Impact of Adjusted Entries

by Group 1
Fernando Casco-Downing, Katie
Fleming, Michael Kubik, Emily
Stone, Fei Wang

Chapter
3-1

Introduction
Accounting

Equation (A= L + SE)

Accounting Cycle
Accounting Concepts
Revenue
Expense
Revenue

Recognition
Matching Principle
Types

of Adjusted Entries
Examples of Adjusted Entries
Impact without entries
Chapter
3-2

The
The Accounting
Accounting Equation
Equation
Relationship among the assets, liabilities and
stockholders equity of a business:
Illustration 3-3

The equation must be in balance after every

transaction. For every Debit there must be a Credit.
Chapter
3-3

The
The Accounting
Accounting Cycle
Cycle
Illustration 3-6

Transactions
Transactions
9.
9. Reversing
Reversing entries
entries

1.
1. Journalization
Journalization

8.
8. Post-closing
Post-closing trail
trail balance
balance

2.
2. Posting
Posting

7.
7. Closing
Closing entries
entries

3.
3. Trial
Trial balance
balance

6.
6. Financial
Financial Statements
Statements

Work
Work
Sheet
Sheet

5.
5. Adjusted
Adjusted trial
trial balance
balance
Chapter
3-4

4.
4. Adjustments
Adjustments

Adjusting
Adjusting Entries
Entries
Revenues - recorded in the period in which they
are earned.
earned
Expenses - recognized in the period in which they
are incurred.
incurred
Adjusting entries - needed to ensure that the
revenue recognition and matching principles are
followed.

Chapter
3-5

Types
Types of
of Adjusting
Adjusting Entries
Entries
Illustration 3-20

Prepayments

Accruals

1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.

3. Accrued Revenues.
Revenues earned but not
yet received in cash or
recorded.

2. Unearned Revenues.
Revenues received in cash
and recorded as liabilities
before they are earned.

4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or
recorded.

Chapter
3-6

Expedient Recording Method

Expedient
Records an expense upon payment of cash
before goods or services are consumed
Records revenue upon receipt of cash
before goods or services are provided

Chapter
3-7

Expedient
Expedient General
General Entries
Entries
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.

Dec. 1

Cash

45,000

Service revenue
Service Revenue
Debit
Credit
45,000
45,000
Chapter
3-8

45,000
Cash
Debit
45,000
45,000

Credit

Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.

Dec. 31

Service revenue

33,750

Unearned service revenue

Service Revenue
Debit
Credit
33,750

45,000
11,250

Chapter
3-9

(=45,000-45,000/4)

33,750

Unearned Service Revenue

Debit
Credit
33,750
33,750

Impact Without Adjusted Entries

Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period. Service revenue
was credited.

Dec. 31

Service revenue (SE)

33,750

Unearned service revenue (L)

Total
Assets

None
Chapter
3-10

(=45,000-45,000/4)

33,750

Total
Liab.

Stk.
Equity

Net
Income

Retained
Earning

Understate
33750

Overstate
33750

Overstate
33750

Overstate
33750

Standard Recording Method

Standard
Asset upon payment of cash
Liability upon receipt of cash
before goods or services are
provided

Chapter
3-11

Standard
Standard General
General Entries
Entries
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period.

Dec. 1

Cash

45,000

Unearned service revenue

Unearned Service Revenue
Debit
Credit
45,000
45,000
Chapter
3-12

45,000
Cash

Debit
45,000
45,000

Credit

Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Q1 : On December 1, 2011, Johnson received a $45,000 payment for
services to be rendered equally over a four-month period.

Dec. 31

Unearned service revenue

11,250

Service revenue
Service Revenue
Debit
Credit
11,250
11,250
Chapter
3-13

11,250
Unearned Service Revenue
Debit
Credit
11,250

45,000
33,750

Expedient Vs. General

Expedient
Service Revenue
Debit
Credit
33,750

Unearned Service Revenue

Debit
Credit

45,000

33,750

11,250

33,750

General
Service Revenue
Debit
Credit
11,250
11,250
Chapter
3-14

Unearned Service Revenue

Debit
Credit
11,250

45,000
33,750

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Q2. On December 31, 2011, the company paid a local radio station
$16,000 for 40 radio ads that were to be aired, 20 per month, throughout
January and February of 2012. Prepaid advertising was debited.

