ACCT 221 1st Edition Lecture 4Outline of Last Lecture I. AccrualsII. Accounts Receivable Outline of Current Lecture I. Steps in the Accounting Cycle II. Deferrals III. Examples of DeferralsCurrent Lecture Steps in the Accounting Cycle1. Record Transactions2. Adjust Accounts3. 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 1st.  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