Acct 230 1st Edition Lecture 9Outline of Last Lecture II. The Financial Reporting Processa. Cash Basisb. Accrual BasisOutline of Current Lecture III. The Financial Reporting Processa. Adjusting Entriesi. Purposeii. Grouping of EntriesCurrent LectureII. The Financial Reporting Processa. Adjusting Entries i. Purpose of adjusting entries1. To record events that have occurred but have not been recorded2. To record revenues in the period earned3. To record expenses in the period they are incurred in the generation of those revenues4. To correctly state assets and liabilities in the balance sheetii. Grouping Adjusting Entries1. 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 ina 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 plansto 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 cashor 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 debitto 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