In order for revenues and expenses to be reported in the accounting period in which they are earned or incurred, adjusting entries must be made at the end of the accounting period. Adjusting entries are made so the revenue recognition and matching principles are followed.

In order for revenues and expenses to be reported in the accounting period in which they are earned or incurred, adjusting entries must be made at the end of the accounting period. Adjusting entries are made so the revenue recognition and matching principles are followed.

The chapter includes a thorough review of various adjusting entries. The adjustments are classified into four categories: converting assets to expenses; converting liabilities to revenue; accruing unpaid expenses and; accruing uncollected revenues. The categories are discussed and illustrated in this order.

We detail the adjusting journal entries required as well as the financial statement impact of the adjustments. We explain that the adjusting entries are needed to satisfy the realization and matching principles. The concept of materiality is introduced and its relevance to the adjusting entries is explained.

The need for adjusting entries stems from the most basic concepts of accrual accounting, the concepts that revenue is recognized when it is earned and that expenses are recognized when the related goods and services are used.

why the word “debit” is abbreviated “Dr.” in the columnar headings of the worksheet, as there is no “r” in “debit.” The word “debit” is derived from the Latin verb debere, which means “to owe.” “Credit” stems from the Latin verb credere , meaning “to entrust” or “to lend.” In modern usage, of course, the term debit has come to mean any entry in the left-hand side of a ledger account, and credit has come to mean any entry in the right-hand side.

CHAPTER 4 NAME #

10-MINUTE QUIZ C SECTION

Scorpio Travel adjusts its books each month and closes its books on December 31 each year. The trial balance at January 31, 2017, before adjustments, follows:

Debit Credit

Cash $ 3,300

Supplies 2,700

Unexpired Insurance 6,300

Equipment 36,000

Accumulated Depreciation: Equipment $9,000

Unearned Admission Revenue 6,000

Capital Stock 7,500

Retained Earnings, January 1, 2017 21,600

Admissions Revenue 13,800

Salaries Expense 4,050

Utilities Expense 2,850

Rent Expense 2,700 ________

$57,900 $57,900

1. Refer to the above data. According to attendance records, $4,800 of the Unearned Admission Revenue has been earned in January. Compute the balance in the following accounts after the proper adjustment is made.

Unearned Admission Revenue account balance $__________

Admission Revenue account balance $__________

Refer to the above data. At January 31, the amount of supplies still on hand was determined to be $675. What amount should be reported in the January income statement for supplies expense? $__________

Refer to the above data. The equipment has an original useful life of eight years. Compute the book value of the equipment at January 31 after the proper January adjustment is recorded. $__________

Refer to the above data. $900 is owed to employees for work since the last payday in January, to be paid the first week of February. What is the effect on January net income if the accountant fails to make any January 31 adjustment for this item? $__________

Refer to the above data. On June 1, 2016, the park purchased a 12-month insurance policy. Give the adjusting entry to record insurance coverage expiring in January. (Hint: The company adjusts its books on a monthly basis.)

CHAPTER 4 NAME #

10-MINUTE QUIZ D SECTION

The accountant for Rose’s Emporium, Inc. prepared the following trial balance at January 31, 2018, after one month of operations:

Debit Credit

Cash $ 5,700

Accounts Receivable 4,500

Unexpired Insurance 2,100

Office Equipment 18,000

Unearned Consulting Fees $ 3,300

Capital Stock 15,600

Retained Earnings, January 1, 2018 0

Dividends 3,300

Consulting Fees Earned 26,800

Salaries Expense 7,700

Utilities Expense 1,700

Rent Expense 2,100

Supplies Expense ___600 ______

$45,700 $45,700

Additional information items:

a Consulting services rendered to a client in January, not yet billed or recorded, $2,400.

b Portion of insurance expiring in January, $300.

c Income taxes expense for January of $2,500.

d The office equipment has a life of 5 years.

Instructions. Prepare adjusting entries for a through d.

Adjusting Entries

Jan. 31

In order for revenues and expenses to be reported in the accounting period in which they are earned or incurred, adjusting entries must be made at the end of the accounting period. Adjusting entries are made so the revenue recognition and matching principles are followed.
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