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Accounting 3

Accounting 3. Chapter 24 Section 2 Accrued Expenses. Analyzing an Adjustment for Accrued Interest Expense. Accrued Expenses – Expenses incurred in one fiscal period but not paid until a later fiscal period. Accrued expense is recorded at the end of a fiscal period by an adjusting entry.

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Accounting 3

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  1. Accounting 3 Chapter 24 Section 2 Accrued Expenses

  2. Analyzing an Adjustment for Accrued Interest Expense • Accrued Expenses – Expenses incurred in one fiscal period but not paid until a later fiscal period. • Accrued expense is recorded at the end of a fiscal period by an adjusting entry. • This entry increases the Interest Expense and the Interest Payable account.

  3. Analyzing an Adjustment for Accrued Interest Expense • Accrued Interest Expense – Interest incurred but not yet paid. • To calculate AIE: • Principal x Interest Rate x Time as fraction of a year = AIE.

  4. Example: On December 31, Winning Edge has one note payable outstanding: a 180-day, 12%, $5,000.00 note dated September 2. • September 2 to December 31 = 120 days. • $5000 (P) x 12%(IR) x 120/360 = $200.00 • AIE = $200.00 • So Interest Expense is debited and Interest Payable is credited for $200.00

  5. Worksheet Account Title Trial Balance Adjustments Debit Credit Debit Credit Visuals next two slides Winning Edge, Inc. For Year Ended December 31, 2006 Interest Payable 2 0 0 00 Interest Expense 2 0 0 00

  6. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 15 Adjusting Entries 31 Interest Expense 2 0 0 00 Interest Payable 2 0 0 00

  7. Posting an Adjusting Entry for Accrued Interest Expense • Posting this type of entry is not any different than any other posting we have ever done.

  8. Reversing Entry for Accrued Interest Expense • This entry is not too much different from a reversing entry for Accrued Interest Income. • In order to correctly show that $200 of the total $300 of interest accrued on this note payable was accrued in 2006; this must be done on Jan 1: • Interest Payable debited for $200 and Interest Expense credited for $200.

  9. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 17 Reversing Entries Jan 1 Interest Payable 2 0 0 00 Interest Expense 2 0 0 00

  10. Paying a Note Payable Signed in a Previous Fiscal Period • The journalizing is done just like paying any other note payable. • The note payable account and the interest expense account are debited for the amount due. • The cash account is credited for the total of these two accounts. • The posting is done in the same way as normal. • The next slide will show the posting for all three accounts effected by these transactions.

  11. Account Account Account Acct No. Acct No. Acct No. Post Ref Post Ref Post Ref Date Date Item Item Debit Debit Credit Credit BALANCE BALANCE Date Item Debit Credit BALANCE DEBIT DEBIT CREDIT CREDIT DEBIT CREDIT Notes Payable 2105 Sep 2 CR28 5 0 0 0 00 5 0 0 0 00 Mar 1 CP55 5 0 0 0 00 _________ Interest Payable 2110 Dec 31 G15 2 0 0 00 2 0 0 00 Adjusting Jan 1 G17 2 0 0 00 --------------- Reversing Interest Expense 8105 Dec 21 CP36 7 5 00 1 1 4 3 00 31 G15 2 0 0 00 1 3 4 3 00 Adjusting 31 G15 1 3 4 3 00 __________ Closing Jan 1 G17 2 0 0 00 2 0 0 00 Reversing Mar 1 CP55 3 0 0 00 1 0 0 00 Payment

  12. Effect of Not Using Reversing Entries • If companies did not use a reversing entry for accrued interest expense or interest income, the interest would be reported twice.

  13. Worksheet Account Title Trial Balance Adjustments Debit Credit Debit Credit Work Together p. 626 Powers Corporation For Year Ended December 31, 2006 Interest Payable (h) 3 1 00 8 4 6 7 00 Interest Expense (h) 3 1 00 Follow the arrows to see the logical steps for this problem. Example: When you get to the end of a post, follow the arrow to keep you in the correct sequence.

  14. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 14 Adjusting Entries Dec 06 31 Interest Expense 8105 3 1 00 Interest Payable 2110 3 1 00 Closing Entries 31 Income Summary 3120 8 4 9 8 00 Interest Expense 8105 8 4 9 8 00 Look at postings now Start of pg G15 Reversing Entries Jan 07 1 Interest Payable 2110 3 1 00 Interest Expense 8105 3 1 00 Look at these postings now After viewing all posts, go to Cash Payments Journal

  15. Account Account Acct No. Acct No. Post Ref Post Ref Date Date Item Item Debit Debit Credit Credit BALANCE BALANCE DEBIT DEBIT CREDIT CREDIT Notes Payable 2105 Dec 1 CR13 2 0 0 0 00 2 0 0 0 00 Mar 07 1 CP25 2 0 0 0 00 ------------ Interest Payable 2110 To GJ Dec 06 31 G14 3 1 00 3 1 00 Jan 07 1 G15 3 1 00 --------------

  16. Account Account Acct No. Acct No. Post Ref Post Ref Date Date Item Item Debit Debit Credit Credit BALANCE BALANCE DEBIT DEBIT CREDIT CREDIT Income Summary 3120 Dec 06 31 G14 8 4 9 8 00 8 4 9 8 00 Interest Expense 8105 Dec 06 31 CP19 1 6 0 00 8 4 6 7 00 31 G14 3 1 00 8 4 9 8 00 31 G14 8 4 9 8 00 -------------- Jan 07 1 G15 3 1 00 3 1 00 Mar 07 1 CP25 9 0 00 5 9 00

  17. Cash Payments Journal Page ___ Ck No. Post Ref. GENERAL Date Account Title Accts Pay Debit Purch. Disc. Credit Cash Credit DEBIT CREDIT 25 Mar 07 1 Notes Payable 343 2105 2 0 0 0 00 2 0 9 0 00 Interest Expense 8105 9 0 00 Assignments

  18. Assignments • Do Application 24-2 and 24-3 by hand. • Turn these in. • Complete 24-4 using the Automated Accounting Software. • Turn this in. • Take chapter 24 test.

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