Accounting Chapter 3

Trial Balance

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Deferred (or prepaid) Expense.

Companies often acquire goods and services before they are used.

Required:

Prepare the closing entries for Porter at December 31, 2019.

Step 3:

Record the adjusting entry.

Accrued Expenses (Picture)

The accrual of the expense is necessary because the expense was incurred prior to the payment of cash.

Solution: (Step 1) Close Revenues to Income Summary.

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Solution: (Step 2) Close Expenses to Income Summary.

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Step 2: Adjusting Entry Columns (Two steps)

1. Adjustments often require the addition of accounts not included in the unadjusted trial balance. These additional accounts can be added, in no particular order, beneath the previous listing of accounts. 2. Letters are typically used on a worksheet to identify the adjusting entries and to allow the accountant to easily match the debit and credit sides of each adjusting entry. The letters (a) through (g) correspond to the adjusting entries (1) through (7) shown earlier in the chapter.

Determining Which Transactions Require Adjustment. Why?

Adjusting journal entries are required for continuous transactions that are partially complete at the end of an accounting period.

Worksheet

An informal schedule to assist them in organizing and preparing the information necessary to perform the end-of period steps in the accounting cycle.

Accruals: Accrued Revenues

Assets resulting from revenues that have been earned but for which no cash has yet been received.

Closing Accounts 2:

Clear the revenue, expenses, and dividends (reduce their balances to zero) so they are ready to accumulate the business activities of the next accounting period. Without closing entries, the temporary accounts would accumulate the business activities of all accounting periods, not just the current time period.

Step 4:

Close Dividends to Retained Earnings.

Step 3:

Close Income Summary to Retained Earnings.

Step 1:

Close Revenues to Income Summary.

Step 2:

Close expenses to Income Summary. At this point, the balance in the Income Summary account should be equal to net income.

Info.

For 2019, Porter Properties' general ledger shows the following balances: Rent Revenue $2,174,000; Salaries Expense $1,300,000; Supplies Expense $150,000; Interest Expense $15,000; Insurance Expense $20,000; Retained Earnings at the beginning of the year $1,135,000; and Dividends $5,000. All accounts have normal balances.

SOLUTION:

Notice that revenues, which have a normal credit balance, are closed by debiting the revenue account. Similarly, expenses, which normally have a debit balance, are closed by crediting the expense accounts. Also, after the first two journal entries, the balance in the Income Summary account is $689,000 ($2,174,000 − $1,485,000), which is the amount of income for the period. This amount is then transferred to Retained Earnings. Finally, the Dividends account is not closed to Income Summary (because dividends are not part of income) but closed directly to Retained Earnings. The ending Retained Earnings account will have a balance of $1,819,000 ($1,135,000 + $689,000 − $5,000).

Step 5: Retained Earnings Statement

The amounts for beginning retained earnings and dividends are transferred from the adjusted trial balance columns (columns F and G) to the retained earnings statement columns (columns J and K). The columns are totaled and the difference is the amount of ending retained earnings. This amount is entered in the debit column of the retained earnings statement (to balance the two columns) and transferred to the credit column of the balance sheet as shown by letter (i).

Closing Accounts 3:

The closing process is accomplished through a series of journal entries that are dated as of the last day of the accounting period. Often, another temporary account, called Income Summary, is used to aid the closing process. The use of the Income Summary account allows the company to easily identify the net income (or net loss) for the period. The closing process can be completed in a 4-step procedure:

Closing The Accounts: Why?

The closing process is designed to transfer the balances in the temporary accounts to retained earnings and to prepare the temporary accounts for the next accounting period.

Step 6: Balance Sheet

The final portion of the worksheet is completed by transferring all the balance sheet account balances from the adjusted trial balance columns (columns F and G) to the balance sheet columns (columns L and M).

Step 4: Income Statement

The income statement balances are transferred to the income statement columns of the worksheet and the columns are totaled. The difference between the two columns is the net income or loss of the period. HiTech reports its net income of $3,175 in the debit column of the income statement and the credit column of the retained earnings statement. This entry is made (1) to balance the two income statement columns and (2) to transfer net income to retained earnings.

