+E% 30911Qe-initions.
,rovide clear= concise ans<ers -or t$e -ollo<ing. 1. C$at is t$e accrual!asis o- accountingD 2. C$at is an accrued expenseD
3. C$at is accrued revenueD 4. C$at is a prepaid expenseD 5. C$at is unearned revenueD
7'. *tate t$e rule t$at indicates <$ic$ ad0usting entries -or prepaid and unearned items s$ould !e reversed.
Solution 30911
1. T$e accrual !asis o- accounting recogni;es revenue <$en t$e per-ormance o!ligation is satis-ied and recogni;es expenses in t$e period incurred.
2. n accrued expense is an expense <$ic$ is incurred !ut not paid in cas$ or recorded.
3. n accrued revenue is a revenue <$ic$ is recogni;ed !ut not "et received in cas$ or recorded.
4. prepaid expense is an expense paid in cas$ and recorded as an asset !e-ore it is used. 5. 9nearned revenues are t$e revenues received in cas$ and recorded as lia!ilities !e-ore t$e"
are recogni;ed.
7'. d0usting entries t$at create an asset or a lia!ilit" account s$ould !e reversed. T$is <ould include prepaid and unearned items originall" recorded in a revenue or expense account.
+E% 30913QTerminolog".
In t$e space provided at t$e rig$t= <rite t$e <ord or p$rase t$at is de-ined or indicated.
1. Revenue and expense accounts. 1. HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH 2. n optional step in t$e accounting 2. HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
c"cle.
3. revenue collected= !ut not recogni;ed.3. HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH 4. revenue recogni;ed= !ut not collected.4. HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH 5. sset= lia!ilit"= and e&uit" accounts. 5. HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH '. n expense paid= !ut not incurred. '. HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH . n expense incurred= !ut not paid. . HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
Solution 30913
1. Nominal (temporar") accounts. 5. Real (permanent) accounts. 2. Reversing entries. '. ,repaid expense.
3. 9nearned revenue. . ccrued expense. 4. ccrued revenue.
+E% 30915Qccrued items and de-erred (unearned or prepaid) items.
/enerall" accepted accounting principles re&uire t$e use o- accruals and de-errals in t$e determination o- income. o< is income determined under t$e accrual!asis o- accountingD Include in "our ans<er <$at constitutes an accrued item and a de-erred (prepaid) item= and give appropriate examples o- eac$.
Solution 30915
ccrual accounting recogni;es and reports t$e e--ects o- transactions and ot$er events in t$e time periods to <$ic$ t$e" relate rat$er t$an onl" <$en cas$ is received or paid. ccrual accounting attempts to matc$ revenues and t$e expenses associated <it$ t$ose revenues in order to determine net income -or an accounting period.
n accrued item is an item o- revenue or expense t$at $as !een recogni;ed or incurred during t$e period= !ut $as not "et !een collected or paid in cas$. n example o- an accrued revenue is rent -or t$e last mont$ o- an accounting period t$at $as !een recogni;ed !" a landlord !ut not "et paid !" t$e tenant. n example o- an accrued expense is salaries incurred -or t$e last <ee# o- an accounting period t$at are not pa"a!le until t$e su!se&uent accounting period.
de-erred (unearned or prepaid) item is an item o- revenue or expense t$at $as !een received or paid in cas$= !ut $as not "et !een recogni;ed or consumed. n example o- a de-erred revenue is unearned su!scription revenue collected in advance o- !eing recogni;ed. n example o- a
de-erred expense is an insurance premium paid at t$e end o- an accounting period <$ic$ <ill provide insurance coverage -or t$e -irst six mont$s o- t$e su!se&uent period.
E2ERCISES
EB% 30916Qd0usting entries.
,resent= in 0ournal -orm= t$e ad0ustments t$at <ould !e made on 8ul" 31= 215= t$e end o- t$e -iscal "ear= -or eac$ o- t$e -ollo<ing.
1. T$e supplies inventor" on ugust 1= 214 <as E=35. *upplies costing E22=15 <ere ac&uired during t$e "ear and c$arged to t$e supplies inventor". count on 8ul" 31= 215 indicated supplies on $and o- E+=+1.
2. Bn pril 3= a tenmont$= 'L note -or E3= <as received -rom a customer.
73. Bn :a" 1= E12= <as collected as rent -or one "ear and a nominal account <as credited.
Solution 30916 1. *upplies xpense ... 22=' *upplies ... 22=' 2. Interest Receiva!le ... 45 Interest Revenue ... 45 73. Rent Revenue ... =
EB% 3091:Qd0usting entries.
Reed 6o. <is$es to enter receipts and pa"ments in suc$ a manner t$at ad0ustments at t$e end o- t$e period <ill not re&uire reversing entries at t$e !eginning o- t$e next period. Record t$e -ollo<ing transactions in t$e indicated manner and give t$e ad0usting entr" on ecem!er 31= 214. (T<o entries -or eac$ part.)
1. n insurance polic" -or t<o "ears <as ac&uired on pril 1= 214 -or E1+=.
