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Chapter No. 04 PPT
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3-2
1. Understand basic accounting terminology.
2. Explain double-entry rules.
3. Identify steps in the accounting cycle.
4. Record transactions in journals, post to ledger accounts,
and prepare a trial balance.
5. Explain the reasons for preparing adjusting entries.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
3-3
Identifying and recording
Journalizing
Posting
Trial balance
Adjusting entries
Adjusted trial balance
Preparing financial statements
Closing
Post-closing trial balance
Reversing entries
Accounting Information System
The Accounting Cycle
Financial Statements for Merchandisers
Basic terminology
Debits and credits
Accounting equation
Financial statements and ownership structure
Income statement
Statement of retained earnings
Balance sheet
Closing entries
The Accounting Information SystemThe Accounting Information SystemThe Accounting Information SystemThe Accounting Information System
3-4
Collects and processes transaction data.
Disseminates the information to interested parties.
Accounting Information SystemAccounting Information SystemAccounting Information SystemAccounting Information System
Accounting Information System (AIS)
3-5 LO 1 Understand basic accounting terminology.
Journal
Posting
Trial Balance
Adjusting Entries
Financial Statements
Closing Entries
Basic Terminology
Accounting Information SystemAccounting Information SystemAccounting Information SystemAccounting Information System
Event
Transaction
Account
Real Account
Nominal Account
Ledger
3-6
Accounting Information SystemAccounting Information SystemAccounting Information SystemAccounting Information System
LO 2 Explain double-entry rules.
An Account shows the effect of transactions on a
given asset, liability, equity, revenue, or expense
account.
Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account and
crediting another.
DEBITS must equal CREDITS.
Debits and Credits
3-7
Account Name
Debit / Dr. Credit / Cr.
Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits
An arrangement that shows the effect of transactions on an account.
Debit = “Left”
Credit = “Right”
AccountAccount
LO 2 Explain double-entry rules.
An Account can An Account can be illustrated in a be illustrated in a T-Account form.T-Account form.
3-8
Account Name
Debit / Dr. Credit / Cr.
Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits
LO 2 Explain double-entry rules.
$10,000 Transaction #2$3,000
$15,000$15,000
8,000
Balance
Transaction #1
Transaction #3
If Debit entries are greater than Credit entries, the account will have a debit balance.
3-9
Account Name
Debit / Dr. Credit / Cr.
Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits
If Credit entries are greater than Debit entries, the account will have a credit balance.
LO 2 Explain double-entry rules.
$10,000 Transaction #2$3,000
$1,000$1,000
8,000 Transaction #3
Balance
Transaction #1
3-10
Chapter 3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter 3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
EquityEquity
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
Normal Balance Credit
Normal Balance Credit
Normal Balance
Debit
Normal Balance
Debit
Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary
LO 2 Explain double-entry rules.
3-11
Balance Sheet Balance Sheet Income StatementIncome Statement
= + =-Asset Liability Equity Revenue Expense
Debit
Credit
Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary
LO 2 Explain double-entry rules.
3-12
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
LO 2 Explain double-entry rules.
Relationship among the assets, liabilities and stockholders’
equity of a business:
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
Illustration 3-3
3-13
Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilitiesStockholders’
Equity
Stockholders’ Equity
= +
1. Owners invest $40,000 in exchange for common stock.
+ 40,000 + 40,000
LO 2 Explain double-entry rules.
3-14
AssetsAssets LiabilitiesLiabilities= +
2. Disburse $600 cash for secretarial wages.
- 600 - 600 (expense)
LO 2 Explain double-entry rules.
Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration
Stockholders’ Equity
Stockholders’ Equity
3-15
Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
3. Purchase office equipment priced at $5,200, giving a 10 percent promissory note in exchange.
+ 5,200 + 5,200
LO 2 Explain double-entry rules.
Stockholders’ Equity
Stockholders’ Equity
3-16
Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
4. Received $4,000 cash for services rendered.
+ 4,000 + 4,000 (revenue)
LO 2 Explain double-entry rules.
Stockholders’ Equity
Stockholders’ Equity
3-17
Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
5. Pay off a short-term liability of $7,000.
- 7,000 - 7,000
LO 2 Explain double-entry rules.
Stockholders’ Equity
Stockholders’ Equity
3-18
AssetsAssets LiabilitiesLiabilities= +
6. Declared a cash dividend of $5,000.
+ 5,000 - 5,000
LO 2 Explain double-entry rules.
Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration
Stockholders’ Equity
Stockholders’ Equity
3-19
Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
7. Convert a long-term liability of $80,000 into common stock.
- 80,000 + 80,000
LO 2 Explain double-entry rules.
