 
|
Accounting 211
Thursday, January 21st, 1999
Announcements: none
Lecture notes:
Example:
7/1/98
$36,000 is received from a tenant. The payment covers the 2 year period beginning 7/1/98 and ending 6/30/98.
|
Cash |
36,000 |
|
|
Unearned Revenue |
|
36,000 |
Deferral: covers the next 2 years, we don't recognize revenue because we haven't earned it
Adjusting Entry (12/31/98):
|
Unearned Revenue |
9,000 |
|
|
Revenue |
|
9,000 |
What is the impact on financial statements if the adjusting entry is now made?
Income Statement:
Revenues are too high, Net Income is too low
Balance Sheet:
Liabilities are too high, SE is too low
As of 12/31/98:
|
Revenue |
$9,000 |
|
Unearned Revenue |
$27,000 |
Retained Earnings Illustration
(assumptions--business began in 1991)
|
1991 Net Income |
$15,000 |
|
1991 Dividends |
-$3,000 |
|
12/31/91 Retained Earnings |
$12,000 |
|
1992 Net Income |
$21,000 |
|
1992 Dividends |
-$7,000 |
|
12/31/92 Retained Earnings |
$26,000 |
*Retained earnings are the accumulative undistributed profits of an organization
Page 122, Exercise #10:
|
PREPAID INSURANCE |
|
Beginning Balance
1450 |
Insurance Expense Adjustment
2150 |
|
X |
|
|
Ending Balance
1200 |
|
Credits are greater than debits by $250
X = Insurance Payments = $1,900
Accrual: recognition of the expense before the cash flow
|
WAGES PAYABLE |
|
Cash Payment |
Accrued Wages |
|
Change = 500 |
|
Cash Payments are greater than Accrued Wages by $500
Cash Payments = $9,750
|
UNEARNED REVENUE |
|
Revenue Earned |
Cash Collections |
|
Change = 1,150 |
Cash Collections are greater than Revenue Earned by $1,150
Cash Collections = $4,450
Page 123, Exercise #13:
|
PREPAID RENT |
|
Rent Payments Made |
Rent Expense Recognition |
|
Change = 900 |
|
Rent Payment made is greater than Rent Expense by $900
Rent Payments = $6,100
Answers to other 2 parts:
#2--$9,000
#3--$78,400
Example:
A company recognized revenue during 1997 which should have been deferred (recognized) until (in) 1998.
What is the impact of this error?
1997 Income Statement:
Revenues are too high, Net Income is too high
1997 Year End Balance Sheet:
Liabilities are too low, SE is too high
Revenue should have been deferred
Example:
A company failed to accrue wages earned by its employees.
What is the impact?
Income Statement:
Expenses are too low, Net Income is too high
Balance Sheet:
Liabilities are too low, SE is too high
The Closing Process
Close the revenue accounts to the income summary account.
|
Revenues |
XX |
|
|
Income Summary |
|
XX |
Close the expense accounts to the income summary account.
|
Income Summary |
XX |
|
|
Expenses |
|
XX |
(1 & 2 together represent net income)
Close the income summary account balance to the retained earnings account.
|
1) Income Summary |
XX |
|
|
Retained Earnings |
|
XX |
OR:
|
2) Retained Earnings |
XX |
|
|
Income Summary |
|
XX |
*Choose #1 if Revenue is greater than Expenses.
Close the dividends (temporary account) to the retained earnings account.
|
Retained Earnings |
XX |
|
|
Dividends |
|
XX |
|
