summary accounts called Income Summary close revenue accounts: Dr Revenue Cr Income summary

close expense accounts

Dr Income summary Cr expense close income summary Dr retained earnings (dr/cr to be determined ) close dividends: Dr retained earnings Cr dividends Once all closing entries are completed prepare after closing Accounting Cycle 1. 2. 3. 4. 5. 6. 7. 8. Journalize transactions Post to ledger Prep trail balance Yearly adjustments Prep adjusting trail balance sheet Prep financial statement and disclosures Journalize and post closing entries Prep after closing trail balance

Accrual basis Cash basis