Yönetim Temelleri Making End-of-Year Adjustments © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Accounting Cycle Making End-of-Year Adjustments Chapter 4© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO1 To explain the purpose of adjusting entries.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Matching Principle The generally accepted accounting ? principles require the recognition of all expenses incurred to generate a revenue in the same period in which that revenue is recognized. Revenues and expenses of the same period ? must be matched in the same period.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Matching Principle A magazine publication company collected ? $14.400 subscription fee from customers for 12 month subscription in January, 2008. The company paid $3.000 for the rent of ? office for 6 months from January to June. Calculate revenue and expense for ? January.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin At the end of the period, adjusting entries are needed to make certain that appropriate amounts of revenue and expense are reported in the financial statements.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Adjusting entries are needed whenever revenue or expenses affect more than one accounting period . Every adjusting entry involves a change in either a revenue or expense and an asset or liability . Adjusting Entries© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO2 To describe and prepare the four basic types of adjusting entries.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Converting ? assets to expenses Accruing ? unpaid expenses Converting ? liabilities to revenue Accruing ? uncollected revenue Types of Adjusting Entries© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO3 To prepare adjusting entries to convert assets to expenses.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Prior Periods Current Period Future Periods Transaction Paid cash in advance of incurring expense (creates an asset). End of Current Period Adjusting Entry Recognizes portion ? of asset consumed as expense, and Reduces balance of ? asset account. Converting Assets to Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Examples Include: Depreciation Supplies Expiring Insurance Policies Prepaid Rent Converting Assets to Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Jan. 1 Dec. 31 $2,400 Insurance Policy Coverage for 12 Months $200 Monthly Insurance Expense On January 1, Webb Co. purchased a one- year insurance policy for $2,400. Converting Assets to Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Jan. 1 Unexpired Insurance 2,400 Cash 2,400 Purchase a one-year insurance policy. Initially, costs that benefit more than one accounting period are recorded as assets . Converting Assets to Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The costs are expensed as they are used to generate revenue. G E N E R A L J O U R N A L D a t e A c c o u n t T i t l e s a n d E x p l a n a t i o n P R D e b i t C r e d i t M o n t h l y A d j u s t i n g E n t r y f o r I n s u r a n c e J a n . 3 1 I n s u r a n c e E x p e n s e 2 0 0 U n e x p i r e d I n s u r a n c e 2 0 0 I n s u r a n c e e x p e n s e f o r J a n u a r y . Converting Assets to Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Insurance Expense 1/31 200 Unexpired Insurance 1/1 2,400 1/31 200 Bal. 2,200 Income Statement Cost of assets used this period to generate revenue. Balance Sheet Cost of assets that benefit future periods. Converting Assets to Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Depreciation is the systematic allocation of the cost of a depreciable asset to expense. Depreciable assets are physical objects that retain their size and shape but lose their economic usefulness over time. The Concept of Depreciation© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The portion of an asset’s utility that is used up must be expensed in the period used. Cash ( credit ) Fixed Asset ( debit ) On date when initial payment is made . . . The asset’s usefulness is partially consumed during the period. At end of period . . . Depreciation Expense ( debit ) Accumulated Depreciation ( credit ) The Concept of Depreciation© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On May 2, 2007, JJ’s Lawn Care Service purchased a lawn mower with a useful life of 50 months for $2,500 cash. Using the straight-line method, calculate the monthly depreciation expense. $2,500 50 = $50 Depreciation expense (per period) = Cost of the asset Estimated useful life Depreciation Is Only an Estimate© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin JJ’s Lawn Care Service would make the following adjusting entry. G E N E R A L J O U R N A L D a t e A c c o u n t T i t l e s a n d E x p l a n a t i o n P R D e b i t C r e d i t M a y 3 1 D e p r e c i a t i o n E x p e n s e : E q u i p m e n t 5 0 A c c u m u l a t e d D e p r e c i a t i o n : E q u i p m e n t 5 0 T o r e c o r d o n e m o n t h ' s d e p r e c i a t i o n . Contra-asset Depreciation Is Only an Estimate© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin JJ’s $15,000 truck is depreciated over 60 months as follows: G E N E R A L J O U R N A L D a t e A c c o u n t T i t l e s a n d E x p l a n a t i o n P R D e b i t C r e d i t M a y 3 1 D e p r e c i a t i o n E x p e n s e : T r u c k 2 5 0 A c c u m u l a t e d D e p r e c i a t i o n : T r u c k 2 5 0 T o r e c o r d o n e m o n t h ' s d e p r e c i a t i o n . $15,000 ??? 