Accrual Accounting Issues

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Accrual Accounting Issues Implementation

• Chapter-4

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Learning Objective-1

• The student should be able to make journal
  entries that properly de-couple the receipt or
  payment of cash from the recognition of an
  expense or revenue

Take a look at Chapter 4 Concepts to Master
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Accruals 1-Revenue Recognition without receipt

• Provide services not yet billed
• Other examples are
• Interest revenue
• Rent revenue
• Key point- we might have to make a JE just
  because time has passed, even though we dont
  have source documents to analyze

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Accruals-1 Revenue

• Debit an asset account
• Credit a revenue account
• Notice, cash is not affected
• How are the financial statements affected if
  these are not recorded?

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Accruals-2 Unrecorded expenses

• Interest expense
• Taxes
• Salaries
• Key to JE
• Debit an expense account
• Credit a liability
• How are the financial statements affected if
  these are not recorded?

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Deferrals-1 prepaid expenses

• Have some asset that was used up during period
• Insurance
• Supplies
• Rent (if we prepay)
• Make an Adjusting Journal Entry to adjust asset
  account to reflect proper balance
• Debit an expense account
• Credit an asset account
• How are the financial statements affected if
  these are not recorded?

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Deferrals-1a use of equipment

• Make investments into equipment used over
  multiple periods
• Equipment value declines from use
• Use of equipment benefited company in allowing
  company to earn revenues
• To recognize these
• Debit depreciation expense
• Credit accumulated depreciation-Contra Asset
• How are the financial statements affected if
  these are not recorded?

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Deferrals-2 Prepaid Revenue

• We might require a deposit from customers
• When we received cash had not earned
• Must recognize liability when received
• After earned have to recognize revenue
• Receipt of cash
• Credit Unearned Revenue
• After completing our obligation
• Debit-unearned revenue
• Credit-revenue
• How are the financial statements affected if
  these are not recorded?

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How do we know?

• No source documents to analyze
• Unadjusted trial balance
• Critical review of existing account names and
  balances (Equipment-must have depreciation)
• Common sense (salaries payable)

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When do we make them

• Called AJE- Adjusting Journal Entries
• Made after prepare the unadjusted trial balance
• Help us prepare the adjusted trial balance

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Depreciation Example

• Depreciation on the equipment for the year is
  10,000.

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Salary Payable

• Employee wages are paid twice a month, on the
  22nd for wages earned from the 1st through the
  15th, and on the 7th of the following month for
  wages earned from the 16th through the end of the
  month. Wages earned from December 16 through
  December 31, 2003, were 1,500.

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Interest Payable

• On October 1, 2003, Pastina borrowed 50,000 from
  a local bank and signed a note. The Note requires
  interest to be paid annually on September 30 at
  12. The principal is due in 16 years.

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Interest Receivable

• On March 1, 2003, the company lent a supplier
  20,000 and a note was signed requiring principal
  and interest at 8 to be paid on February 28,
  2004.

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Prepaid Expense

• On April 1, 2003, the company paid an insurance
  company 6,000 for a two-year fire insurance
  policy.

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Unearned Revenue

• A customer paid Pastina 2,000 in December for
  1,500 pounds of spaghetti to be manufactured and
  delivered in January 2004. Pastina credited sales
  revenue .

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Prepaid Expense

• On December 1, 2003, 2,000 rent was paid to the
  owner of the building. The payment represented
  rent for December and January 2004, at 1,000 per
  month