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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Adjusting and Closing Entries
CHAPTER THREE
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
LEARNING OBJECTIVES
Understand the revenue recognition and matching principles
Understand the four types of adjustments and prepare adjusting entries
Prepare financial statements from an adjusted trial balance
Prepare closing entries and a post-closing trial balance
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Accounting Cycle
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1
2
3
4
5
6
7
8
Analyze & journalize
transactions
Post transaction
s to general ledger
Prepare unadjusted
trial balance
Journalize & post
adjusting entries
Prepare adjusted
trial balance
Journalize & post closing entries
Prepare post-closing
trial balance
Prepare financial
statements
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Accounting Period
◘ Reporting time frame Month, quarter, or year
◘ Annual accounting period Calendar year Fiscal year Any consecutive 12-month period
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Understand the revenue recognit ion and matching pr inc ip les
LEARNING OBJECTIVE ONE
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Revenue Recognition Principle
◘ Revenues should be recognized, or recorded, when they are earned, regardless of when cash is received.
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Matching Principle
◘ Expenses should be matched with the revenues they helped generate, regardless of when paid.
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
ACCRUALS
◘ Business has earned revenue before receiving cash from customer
OR
◘ Business has incurred expense before cash is paid
DEFERRALS
◘ Business received cash before providing goods or services to customer
OR
◘ Business paid for expense before it was incurred
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Accruals and Deferrals
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Accruals and Deferrals
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Now Later
Accrued Revenue Revenue is recognized
Cash is received
Accrued Expense Expense is recognized
Cash is paid
Deferred Revenue
Cash is received
Revenue is recognized
Deferred Expense
Cash is paid Expense is recognized
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Understand the four types of adjustments and prepare adjust ing entr ies
LEARNING OBJECTIVE TWO
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Adjusting Entries
◘ Ensures revenue recognition and matching principles are followed
◘ Recorded at the end of the accounting period
◘ Results in accurate, up-to-date financial statements
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
ACCRUED REVENUE
◘ Revenue is earned before cash is received
◘ Debit a receivable; credit a revenue
ACCRUED EXPENSE
◘ Expense is incurred before cash is paid
◘ Debit an expense; credit a liability
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Adjustments for Accruals
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Adjustments for Deferrals
◘ Unearned revenue Recorded as liabilities when payment is received from
customer Revenue is recorded when customer receives goods
or services
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◘ Prepaid expense Recorded as assets when paid for Expense is recorded as asset is used up
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Accruing Revenues
◘ Business earns revenue before receiving cash
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Mar.31
Accounts Receivable 250
Service Revenue 250
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Accruing Expenses
◘ Business incurs expense before making payment
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Mar.31
Salaries Expense 550
Salaries Payable 550
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Summary of Accrual Adjusting Entries◘ For accruals, cash transaction comes
later
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First Dr. Cr. Later Dr.
Cr.
Accrue a revenue and the related asset:Receive cash and decrease the asset:
Accrued Revenue
Accounts Receivable
$$$ Cash $$$
Service Revenue
$$$
Accounts Receivable
$$$
Accrue an expense and the related liability:
Pay cash and decrease the liability:
Accrued Expense
Salaries Expense $$$ Salaries Payable $$$
Salaries Payable
$$$
Cash $$$
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Adjusting Deferred Revenues
◘ Business receives cash from customer before earning revenue
Liability Unearned revenue
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Mar.21
Cash 450
Unearned Service Revenue
450
Mar.31
Unearned Service Revenue
150
Service Revenue 150
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Adjusting Deferred Expenses
◘ Business pays for items before they are used
◘ Examples: Assets Prepaid Rent Prepaid Insurance Supplies
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Prepaid Rent
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Mar.1 Prepaid Rent 3,000
Cash 3,000
Mar.31
Rent Expense 1,000
Prepaid Rent 1,000
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Supplies
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Mar.5 Supplies 900
Cash 900
Mar.31
Supplies Expense 300
Supplies 300
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Depreciation of Long-Term Assets
◘ Last for more than one year Land, Buildings, Equipment and Furniture
◘ Used up over time Excluding land
◘ Expense cost of long-term asset over its life
Depreciation
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Depreciation
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Mar.8 Equipment 12,600
Accounts Payable 12,600
$12,600 purchase
price
$4,200 annual
depreciation
3 years
$4,200 annual
depreciation
$350 monthly
depreciation
12 mont
hs
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Depreciation
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Mar.31
Depreciation Expense, Equipment 350
Accumulated Depreciation, Equipment
350
Contra-asset
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Contra-Accounts
◘ Linked to another account and will appear with it in the financial statements
◘ Normal balance is the opposite of the account to which it is linked
◘ Balance is subtracted from the balance of the linked account to determine the net value
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Book Value
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Equipment 12,600
Less: Accumulated Depreciation, Equipment
350
Book Value, Equipment $12,250
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Summary of Deferral Adjusting Entries◘ For deferrals, cash transaction comes
first
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First Dr. Cr. Later Dr.
Cr.
