There is still a balance of $250 (400 – 150) in the Supplies account. The balances in the Supplies and Supplies Expense accounts show as follows. Insurance is typically purchased by prepaying for an annual or semi-annual policy. Or, rent on a building may be paid ahead of its intended use (e.g., most landlords require monthly rent to be paid at the beginning of each month).

The statement of retained earnings will include beginning retained earnings, any net income (loss) (found on the income statement), and dividends. The balance sheet is going to include assets, contra assets, liabilities, and stockholder equity accounts, including ending retained earnings and common stock. The mechanics of accounting for prepaid expenses and unearned revenues can be carried out in several ways. At left below is a “balance sheet approach” for Prepaid Insurance. The expenditure was initially recorded into a prepaid account on the balance sheet.

  1. Two main types of deferrals are prepaid expenses andunearned revenues.
  2. An income statement shows the organization’s financial performance for a given period of time.
  3. If a company uses a calendar year, it is reporting financial data from January 1 to December 31 of a specific year.

During theyear, it collected retainer fees totaling $48,000 from clients.Retainer fees are money lawyers collect in advance of starting workon a case. When the company collects this money from its clients,it will debit cash and credit unearned fees. Even though not all ofthe $48,000 was probably collected on the same day, we record it asif it was for simplicity’s sake.

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If dividends were not declared, closing entries would cease at this point. If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings. As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends. The first part is the date of declaration, which creates the obligation or liability to pay the dividend. The second part is the date of record that determines who receives the dividends, and the third part is the date of payment, which is the date that payments are made. Printing Plus has $100 of dividends with a debit balance on the adjusted trial balance.

Atthe end of a period, the company will review the account to see ifany of the unearned revenue has been earned. If so, this amountwill be recorded as revenue in the current period. He does the accountinghimself and uses an accrual basis for accounting. At the end of hisfirst month, he remote bookkeeping services reviews his records and realizes there are a fewinaccuracies on this unadjusted trial balance. If the debit and credit columns equal each other, it means the expenses equal the revenues. This would happen if a company broke even, meaning the company did not make or lose any money.

Interest Receivable increases (debit) for $1,250 becauseinterest has not yet been paid. Interest Revenue increases (credit)for $1,250 because interest was earned in the three-month periodbut had been previously unrecorded. The fourth entry requires Dividends to close to the Retained Earnings account. Remember from your past studies that dividends are not expenses, such as salaries paid to your employees or staff. Instead, declaring and paying dividends is a method utilized by corporations to return part of the profits generated by the company to the owners of the company—in this case, its shareholders. It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year.

Closing Entries

As such, the beginning- of-period retained earnings amount remains in the ledger until the closing process “updates” the Retained Earnings account for the impact of the period’s operations. Using the table provided, for each entry write down the income statement account and balance sheet account used in the adjusting entry in the appropriate column. On January 9, the company received $4,000 from a customer for printing services to be performed. The company recorded this as a liability because it received payment without providing the service. Assume that as of January 31 some of the printing services have been provided. Since a portion of the service was provided, a change to unearned revenue should occur.

5 Prepare Financial Statements Using the Adjusted Trial Balance

Interest Revenue increases (credit) for $1,250 because interest was earned in the three-month period but had been previously unrecorded. Long-lived assets like buildings and equipment will provide productive benefits to a number of periods. However, one simple approach is called the straight-line method, where an equal amount of asset cost is assigned to each year of service life.

Deferrals are prepaid expense and revenue accounts that have delayed recognition until they have been used or earned. This recognition may not occur until the end of a period or future periods. When deferred expenses and revenues have yet to be recognized, their information is stored on the balance sheet. As soon as the expense is incurred and the revenue is earned, the information is transferred from the balance sheet to the income statement. Two main types of deferrals are prepaid expenses and unearned revenues.

2: Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries

This takes information from original sources or activities and translates that information into usable financial data. An original source is a traceable record of information that contributes to the creation of a business transaction. Activities would include paying an employee, selling products, providing a service, collecting cash, borrowing money, and issuing stock to company owners. Once the original source has been identified, the company will analyze the information to see how it influences financial records.

For example, a company performs landscaping services in the amount of $1,500. At the period end, the company would record the following adjusting entry. Depreciation Expense increases (debit) and Accumulated Depreciation, Equipment, increases (credit).

Following our year-end example of Paul’s Guitar Shop, Inc., we can see that his unadjusted trial balance needs to be adjusted for the following events. Returning to Supreme Cleaners, Mark identified the accounts needed to represent the $200 sale and recorded them in his journal. He will then take the account information and move it to his general ledger. All of the accounts he used during the period will be shown on the general ledger, not only those accounts impacted by the $200 sale. One fundamental concept to consider related to the accounting cycle—and to accrual accounting in particular—is the idea of the accounting period.

Atthe period end, the company would record the following adjustingentry. Interest can be earned from bank account holdings, notesreceivable, and some accounts receivables (depending on thecontract). Interest had been accumulating during the period andneeds to be adjusted to reflect interest earned at the end of theperiod. Note that this interest has not been paid at the end of theperiod, only earned.

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