10. Example: Accrual- vs. Cash-Basis Accounting Crown Consulting Reported Income for 2006 During 2006, Crown Consulting billed its client for $48,000. On December 31, 2006, it had received $41,000, with the remaining $7,000 to be received in 2007. Total expenses during 2006 were $31,000 with $3,000 of these costs not yet paid at December 31. Determine net income under both methods.
16. What Is the 3-Step Process for Adjusting Entries?
17. Bullseye Management earns a rent revenue of $500 in 2006 but will not receive the payment until January 10, 2007. An adjustment will be needed. What is the adjusting entry? Example: Unrecorded Receivables Original entry none none Correct balances 500 500 Rent Receivable Rent Revenue
18. Original entry none none Correct balances 1,000 1,000 MoneyTree Inc. is assessed property taxes of $1,000 for 2006, but will not make this payment until January 5, 2007. An adjustment will be needed. What is the adjusting entry? Property Tax Expense Property Tax Payable Example: Unrecorded Liabilities
19. Example: Prepaid Expenses Rent Expense Prepaid Rent Original entry 3,600 3,600 Adjusting entry 1,800 1,800 Correct balances 1,800 1,800 Cash On July 1, 2006, I Think I Can Inc. pays $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry ?
20. Example: Unearned Revenues On July 1, 2006, Clean As A Whistle Co. received $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry? Original entry 3,600 3,600 Adjusting entry 1,800 1,800 Correct balances 1,800 1,800 Unearned Rent Rent Revenue Cash
31. Closing Entries Describe Which Accounts Are Used For Each Entry Step 1. Close all revenue accounts by debiting them. Sales Revenue. . . . . . . . . 15,000 Retained Earnings . . . . 15,000 Step 2. Close all expense accounts by crediting them. Retained Earnings. . . . . . . 13,600 Cost of Goods Sold. . . . 12,800 Insurance Expense. . . . 500 Supplies Expense. . . . . 300
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33. Declaration of Dividends : Payment of Dividends : Closing Entry for Dividends : Make All Three Dividends Entries for $200
34. Dividends Bal. xxx Retained Earnings Beg. Bal. xxx The Closing Process Revenues Revenues Bal. xxx Expenses Bal. xxx Since the revenues account is a nominal account, it is closed at the end of the period to Retained Earnings. xxx Revenues
35. The Closing Process Expenses Dividends Bal. xxx Retained Earnings Beg. Bal. xxx Revenues Expenses Bal. xxx The expenses account is also a nominal account and is debited to Retained Earnings to close it. xxx Expenses Revenues Bal. xxx xxx
36. The Closing Process Dividends Dividends Bal. xxx Retained Earnings Beg. Bal. xxx Expenses Revenues xxx Revenues Bal. xxx The dividends account, which is also nominal, is credited to close out the balance. xxx Dividends Expenses Bal. xxx xxx
37. The Closing Process Dividends Bal. xxx Retained Earnings Beg. Bal. xxx xxx Dividends Expenses Revenues xxx Revenues Bal. xxx Expenses Bal. xxx xxx End. Bal. xxx Net income for the period is determined by these two entries. Retained Earnings is a real account and always carries a balance.
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39. Example: Post-Closing Trial Balance Three Monkeys Inc. Post-Closing Trial Balance December 31, 2006 Debits Credits Cash $ 8,200 Accounts Receivable 4,000 Inventory 3,000 Supplies 1,000 Accounts Payable $ 5,000 Capital Stock 10,000 Retained Earnings ______ 1,200 Totals $16,200 $16,200
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43. Original entry 3,600 3,600 Adjusting entry 1,800 1,800 Correct balances 1,800 1,800 Example: Prepaid Expenses Rent Expense Prepaid Rent Cash On July 1, 2006, Time Flies Company pays $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. What is the adjusting entry using the expense approach?
44. Original entry 3,600 3,600 Adjusting entry 1,800 1,800 Correct balances 1,800 1,800 Example: Prepaid Expenses On July 1, 2006, Pot Of Gold Inc. pays the Rainbow Company $3,600 for one year’s rent in advance (covering July 1, 2006, to June 30, 2007). On December 31, 2006, an adjustment will be needed. Use the revenue approach. Unearned Rent Rent Revenue Cash
45. END CHAPTER 4 "Things which matter most must never be at the mercy of things which matter least."