8. Advantages of Special Journals Record frequent transactions on 1 line vs. 2 or 3 Usually includes guidance on which accounts to debit, credit Disadvantage of Special Journals May lose the ability to “look in one place” for a chronological listing of all transactions

10. Revenue Journal or

11. T-accounts: simple account formatT-Accounts Cheat Sheet Figures are from Cliffs Notes web site

25. Learning Objectives: Adjusting Entries (Chapter 4)

26. Analyze Business Transactions Record Journal Entries Post Journal Entries Financial Statements Closing Entries & Post-Closing Trial Balance

29. Copyright © Houghton Mifflin Company. All rights reserved. 2–29 A ruled line appears before each subtotal or total A double line appears under a final total that has been verified Dollar signs are required and are placed before the first amount in each column

32. Copyright © Houghton Mifflin Company. All rights reserved.

35. Journal Entry TypeExplanation & Example Deferred ExpensesExpense that is “paid for before it is incurred,” e.g. supplies, prepaid insurance (Type 1 on next page) Accrued ExpensesExpenses that are incurred before they are paid for, e.g. Wages Payable (Type 2) Deferred RevenuesRevenues paid by customers but not yet fully earned by company (Type 3) Accrued RevenuesRevenues earned by company but not yet billed to/paid for by customers (Type 4) DepreciationAccount for decreasing value of a Fixed Asset (Long-term asset) such as Equipment or Buildings

37. Copyright © Houghton Mifflin Company. All rights reserved. Prepaid Rent July 2 1,600 July 31: Prepaid rent of $800 has expired. Adjust account by allocating $800 of prepaid rent to rent expense Joan Miller Advertising Agency’s July 31 trial balance showed a balance of $1,600 in the Prepaid Rent account July 2: Paid $1,600 rent in advance for July and August Rent Expense Bal. 800 July 31 800 The correct account balance of $800 will now be reflected on the balance sheet The correct account balance of $800 will now be reflected on the income statement If this adjustment was not made, assets on the balance sheet would be $800 too high, and expenses on the income statement would be $800 too low

40. Type of AssetIncome Statement Expense Tangible Asset; Property, Plant & Equipment, etc. Depreciation Intangible Asset: Patent, Copyright, Trademark, License, Leasehold Improvements, Goodwill, etc. Amortization Natural Resources: Timber, oil, gas, ore, coal, etc. Depletion

45. Example: Depreciation of a Delivery Truck Cost: $10,000 Salvage (residual) value: $1,000 Useful life: 5 years How much is each year’s depreciation?

46. The amount of depreciation is the same each year Accumulated depreciation increases uniformly The carrying value (Book Value) decreases uniformly until it reaches the estimated residual (salvage) value Depreciation Schedule: Straight-Line Method Delivery Truck: cost $10K; salvage value $1k; Useful life 5 years

47. Example of Double-Declining-Balance Method A delivery truck costs $10,000 and has an estimated residual value of $1,000 at the end of its estimated useful life of 5 years Under the straight-line method, the depreciation rate for each year is 20 percent Under the double-declining-balance method, the depreciation rate for each year is twice the rate of the straight-line method, or 40 percent This fixed rate is applied to the remaining carrying value at the end of each year

48. Note that the fixed rate is always applied to the carrying value at the end of the previous year Depreciation is greatest in the first year and declines each year after that The depreciation in the last year is limited to the amount necessary to reduce the carrying value to the residual value ($1,296 - $1,000 = $296) Depreciation Schedule Double-Declining-Balance Method Book Value or