Outline - Chapter 2A

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College of Southern Nevada *

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201

Subject

Accounting

Date

Apr 3, 2024

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CHAPTER 2 THE ACCOUNTING CYCLE THE ACCOUNTING PROCESS 1. Obtain information about external transactions from source documents. 2. Analyze the transaction. 3. Record the transaction in a journal. 4. Post from the journal to the general ledger accounts. 5. Prepare an unadjusted trial balance . 6. Record adjusting entries and post to the general ledger accounts. 7. Prepare an adjusted trial balance . 8. Prepare financial statements . 9. Close the temporary accounts to retained earnings (at year-end only). 10. Prepare a post-closing trial balance (at year-end only) STEP 6 - ADJUSTING ENTRIES Necessary due to the "accrual basis of accounting": Types of adjustments: 1. Prepayments 2. Accruals 3. Estimates Prepayments • Occur when the cash flow precedes either expense or revenue recognition • Sometimes referred to as deferrals • Includes: Prepaid expenses Deferred revenues • Costs of assets acquired in one period and expensed in a future period Example: The Dress Right Clothing Corporation purchased $2,000 of supplies in July. Assume that Dress Right determines that at the end of July, $1,200 of supplies remain. Supplies Expense: 800 Supplies: 800 1

Example: At the beginning of July, Dress Right Clothing Corporation paid $24,000 to its landlord representing one year’s rent paid in advance. Rent expense: 2000 Prepaid rent: 2000 Example: Office equipment was purchased during the month of July for $12,000. Assume that its useful life is five years (60 months) and it will be worthless at the end of that period. Depreciation expense: 200 Accumulated depreciation: 200 The correct amount of prepaid insurance shown on a company’s December 31, 2024, balance sheet was $1,400. On May 1, 2025, the company paid an additional insurance premium of $1,100. In the December 31, 2025, balance sheet, the amount of prepaid insurance was correctly shown as $1,000. The amount of insurance expense that should appear in the company’s 2025 income statement is: a. $2,000 b. $1,900 c. $1,500 d. $1,600 Alternative Approach to Record Prepaid Expenses 记录预付费用的替代方法 Example: On July 1, 2024, Dress Right paid $24,000 in cash for one year’s rent on its building. The company could have debited rent expense, and the adjusting entry records the prepaid rent as of the end of July. Rent expense: 24000 Cash: 24000 Prepaid rent: 22000 Rent expense: 22000 Deferred Revenues • Cash received from customers in advance of providing a good or service 在提供商品或服务之前从顾客那里收到的现金 • Represent a company’s obligation to provide goods or services in the future 代表公司在未来提供商品或服务的义务 2

Example: Dress Right Clothing Corporation subleased space to a jewelry store for $500 per month. On July 16, the jewelry store paid Dress Right $1,000 in advance for the first two months’ rent. By the end of July, one half of one month’s rent service has been provided. Deferred revenue: 250 Rent Revenue: 250 The Contra Costa Times Company reported a $17,200 liability in its 2024 balance sheet for subscription revenue received in advance. During 2025, $68,000 was received from customers for subscriptions and the 2025 income statement reported subscription revenue of $69,700. What is the liability amount for deferred subscription revenue that will appear in the 2025 balance sheet? a. $0 b. $17,200 c. $18,900 d. $15,500 Example: Dress Right Clothing Corporation subleased a portion of its building for $500 per month. On July 16, the jewelry store paid Dress Right $1,000 in advance for the first two months’ rent. Cash: 1000 Rent revenue: 1000 Rent revenue: 750 Deferred rent revenue: 750 Accruals • Involve cash flows that occur after either expense or revenue recognition 包括在确认费用或收入后发生的现金流 • Includes: Accrued Liabilities Accrued Receivables • Many accruals involve external transactions that automatically are recorded from a source document 许多应计项目涉及从源文档自动记录的外部事务 • Some accruals involve internal transactions and require adjusting entries 一些应计科目涉及内部交易，需要调整分录 • Represent liabilities recorded when an expense has been incurred prior to cash payment 当一项费用在现金支付之前发生时，应记录负债 3

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Example: On July 20, Dress Right Clothing Corporation paid employees $5,000 for salaries for the first half of the month. Assume that salaries for the second half of July are $5,500 and will be paid in early August. Salaries expense: 5500 Salaries payable: 5500 Example: The unadjusted trial balance of Dress Right reflects a balance in the notes payable account of $40,000. The company borrowed this amount on July 1, 2024, evidenced by two notes, each requiring the payment of 10% interest. Interest expense: 333.33 Interest payable: 333.33 Gary’s Grocery borrowed $12,000 at 8% interest on May 1, 2024, with principal and interest due on April 30, 2025. The company’s fiscal year ends December 31. What amount of interest expense would appear in the company’s income statement for the year ended December 31, 2024, related to this loan? a. $480 b. $640 c. $960 d. $560 Accrued Receivables • Involve situations when revenue is recognized in a period prior to the cash receipt Example: Assume that Dress Right loaned another corporation $30,000 at the beginning of August. Terms of the note call for the payment of principal, $30,000, and interest at 8% in three months. Principal * Interest rate * Time = Interest 30000 * 8% * 1/12 = 200 Interest receivable: 200 Interest revenue: 200 4

Estimates • Third classification of adjusting entries Example: • Depreciation expense requires an estimate of: • Expected useful life • Expected residual value • Bad debt expense requires estimate of: • Amount of accounts receivable that will not be collected Eve's Apples opened its business on January 1, 2019, and paid for two insurance policies effective that date. The liability policy was $35,100 for 18 months, and the crop damage policy was $14,400 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2019? a. $15,300. b. $45,000. c. $18,900. d. $15,500. The information necessary for preparing the 2019 year-end adjusting entries for Vito’s Pizza Parlor appears below. Vito’s fiscal year-end is December 31. On July 1, 2019, purchased $15,000 of IBM Corporation bonds at face value. The bonds pay interest twice a year on January 1 and July 1. The annual interest rate is 11%. Interest receivable: 825 Interest revenue: 825 Vito’s depreciable equipment has a cost of $42,000, a six-year life, and no salvage value. The equipment was purchased in 2016. The straight-line depreciation method is used. Depreciation expense: 7000 Accumulated depreciation: 7000 On November 1, 2019, the bar area was leased to Jack Donaldson for one year. Vito’s received $9,000 representing the first six months’ rent and credited deferred rent revenue. 5

Deferred rent revenue: 3000 Rent revenue: 3000 a. On April 1, 2019, the company paid $3,600 for a two-year fire and liability insurance policy and debited insurance expense. Prepaid insurance: 2250 Insurance expense: 2250 b. On October 1, 2019, the company borrowed $30,000 from a local bank and signed a note. Principal and interest at 11% will be paid on September 30, 2020. Interest expense: 825 Interest payable: 825 c. At year-end, there is a $2,300 debit balance in the supplies (asset) account. Only $800 of supplies remain on hand. Supplies expense: 1500 Supplies: 1500 Required: Prepare the necessary adjusting journal entries at December 31, 2019. 6

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