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Lecture 4 - Income Statement - Adjusting Entries

The document is an income statement for Overnight Auto Service for the year ended December 31, 2011. It shows the company had total revenue of $175,000, with expenses of $108,430, giving income before taxes of $66,570 and net income of $39,942.

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Maham Farooqui
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34 views2 pages

Lecture 4 - Income Statement - Adjusting Entries

The document is an income statement for Overnight Auto Service for the year ended December 31, 2011. It shows the company had total revenue of $175,000, with expenses of $108,430, giving income before taxes of $66,570 and net income of $39,942.

Uploaded by

Maham Farooqui
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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LECTURE 4

OVERNIGHT AUTO SERVICE


INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2011
Revenue:
Repair service revenue 172,000
Rent revenue earned 3,000
Total revenue 175,000
Expenses:
Advertising 3,900
Salaries and wages 58,750
Supplies 7,500
Depreciation: building 1,650
Depreciation: tools and equipment 2,200
Utilities 19,400
Insurance 15,000
Interest 30 108,430
Income before income taxes 66,570
Income taxes 26,628
Net income 39,942
=====
*****************************

CHAPTER 4 OF THE PRESCRIBED BOOK

ADJUSTING ENTRIES AND TIMING DIFFERENCES:

Accrual accounting is an accounting method where revenue or expenses are recorded when an


accounting transaction occurs rather than when payment is received or made.

Matching Concept: It requires that the expenses incurred during an accounting period be
recorded in the same period in which the related revenues are earned and recorded.

Realization Concept: It requires that the revenue can only be recognized once the underlying
goods or services associated with the revenue have been delivered or rendered. Thus, revenue
can only be recognized after it has been earned.

In an accrual accounting system, there are often timing differences between cash flows and the
recognition of expenses or revenue. A company can pay cash in advance of incurring certain
expenses or receive cash before revenue has been earned. Likewise, it can incur certain expenses
before paying any cash or it can earn revenue before any cash is received. These timing
differences, and the adjusting entries that result from them, are summarized below:
Four basic types of adjusting entries:

1. Adjusting entries to convert assets to expenses.

• Adjusting entries to convert assets to expenses result from cash being paid prior to an expense
being incurred. At the time of payment, an asset account is debited (for example, Supplies or
Unexpired Insurance) by crediting cash.

The adjusting entry is recorded by debiting the appropriate expense account (for example,
Supplies Expense or Insurance Expense) and crediting the related asset account (for example,
Supplies or Unexpired Insurance).

2. Adjusting entries to convert liabilities to revenue.

• Adjusting entries to convert liabilities to revenue result from cash being received prior to
revenue being earned. At the time of collection, cash is being debited by crediting a liability
account (for example Unearned Revenue).

The adjusting entry is recorded by debiting the liability account (for example, Unearned
Revenue) and crediting Revenue Earned (or a similar account) for the value of the services
rendered.

3. Adjusting entries to accrue unpaid expenses.

• Adjusting entries to accrue unpaid expenses result from expenses being incurred before cash is
paid.

This adjusting entry is recorded by debiting the appropriate expense account (for example,
Interest Expense or Salary Expense) and by crediting the related liability account (for example,
Interest Payable or Salaries Payable).

4. Adjusting entries to accrue uncollected revenue.

• Adjusting entries to accrue uncollected revenue result from revenue being earned before cash is
received.

This adjusting entry is recorded by debiting the appropriate asset account (for example, Accounts
Receivable or Interest Receivable) and by crediting the appropriate revenue account (for
example, Service Revenue Earned or Interest Earned).

Please go through Exhibit 4–1. Adjusting entries provide links between accounting periods
on Page 175 of soft copy of the book or Page 142 of hard copy of the book.

DEMONSTRATION PROBLEM

Assignment 4 - PROBLEMS 4.2A, 4.4A, 4.5A. Prepare adjusting entries in JOURNAL

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