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Rosi, Inc. purchased buildings in 2000 at a cost of $156,000, an expected life of 20 years, and no anticipated residual value. Each year, 5% of the cost is depreciated. At the end of 2005, the following adjusting entry is made:
An estimation of bad debts based on the ending receivables balance reveals that the allowance account needs to be increased by $1,100.Adjusting Entry 12/31 Bad Debts Expense 1,100
Allowance for Bad Debts 1,100
To adjust for estimated bad
debts expense.
Bad Debts
Later, on March 19 that a $150 receivable is deemed to be uncollectible. Using the allowance account, the uncollectible account is written off the books.
3/19 Allowance for Bad Debts 150Accounts Receivable 150
To write off an uncollectibleaccount.
Bad Debts
Note that this entry is not an adjusting entry. It is made when the
account is determined to be uncollectible.
At the end of the fiscal period, Rosi, Inc. had accrued salaries and wages totaling $2,150.
Adjusting Entry 12/31 Salaries and Wages Expense 2,150
Salaries and Wages Payable 2,150To record accrued salaries andwages.
Accrued Expenses
Rosi, Inc. holds a note receivable from a customer on which interest total $250 has accrued.
Adjusting Entry 12/31 Interest Receivable 250
Interest Revenue 250To record accrued interest on anote receivable.
Accrued Revenues
Rosi, Inc.’s trial balance shows that the asset account Prepaid Insurance has a balance of $8,000. By December 31, only $3,800 applies to future periods.
Adjusting Entry 12/31 Insurance Expense 4,200
Prepaid Insurance 4,200To record expired insurance.
$8,000 – $3,800$8,000 – $3,800
Original debit to an asset accountOriginal debit to an asset account
Prepaid Expenses
Rosi, Inc.’s trial balance shows that the asset account Insurance Expense has a balance of $8,000. By December 31, $3,800 applies to future periods.
Adjusting Entry 12/31Prepaid Insurance 3,800
Insurance Expense 3,800To record expired insurance.
$8,000 – $4,200$8,000 – $4,200
Original debit to an expense accountOriginal debit to an expense account
Prepaid Expenses
Rosi, Inc. receives a payment of $2,550 from a customer prior to the services being rendered. By December 31, $2,075 in services have been provided.
Adjusting Entry 12/31Rent Revenue 475
Unearned Rent Revenue 475To record unearned rent revenue.
Original credit to a revenue accountOriginal credit to a revenue account
$2,550 – $2,075$2,550 – $2,075
Deferred Revenues
Adjusting Entry 12/31 Unearned Rent Revenue 2,075
Rent Revenue 2,075To record rent revenue.
Rosi, Inc. receives a payment of $2,550 from a customer prior to the services being rendered. By December 31, $2,075 in services have been provided.$2,550 – $475$2,550 – $475
Original credit to a liability accountOriginal credit to a liability account
Dividends 13,600Sales 479,500Purchases 162,600Purchases Discounts 3,290Cost of Goods Sold 0Salaries and Wages Expense 172,450Heat, Light, and Power 32,480
Debit Credit
Partial Trial Balancefrom page 64 in your text
Adjusting Entry 12/31 Inventory 6,000
Purchases Discounts 3,290Cost of Goods Sold 153,310
Purchases 162,500To adjust inventory, cost ofgoods sold, and related accounts.
$51,000 – $45,000$51,000 – $45,000To closeTo close
To closeTo close
Purchases, Purchases Discounts, and Cost of Goods Sold are affected by the adjusting entry to update the inventory account.
Inventory
When a perpetual inventory system is
maintained, a separate
Purchases account is not used.
When a perpetual inventory system is
maintained, a separate
Purchases account is not used.
When a sale takes place, the sale is recorded similar to the periodic
inventory system.
When a sale takes place, the sale is recorded similar to the periodic
inventory system.The cost of the merchandise is recorded by a
debit to Cost of Goods Sold and
a credit to Inventory.
The cost of the merchandise is recorded by a
debit to Cost of Goods Sold and
a credit to Inventory.
Perpetual Inventory System
1. Record Transactions
2. Prepare Trial Balance
3. Make Adjusting Entries
4. Prepare Financial Statements
Preparing Financial Statements
Financial Statements
• Real accounts or permanent accounts • Not closed to a zero balance at the end of the
accounting period.• Carried forward to the next period.
• Nominal accounts or temporary accounts• Closed to a zero balance at the end of each
accounting period.• All Income statement accounts & Dividend
Account.• Closing entries reduce all nominal
accounts to a zero balance.
The Closing Process
Revenues Bal. xxx
Retained Earnings
Beg. Bal. xxxxxx
Since the revenue account is a nominal account, it is closed at
the end of the period to Retained Earnings.
Since the revenue account is a nominal account, it is closed at
the end of the period to Retained Earnings.
Revenues
The Closing Process
Expenses
Bal. xxx xxx The expense account is credited in order to close the account at
the end of the period.
The expense account is credited in order to close the account at
the end of the period.
Retained Earnings Beg. Bal. xxx RevenuesExpenses
The Closing Process
Dividends
Bal. xxx xxx
The dividends account, which is also nominal, is credited
to close out the balance.
The dividends account, which is also nominal, is credited
to close out the balance.
Retained Earnings
Beg. Bal. xxx RevenuesExpensesDividends
The Closing Process
Retained Earnings
Retained Earnings is a real account
and always carries a balance.
Retained Earnings is a real account
and always carries a balance.
Net Income for the period is determined by these two items.
Net Income for the period is determined by these two items.
2. Journalize transactions.3. Post journal entries to accounts.4. Determine account balances and
prepare a trial balance.5. Journalize and post adjusting entries.6. Prepare financial statements.7. Journalize and post closing entries.8. Prepare a post-closing trial balance.
Summary of the Accounting Cycle
Accrual Accounting
• Recognizes revenues as they are earned, not necessarily when cash is received.
• Recognizes expenses as they are incurred, not necessarily when cash is paid.
• Provides a better basis for financial reports, according to the FASB.
Cash Basis Accounting
• Cash-basis accounting is focused on cash receipts and cash disbursements.
• Typically used by service businesses, such as CPAs, dentists, and engineers.
• AICPA holds that it is appropriate for small companies.
Computers and Accounting
• Many steps of the accounting cycle are performed using computers.
• Typical computerized functions include, generating reports and computational analysis.