Step 2: Adjusting Entry Columns

The next two columns contain the adjustments made to record the completed portionof business activities that remain underway at the end of the accounting period. Rather than take the time to make formal adjusting journal entries, the accountant typically enters the adjustments directly into the worksheet and then makes the formal journal entries after the worksheet has been completed. Two items should be noted:

Step 3: Adjusted Trail Balance

The next two columns represent an adjusted trial balance. The adjustments entered in columns D and E are added to or subtracted from the unadjusted balances in columns B and C. The two columns are totaled to ensure the equality of debits and credits. The adjusted trial balance is the basis for preparing the financial statements.

Step 1: Unadjusted Trail Balance.

The worksheet starts with the unadjusted trial balance. The first column contains the listing of accounts used during the period in the same order as the accounts appear in the trial balance—the balance sheet accounts first followed by the income statement accounts. Note that a retained earnings account was added. Because this is the first month of operations, this account has a zero balance. The next two columns contain the unadjusted balances of these accounts and are totaled to ensure the equality of debits and credits.

Contra-accounts

accounts that have a balance that is opposite of the balance in the related account.

Adjusted Trial Balance (Pictures)

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Journal Entries Steps

1. Identify pairs of income statement and balance sheet accounts that require adjustment. 2. Calculate the amount of adjustments based on the amount of revenue that was earned or the amount of expense that was incurred during the accounting period. 3. Record the Adjusting Journal Entry.

Relationships Among the Financial Statements.

1. Net Income, from the income statement, is a component in determining ending Retained Earnings on the statement of retained earnings. 2. Ending Retained Earnings from the statement of retained earnings is then reported on the balance sheet. 3. The Cash on the balance sheet is equal to the ending Cash reported on the statement of cash flows.

Required.

1. Prepare the adjusting journal entry necessary for Porter on December 31, 2019. 2. Prepare the entry necessary on January 10, 2020, to record the payment of salaries.

Required.

1. Prepare the adjusting journal entry necessary for Porter on December 31, 2019. 2. Prepare the entry necessary on January 31, 2020, to record the receipt of cash.

Required:

1. Prepare the entry on November 1, 2019, to record the receipt of cash. 2. Prepare the adjusting journal entry necessary for Porter on December 31, 2019.

Required:

1.Prepare the entry on November 10, 2019, to record the purchase of supplies. 2.Prepare the adjusting journal entry necessary for Porter on December 31, 2019.

Effects of Adjusting Entries on the Financial Statements.

Adjusting entries are internal events that do not involve another company. The purpose of all adjustments is to make sure that revenues and expenses get recorded in the proper time period. As the revenue and expense balances are adjusted, asset and liability balances will be adjusted also. Therefore, all adjusting entries will affect at least one income statement account and one balance sheet account. Remember, the cash account is never used in an adjusting entry.

STEP 5: Adjusting the Accounts.

Adjustments are often necessary because timing differences exist between when a revenue or expense is recognized and cash is received or paid. These timing differences give rise to two categories of adjusting entries—accruals and deferrals

Adjusting Entries Info

All adjusting entries will affect at least one income statement account and one balance sheet account. Cash is never affected by the adjustments.

Accrual-basis Accounting.

Alternative to cash-basis accounting that is required by generally accepted accounting principles. Transactions are recorded when they occur.

Accrued Revenues Example:

Another example of an accrued revenue is interest earned, but not yet received, on a loan. While interest is earned as time passes, the company only receives the cash related to interest periodically (e.g., monthly, semiannually, or annually). Therefore, an adjustment is necessary to record the amount of interest earned but not yet received.

Information:

Assume that Porter Properties Inc., a calendar-year company, had $4,581 of office supplies on hand at the beginning of November. On November 10, Porter purchased office supplies totaling $12,365. The amount of the purchase was added to the Supplies account. At the end of the year, the balance in Supplies was $16,946 ($4,581 + $12,365). A count of office supplies on hand indicated that $3,263 of supplies remained.