60 months = $250 per month Depreciation Is Only an Estimate© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin J J ' s L a w n C a r e S e r v i c e P a r t i a l B a l a n c e S h e e t M a y 3 1 , 2 0 0 1 A s s e t s L i a b i l i t i e s & O w n e r ' s E q u i t y C a s h 3 , 9 2 5 $ N o t e s p a y a b l e 1 3 , 0 0 0 $ A c c o u n t s r e c e i v a b l e 7 5 A c c o u n t s p a y a b l e 1 5 0 E q u i p m e n t 2 , 5 0 0 $ T o t a l l i a b i l i t i e s 1 3 , 1 5 0 $ L e s s : A c c u m . d e p r . 5 0 2 , 4 5 0 T r u c k 1 5 , 0 0 0 $ O w n e r ' s E q u i t y L e s s : A c c u m . d e p r . 2 5 0 1 4 , 7 5 0 J i l l J o n e s , c a p i t a l 8 , 1 2 5 T o t a l 2 1 , 2 7 5 $ Accumulated depreciation would appear on the balance sheet as follows: © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO4 To prepare adjusting entries to convert liabilities to revenue.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Prior Periods Current Period Future Periods Transaction Collect cash in advance of earning revenue (creates a liability). End of Current Period Adjusting Entry Recognizes portion ? earned as revenue, and Reduces balance of ? liability account. Converting Liabilities to Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Examples Include: Airline Ticket Sales Sports Teams’ Sales of Season Tickets Converting Liabilities to Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Jan. 1 Dec. 31 $6,000 Rental Contract Coverage for 12 Months $500 Monthly Rental Revenue On January 1, Webb Co. received $6,000 in advance for a one-year rental contract. Converting Liabilities to Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Jan. 1 Cash 6,000 Unearned Rental Revenue 6,000 Collected $6,000 in advance for rent. Initially, revenues that benefit more than one accounting period are recorded as liabilities . Converting Liabilities to Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Over time, the revenue is recognized as it is earned . GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Monthly Adjusting Entry for Rent Revenue Jan. 31 Unearned Rental Revenue 500 Rental Revenue 500 Rental revenue for January. Converting Liabilities to Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Rental Revenue 1/31 500 Unearned Rental Revenue 1/31 500 1/1 6,000 Bal. 5,500 Income Statement Revenue earned this period. Balance Sheet Liability for future periods. Converting Liabilities to Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO5 To prepare adjusting entries to accrue unpaid expenses.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Prior Periods Current Period Future Periods Transaction Pay cash in settlement of liability. End of Current Period Adjusting Entry Recognizes expense ? incurred, and Records liability for ? future payment. Accruing Unpaid Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Examples Include: Interest Wages and Salaries Hey, when do we get paid? Accruing Unpaid Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Monday, May 29 Friday, June 2 $3,000 Wages Expense On May 31, Webb Co. owes wages of $3,000. Payday is Friday, June 2. Wednesday, May 31 Accruing Unpaid Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit May 31 Wages Expense 3,000 Wages Payable 3,000 To accrue wages owed to employees. Initially, an expense and a liability are recorded. Accruing Unpaid Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Wages Expense 5/31 3,000 Wages Payable 5/31 3,000 Income Statement Cost incurred this period to generate revenue. Balance Sheet Liability to be paid in a future period. Accruing Unpaid Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Monday, May 29 Friday, June 2 $5,000 Weekly Wages Let’s look at the entry for June 2. Wednesday, May 31 $2,000 Wages Expense $3,000 Wages Expense Accruing Unpaid Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The liability is extinguished when the debt is paid. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit June 2 Wages Expense (for June) 2,000 Wages Payable (accrued in May) 3,000 Cash 5,000 Weekly payroll for May 29-June 2. Accruing Unpaid Expenses© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO6 To prepare adjusting entries to accrue uncollected revenue.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Prior Periods Current Period Future Periods Transaction Collect cash in settlement of receivable. End of Current Period Adjusting Entry Recognizes revenue ? earned but not yet recorded, and Records receivable. ? Accruing Uncollected Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Examples Include: Interest Earned Work Completed But Not Yet Billed to Customer Accruing Uncollected Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Saturday, Jan. 15 Tuesday, Feb. 15 $170 Interest Revenue On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the 15 th day of each month. Monday, Jan. 31 Accruing Uncollected Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Jan. 31 Interest Receivable 170 Interest Revenue 170 To recognize interest revenue. Initially, the revenue is recognized and a receivable is created. Accruing Uncollected Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Interest Revenue 1/31 170 Interest Receivable 1/31 170 Income Statement Revenue earned this period. Balance Sheet Receivable to be collected in a future period. Accruing Uncollected Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Saturday, Jan. 15 Tuesday, Feb. 15 $320 Monthly Interest $170 Interest Revenue Let’s look at the entry for February 15. Monday, Jan. 31 $150 Interest Revenue Accruing Uncollected Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The receivable is collected in a future period. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Feb. 15 Cash 320 Interest Revenue (for February) 150 Interest Receivable (accrued Jan. 31) 170 To record interest received. Accruing Uncollected Revenue© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin As a corporation earns taxable income, it incurs income taxes expense, and also a liability to governmental tax authorities. G E N E R A L J O U R N A L D a t e A c c o u n t T i t l e s a n d E x p l a n a t i o n P R D e b i t C r e d i t D e c . 3 1 I n c o m e T a x e s E x p e n s e 7 8 0 I n c o m e T a x e s P a y a b l e 7 8 0 E s t i m a t e d i n c o m e t a x e s a p p l i c a b l e t o t a x a b l e i n c o m e e a r n e d i n D e c e m b e r . Accruing Income Taxes Expense: The Final Adjusting Entry© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Accruing Expenses and Revenues Example Assume that on November 1, Porter Company ? borrows $10,000 from National Bank for a period of six months at an annual interest rate of 12%. Prepare journal entries ? For borrowing a) For year-end adjustments b) For repayment of the loan c) from the perspective of lender (bank) and borrower (Porter Co.)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin PROMISSORY NOTE Location Date after this date promises to pay to the order of the sum of with interest at the rate of per annum. signed title Miami, Fl Nov. 1, 2007 Six months Porter Company John Caldwell Security National Bank $10,000.00 12.0% treasurer Notes Payable© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On November 1, 2007, Porter Company would make the following entry. D a t e D e s c r i p t i o n D e b i t C r e d i t N o v . 1 C a s h 1 0 , 0 0 0 N o t e P a y a b l e 1 0 , 0 0 0 Notes Payable© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Interest expense is the • compensation to the lender for giving up the use of money for a period of time. The liability is called interest • payable . To the lender, interest is a revenue . • To the borrower, interest is an • expense . Interest Rate Up! Interest Payable© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The interest formula includes three variables that must be considered when computing interest: Interest = Principal × Interest Rate × Time When computing interest for one year, “ Time ” equals 1. When the computation period is less than one year, then “ Time ” is a fraction. Interest Payable For example, if we needed to compute interest for 3 months, “ Time ” would be 3/12.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin What entry would Porter Company make on December 31, the fiscal year-end? Date Description Debit Credit Interest Payable – Example D a t e D e s c r i p t i o n D e b i t C r e d i t D e c . 3 1 I n t e r e s t E x p e n s e 2 0 0 I n t e r e s t P a y a b l e 2 0 0 $10,000 ?? ? 12% ?? 2 / 12 = $200© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Porter will pay the note on May 1, 2008. Let’s look at the entry. Date Description Debit Credit Interest Payable – Example D a t e D e s c r i p t i o n D e b i t C r e d i t J a n . 3 1 I n t e r e s t E x p e n s e 4 0 0 I n t e r e s t P a y a b l e 2 0 0 N o t e s P a y a b l e 1 0 . 0 0 0 C a s h 1 0 . 6 0 0 $10,000 ??? 12% ? ? 4 / 12 = $400© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO7 To explain the concept of materiality.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin An item is “ material ” if knowledge of the item might reasonably influence the decisions of users of financial statements. Supplies Lightbulbs Many companies immediately charge the cost of immaterial items to expense. The Concept of Materiality© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO8 To prepare an adjusted trial balance and describe its purpose.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Make end-of- year adjustments. Prepare adjusted trial balance. Let’s look at JJ’s Lawn Care Services’ adjusted trial balance . Effects of the Adjusting Entries© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin J J ' s L a w n C a r e S e r v i c e A d j u s t e d T r i a l B a l a n c e M a y 3 1 , 2 0 0 7 C a s h 4 . 0 0 0 $ A c c o u n t s r e c e i v a b l e 1 5 0 T o o l s & e q u i p m e n t 2 . 6 5 0 A c c u m . d e p r e c i a t i o n : t o o l s & e q . 5 0 $ T r u c k 1 5 . 0 0 0 A c c u m . d e p r e c i a t i o n : t r u c k 2 5 0 N o t e s p a y a b l e 1 3 . 0 0 0 A c c o u n t s p a y a b l e 3 0 0 C a p i t a l s t o c k 8 . 0 0 0 D i v i d e n d s 2 0 0 S a l e s r e v e n u e 7 5 0 G a s o l i n e e x p e n s e 5 0 D e p r e c i a t i o n e x p . : t o o l s & e q . 5 0 D e p r e c i a t i o n e x p . : t r u c k 2 5 0 T o t a l 2 2 . 3 5 0 $ 2 2 . 3 5 0 $ All balances are taken from the ledger accounts on May 31 after preparing the two depreciation adjusting entries. Adjusted Trial Balance© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin End of Chapter 4