Dec. 31

Prepaid Advertising

16,000

Cash
Prepaid Advertising
Debit
Credit
16,000
16,000
Chapter
3-15

16,000
Cash
Debit

Credit
16,000

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Q3. Employee salaries for the month of December 2011 totaling

$8,400 will be paid on January 5, 2012.

Dec. 31

Salaries expense
Salaries payable
Salaries Expense
Debit
Credit
8,400
8,400

Chapter
3-16

8,400
8,400
Salaries Payable
Debit
Credit
8,400

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Q3. Employee salaries for the month of December 2011 totaling

$8,400 will be paid on January 5, 2012.

Dec. 31

Salaries expense(SE)

8,400

Salaries payable(L)

Chapter
3-17

8,400

Total
Assets

Total
Liab.

Stk.
Equity

Net
Income

Retained
Earning

None

Understate
8400

Overstate
8400

Overstate
8400

Overstate
8400

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local
bank. A note was signed with principal and 6% interest to be paid on
September 1, 2012.

(Interest = 60,000 * 6% /12 *3)

Dec. 31

Interest expense
Interest payable
Interest Expense
Debit
Credit
900

Chapter
3-18

900
900
Interest Payable
Debit
Credit
900

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Q4. On September 31, 2011, Johnson Corp. borrowed $60,000 from a local
bank. A note was signed with principal and 6% interest to be paid on
September 1, 2012.

(Interest = 60,000 * 6% /12 *3)

Dec. 31

Interest expense(SE)

900

Interest payable(L)

Chapter
3-19

900

Total
Assets

Total
Liab.

Stk.
Equity

Net
Income

Retained
Earning

None

Understate
900

Overstate
900

Overstate
900

Overstate
900

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Q5. On December 31, 2011, it was determined that $8,000 of the recorded
Accounts receivable would prove to be uncollectible.

Dec. 31

Bad Debt Expense

8,000

Allowance for Doubtful Accounts

Bad Debt Expense
Debit
Credit
8,000

Chapter
3-20

8,000

Allowance for Doubtful Accounts

Debit

Credit
8,000

Impact Without Adjusted Entries

Q5. On December 31, 2011, it was determined that $8,000 of the recorded
Accounts receivable would prove to be uncollectible.

Dec. 31

Bad Debt Expense (SE)

8,000

Allowance for Doubtful Account (A)

Total
Assets
Overstated
8000
Chapter
3-21

8,000

Total
Liab.

Stk.
Equity

Net
Income

Retained
Earning

None

Overstated
8000

Overstated
8000

Overstated
8000

Impact Without Adjusted Entries

Total
Assets

Net
Income

Retained
Earning

Overstate
33750

Overstate
33750

None

None

None

Understate Overstate
8400
8400

Overstate
8400

Overstate
8400

Q4

None

Understate Overstate
900
900

Overstate
900

Overstate
900

Q5

Overstated
8000

Overstated
8000

Overstated
8000

Overstated
8000

Overstate Understate Overstate

Total
8000
43050
51050

Overstate
51050

Overstate
51050

Q1

None

Q2

None

Q3

Chapter
3-22

Total
Liab.

Stk.
Equity

Understate Overstate
33750
33750
None

None

None

Conclusion
Accounting

Concepts

Revenue

and Expense
Revenue Recognition and Matching Principle
Standard

Vs. Expedient Recording Method

Types of Adjusted Entries
Prepayments

: Prepaid Expense and Unearned

Revenue
Accruals: Accrued Rev. and Accrued Exp.
Impact

without adjusted entries

Overstated

A, L, SE, NI, RE
Understated A, L, SE, NI, RE
Chapter
3-23

Questions

Chapter
3-24