Stockholders’ Equity
Stockholders’ Equity
3-20
Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration
AssetsAssets LiabilitiesLiabilities= +
8. Pay cash of $16,000 for a delivery van.
LO 2 Explain double-entry rules.
- 16,000
+ 16,000
Note that the accounting equation equality is maintained after recording each transaction.
Note that the accounting equation equality is maintained after recording each transaction.
Stockholders’ Equity
Stockholders’ Equity
3-21
Ownership structure dictates the types of accounts that are part of the equity section.
Proprietorship or Partnership
Proprietorship or Partnership CorporationCorporation
Capital Account Drawing Account
Common Stock Additional Paid-in
Capital Dividends Declared Retained Earnings
Financial Statements and Ownership StructureFinancial Statements and Ownership StructureFinancial Statements and Ownership StructureFinancial Statements and Ownership Structure
LO 2 Explain double-entry rules.
3-22
Financial Statements and Ownership StructureFinancial Statements and Ownership StructureFinancial Statements and Ownership StructureFinancial Statements and Ownership Structure
LO 2 Explain double-entry rules.
Stockholders’ EquityStockholders’ Equity
Balance Sheet
Statement of Retained Earnings
Net income or Net loss (Revenues less expenses)(Revenues less expenses)
Income StatementIncome Statement
Net income or Net loss (Revenues less expenses)(Revenues less expenses)
Income StatementIncome StatementDividendsDividends
Retained Earnings Retained Earnings (Net income retained in business)(Net income retained in business)
Retained Earnings Retained Earnings (Net income retained in business)(Net income retained in business)
Common Stock Common Stock (Investment by stockholders)(Investment by stockholders)
Common Stock Common Stock (Investment by stockholders)(Investment by stockholders)
Illustration 3-4
3-23
The Accounting CycleThe Accounting CycleThe Accounting CycleThe Accounting Cycle
LO 3 Identify steps in the accounting cycle.
TransactionsTransactions
1. Journalization1. Journalization
6. Financial Statements6. Financial Statements
7. Closing entries7. Closing entries
8. Post-closing trail balance8. Post-closing trail balance
9. Reversing entries9. Reversing entries
3. Trial balance3. Trial balance
2. Posting2. Posting
5. Adjusted trial balance5. Adjusted trial balance
4. Adjustments4. AdjustmentsWork SheetWork Sheet
Illustration 3-6
3-24
Identify and Recording TransactionsIdentify and Recording TransactionsIdentify and Recording TransactionsIdentify and Recording Transactions
What to Record?
FASB states, “transactions and other events and
circumstances that affect a business enterprise.”
LO 3 Identify steps in the accounting cycle.
Types of Events:
External – between a business and its environment.
Internal – event occurring entirely within a business.
3-25
General Journal – a chronological record of transactions. Journal Entries are recorded in the journal.
1. Journalizing1. Journalizing1. Journalizing1. Journalizing
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
September 1: Stockholders invested $15,000 cash in the corporation in exchange for shares of stock.
Illustration 3-7
3-26
Posting – the process of transferring amounts from the journal to the ledger accounts.
2. Posting2. Posting2. Posting2. Posting
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
Illustration 3-7
Illustration 3-8
3-27
Posting – Transferring amounts from journal to ledger.
2. Posting2. Posting2. Posting2. Posting
LO 4
Illustration 3-8
3-28
Expanded Example
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
2. Posting2. Posting2. Posting2. Posting
The purpose of transaction analysis is
(1) to identify the type of account involved, and
(2) to determine whether a debit or a credit is required.
Keep in mind that every journal entry affects one or more of the following items: assets, liabilities, stockholders’ equity, revenues, or expense.
3-29
1. October 1: Stockholders invest $100,000 cash in an advertising venture to be known as Pioneer Advertising Agency Inc.
Common stock 100,000
Cash 100,000Oct. 1
Debit Credit
Cash
100,000100,000 100,000100,000
Debit Credit
Common Stock
2. Posting2. Posting2. Posting2. Posting
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-30
2. October 1: Pioneer Advertising purchases office equipment costing $50,000 by signing a 3-month, 12%, $50,000 note payable.
Notes payable 50,000
Equipment 50,000Oct. 1
Debit Credit
Equipment
50,00050,000 50,00050,000
Debit Credit
Notes Payable
2. Posting2. Posting2. Posting2. Posting
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-31
3. October 2: Pioneer Advertising receives a $12,000 cash advance from KC, a client, for advertising services that are expected to be completed by December 31.