Information.

Assume that Porter Properties Inc., a calendar-year company, paid its clerical employees every 2 weeks. Employees work 5 days a week for a total of 10 work days every 2 weeks. Total wages for 10 days is $50,000. Also assume that December 31, 2019, is 4 days into a 10-day pay period.

Information.

Assume that Porter Properties Inc., a calendar-year company, rented office space to the Tiger Travel Agency on November 1, 2019, for $5,000 per month. Porter requires Tiger Travel to make a rental payment every 3 months. If Tiger Travel pays its entire 3-month rental in advance, Porter has agreed to reduce the monthly rental to $4,500. Tiger Travel agrees and pays Porter $13,500 for 3 months' rental in advance.

Information.

Assume that Porter Properties Inc., a calendar-year company, rented office space, to be occupied immediately, to the Tiger Travel Agency on November 1, 2019, for $5,000 per month. Porter requires Tiger Travel to make a rental payment at the end of every 3 months. No payment was made on November 1.

Regina Vacuum

Backdated sales invoices, improperly recorded revenue on consignment sales that had not been earned, and hid unpaid bills in a filing cabinet to reduce expenses. Chairman, CEO, and president Donald Sheelen pleaded guilty to fraud, fined $25,000, and sentenced to 1 year in a work release program in Florida.

Adjustment 2: Info.

Because interest expense has been incurred but the cash payment for interest will not occur until a later date, interest is an accrued expense that requires an increase to an expense account and an increase to a liability account. The adjusting entry to recognize accrued interest is:

Required.

Calculate net income for November 2019, December 2019, and January 2020 using the following methods: (1) cash-basis accounting and (2) accrual-basis accounting.

Solution 2: Step 2.

Calculate the amount of the adjustment. The amount of the adjustment would be calculated as: $16,946 (supplies available to be used) - $3,263 (supplies on hand) = $13,683.

Solution: Step 2

Calculate the amount of the adjustment. The amount of the adjustment would be calculated as: $5,000 per month x 2 months (office space occupied) = $10,000.

Solution: Step 2.

Calculate the amount of the adjustment. The amount of the adjustment would be calculated as: $50,000 biweekly salaries x (4 days / 10 days) worked in 2 weeks = $20,000.

Required (1) How Should Computer Town Account for cash and credit sales of equipment.

Cash sales should be recorded as they occur and the equipment is delivered, often at a cash register that tracks total sales for the day. When orders are received from customers who want to purchase equipment on credit, the sale should be recorded when the equipment is delivered to the customer. In both situations, the sale is complete at a single point in time (the delivery of the equipment) and no adjusting entry is needed.

Information.

Computer Town sells computer equipment and provides computer repair service. Sales are typically made in cash or on account. Repairs are provided under service contracts, which customers purchase up front for a specified period of time (2, 3, or 5 years). Customers pay nothing when the computer is brought in for repair.

Applying the Revenue Recognition and Expense Recognition Principle.

Even though Conservation did not receive the payment from the state of Georgia until January 2020, Conservation had performed services in November 2019 and appropriately recognized the revenue as the service was performed. The $60,000 of expenses were matched with revenues and also recognized in November 2019. If cash-basis accounting would have been used, $60,000 of expense would have been recognized in December 2019 (when the cash was paid) and $100,000 of revenue would have been recognized in January 2020 (when the cash was received). By following the revenue recognition and expense recognition principles, net income was properly recognized in the period that the business activity occurred. Inshort, the difference between cash-basis and accrual-basis accounting is a matter of timing.

Adjusting Deferred (Prepaid) Expenses: Why?

Expenses are recognized when incurred, regardless of when cash is paid. The adjusting entry for deferred expenses will result in an increase to an expense account and a decrease to an asset account.

Recording Accrued Expenses. Why?

