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:
Cash $ 3,300
Unexpired Insurance 6,300
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 ________
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:
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
Consulting Fees Earned 26,800
Salaries Expense 7,700
Utilities Expense 1,700
Rent Expense 2,100
Supplies Expense ___600 ______
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.