Unearned service revenue 12,000
Cash 12,000Oct. 2
Debit Credit
Cash
100,000100,000 12,00012,000
Debit Credit
Unearned Service Revenue
2. Posting2. Posting2. Posting2. Posting
12,00012,000
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-32
4. October 3: Pioneer Advertising pays $9,000 office rent, in cash, for October.
Cash 9,000
Rent expense 9,000Oct. 3
Debit Credit
Cash
100,000100,000 9,0009,000
Debit Credit
Rent Expense
2. Posting2. Posting2. Posting2. Posting
12,00012,0009,0009,000
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-33
5. October 4: Pioneer Advertising pays $6,000 for a one-year insurance policy that will expire next year on September 30.
Cash 6,000
Prepaid insurance 6,000Oct. 4
Debit Credit
Cash
100,000100,000 6,0006,000
Debit Credit
Prepaid Insurance
2. Posting2. Posting2. Posting2. Posting
12,00012,0009,0009,000
6,0006,000
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-34
6. October 5: Pioneer Advertising purchases, for $25,000 on account, an estimated 3-month supply of advertising materials from Aero Supply.
Accounts payable 25,000
Supplies 25,000Oct. 5
Debit Credit
Supplies
25,00025,000 25,00025,000
Debit Credit
Accounts Payable
2. Posting2. Posting2. Posting2. Posting
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-35
7. October 9: Pioneer Advertising signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. Pioneer will start work on the content of the flyers in November. Payment of $7,000 is due following delivery of the Sunday papers containing the flyers.
2. Posting2. Posting2. Posting2. Posting
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-36
8. October 20: Pioneer Advertising’s board of directors declares and pays a $5,000 cash dividend to stockholders.
Cash 5,000
Dividends 5,000Oct. 20
Debit Credit
Cash
100,000100,000 5,0005,000
Debit Credit
Dividends
2. Posting2. Posting2. Posting2. Posting
12,00012,0009,0009,000
6,0006,000
5,0005,000
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-37
9. October 26: Employees are paid every four weeks. The total payroll is $2,000 per day. The pay period ended on Friday, October 26, with salaries of $40,000 being paid.
Cash 40,000
Salaries expense 40,000Oct. 26
Debit Credit
Cash
100,000100,000 40,00040,000
Debit Credit
Salaries Expense
2. Posting2. Posting2. Posting2. Posting
12,00012,0009,0009,000
6,0006,000
5,0005,000
40,00040,000
LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3-38
10. October 31: Pioneer Advertising receives $28,000 in cash and bills Copa Company $72,000 for advertising services of $100,000 provided in October.
Accounts receivable 72,000Cash 28,000Oct. 31
Debit Credit
Cash
100,000100,000 72,00072,000
Debit Credit
Accounts Receivable
2. Posting2. Posting2. Posting2. Posting
12,00012,0009,0009,000
6,0006,000
5,0005,000
40,00040,000
Service revenue 100,000
100,000100,000
Debit Credit
Service Revenue
28,00028,000
80,00080,000
3-39
Trial BalanceTrial Balance – A list of each account and its balance; used to prove equality of debit and credit balances.
3. Trial Balance3. Trial Balance3. Trial Balance3. Trial Balance
LO 4
Illustration 3-19
3-40
4. Adjusting Entries4. Adjusting Entries4. Adjusting Entries4. Adjusting Entries
LO 5 Explain the reasons for preparing adjusting entries.
Makes it possible to:
Report on the statement of financial position the appropriate assets, liabilities, and equity at the statement date.
Report on the income statement the proper revenues and expenses for the period.
► Revenues are recorded in the period in which they are earned.
► Expenses are recognized in the period in which they are incurred.
3-41
Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.
Prepayments
3. Accrued Revenues. Revenues earned but not yet received in cash or recorded.
4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.
2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned.
Accruals
LO 5 Explain the reasons for preparing adjusting entries.
Illustration 3-20
3-42
Deferrals are either prepaid
expenses or
unearned revenues.
Adjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for Deferrals
Illustration 3-21
LO 5 Explain the reasons for preparing adjusting entries.
3-43
Payment of cash that is recorded as an asset because service or benefit will be received in the future.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
insurance
supplies
advertising
Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE
LO 5 Explain the reasons for preparing adjusting entries.
rent
buildings and equipment
Prepayments often occur in regard to:
3-44
Supplies.Supplies. Pioneer purchased advertising supplies costing$25,000 on October 5. Prepare the journal entry to record the purchase of the supplies.
Cash 25,000
Supplies 25,000Oct. 5
Debit Credit
Supplies
25,00025,000 25,00025,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.
3-45
Supplies. An inventory count at the close of business on October 31 reveals that $10,000 of the advertising supplies are still on hand.
