ACCRUALS
Accruals involve transactions where the cash outflow or
inflow occurs in a period subsequent to expense or revenue
recognition.
➢ ACCRUED LIABILITIES
Accrued liabilities represent liabilities recorded when an expense has
been incurred prior to cash payment.
July 31
Salaries expense ……………………………. 5,500
To accrue interest expense for July on notes payable.
T2-9
Instructors Resource Manual 2-17
➢ ACCRUED RECEIVABLES
Accrued receivables involve situations when the revenue is recognized
in a period prior to the cash receipt. Assume that Dress Right loaned
August 31
T2-9 (continued)
ESTIMATES
Estimates often are made to comply with the accrual
T2–10
ADJUSTED TRIAL BALANCE
DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2016
Account Title
Debits
Credits
Cash
68,500
Accounts receivable
2,000
Supplies
1,200
Inventory
38,000
Furniture and fixtures
12,000
Accounts payable
35,000
Notes payable
40,000
Deferred rent revenue
750
Salaries payable
5,500
Interest payable
333
Common stock
60,000
Retained earnings
1,000
Sales revenue
38,500
Rent revenue
250
Cost of goods sold
22,000
Salaries expense
Supplies expense
800
Rent expense
2,000
Depreciation expense
200
Interest expense
Totals
Illustration 2-12
T2–11
THE INCOME STATEMENT
DRESS RIGHT CLOTHING CORPORATION
Income Statement
For the Month of July 2016
Sales revenue $38,500
Cost of goods sold 22,000
Gross profit 16,500
Interest expense (333) (83)
Net income $2,917
Illustration 2-13
T2–12
THE BALANCE SHEET
DRESS RIGHT CLOTHING CORPORATION
Balance Sheet
At July 31, 2016
Assets
Current assets:
Cash $ 68,500
Accounts receivable 2,000
Supplies 1,200
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 35,000
Salaries payable 5,500
Deferred rent revenue 750
Illustration 2-10
T2–14
THE STATEMENT OF CASH FLOWS
DRESS RIGHT CLOTHING CORPORATION
Statement of Cash Flows
For the Month of July 2016
Cash Flows from Operating Activities:
Cash inflows:
From customers $ 36,500
Cash Flows from Investing Activities:
Purchase of furniture and fixtures (12,000)
Cash Flows from Financing Activities:
Issue of common stock $ 60,000
Net increase in cash $68,500
Illustration 2-15
T2–14
THE STATEMENT OF SHAREHOLDERS’ EQUITY
DRESS RIGHT CLOTHING CORPORATION
Statement of Shareholders’ Equity
For the Month of July 2016
Total
Common Retained Shareholders’
Stock Earnings Equity
Illustration 2-16
T2–15
THE CLOSING PROCESS
To close the revenue accounts to income summary
Sales revenue ………………………………………. 38,500
To close the expense accounts to income summary
Income summary …………………………………. 35,833
Cost of goods sold ……………………………. 22,000
Income Summary
To close income summary to retained earnings
Income summary …………………………………. 2,917
Retained earnings ……………………………… 2,917
T2–16
POST-CLOSING TRIAL BALANCE
DRESS RIGHT CLOTHING CORPORATION
Post-Closing Trial Balance
July 31, 2016
Account Title
Debits
Credits
Cash
68,500
Accounts receivable
2,000
Supplies
1,200
Prepaid rent
22,000
Inventory
38,000
Furniture and fixtures
12,000
Accounts payable
Notes payable
Deferred rent revenue
Salaries payable
Interest payable
Common stock
Retained earnings
Totals
T2–17
CONVERSION FROM CASH TO ACCRUAL
Converting from cash to accrual income:
➢ Add (deduct) increases (decreases) in assets. For example, an increase in
accounts receivable means that the company recognized more revenue
The Krinard Cleaning Services Company maintains its records on the cash basis,
with one exception. The company reports equipment as an asset and records
January 1, 2016 December 31, 2016
Accounts receivable $16,000 $25,000
Prepaid expenses 7,000 4,000
Accrual net income is $68,500, determined as follows:
Cash-basis net income $63,000
Illustration 2-18
T2–18
Instructors Resource Manual 2-27
Copyright © 2015 McGraw-Hill Education. All rights reserved.