Expenses are recorded as they are incurred, regardless of when cash is paid. The adjusting entry for an accrued expense will result in an increase to an expense account and an increase to a liability account.

Expense Recognition Principle

Expenses be recorded and reported in the same period as the revenue that it helped to generate. Expenses for an accounting period should exclude those costs used to earn revenue in a earlier period and those costs that will be used to earn revenue in a later period, thus the key to expense recognition is matching the expense with revenue.

Adjustment 3: Accrual Of Salaries

HiTech paid its weekly salaries on March 26 and properly recorded an expense. Salaries are $360 per day. HiTech will not pay salaries again until April 2. However, employees worked on March 29, March 30, and March 31. Because employees have worked but will not be paid until a later date, an adjustment is necessary to record the salaries incurred in March but not yet paid. Accrued salaries are $1,080 (3 days × $360 per day). The adjusting entry to recognize accrued salaries is:

Adjustment 1: Accrued Revenue

HiTech's accountant noted that HiTech had performed $1,500 of advertising services for which it had not yet billed the customer. Because the services had not yet been billed, no entry was made in the accounting system. However, HiTech must record the revenue that was earned during the accounting period, even though the cash flow will not occur until a later date. The adjusting entry to record this accrued revenue is:

Adjustment 6: Deferred (Prepaid) Expense - Insurance.

HiTech's trial balance shows a balance of $1,200 in the Prepaid Insurance account related to a 6-month insurance policy purchased at the beginning of March. Because time has passed since the purchase of the insurance policy, the asset, Prepaid Insurance, has partially expired and an expense needs to be recognized. The expired portion of the insurance is $200 ($1,200 × 1/6). The adjustment necessary to record insurance expense is:

Adjustment 5: Deferred (Prepaid) Expense.

HiTech's trial balance shows a balance of $6,500 in the Supplies account. However, an inventory count at the close of business on March 31 determined that supplies on hand were $1,200. Because it was not efficient to record supplies expense during the period, HiTech must make an adjustment at the end of the period to record the supplies used during the period. It was determined that HiTech used $5,300 ($6,500 available to be used minus $1,200 not used) of supplies. The adjustment necessary to record the supplies used during March is:

Adjustment 7: Deprecation.

HiTech's trial balance shows that $4,500 of equipment was purchased. Because this equipment is used to generate revenue, a portion of the cost of the equipment must be allocated to expense. HiTech computed depreciation expense as $125 per month. The adjustment necessary to record depreciation expense is:

Adjustment 4: Deferred (Unearned) Revenue.

HiTech's trial balance shows that a customer paid $9,000 in advance for services to be performed at a later date. This amount was originally recorded as a liability, Unearned Service Revenue. As HiTech performs services, the liability will be reduced and revenue will be recognized. Based on HiTech's analysis of work performed during March, it is determined that $3,300 of revenue has been earned. The adjusting entry to record this previously unearned revenue is:

Solution: Step 1.

Identify the accounts that require adjustment. Consistent with the revenue recognition principle, Rent Revenue needs to be increased because Porter has satisfied its performance obligation by providing the office space. Because no payment was received, Porter would need to increase Rent Receivable to reflect their right to receive payment from Tiger Travel.

Solution: Step 1.

Identify the accounts that require adjustment. Salaries Expense needs to be increased because Porter has incurred an expense related to its employees working for 4 days in December. This expense needs to be matched against December revenues (an application of the expense recognition principle). Because no payment to the employees was made, Porter would need to increase Salaries Payable to reflect its obligation to pay its employees.

Solution 2: Step 1.

Identify the accounts that require adjustment. Supplies Expense needs to be increased because Porter has used office supplies during November and December of 2019. The use of the supplies would also decrease the asset, Supplies.

Step 3: Recording the Adjusting Entry.

If the adjusting entry on December 31, 2019, was not made, assets, stockholders' equity, and net income would be overstated and expenses would be understated. The adjusting journal entry recognizes the expense incurred during November and December 2019 and updates the corresponding balance in the asset, Supplies. As a result of the adjusting entry, the expense is recorded in the period that it is incurred.

