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© 2015 Cengage Learning. All Rights Reserved.

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Presentation on theme: "© 2015 Cengage Learning. All Rights Reserved."— Presentation transcript:

1 © 2015 Cengage Learning. All Rights Reserved.
LESSON 8-3 Accrued Expenses Learning Objectives LO4 Journalize adjusting and reversing entries for accrued expenses. LO5 Account for warranty expenses. LO6 Compare the accounting principles supporting the recognition of warranty expense and uncollectible accounts expense. © 2015 Cengage Learning. All Rights Reserved.

2 Journalizing Accrued Interest Expense
Lesson 8-3 Journalizing Accrued Interest Expense LO4 Expenses incurred in one fiscal period but not paid until a later fiscal period are called accrued expenses. On December 31, Vaughn Distributors has a 60-day, 8% note payable for $9,000.00, dated December 6. Vaughn owes the bank for interest on the note from December 6 to the end of the month. On December 31, Vaughn owes 25 days’ worth of accrued interest on the note, $ However, Vaughn will not pay any interest on this note until its maturity date. © 2015 Cengage Learning. All Rights Reserved.

3 Procedure for Recording Accrued Expenses
Lesson 8-3 Procedure for Recording Accrued Expenses LO4 A business may need to record several accrued expenses, such as payroll, payroll taxes, and income taxes. The same procedure is used to record any accrued expense. © 2015 Cengage Learning. All Rights Reserved.

4 Reversing Entry for Accrued Interest
Lesson 8-3 Reversing Entry for Accrued Interest LO4 Accountants generally reverse an adjusting entry that creates a balance in a liability account. Such is the case with accrued interest expense. Debit the Liability Account Credit the Expense Account © 2015 Cengage Learning. All Rights Reserved.

5 Payment of a Note At Maturity
Lesson 8-3 Payment of a Note At Maturity LO4 February 4. Paid cash for the maturity value of the December 6 note: principal, $9,000.00, plus interest, $118.36; total, $9, Check No. 855. Journalizing Warranty Expense © 2015 Cengage Learning. All Rights Reserved.

6 Journalizing Warranty Expense
Lesson 8-3 Journalizing Warranty Expense LO5 Jackson Sports sold 850 carts during the fiscal year and estimates that it spends an average of $60.00 on warranty repairs for each cart. © 2015 Cengage Learning. All Rights Reserved.

7 Journalizing Warranty Payments
Lesson 8-3 Journalizing Warranty Payments LO5 January 16. Paid cash to replace a defective battery, $ Check No. 225. Jackson Sports accrues its warranty costs when it sells a golf cart. Because of this, no expense is recorded when Jackson Sports incurs a warranty expenditure. © 2015 Cengage Learning. All Rights Reserved.

8 Accounting for Warranty Expense and Uncollectible Accounts Expense
Lesson 8-3 Accounting for Warranty Expense and Uncollectible Accounts Expense LO6 The accounting concept (Matching Expenses with Revenue) that supports the accounting for uncollectible accounts also applies to the accounting for warranty expenses. Since the exact amount of each expense is not known at the time the sale is recorded, accountants must estimate these expenses and regularly evaluate the adequacy of their estimates. © 2015 Cengage Learning. All Rights Reserved.

9 Accounting for Warranty Expense and Uncollectible Accounts Expense
Lesson 8-3 Accounting for Warranty Expense and Uncollectible Accounts Expense LO6 While accountants generally reverse an adjusting entry that creates a balance in a liability account, the accounting for uncollectible accounts and warranty expenses is an exception to this rule. Neither of the adjustments to estimate uncollectible accounts or warranty expenses is reversed. Accrued Warranty Liability and Allowance for Uncollectible Accounts each have natural credit balances. Allowance for Uncollectible Accounts has a related asset account and is therefore classified as a contra asset account on the balance sheet. Accrued Warranty Liability does not have a related asset and is classified as a liability. © 2015 Cengage Learning. All Rights Reserved.

10 Lesson 8-3 Audit Your Understanding
1. What are the three steps to accrue an expense? ANSWER a. Determine the amounts of the accrual. b. Record the expense accounts. c. Record the liability accounts. © 2015 Cengage Learning. All Rights Reserved.

11 Lesson 8-3 Audit Your Understanding
2. How do accountants determine if an adjusting entry for an accrued expense should be reversed? ANSWER Accountants generally reverse an adjusting entry that creates a balance in a liability account. © 2015 Cengage Learning. All Rights Reserved.

12 Lesson 8-3 Audit Your Understanding
3. When should the cost of repairing an item under warranty be expensed? ANSWER In the fiscal period in which the item is sold. © 2015 Cengage Learning. All Rights Reserved.

13 Lesson 8-3 Audit Your Understanding
4. Identify the similarities and differences between the accounting for warranty costs and uncollectible accounts. ANSWER Similarities: With each sale on account, there is a chance that the business will incur warranty costs and that the customer will not pay its account. An estimate of these expenses is recorded in the same fiscal period as the sale. Differences: Allowance for Uncollectible Accounts has a related asset account and is reported on the balance sheet as a contra asset account. Accrued Warranty Payable does not have a related asset and is reported as a liability on the balance sheet. © 2015 Cengage Learning. All Rights Reserved.


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