Accrual Accounting and Adjusting Journal Entries Linda Mullins Associate Professor of Accounting Georgia State University Perimeter College Cash Basis versus Accrual Basis Cash Basis Accrual Basis Only records revenues Revenue Recognition and expenses when cash is exchanged Principle Records revenue when it is Not GAAP generally accepted accounting principles earned Matching Principle Records expenses when the cost contributes to the revenue earned Requires month end adjusting journal entries The Accounting Cycle Prepare a Trial Balance Ready to start recording business transactions for the next accounting period Prepare a Post Closing Trial Balance Close temporary accounts Prepare Financial Statements Journalize Adjusting Entries Post adjusting journal entries to the General Ledger Prepare a Adjusted Trial Balance Types of Adjusting Journal Entries Prepaid Expense Unearned Revenue Accrued Revenue Expired assets that need to be reduced and recorded as an expense The adjusting journal entry will ALWAYS include a debit to an expense account and a credit to an asset account Cash received in advance of the performance of a service or delivery of a product Deposit originally recorded as a liability but is now revenue The adjusting journal entry will ALWAYS include a debit to a liability account and a credit to a revenue account Performance of a service or delivery of a product without being recorded The adjusting journal entry will ALWAYS include a debit to an asset account and a credit to a revenue account Accrued Expense A cost incurred to support revenue that has not been recorded The adjusting journal entry will ALWAYS include a debit to an expense account and a credit to a liability account Expired assets that need to be reduced and recorded as an expense The adjusting journal entry will ALWAYS include a debit to an expense account and a credit to an asset account Cash received in advance of the performance of a service or delivery of a product Deposit originally recorded as a liability but is now revenue The adjusting journal entry will ALWAYS include a debit to a liability account and a credit to a revenue account Performance of a service or delivery of a product without being recorded The adjusting journal entry will ALWAYS include a debit to an asset account and a credit to a revenue account A cost incurred to support revenue that has not been recorded The adjusting journal entry will ALWAYS include a debit to an expense account and a credit to a liability account Prepaid Expense Aphrodite Spas Trial Balance June 30 20XX Account Debit Credit Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Spa Revenue Common Stock Dividends Spa Revenue Rent Expense Totals 45 550 4 000 300 9 000 200 1 000 4 650 500 50 000 4 900 60 050 60 050 Let s Practice Aphrodite Spas adjusting entries for June 20XX are as follows a A count of supplies revealed only 75 b Depreciation on equipment was 150 c 200 of the unearned revenue has been d June revenue not recorded totaled 700 e Receptionist salary of 1 200 need to be remained earned accrued Let s Practice Aphrodite Spas adjusting entries for June 20XX are as follows PE A count of supplies revealed only 75 remained PE Depreciation on equipment was 150 UR 200 of the unearned revenue has been AR June revenue not recorded totaled AE Receptionist salary of 1 200 need to be earned 700 accrued General Journal Date Account Name Debit Credit General Journal Date Account Name Debit Credit Accumulated Depreciation Equipment June 30 Supplies Expense Supplies June 30 Depreciation Expense June 30 Unearned Spa Revenue Spa Revenue June 30 Accounts Receivable Spa Revenue June 30 Salaries Expense Salary Payable 225 150 200 700 1200 225 150 200 700 1200 Balance 45550 Cash DR Accounts Receivabl e DR Supplies DR 4000 700 4700 300 75 Equipment DR Balance June 30 Balance Balance Balance Journal Entries General Ledger June 30 225 June 30 200 CR CR CR CR CR 150 150 CR June 30 Balance Accum Deprec DR Accounts Payable DR Unearned Spa Revenue Balance 4650 DR CR Balance 500 Spa Revenue DR Balance June 30 June 30 Balance CR 4900 200 700 5800 CR CR Balance 300 June 30 Balance DR CR June 30 Balance 1200 1200 Balance 1000 Rent Expense DR Supplies Expense DR 225 225 Depreciation Expense June 30 Balance 150 150 Salary Expense DR 1200 1200 June 30 Balance CR CR Balance 50000 CR Salaries Payable Common Stock DR Dividends DR Balance 200 Balance 9000 DR CR Aphrodite Spas Adjusted Trial Balance June 30 20XX Account Debit Credit Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Spa Revenue BS Salaries Payable Common Stock Dividends Spa Revenue Rent Expense Supplies Expense Depreciation Expense Salary Expense Totals RE IS 45 550 4 700 75 9 000 200 1 000 225 150 1200 150 4 650 300 1200 50 000 5800 62 100 62 100 Aphrodite Spas Income Statement For the Month Ended 6 30 XX 1 000 225 150 1200 Aphrodite Spas Retained Earnings Statement For the Month Ended 6 30 XX Revenue Spa Revenue Expenses Rent Expense Supplies Expense Depreciation Expense Salary Expense Total Expenses Net Income Retained Earnings 6 1 XX Add Net Income Subtotal Less Dividends Retained Earnings 6 30 XX 5 800 2 575 3 225 0 3 225 3 225 200 3 025 Aphrodite Spas Classified Balance Sheet 6 30 XX Assets Current Assets Cash Accounts Receivable Supplies Total Current Assets Plant Property and Equipment Equipment Less Accumulated Depreciation Equipment Total Plant Property and Equipment Total Assets Liabilities and Stockholders Equity Current Liabilities Accounts Payable Unearned Spa Revenue Salaries Payable Total Liabilities Stockholders Equity Common Stock Retained Earnings Total Stockholders Equity Total Liabilities Stockholders Equity 45 550 4 700 75 9 000 150 4 650 300 1 200 50 000 3 025 50 325 8 850 59 175 6 150 53 025 59 175 Closing Entries Date Account Name Debit Credit March 31 Spa Revenue Income Summary 31 Income Summary Rent Expense Supplies Expense Depreciation Expense Salary Expense 31 Income Summary Retained Earnings 31 Retained Earnings Dividends 5800 2575 3225 200 5800 1 000 225 150 1200 3225 200 Aphrodite Spas Post Closing Trial Balance June 30 20XX Account Debit Credit Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Spa Revenue Salaries Payable Common Stock Retained Earnings Totals 45 550 4 700 75 9 000 59 325 150 4 650 300 1200 50 000 3 025 59 325