2. Rent o- E12= -or six mont$s -or a portion o- t$e !uilding <as received on Novem!er 1= 214. Solution 3091: 1. ,repaid Insurance ... 1+= 6as$ ... 1+= Insurance xpense ... '=5 ,repaid Insurance ... '=5 2. 6as$ ... 12=
9nearned Rent Revenue... 12=
9nearned Rent Revenue... 4=
Rent Revenue ... 4=
EB% 3091; T$e ad0usted trial !alance o- R"an Financial ,lanners appears !elo<. 9sing t$e in-ormation -rom t$e ad0usted trial !alance= "ou are to prepare -or t$e mont$ ending ecem!er 31> 1. an income statement. 2. a retained earnings statement. 3. a !alance s$eet. RN FINN6I ,NNR* d0usted Trial alance ecem!er 31= 214 e!it 6redit 6as$ ... E 2= ccounts Receiva!le... 2=2 *upplies... 1=+ &uipment... 1'= ccumulated epreciationQ&uipment... E 4= ccounts ,a"a!le... 3=3 9nearned *ervice Revenue... 5=
6ommon *toc#... 1= Retained arnings... 4=4 ividends... 2= *ervice Revenue... 4=2 *upplies xpense... ' epreciation xpense... 2=5 Rent xpense... 2= HHHHHH E3= E3=
Solution 3091; (2 min)
1. RN FINN6I ,NNR* Income *tatement
For t$e :ont$ nded ecem!er 31= 214 Revenues
*ervice revenue... E 4=2 xpenses
Rent expense... E2= epreciation expense... 2=5 *upplies expense... '
Total expenses... '= Net loss... E(1=+)
2. RN FINN6I ,NNR* Retained arnings *tatement
For t$e :ont$ nded ecem!er 31= 214
Retained earnings= ecem!er 1... E 4=4 ess> Net loss... E1=+
ividends... 2= 3=+ Retained earnings= ecem!er 31... E '
3. RN FINN6I ,NNR* alance *$eet ecem!er 31= 214 ssets 6as$... E 2= ccounts receiva!le... 2=2 *upplies ... 1=+ &uipment ... E1'=
ess> ccumulated depreciationQe&uipment... 4= 12= Total assets... E1+=
ia!ilities and *toc#$olders% &uit" ia!ilities
ccounts pa"a!le... E 3=3 9nearned service revenue... 5=
Total lia!ilities... E +=3 *toc#$olders% &uit"
6ommon stoc#... 1=
Retained earnings... ' 1=' Total lia!ilities and stoc#$olders% e&uit"... E1+=
=EB% 3091<Q6as$ !asis vs. accrual !asis o- accounting.
6ontrast t$e cas$ !asis o- accounting <it$ t$e accrual !asis o- accounting.
=Solution 3091<
T$e essential di--erence !et<een t$e cas$ !asis and t$e accrual !asis o- accounting relates to t$e timing o- t$e recognition o- revenues and expenses. 9nder t$e cas$ !asis o- accounting= t$e e--ects o- transactions and ot$er events are recogni;ed and reported onl" <$en cas$ is received or paid. 9nder t$e accrual !asis o- accounting= t$ese e--ects are recogni;ed and reported in t$e time periods to <$ic$ t$e" relate= regardless o- t$e time o- t$e receipt or pa"ment o- cas$. ecause no attempt is made under t$e cas$ !asis o- accounting to matc$ revenues and t$e expenses associated <it$ t$ose revenues= cas$ !asis -inancial statements are not in accordance <it$ generall" accepted accounting principles.
=EB% 3091>Qccrual !asis.
*ales salaries paid during 214 <ere E+5=. dvances to salesmen <ere E1=1 on 8anuar" 1= 214= and E+ on ecem!er 31= 214. *ales salaries accrued <ere E1=3' on 8anuar" 1= 214= and E1=++ on ecem!er 31= 214. *$o< t$e computation o- sales salaries on an accrual !asis -or 214.
=Solution 3091>
E+5= O E1=1 M E+ M E1=3' O E1=++ ? E+5=+2.
=EB% 3093?Qccrual !asis.
T$e records -or Todd Inc. s$o<ed t$e -ollo<ing -or 214>
8an. 1 ec. 31 ccrued expenses E1=3 E2=15
,repaid expenses 2 +
6as$ paid during t$e "ear -or expenses= E42=5
*$o< t$e computation o- t$e amount o- expense t$at s$ould !e reported on t$e income statement.
=Solution 3093?
=EB% 30939Qccrual !asis.
T$e records -or ile" 6ompan" s$o<ed t$e -ollo<ing -or 214>
8an. 1 ec. 31 9nearned revenue E1=1 E2=1'
ccrued revenue 1=2' 2
6as$ collected during t$e "ear -or revenue= E'5=
*$o< t$e computation o- t$e amount o- revenue t$at s$ould !e reported on t$e income statement.
=Solution 30939
E'5= O E1=1 M E2=1' M E1=2' O E2 ? E'3='.
=EB% 30931Q6as$ !asis.
Revenue on t$e income statement <as E125=+. ccounts receiva!le <ere E3=5 on 8anuar" 1 and E3=54 on ecem!er 31. 9nearned revenue <as E1=5 on 8anuar" 1 and E1=' on ecem!er 31.
*$o< t$e computation o- revenue -or t$e "ear on a cas$ !asis.
=Solution 30931
E125=+ O E3=5 M E3=54 M E1=5 O E1=' ? E12'=3+.