PowerPoint PresentationTiming IssuesSlide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9The Basics of Adjusting EntriesTypes of Adjusting EntriesSlide 12Adjusting Entries for DeferralsAdjusting Entries for “Prepaid Expenses”Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Adjusting Entries for AccrualsSlide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Adjusting Entries for “Accrued Expenses”Summary of Basic RelationshipsPracticeSlide 41The Adjusted Trial BalanceSlide 43Preparing Financial StatementsSlide 45Slide 46Closing the BooksSlide 48Slide 49Preparing a Post-Closing Trial BalanceSlide 51Slide 52Slide 53Slide 54Summary of the Accounting CycleSlide 56Learning ObjectivesCopyright4-1Preview of Chapter 4Financial AccountingSeventh EditionKimmel Weygandt Kieso4-2Generally a month, a quarter, or a year.Fiscal year vs. calendar yearAccountants divide the economic life of a business into artificial time periods (Periodicity Assumption).LO 1 Explain the revenue recognition principle and the expense recognition principle.Jan. Feb. Mar. Apr. Dec.. . . . .Timing IssuesTiming IssuesTiming IssuesTiming Issues4-3Timing IssuesTiming IssuesTiming IssuesTiming IssuesThe Revenue Recognition PrincipleCompanies recognize revenue in the accounting period ________________________________________________LO 1 Explain the revenue recognition principle and the expense recognition principle.4-4Timing Issues ExampleTiming Issues ExampleTiming Issues ExampleTiming Issues ExampleA customer booked a ticket with USAirways on January 15 and paid cash to USAirways on February 14. The flight took place on April 15. According to the revenue recognition principle, in which month should USAirways recognize this revenue? LO 1 Explain the revenue recognition principle and the expense recognition principle.4-5Timing IssuesTiming IssuesTiming IssuesTiming IssuesIllustration: Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim and pay for their clothes until the first week of July. The journal entries for June and July would be:LO 1 Explain the revenue recognition principle and the expense recognition principle.4-6Timing IssuesTiming IssuesTiming IssuesTiming Issues“Let the expenses follow the revenues.”LO 1 Explain the revenue recognition principle and the expense recognition principle.Illustration 4-1 (Partial)4-7Accrual-Basis Accounting►Transactions recorded in the periods in which the events occur.►Revenues are recognized when services performed, _____________________. ►Expenses are recognized when incurred,________________________________Timing IssuesTiming IssuesTiming IssuesTiming IssuesAccrual versus Cash Basis of AccountingLO 2 Differentiate between the cash basis and the accrual basis of accounting.4-8Timing IssuesTiming IssuesTiming IssuesTiming IssuesLO 2 Differentiate between the cash basis and the accrual basis of accounting.Accrual versus Cash Basis of AccountingCash-Basis Accounting►Revenues are recognized only when cash is received.►Expenses are recognized only when cash is paid. ►Prohibited under generally accepted accounting principles (GAAP).4-9Timing IssuesTiming IssuesTiming IssuesTiming IssuesIllustration: Suppose that Fresh Colors paints a large building in 2013. In 2013, it incurs and pays total expenses (salaries and paint costs) of $50,000. It bills the customer $80,000, but does not receive payment until 2014.Illustration 4-2 (Partial)LO 2 Differentiate between the cash basis and the accrual basis of accounting.2013 20144-10Adjusting entries ensure that ________________________________________are required _______________________________includes one income statement account and one balance sheet account.never include __________.The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesLO 3 Explain why adjusting entries are needed, and identify the major types of adjusting entries4-11Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesIllustration 4-3Categories of adjusting entriesLO 3 Explain why adjusting entries are needed, and identify the major types of adjusting entriesDeferrals:1. Prepaid expenses2. Unearned revenues:Accruals:1. Accrued revenues: 2. Accrued expenses:4-12Trial Balance – Each account is analyzed to determine whether it is complete and up-to-date.Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesLO 3 Explain why adjusting entries are needed, and identify the major types of adjusting entriesIllustration 4-44-13Deferrals are either: Prepaid expenses OR Unearned revenues.Adjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsLO 4 Prepare adjusting entries for deferrals.4-14Payment of cash, that is recorded as an asset because service or benefit will be received in the future, such as:Prepaid Insurance 12,000 Cash 12,000Adjusting Entries for Adjusting Entries for ““Prepaid ExpensesPrepaid Expenses””Adjusting Entries for Adjusting Entries for ““Prepaid ExpensesPrepaid Expenses””insurancesuppliesadvertisingCash PaymentCash PaymentExpense RecordedExpense RecordedBEFORErentequipmentbuildingsPrepayments often occur in regard to:LO 4 Prepare adjusting entries for deferrals.4-15Adjusting Entries for Adjusting Entries for ““Prepaid ExpensesPrepaid Expenses””Adjusting Entries for Adjusting Entries for ““Prepaid ExpensesPrepaid Expenses””Adjusting entries for prepaid expenses__________________________________ __________________________________LO 4 Prepare adjusting entries for deferrals.Illustration 4-54-16Illustration: Sierra Corporation purchased supplies costing $2,500 on October 5. Sierra recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand.Oct. 31Adjusting Entries for Adjusting Entries for ““Prepaid ExpensesPrepaid Expenses””Adjusting Entries for Adjusting Entries for ““Prepaid ExpensesPrepaid Expenses””LO 4 Prepare adjusting entries for deferrals.Illustration 4-6