Accrued Revenues (Extra Info)

If the adjusting entry on December 31, 2019, was not made, assets, stockholders' equity, revenues, and income would be understated. The adjusting journal entry recognizes 2 months of revenue (November and December 2019) in the accounting period in which the performance obligation was satisfied and updates the corresponding balance in Rent Receivable. Later, when cash is received, the remaining portion of the revenue is recognized and the receivable is reduced to reflect that it was paid. Consistent with the revenue recognition principle, revenue is recorded in the period in which the service is provided.

Adjusting Entry (Extra Info)

If the adjusting entry on December 31, 2019, was not made, liabilities (Unearned Rent Revenue) would be overstated while stockholders' equity, revenue, and net income would be understated. The adjusting journal entry recognizes 2 months of revenue (November and December 2019) in the accounting period in which it was earned and updates the corresponding balance in the liability, Unearned Rent Revenue. As a result of the adjusting entry, revenue is recorded in the period that a company satisfies its performance obligation.

Recording Accrued Expenses (Extra Info)

If the adjusting journal entry on December 31, 2019, were not made, liabilities and expenses would be understated while income and stockholders' equity would be overstated. The adjusting journal entry recognizes the expense that was incurred during the accounting period and updates the balance in the corresponding liability. Later, when the cash is paid to the employees, the portion of the expense that was incurred in January 2020 is recognized and the previously created liability is reduced. Consistent with the expense recognition principle, expenses are recorded in the period that they were incurred.

Miniscribe

Improperly recognized revenue through a variety of means, including packaging and shipping bricks as finished products. Chief executive Q. T. Wiles fined $250 million.

WorldCom

Improperly reduced operating expenses, which inflated income, by reversing (releasing) accrued liabilities and improperly classifying certain expenses as assets. Chief executive Bernard Ebbers was sentenced to 25 years in jail.

Contra - accounts (Example)

In this case, Accumulated Depreciation is a contra account to the building. Therefore, while the asset has a normal debit balance, the contra account has a normal credit balance. Contra accounts are deducted from the balance of the related asset account in the financial statements, and the resulting difference is known as the book value of the asset.

Revenue Recognition Principle

It determines when revenue is recorded and reported, under this principle, revenue is recognized , or recorded, in the period in which a company satisfies its performance obligation, or promise within a contract.

Cash Basis Accounting (Extra Info)

It does not link recognition of revenues and expenses to the actual business activity but rather the exchange of cash. By recording only the cash effect of transactions, cash-basis financial statements may not reflect all of the assets and liabilities of a company for a particular date.

Accrued Revenues (Picture)

It is necessary because the performance obligation was satisfied prior to the receipt of cash.

Adjusting Entries

Journal entries made at the end of an accounting period to record the completed portion of partially completed transactions. They are necessary to apply the revenue recognition and expense recognition principles and ensure that company's financial statements include the proper amount for revenues, expenses, assets, liabilities, and stockholders equity.

Accruals: Accrued Expenses

Liabilities arising from expenses that have been incurred but not yet paid in cash.

Accrued Expenses

Liabilities arising from expenses that have been incurred but not yet paid in cash.

Defferals: Unearned Revenues

Liabilities arising from the receipt of cash for which revenue has not yet been earned.

Deferred (Unearned) Revenues (Picture)

Note that the deferral of revenue is necessary because the performance obligation was not satisfied at the time of cash receipt. The adjusting entry recognizes the amount of revenue that has been earned from the time of cash receipt until the end of the accounting period.

Deferred (or prepaid) Expense

Note that the deferral of the expense is necessary because the initial cash payment did not result in an expense. Instead, an asset that provides future economic benefit was created. The adjusting entry recognizes the amount of expense that has been incurred from the time of the cash payment until the end of the accounting period.

Financial Statement Presentation of Accumulated Depreciation.