Receive cash and record a liability: Record revenue and decrease liability:
Unearned Revenue
Cash $$$ Unearned Revenue $$$
Unearned Revenue
$$$
Service Revenue $$$
Pay cash and record an asset:Record expense and decrease asset:
Prepaid Expense
Prepaid Rent $$$ Rent Expense $$$
Cash $$$
Prepaid Rent $$$
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Problem P3-42A (1 of 3)
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GENERAL JOURNAL Page 1
DATE ACCOUNTS DEBIT CREDIT
Dec.31
Insurance Expense 1,500
Prepaid Insurance 1,500
($3,600 x 5/12)
Dec.31
Salaries Expense 6,600
Salaries Payable 6,600
($16,500 x 2/5)
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Problem P3-42A (2 of 3)
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GENERAL JOURNAL Page 1
DATE ACCOUNTS DEBIT CREDIT
Dec.31
Interest Receivable 300
Interest Revenue 300
Dec.31
Supplies Expense 3,600
Supplies 3,600
($900 + 4,500 - 1,800)
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Problem P3-42A (3 of 3)
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GENERAL JOURNAL Page 1
DATE ACCOUNTS DEBIT CREDIT
Dec.31
Unearned Revenue 5,100
Service Revenue 5,100
Dec.31
Depreciation Expense 4,290
Accumulated Depreciation, Vehicles
2,990
Accumulated Depreciation, Equipment
1,300
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Prepare fi nancia l statements from an adjusted tr ia l balance
LEARNING OBJECTIVE
THREE04/08/2023
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Preparing the Financial Statements
◘ After adjustments are made and posted, the adjusted trial balance is prepared
◘ The financial statements are prepared using the amount from the adjusted trial balance
Income Statement Statement of Retained Earnings Balance Sheet
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Prepare c los ing entr ies and a post-c los ing tr ia l balance
LEARNING OBJECTIVE FOUR
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Closing Entries
◘ Revenue, expense and dividend account balances are set to zero before starting next accounting period. The accounts are transferred to Retained Earnings
Transferring revenue and expense account balances increases Retained Earnings by the amount of net income (or deceases it by the amount of net loss)
Transferring the dividends account balance decreases Retained Earnings
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
TEMPORARY
◘Revenues
◘Expenses
◘Dividends
◘ Closed to Retained Earnings
Begin next period with a zero balance
PERMANENT
◘ Assets ◘ Liabilities ◘ Common Stock ◘ Retained Earnings
◘ Not Closed Balances carry forward
to next period
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Temporary and Permanent Accounts
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Three Closing Entries
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Dr. Cr.
Close Revenues
Revenues $$$
Retained Earnings $$$
Close Expenses
Retained Earnings $$$
Expenses $$$
Close Dividends
Retained Earnings $$$
Dividends $$$
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Impact of Closing Entries on Retained Earnings
◘ Increased by net income (or decreased by net loss)
Close revenues and expenses
◘ Decreased by dividends
◘ Account balance will match ending balance on Statement of Retained Earnings
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Exercise E3-38B (1 of 3)
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Common Stock $22,000 Accounts Receivable $ 7,000
Service Revenue R 54,000 Retained Earnings 4,200
Unearned Revenue 2,100 Salaries Payable 1,300
Salaries Expense E 20,800 Depreciation Expense E 2,600
Accumulated Depreciation 30,000 Rent Expense E 5,900
Supplies Expense E 1,800 Dividends D 16,000
Interest Revenue R 500 Supplies 1,700
Interest Expense E 2,400
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Exercise E3-38B (2 of 3)
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Apr.30
Service Revenue 54,000
Interest Revenue 500
Retained Earnings 54,500
Apr.30
Retained Earnings 33,500
Salaries Expense 20,800
Supplies Expense 1,800
Interest Expense 2,400
Depreciation Expense 2,600
Rent Expense 5,900
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Exercise E3-38B (3 of 3)
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GENERAL JOURNAL
DATE ACCOUNTS DEBIT CREDIT
Apr.30
Retained Earnings 16,000
Dividends 16,000
Jona and Son Electrical, Inc.Statement of Retained Earnings
Month Ended April 30, 2012
Retained Earnings, April 1, 2012 $ 4,200
Add: Net Income for the month
21,000
Subtotal 25,200
Less: Dividends 16,000
Retained Earnings, April 30, 2012 $ 9,200
C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
Post-closing Trial Balance
◘ Final step of the accounting cycle
◘ Includes only assets, liabilities and stockholders’ equity accounts
All temporary accounts have been closed
◘ Provides a starting point for next period’s transactions
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
ADJUSTING ENTRIES
◘ Report net income accurately
◘ Reflect correct account balances on balance sheet
◘ Never include cash
CLOSING ENTRIES
◘ Zero out revenue, expenses and dividends
◘ Transfer balances of temporary accounts to Retained Earnings
40
Summary of Adjusting Entries and the Closing Process
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C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S P R E N T I C E H A L L
CHAPTER SUMMARY
Adjusting entries are necessary to adhere to revenue recognition and matching principles and to generate accurate, up-to-date financial statements.
Closing entries are necessary to prepare temporary accounts for the next accounting period by zeroing them out into Retained Earnings and to ensure the Balance Sheet reflects the ending balance for all permanent accounts.
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?C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S
P R E N T I C E H A L L42
04/08/2023
Questions
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Printed in the United States of America.C O P Y R I G H T © 2 0 1 2 P E A R S O N E D U C AT I O N I N C . P U B L I S H I N G A S
P R E N T I C E H A L L04/08/2023
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