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Chapter 4

Chapter 4. Adjusting the Accounts. Guidelines to Report Revenue and Expenses. Time Period Assumption Economic life of business can be divided into artificial time periods. Revenue Recognition Principle Revenue recognized in the accounting period in which it is earned.

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Chapter 4

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  1. Chapter 4 Adjusting the Accounts

  2. Guidelines to Report Revenue and Expenses Time Period Assumption Economic life of business can be divided into artificial time periods Revenue Recognition Principle Revenue recognized in the accounting period in which it is earned Matching Principle Expenses matched with revenues in the period when efforts are expended to generate revenues

  3. Depreciation PREPAYMENT ASSET EXPENSE Cost of Truck $15,000 2008 2009 2010 1/1/08 12/31/08 12/31/09 12/31/10 Entry: Truck 15,000 Cash 15,000 Depreciation Expense 5,000 ASSET Accumulated Depreciation 5,000 Depreciation Expense 5,000 EXPENSE Accumulated Depreciation 5,000 CONTRA ASSET Depreciation Expense 5,000 Accumulated Depreciation 5,000

  4. Prepayment Relationships PREPAYMENTS Benefits More Than One Accounting Period RECORD AS ASSET RECORD AS LIABILITY Initial Entry Adjusting Entry Benefits Consumed or Earned in Current Period

  5. Prepayment Relationships(continued) Account Effects:

  6. Accrual Relationships ACCRUALS Expense or Revenue Not Yet Recorded RECORD EXPENSE RECORD REVENUE Adjusting Entry Subsequent Entry

  7. Types of Adjusting Entries Each adjusting entry affects a balance sheet account and an income statement account.

  8. Examples of Adjusting Entries Instructions: For each entry indicate the name of the account debited and the account credited.

  9. Examples of Adjusting Entries(continued) Answer:

  10. Posting of Adjusting Entries The following unadjusted accounts and related balances are provided at September 30: Instructions: Open T-accounts and post the adjusting entries indicated from the following data: • Supplies on hand, $200. • Revenue earned but not accrued, $900. • Unearned revenue earned by not recorded, $400. • Salary owed to employees, $700. • Depreciation of $200 is recognized.

  11. Posting of Adjusting Entries (continued)

  12. Review Chapter Concepts

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