Notice that accumulated depreciation shows the total amount of depreciation taken in all years of the asset's life ($15,000 per year for 2017, 2018, and 2019). Therefore, the balance in the accumulated depreciation account will increase over the asset's life. The use of the contra account provides more information to users of the financial statements because it preserves both the original cost of the asset and the total cost that has expired to date.

Solution 2: Accrual-Basis Accounting

Notice that, under accrual accounting, revenue is recognized when a company satisfies its performance obligation and expenses are matched with revenues

Revenue Recognition Principle (Extra Info)

Occurs when goods are delivered to a customer or when services have been performed for a customer. At this point the risks and rewards of ownership usually have been transferred from the seller to the buyer and the revenue is considered to be earned. NOTICE THAT REVENUE IS RECORDED WHEN A PERFORMANCE OBLIGATION IS SATISFIED, REGARDLESS OF WHEN CASH IS RECEIVED.

Deferred (Or unearned revenue) (Extra info)

Other examples of deferred revenues include rent received in advance, magazine or newspaper subscriptions received in advance, and tickets (e.g., for airlines, sporting events, concerts) sold in advance. In all of these situations, the receipt of cash creates a liability for the company to deliver goods or perform services in the future. The unearned revenue account delays, or defers, the recognition of revenue by recording the revenue as a liability until it is earned.

Bally Total Fitness

Recognized revenue on gym membership contracts before it was earned, and improperly delayed the recognition of expenses. In total, more than two dozen improprieties were discovered that caused stockholders' equity to be overstated by $1.8 billion. Bally's auditor paid $8.5 million to settle charges lof improper auditing.

Solution: Step 3

Record the adjusting journal entry.

Step 1: Identify the accounts that require adjustment.

Rent Revenue needs to be increased because Porter has satisfied its performance obligation by providing the office space. Because a liability was previously recorded, Porter would need to decrease the liability, Unearned Rent Revenue, to reflect the decrease in their obligation to perform the service.

Required (2) How Should Computer Town account for repair services provided under service contracts.

Repair service contracts are continuous activities that require an adjustment at the end of the accounting period. Revenue is recognized over time as the service is provided and should be recorded in proportion to the period of time that has passed since the contract became effective. The unexpired portion of the service contract should be recorded as a liability (unearned revenue) until the service is provided. Any expenses associated with the repair services should be recognized in the same period that service revenue is recognized (the expense recognition principle).

Accrual-Basis Accounting (Extra Info)

Revenue is recognized as the company satisfies its performance obligations by delivering goods or providing services ; expenses are recognized when they are incurred. In contrast to cash-basis accounting, this is a more complex system that records both cash and noncash transactions.

Recording Accrued Revenues. Why?

Revenue is recognized when a company satisfies its performance obligation, regardless of when cash is received. The adjusting entry for an accrued revenue will result in an increase to a revenue account and an increase to an asset account.

Adjusting Deferred (Unearned) Revenues: Why?

Revenues are recognized when a company satisfies its performance obligation, regardless of when cash is received. The adjusting entry for deferred revenue will result in an increase to a revenue account and a decrease to a liability account.

Adjusted Trail Balance

Similar to the trial balance, the adjusted trial balance lists all of the active accounts and proves the equality of debits and credits. The adjusted trail balance is the primary source of info needed to prepare the financial statements.

Recording Accrued Revenues : 2

The amount of cash received is calculated as: $5,000 per month x 3 months (office space rented) = $15,000. $5,000 of Rent Revenue represents the 1 month of rent provided in 2020.

Step 2: Calculate the amount of the adjustment.

The amount of the adjustment would be calculated as: $4,500 per month x 2 months (office space rented) = $9,000.

2.

The amount of the salaries expense for the current year would be calculated as: $50,000 biweekly salaries x (6 days / 10 days) worked in 2 weeks = $30,000.

Depreciation

The expense recognition principle requires companies to systematically assign, or allocate, the asset's cost as an expense to each period in which assets are used.