Supplies 15,000
Supplies expense 15,000Oct. 31
Debit Credit
Supplies
25,00025,000 15,00015,000
Debit Credit
Supplies Expense
15,00015,000
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
10,00010,000
LO 5 Explain the reasons for preparing adjusting entries.
3-46
Statement
Presentation:
Supplies identifies that
portion of the asset’s
cost that will provide
future economic benefit.
Adjusting Entries Adjusting Entries for “Prepaid for “Prepaid Expenses”Expenses”
Adjusting Entries Adjusting Entries for “Prepaid for “Prepaid Expenses”Expenses”
Illustration 3-35
Illustration 3-35
3-47
Statement
Presentation:
Supplies expense
identifies that portion of
the asset’s cost that
expired in October.
Illustration 3-35
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.
3-48
Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire insurance policy, beginning October 1. Show the entry to record the purchase of the insurance.
Cash 6,000
Prepaid insurance 6,000Oct. 4
Debit Credit
Prepaid Insurance
6,0006,000 6,0006,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.
3-49
Insurance. An analysis of the policy reveals that $500 ($6,000 / 12) of insurance expires each month. Thus, Pioneer makes the following adjusting entry.
Prepaid insurance 500
Insurance expense 500Oct. 31
Debit Credit
Prepaid Insurance
6,0006,000 500500
Debit Credit
Insurance Expense
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
500500
5,5005,500
LO 5 Explain the reasons for preparing adjusting entries.
3-50
Statement
Presentation:
Prepaid insurance
identifies that portion of
the asset’s cost that will
provide future economic
benefit.
Adjusting Entries Adjusting Entries for “Prepaid for “Prepaid Expenses”Expenses”
Adjusting Entries Adjusting Entries for “Prepaid for “Prepaid Expenses”Expenses”
Illustration 3-35
Illustration 3-35
3-51
Statement
Presentation:
Insurance expense
identifies that portion of
the asset’s cost that
expired in October.
Illustration 3-35
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.
3-52
Depreciation. Pioneer Advertising estimates depreciation on its office equipment to be $400 per month. Accordingly, Pioneer recognizes depreciation for October by the following adjusting entry.
Accumulated depreciation 400
Depreciation expense 400Oct. 31
Debit Credit
Depreciation Expense
400400 400400
Debit Credit
Accumulated Depreciation
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.
3-53
Statement
Presentation:
Accumulated Depreciation—is a contra asset account.
Adjusting Entries Adjusting Entries for “Prepaid for “Prepaid Expenses”Expenses”
Adjusting Entries Adjusting Entries for “Prepaid for “Prepaid Expenses”Expenses”
Illustration 3-35
Illustration 3-35
3-54
Statement
Presentation:
Depreciation expense
identifies that portion of
the asset’s cost that
expired in October.
Illustration 3-35
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
LO 5 Explain the reasons for preparing adjusting entries.
3-55
Receipt of cash that is recorded as a liability because the revenue has not been earned.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
rent
airline tickets
school tuition
Cash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFORE
magazine subscriptions
customer deposits
Unearned revenues often occur in regard to:
LO 5 Explain the reasons for preparing adjusting entries.
3-56
Unearned Revenue. Pioneer Advertising received $12,000 on October 2 from KC for advertising services expected to be completed by December 31. Show the journal entry to record the receipt on Oct. 2nd.
Unearned advertising revenue 12,000
Cash 12,000Oct. 2
Debit Credit
Cash
12,00012,000 12,00012,000
Debit Credit
Unearned Rent Revenue
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
LO 5 Explain the reasons for preparing adjusting entries.
3-57
Debit Credit
Service Revenue
100,000100,000 12,00012,000
Debit Credit
Unearned Service Revenue
4,0004,000
8,0008,000
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
Unearned Revenues. Analysis reveals that Pioneer earned $4,000 of the advertising services in October. Thus, Pioneer makes the following adjusting entry.
Service revenue 4,000
Unearned service revenue 4,000Oct. 31
4,0004,000
LO 5 Explain the reasons for preparing adjusting entries.
3-58
Statement
Presentation:
Unearned service revenue identifies that portion of the liability that has not been earned.
Adjusting Entries Adjusting Entries for “Unearned for “Unearned
Revenues”Revenues”
Adjusting Entries Adjusting Entries for “Unearned for “Unearned
Revenues”Revenues”Illustration 3-35
Illustration 3-35
3-59
Statement
Presentation:
Service Revenue
includes the portion of
unearned service
revenue earned in
October.
Illustration 3-35
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
LO 5 Explain the reasons for preparing adjusting entries.