Suggestions for Class Activities
1. Spreadsheet Activities
2. Professional Skills Development Activities
The following are suggested assignments from the end–of-chapter material that will help your
students develop their communication, analysis and judgment skills.
Communication Skills. In addition to Communication Case 2-3, Judgment Cases 2-1 and 2-2 can
Assignment Chart
Learning Est. time
Questions Objective(s) Topic (min.)
2-1
1
External and internal events
5
2-2
1
Dual effect of transactions on financial position
5
2-3
2,3
Purpose of journal and ledger
5
2-4
3
Permanent and temporary accounts
5
2-5
2,3
Debits and credits
5
2-6
2,3
Debits and credits
5
2-8
Transaction analysis
5
2-9
3
Posting
5
2-10
2
Journal entries
5
2-11
3,5
Trial balance
5
2-12
4
Adjusting entries
5
2-13
7
Closing entries
5
2-14
4
Adjusting entries—prepaid expenses
5
2-15
4
Adjusting entries—deferred revenue
5
2-16
4
Adjusting entries—accrued liabilities
5
2-17
6
Financial statements
5
Worksheet [Based on Appendix A]
5
Special journals [Based on Appendix C]
5
2-21
Subsidiary ledger [Based on Appendix C]
5
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
2-1
1
Transaction analysis
10
2-2
2
Journal entries
10
2-3
3
T-accounts
15
2-4
2
Journal entries
15
2-5
5
Adjusting entries
15
2-6
4,5
Adjusting entries; income determination
15
2-7
5
Adjusting entries
15
2-8
4
Income determination
15
2-9
5
Adjusting entries
10
2-10
6
Financial statements
10
2-11
6
Financial statements
10
2-12
7
Closing entries
10
2-13
8
Cash versus accrual accounting
15
Learning Est. time
Exercises Objective(s) Topic (min.)
2-1
1
Transaction analysis
15
2-2
2
Journal entries
15
2-3
3
T-accounts and trial balance
15
2-4
2
Journal entries
20
2-5
The accounting processing cycle
15
2-6
2
Debits and credits
15
2-7
2
Transaction analysis; debits and credits
15
2-8
5
Adjusting entries
15
2-9
5
Adjusting entries
15
2-10
4,5
Adjusting entries; solving for unknowns
15
2-11
5
Adjusting entries
15
2-12
6,7
Financial statements and closing entries
20
2-13
7
Closing entries
10
2-14
7
Closing entries
10
2-15
Cash versus accrual accounting; adjusting entries
15
2-16
2,5
External transactions and adjusting entries
15
2-17
4,8
Accrual accounting income determination
15
2-18
8
Cash versus accrual accounting
20
2-19
8
Cash versus accrual accounting
20
2-20
Worksheet [Based on Appendix A]
35
2-21
Reversing entries [Based on Appendix B]
10
2-23
Reversing entries [Based on Appendix B]
10
2-24
Special journals [Based on Appendix C]
15
2-25
Special journals [Based on Appendix C]
15
CPA Learning Est. time
Exam Questions Objective(s) Topic (min.)
CPA-1
1
The effect of a transaction on the accounting
equation
3
Accrued liabilities
3
Cash versus accrual accounting
3
Cash versus accrual accounting
3
Prepaid expenses
3
Learning Est. time
Problems Objective(s) Topic (min.)
2-1
2,3
Accounting cycle through unadjusted trial
balance
40
2-2
2,3
balance
2-3
Adjusting entries
20
Accounting cycle; adjusting entries through post-
closing trial balance
2-5
Adjusting entries
20
2-8
Adjusting entries
20
2-9
Accounting cycle; unadjusted trial balance
through closing
45
2-11
Cash versus accrual accounting
15
2-13
Worksheet [Based on Appendix A]
40
Accounting cycle through unadjusted trial
40
Star Problems
Learning Est. time
Cases Objective(s) Topic (min.)
Judgment Case 2-1
4,8
Cash versus accrual; adjusting entries
20
Judgment Case 2-2
Cash versus accrual; adjusting entries
30
Communication Case 2-3
Adjusting entries
20