BUSI 101 1nd Edition Lecture 7Outline of Last Lecture I. Practice Exam QuestionsA. Working Capital and Current RatioII. Problem 1 Chapter 4III. Page 25 in Course PackOutline of Current Lecture IV. Adjusting EntriesB. Deferrals versus Accrualsi. Practice ProblemsV. Closing Entriesa. Practice ProblemsVI. Pg. 31 in Course PackVII. Pg. 32 in class Practice QuizCurrent LectureStudy the Old ExamsNot Responsible for:p. 42 #20-24p. 43 #25-29p. 57 #16-19p. 58 # 20-21- Cash Basis of Accounting – recognizes revenues when cash is received and expenses when cash is paido Not GAAPThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Accrual Basis of Accounting – recognizes revenue when earned and then matches expenses with the revenueso Is GAAPAdjusting Entries- Deferrals – cash leads (cash transaction precedes the accrual basis recognition – pay for something then recognize the expense that is associated with the cash that went out or vice versa)Expense OR LiabilitiesAssets RevenuesDepreciation Expense (E)Accumulated Depreciation (XA)*XA= contra asset (behaves like a liability)Accruals – Cash Lags (accrual basis recognition precedes the cash transaction – recognize revenue first then receive the cash later or vice versa)Expenses AssetsLiabilities OR Revenues*Liabilities will all be payables and assets will all be receivablesEx. A company pays four months rent in advance on November 30 for December, January, February, and March at $1800/month.Tenant11/30 Prepaid Rent (A) 7200 Cash (A) 720012/31 Rent Expense (E) 1800 Prepaid Rent (A) 180011/30 LandlordCash (A) 7200 Unearned Rent (L) 720012/31 Unearned Rent (L) 1800 Rent Revenue (R) 1800*Wait until the end of the period to update the booksPrepaid Rent (A)Ex. A company buys equipment for $14,000 cash on 1/1/A. Equipment has a five-year useful life, $2,100 salvage value. The company uses straight-line depreciation.1/1/A Equipment (A) 14,100 Cash (A) 14,10012/31/A (adjusting entry) Depreciation Expense (E) 2400 Accumulated Depreciation(XA) 240012/21/B Depreciated Expense (E) 2400 Accumulated Depreciation (XA) 2400Cost-SAL VAL= 14100-2100 = 2400/year Life 5yearsOn 1/1/C, Equipment is sold for $12000 cash.- Will experience gain1/1/C Cash (A) 1200011/30 720012/31 54001800A/D (XA) 4800 EQ (A) 14100 Gain (R) 2700Cash (A) 5000A/D (XA) 4800Loss (E) 4300 EQ (A) 14,10012/29 12/30 12/31 1/1 1/2M Tues. Wed. Th. FEmployees earn $30,000/dayFriday is pay dayEmployer12/31 (adjusting entry) Wages Expense (E) 90000 Wages Payable (L) 900001/2(accrual situation – cash lags) Wages Payables (L) 90000Wages Expense (E) 60000 Cash (A) 150,000Employees12/31 (adjusting entry) Wages Receivable (A) 90000 Wages Receivable (R) 900001/2 Cash (A) 150000 Wages Receivable (A) 90000Wage Revenue (R) 60000Closing EntriesRevenue (R)1000010000Expense (E)520052000Net Income:Revenue (R) 10,000 Expense (E) 5200 Retained Earnings (OE) 4800Net Loss:Revenue (R)1000010000Expense (E)1570015700Revenue (R) 10000Retained Earnings (OE) 5700 Expenses (E) 15,7000Page 31 in Course PackDID Should Have Done TR-TE=NI TA=TL+TOEEx. X (nothing) Cash (A) Serv. Rev. (R)U/NE/U U/NE/U1. Building (A) Cash (A)Repairs Ex. (E) Cash (A)NE/U/O O/NE/O2. Cash (A) Revenue (R)Cash (A) Accounts Receivable (A)O/NE/O O/NE/O3. X Depreciation (E) Accumulated Depreciation (XA)NE/U/O O/NE/O4.Do Problems 4-12 for Class WednesdayPg. 32 In-Class Practice Quiz1. Examples of Deferral Accounts – Prepaid Rent, Unearned Rent2. Examples of Accrual Accounts – Wages Payable, Wages Receivable3.DID Should Have Done TR-TE=NI TA=TL+TOEX Exp. (E) Asset (A)NE/U/O O/NE/O4. DID Should Have Done TR-TE=NI TA=TL+TOESal Payable (L) 20000 Sal Expense (E) 20000Sal. Expense (E) 20000 Sal Payable (L) 20000NE/U/O NE/U/OAnother way to visualize the mistake using T-Accounts:Salary Expense (E) Salary Expense (E)60000 600000 2000020000 580000 6200005. Model:IN OUTCash (A) Expense (E) Revenues (R) Cash (A)Salary Expense (E) 44,000Salary Payable (L) 650Cash (A) 446506. IN OUTCash (A) 30,000 Expense (E) 16920U/R (L) 600 Prepaid Rent (A) 500R/R (A) 670 R/P 420Revenue (R) 29930 Cash (A) 17000Prepaid Rent +500 Out Asset DeferralRent Receivable -670 In Asset AccruedRent Payable +420 Out Liability AccruedUnearned Rent In Liability