Group (Action)

The groups above were fraudulent and led to severe fines or jail time for many of the company executives, other innocent parties were also affected by these unethical actions. Stockholders, many of whom who had bought the stock at an inflated price, saw a significant drop in the stock's value after these actions were made public. In addition, innocent employees lost their jobs as the companies struggled to deal with the fraud that occurred. When faced with an ethical dilemma to manipulate the recognition of revenue or expenses, a good rule of thumb is to make the decision that best portrays the economic reality of your company.

Financial Statements are prepared in a particular order. (1)

The income statement is prepared from the revenue and expense accounts ; Net income (obtained from the income statement) and dividends are used to prepare the retained earnings statement ; The balance sheet is prepared using the ending balance of retained earnings from the retained earnings statement.

Expense Recognition Principle (Extra Info)

The key idea is that an expense is recorded when it is incurred regardless of when cash is paid.

Adjustment 2: Accrual of Interest.

The note payable for $3,000 that HiTech signed on March 2 required it to pay interest at an annual rate of 8% The formula for computing interest is: Interest = Principal x Interest Rate x Time.

Adjustment 2.

The principal amount of the loan is usually the face value of the note. The interest rate is stated as an annual rate, and the time period is the fraction of a year that the note is outstanding. For HiTech, interest expense for March 2017 is computed as: Interest = $3,000 x 8% x 1/12 = $20.

Information.

The state of Georgia hired Conservation Inc., a consulting company specializing in the conservation of natural resources, to explore options for providing water resources to the Atlanta metropolitan area. In November 2019, Conservation incurred $60,000 of expenditures, on account, while investigating the water shortage facing the state. Conservation also delivered its recommendations and billed the state $100,000 for its work. In December 2019, Conservation paid the $60,000 of expenses. In January 2020, Conservation received the state's check for $100,000.

Required (3) How should Computer Town account for use of office supplies.

The use of supplies can be viewed as a sequence of individual activities. However, the preparation of documents required to keep track of each activity individually would be too costly. Instead, the use of supplies can be treated as a continuous transaction and recognized through an adjusting entry. Any supplies used will be reported as an expense, and the unused portion of supplies will be reported as an asset.

Deferred (or unearned revenue)

Transactions for which a company has received cash but not yet satisfied its performance obligations.

Closing accounts :

Transfer the effects of revenues, expenses, and dividends (the temporary accounts) to the permanent stockholders' equity account, Retained Earnings.

General Ledger of Hitech Communications.

Two Major Items: Adjusting entries affect one balance sheet account and one income statement account. Without adjusting entries, the balances reported on both the balance sheet and the income statement would have been incorrect. If the adjustments were not recorded, HiTech would have understated revenue by $4,800 and understated expenses by $6,725 ; Adjusting entries do not affect cash.

Applying the Revenue Recognition and Expense Recognition Principles. Why?

Under accrual accounting, revenue is recognized when a company satisfies its performance obligation to a customer. Expenses are recognized in the same period as the revenue they helped generate.

Cash Basis Accounting

Under cash-basis accounting, revenue is recorded when cash is received, regardless of when the goods are delivered or services are provided. An expense is recorded when cash is paid, regardless of when it has actually incurred.

Sunbeam

Used a variety of techniques to improperly recognize revenue (including bill and hold transactions and channel stuffing). CEO Al Dunlap fined $500,000 and barred from ever serving as an officer or director lof a public company.

Time Period Assumption

allows companies to artificially divide their operations into time periods so they can satisfy users' demands for information.

Deferred: Prepaid Expenses

assets arising from the payment of cash which have not been used or consumed by the end of the period.

Permanent Accounts.

assets, liabilities, stockholders equity. Their balances are carried forward from the current accounting period to future accounting periods.

Accrued Revenues

revenues for services performed but not yet received in cash or recorded.

Temporary Accounts

revenues, expenses, dividends. Collect activities of one period.

Key Elements of Accrual Accounting

time-period assumption, revenue recognition principle, expense recognition (matching) principle.