Acct 230 1st Edition Lecture 9 Outline of Last Lecture II The Financial Reporting Process a Cash Basis b Accrual Basis Outline of Current Lecture III The Financial Reporting Process a Adjusting Entries i Purpose ii Grouping of Entries Current Lecture II The Financial Reporting Process a Adjusting Entries i Purpose of adjusting entries 1 To record events that have occurred but have not been recorded 2 To record revenues in the period earned 3 To record expenses in the period they are incurred in the generation of those revenues 4 To correctly state assets and liabilities in the balance sheet ii Grouping Adjusting Entries 1 It is useful to group entries in the following 4 categories a Prepayments i Prepaid expenses we paid cash or had an obligation to pay cash for the purchase of an asset BEFORE we incurred the expense ii Unearned revenues We received cash and recorded a liability BEFORE we earned the revenue b Accruals i Accrued Expenses We paid cash AFTER we incurred the expense and recorded the liability ii Accrued Revenues We received cash AFTER we earned the revenue and recorded the asset 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 iii Prepaid Expenses 1 The costs of assets acquired in one period that will be expensed in a future period a Examples Purchase of equipment or supplies paying rent in advance payment of insurance in advance 2 The adjusting entry for a prepaid expense always includes a debit to an expense account increase to expense and a credit to an asset account decrease to asset a Example The balance in prepaid rent account on Jan 1 is 6 000 The rent expense for the month of January is 500 As such the balance in prepaid rent account is reduced to 5 500 on Jan 31 iv Unearned Revenues 1 Unearned revenues occur when a company receives cash in advance from a customer for products or services to be provided in the future 2 The adjusting entry for an unearned revenue always includes a debit to a liability account decrease a liability and a credit to a revenue account increase a revenue a Example 600 is received in advance from customers who will be given services that is golf training in this case in the future i Service worth 60 is provided to the customers during the month ii Unearned training revenue equals 540 as of Jan 31 v Accrued Expenses 1 When a company has incurred an expense but hasn t yet paid cash or recorded an obligation to pay it still should record the expense This is referred to as an accrued expense A few examples are accrued salaries accrued interest accrued utility costs 2 The adjusting entry for an accrued expense always includes a debit to an expense account increase an expense and a credit to a liability account increase a liability a Example At the end of January Eagle receives a utility bill for 960 associated with operations in January Eagle plans to pay the bill on February 6 Even though it won t pay the cash until February Eagle must record the utility costs for January as an expense in January vi Accrued Revenues 1 When a company has earned revenue but hasn t yet received cash or recorded an amount receivable it still should record the revenue This is referred to as an accrued revenue A few examples include interest receivable accounts receivable 2 The adjusting entry for an accrued revenue always includes a debit to an asset account increase an asset and a credit to a revenue account increase a revenue a Suppose Eagle provides 200 of golf training to customers from January 28 to January 31 b However it usually takes Eagle one week to mail bills to customers and another week for customers to pay c Therefore Eagle expects to receive cash from these customers during February 8 14 d Irrespective of when cash will be received the revenue should be recognized in January