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Lecture Financial and managerial accounting (12/e): Chapter 4 – Williams, Haka, Bettner, Meigs

Chapter 4 – The accounting cycle: Accruals and deferrals. The learning objectives for this chapter include: Explain the purpose of adjusting entries, describe the four basic types of adjusting entries, prepare adjusting entries to convert assets to expenses, prepare adjusting entries to convert liabilities to revenue, prepare adjusting entries to accrue unpaid expenses,. | Chapter 4 THE ACCOUNTING CYCLE: Accruals and Deferrals 2 At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements. Adjusting entries are needed whenever revenue or expenses affect more than one accounting period. Every adjusting entry involves a change in either a revenue or expense and an asset or liability. Adjusting Entries 4 Converting assets to expenses Accruing unpaid expenses Converting liabilities to revenue Accruing uncollected revenues Types of Adjusting Entries 4 Prior Periods Current Period Future Periods Transaction Paid future expenses in advance (creates an asset). End of Current Period Adjusting Entry Recognize portion of asset consumed as expense, and Reduce balance of asset account. Converting Assets to Expenses 4 Examples Include: Depreciation Supplies Expiring Insurance Policies Converting Assets to Expenses 4 Jan. 1 Dec. 31 $2,400 Insurance Policy Coverage for 12 Months $200 Monthly Insurance Expense On January 1, Webb Co. purchased a one-year insurance policy for $2,400. Converting Assets to Expenses 4 Initially, costs that benefit more than one accounting period are recorded as assets. Converting Assets to Expenses 4 The costs are expensed as they are used to generate revenue. Converting Assets to Expenses 4 Income Statement Cost of assets used this period to generate revenue. Balance Sheet Cost of assets that benefit future periods. Converting Assets to Expenses 4 Depreciation is the systematic allocation of the cost of a depreciable asset to expense. Depreciable assets are physical objects that retain their size and shape but lose their economic usefulness over time. The Concept of Depreciation The portion of an asset’s utility that is used up must be expensed in the period used. Cash (credit) Fixed Asset (debit) On date when initial payment is made . . . The asset’s usefulness is partially consumed during the period. At end of period . . . Accumulated Depreciation (credit) | Chapter 4 THE ACCOUNTING CYCLE: Accruals and Deferrals 2 At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements. Adjusting entries are needed whenever revenue or expenses affect more than one accounting period. Every adjusting entry involves a change in either a revenue or expense and an asset or liability. Adjusting Entries 4 Converting assets to expenses Accruing unpaid expenses Converting liabilities to revenue Accruing uncollected revenues Types of Adjusting Entries 4 Prior Periods Current Period Future Periods Transaction Paid future expenses in advance (creates an asset). End of Current Period Adjusting Entry Recognize portion of asset consumed as expense, and Reduce balance of asset account. Converting Assets to Expenses 4 Examples Include: Depreciation Supplies Expiring Insurance Policies Converting Assets to Expenses 4 Jan. 1 Dec. 31 $2,400 Insurance Policy Coverage for 12 Months $200 Monthly Insurance .