1. Accrual Accounting & Adjusting Entries
Chapter 4

2. Chapter 4 Highlights
Examine Revenue Recognition and Matching Principles
What is an accrual?
What type of accrual entries do we need?
Prepare adjusting entries, closing entries and an adjusted Trial Balance

3. Revenue Recognition
Accounting rule: revenue must be recorded in the books in the period it is “earned”
For example: If purchase a CD on May 1st but don’t pay for it until June
Record sale in May

4. Matching Principle Expenses must be matched to revenue
i.e.. must record all expenses associated with the revenue you are recording
Not following either of this principles will distort results!

5. Cash Basis of Accounting
Revenue recorded only when cash received
Expense recorded only when cash paid
Not GAAP

6. Accrual Basis of Accounting
Adheres to the
Revenue recognition principle
Matching principle
Revenue recorded when earned, not only when cash received
Expense recorded when incurred, not only when cash paid

7. Adjusting Entries
Required to ensure matching and rev recognition followed
Normally req’d each time statements are prepared

8. Common Adjusting Entries
Unearned Revenue = cash rec’d and recorded before revenue has been earned
Should appear as a liability
Example: maintenance fees, deposits
Prepaid Expense = item paid for that have not been used or consumed (ie shown as assets)
Example: autopac insurance

9. Common Adjusting Entries
Accrued Revenue = revenue earned but not yet recorded and/or cash not rec’d yet
Example: Home builder
Accrued Expenses = expenses incurred but not yet billed or paid for
Example: place ad in the newspaper on April 27 not billed until May

28. Summary of Adjustments
Type of Adjustment Adjusting Entries
Prepd Exp. Dr. Exp
Cr. Assets
Unearned Rev. Dr. Liab
Cr. Rev.
Accrued Rev. Dr. Assets
Accrued Exp. Dr. Exp.
Cr. Liab.

29. Adjusted Trial Balance
1st need to journalize the adjusting entries
Next post adjusting entries
Prepare the “new” adjusted Trial balance reflecting these changes
Note: all should still balance between Dr & Cr balances

30. Adjusted Trial Balance
Once adjusted TB has been prepared and reviewed create financial stmts
Note: Top of financial statement(s) should have 3 lines
1st – Organization name
2nd – Type of report
3rd – reporting period and date

33. Closing the Books
Involves preparing the books for a new year of activity
I/S related accounts must be closed as they represent the activity for a period only
I.e. not cumulative

34. Closing the Books Temporary Accounts
Temporary accounts are closed (i.e. record entry to create a zero balance in that account) at the end of the period
All Rev & Exp are closed out to a summary acct. called “Income Summary” which is then closed out to Retained Earnings
Temporary Accounts
All revenue accounts
All expense accounts
Dividends

35. Retained Earnings is a permanent account; the others shown here
are temporary
Individual Expenses
Retained Earnings
Income Summary
Individual Revenues
Dividends 1 3 4 2

36. The Accounting Cycle Review
Analyze business transactions
Journalize the transactions
Post to ledger accounts
Prepare a trial balance
Journalize and post adjusting entries-prepayments and accruals

37. The Accounting Cycle Review
Prepare an adjusting trial balance
Prepare financial statements
Journalize and post closing entries
Prepare a post-closing trial balance

38. Chapter 4 – The End