Accounting 215 Quiz Section 6 Autumn 2013 A Little Review Revenue recognition We record revenue in the period in which it is earned which may or may not be the period in which we receive cash Expense recognition We record expenses in the same period we recognize the revenues they helped generate In other words we match the expenses with the revenues they helped generate this is called the matching principle Three Different Types of Journal Entries External Transactions Journal entries that record explicit transactions with external parties Adjusting Journal Entries Journal entries that record events that have occurred but have not yet been recorded Generally occur at the end of each period Do not involve cash Involve one temporary one permanent account Attempt to better match expenses to revenues in the proper time period Closing Entries End of period journal entries that close out all temporary accounts into retained earnings Recording an Adjusting Entry 1 Was the revenue earned or the expense incurred 2 Was cash received paid in the past or will it be received paid in the future 3 Calculate the amount 4 Verify that Debits Credits and Assets Liabilities Shareholders Equity Adjusting journal entries fall into four general categories Prepayments Deferrals Unearned Revenues and Prepaid Expenses e g prepaid insurance supplies Accruals Accrued Revenues e g interest receivable other receivables and Accrued Expenses e g wages payable other payables 1 Accounting 215 Quiz Section 6 Autumn 2013 Practice Problem The information necessary for preparing the 2012 year end adjusting entries for Tom Jackson Advertising Agency appears below Jackson s fiscal year end is December 31 a On July 1 2012 Jackson receives 5 000 from a customer for advertising services to be given evenly over the next 10 months beginning in July Jackson credits unearned revenue b At the beginning of 2012 Jackson s depreciable equipment has a cost of 30 000 a five year life and no salvage value The equipment is depreciated evenly straight line depreciation method over the five years c On November 1 2012 extra office space is rented to Don Jackson Tom s brother for the next six months Payment of 6 000 is due at the end of the six months April 30 2013 No entry is made on November 1 d On May 1 2012 the company pays 3 600 for a two year fire and liability insurance policy and debits prepaid insurance e On September 1 2012 the company borrows 10 000 from a local bank and signs a note Principal and interest of 12 annual rate will be paid on August 31 2013 f At year end there is a 2 200 debit balance in the supplies asset account Only 900 of supplies remains on hand Required 1 Record the necessary adjusting entries on December 31 2012 No prior adjustments have been made during 2012 2 Determine the amounts by which total assets total liabilities and net income are misstated if Tom Jackson failed to make these adjusting entries 2 Accounting 215 Quiz Section 6 Autumn 2013 Requirement 1 A Assets XA Contra Assets L Liabilities R Revenues E Expenses SE Shareholders Equity a Debit L Unearned Revenue R SE Advertising Revenue Adjust unearned revenue b 3 000 E SE Depreciation Expense XA A Accumulated Depreciation Adjust accumulated depreciation c 6 000 A Rent Receivable R SE Rent Revenue Adjust rent receivable d 2 000 E SE Insurance Expense A Prepaid Insurance Adjust prepaid insurance e 1 200 Credit 3 000 Debit Credit 6 000 Debit Credit 2 000 Debit Credit 1 200 Debit E SE Interest Expense L Interest Payable Adjust interest payable f Credit 400 400 Debit E SE Supplies Expense A Supplies Adjust supplies Credit 1 300 1 300 Requirement 2 If the adjusting entry is NOT Jackson s books would be misstated as follows Assets Liabilities Net Income a 0 3 000 3 000 b 6 000 0 6 000 c 2 000 0 2 000 d 1 200 0 1 200 e 0 400 400 f 1 300 0 1 300 6 500 2 600 3 900 3