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VISUAL #3-1
ACCRUAL BASIS ACCOUNTING
(Follows GAAP)
requires that the
3-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
VISUAL #3-2
DEFERRALS
The converse of statements in Visual #3-1 also applies.
Revenue not earned or expense not incurred results in Deferrals*
UNEARNED = LIABILITY *
A REVENUE not earned cannot be shown, even if collected.
An EXPENSE not incurred cannot be shown, even if paid.
PREPAID = ASSET *
*We defer or postpone the reporting of the collected revenues
(as revenues) and prepaid expenses (as expenses) until the
revenue is earned and the expense is incurred.
3-2
Education.
VISUAL #3-3
ADJUSTMENTS
TYPE GENERALIZED*
ENTRY AMOUNT
1A. Prepaid (deferred)
expenses—initially recorded as
assets
Dr. _________ Expense
Cr. the Asset* acct.
Amount used, or
consumed, or expired
1B. Prepaid (deferred)
expenses—that are depreciable
(plant assets)
Dr. Depreciation Expense
Cr. Accumulated
Depreciation
Portion of cost
allocated to this period
as depreciation
1C. Prepaid (deferred)
Dr. the Asset** acct.
Amount left, or
2A. Unearned revenues—
(revenue received in advance)
initially record as liability
(unearned account)
Dr. Unearned ________
Cr. the Revenue** acct. Amount earned to date
2B. Unearned revenues—
(revenue received in advance)
initially recorded as a revenue
(alternate treatment—
appendix)
Dr. the Revenue** acct.
Cr. Unearned________
Amount still not
earned
3. Accrued expenses—
Dr. _________ Expense
Amount accrued
4. Accrued revenues
(revenues earned but not
Dr. ________ Receivable
Cr. the Revenue** acct.
Amount accrued
3-3
Education.
Alternate Demonstration Problem
Chapter Three
On July 1, 2013, Howard M. Tenant, Inc., rents office space from John Q.
Landlord for two years, starting immediately, at a rate of $100 per month, or
$2,400 in total. The full $2,400 was paid on this date. Record the original
transaction and the appropriate adjusting entries in 2013, 2014, and 2015
from the point of view of Tenant and Landlord.
Solution: Alternate Demonstration Problem
Chapter 3
Tenant Landlord
7/1/13
Prepaid Rent................ 2,400 Cash............................. 2,400
Cash 2,400 Unearned Rent
Rev...................... 2,400
12/31/15
*Rent Expense............. 600 Unearned Rent Rev. 600
Prepaid Rent........ 600 Rent Revenue 600
An Alternative Solution (Based on the Appendix)
Tenant Landlord
7/1/13
Rent Expense.............. 2,400 Cash............................. 2,400
Cash...................... 2,400 Rent Rev............... 2,400
12/31/13
Prepaid Rent ............... 1,800 Rent Rev. 1,800
3-4
Education.
*Notice the adjustment is the same in 2014 and 2015 under both
approaches. This is because the adjustment in the appendix alternative
3-5
Education.
Another Alternate Demonstration Problem
Chapter Three
The trial balance of Large Company, Inc., at the end of its annual
accounting period is as follows:
LARGE COMPANY, INC.
Trial Balance
December 31, 2015
Cash.......................................................................... $ 4,000
C. Large, Withdrawals............................................. 2,000
Revenue................................................................... 33,000
Salaries Expense..................................................... 18,300
Rent Expense .......................................................... 6,000 ______
Totals........................................................................ $54,000 $54,000
Additional information:
1. Expired insurance, $400.
2. Unused supplies, per inventory, $800.
billed for those services, $500
Required:
Prepare adjusting entries.
3-6
Education.
Solution: Another Alternate Demonstration Problem
Chapter 3
Insurance Expense............................................ 400
Prepaid Insurance....................................... 400
Depreciation Expense Equip............................ 1,000
Accumulated Depreciation Equip............. 1,000
3-7
Education.
