ACCT 221 1st Edition Lecture 4 Outline of Last Lecture I Accruals II Accounts Receivable Outline of Current Lecture I Steps in the Accounting Cycle II Deferrals III Examples of Deferrals Current Lecture Steps in the Accounting Cycle 1 Record Transactions 2 Adjust Accounts 3 Prepare Financial Statements 4 Close Nominal Temporary Accounts Deferrals Involves recognizing a revenue or expense at some time after cash has been collected or paid Cash came out or went in BUT no Revenue was earned and no expense was incurred Pre paid expenses Supplies Prepaid insurance Prepaid rent Cost what you initially spend Assets become expenses when used asset expense Ex 1 Conner designed a one year lease agreement and paid 12 000 in advance for a lease which begins on March 1 1st transaction Cash asset decreases by 12 000 Prepaid Rent asset increases by 12 000 Cash Flows Operating Activity will become an expense when used Ex 2 On 1 1 Conner received 18 000 cash in advance from Westberry Company for consulting services to be performed over a one year period starting on June 1 st Cash asset increased These 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 Unearned revenue liability increases Cash Flows Operating Activity will become revenueonce services are complete Ex 3 Conner paid 800 for supplies Supplies asset is increased by 800 Cash asset is decreased by 800 Cash Flows Operating Activity supplies will become an expense when used Adjusting Entries Why To update account balances When Prior to preparing the finical statements Adjustments will always affect the balance sheet and the income statement Adjustment 1 As of December 31 Conner earned some of the cash it collected in advance for services to start on June 1 18 000 12 months 1 500 7 months used 10 500 Unearned Revenue liability is decreased by 10 500 Retained Earnings equity is decreased by 10 500 Cash Flows NO CASH Adjustment 2 As of December 31 Conner had used 10 months of the rent that was prepaid on March 1 12 000 12 months 1 000 10 months used 10 000 Prepaid Rent asset decreased by 10 000 Retained Earnings equity decreased by 10 000 Cash Flows NO CASH Adjustment 3 As of December 31 2011 a physical count of the supplies on hand reveals that 150 of supplies remained available for future use 800 150 650 Supplies asset decreased by 650 Retained Earnings equity decreases by 650 Cash Flows NO CASH
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