ACC 221 1st Edition Lecture 8 Outline of Previous Lecture- Chapters 5 & 6: Closing Accounts & Purchasing on Account Closing accounts and post-closing trial balanceso Closing entrieso Steps in accounting cycle Purchasing on Accounto New Liabilityo Making a partial payment Paying interesto Paying interest for 2 monthsOutline of Current Lecture - Chapters 7: Intro to adjusting entries Service company basicso Similar to merchandising accounts, only a few differenceso Supply and depreciation accounts Adjusting journal entrieso Adjusting entrieso Depreciation adjusting entrieso Depreciation errorso Supply adjusting entrieso Supply errorsCurrent Lecture- Chapters 7: Intro to Adjusting Entries Service Company Basicso Similar to merchandising accounts, only a few differences Accounting system works for any type of company No inventory asset accounts No cost of goods sold- Not selling an actual product, so do not need these accounts Service revenue accounts, instead of sales revenue Truck rent revenue account, instead of office rentingo Supply and depreciation accounts Rent: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.- Dr. Expense Rent, Cr. Cash Supplies – don’t intend to sell, last less than 1 year (gas in mower):- Dr. Supplies Expense account, Cr. Cash Bill a customer with an invoice for services done:- Dr. Accounts receivable, Cr. Service Revenue Adjusting Journal Entries:o Adjusting entries  Nothing is prompting you to make these actions, must review account to makesure everything is balanced in the permanent accounts- Everything must be exactly right, or may incur errors in balanceso Depreciation adjusting entries - Using equipment you intend to use for over 1 year, do not intend to sell (mowers, tools) Long term assets – use longer than 1 year Must have a way to show usage over time- Becomes an expense to the business, lowers profits Depreciation – an allocation method, not based on market value, based on use Straight-line depreciation methods- Equipment will depreciate evenly throughout year, rather than depreciating more in the summer, than in the winter or vice versa Estimated life – estimated useful life, item will be worthless when no longer usable or running; used as a tool when figuring how to allocate depreciation costs Example: Mowers cost $48,000. Estimated life is 4 years. Straight-line depreciation. - Person will pay $1,000 per month for four years- Equipment may still be working after paid off, and may still use it without continuing to pay for depreciation- Equipment may have stopped working before depreciation was complete, so person will incur a loss Must keep 3 questions separate:- How much did you originally pay for the equipment? o Contra account – Asset account that runs contrary to an asset: Beginning balance is on Cr. Side, creates a running total of all depreciation. o Accumulated depreciation – Contra account for equipment Dr. decreases depreciation owed, Cr. Adds depreciation to your account- How much value of the equipment is left to be used?o Balance for how much value of the equipment is left to be used is in the Cr. Side of Accumulated Depreciation- Current month’s usage of depreciation: Depreciation Expense accounto Temporary owner’s equity account How to stop making depreciation entry:- When book value = 0, stop making entries- Assets completely transferred How to create final balances:- Retained earnings + net income = new retained earnings balance- Accumulated depreciation – depreciation expense = new accumulated depreciation Positive and negative numbers- May use + and – on statement and balance- Cannot use + and – on general ledger- Contra account shows as a negative Depreciation expense is closed to retained incomeo Depreciation errors - Forget to adjust journal and ledger for depreciation Statements and balances will be incorrect- Understating depreciation and overstating profits- Understating depreciation on temporary accounts, overstating assets and retained earnings o Supply adjusting entries – prepaid entries Making adjusting entries is the same no matter if the account is rent, insurance, equipment, ect.  Each month, we use a month’s worth of supplies - Buying the supplies in advance: Dr. Supply and Cr. Cash- Paying for month of expenses: Dr. Supplies expense, Cr. Supplies Adjusting accounts is always done on the last day of the accounting period It helps to have T account running on the side of the account, looking at total supply account and decreasing the total by the month’s use of supplieso Supply errors - Forget to adjust journal and ledger for supply Overstate supplies, understate supplies expense Overstate total assets, retained earnings and total liabilities and assets Understate total expense and net