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Business LibreTexts

3.10: Understanding the learning objectives

  • Page ID
    48933
  • • The cash basis of accounting recognizes revenues when cash is received and recognizes expenses when cash is paid out.

    • The accrual basis of accounting recognizes revenues when sales are made or services are performed, regardless of when cash is received; expenses are recognized as incurred, whether or not cash has been paid out.

    • The accrual basis is more generally accepted than the cash basis because it provides a better matching of revenues and expenses.

    • Adjusting entries convert the amounts that are actually in the accounts to the amounts that should be in the accounts for proper periodic financial reporting.

    • Adjusting entries reflect unrecorded economic activity that has taken place but has not yet been recorded.

    • Deferred items consist of adjusting entries involving data previously recorded in accounts. Adjusting entries in this class normally involve moving data from asset and liability accounts to expense and revenue accounts. The two types of adjustments within this deferred items class are asset/expense adjustments and liability/revenue adjustments.

    • Accrued items consist of adjusting entries relating to activity on which no data have been previously recorded in the accounts. These entries involve the initial recording of assets and liabilities and the related revenues and expenses. The two types of adjustments within this accrued items class are asset/revenue adjustments and liability/expense adjustments.

    • This chapter illustrates entries for deferred items and accrued items.

    • Failure to prepare adjusting entries causes net income and the balance sheet to be in error.

    • For a particular item such as sales or net income, select a base year and express all dollar amounts in other years as a percentage of the base year dollar amount.

    Demonstration problem

    Among other items, the trial balance of Korman Company for 2010 December 31, includes the following account balances:

     

     

    Debits

    Credits

    Supplies on Hand

    $ 6,000

     

    Prepaid Rent

    25,200

     

    Buildings

    200,000

     

    Accumulated Depreciation—Buildings

     

    $33,250

    Salaries Expense

    124,000

     

    Unearned Delivery Fees

     

    4,000

     

    Some of the supplies represented by the USD 6,000 balance of the Supplies on Hand account have been consumed. An inventory count of the supplies actually on hand at December 31 totaled USD 2,400.

    On May 1 of the current year, a rental payment of USD 25,200 was made for 12 months’ rent; it was debited to Prepaid Rent.

    The annual depreciation for the buildings is based on the cost shown in the Buildings account less an estimated residual value of USD 10,000. The estimated useful lives of the buildings are 40 years each.

    The salaries expense of USD 124,000 does not include USD 6,000 of unpaid salaries earned since the last payday.

    The company has earned one-fourth of the unearned delivery fees by December 31.

    Delivery services of USD 600 were performed for a customer, but a bill has not yet been sent.

    a. Prepare the adjusting journal entries for December 31, assuming adjusting entries are prepared only at year-end.

    b. Based on the adjusted balance shown in the Accumulated Depreciation—Buildings account, how many years has Korman Company owned the building?

    Solution to demonstration problems

    KORMAN COMPANY General Journal

    Date

    Account Titles and Explanation

    Post. Ref.

    Debit

    Credit

    2010 Dec.

    31

    Supplies Expense

     

     

     

    3

    6

    0

    0

     

     

     

     

     

     

     

     

     

     

    Supplies on Hand

     

     

     

     

     

     

     

     

     

     

    3

    6

    0

    0

     

     

     

    To record supplies expense ($6,000 - $2,400).

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    31

    Rent Expense

     

     

    1

    6

    8

    0

    0

     

     

     

     

     

     

     

     

     

     

    Prepaid Rent

     

     

     

     

     

     

     

     

     

    1

    6

    8

    0

    0

     

     

     

    To record rent expense ($25,200 X 8/12).

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    31

    Depreciation Expense—Buildings

     

     

     

    4

    7

    5

    0

     

     

     

     

     

     

     

     

     

     

    Accumulated Deprecation—Buildings

     

     

     

     

     

     

     

     

     

     

    4

    7

    5

    0

     

     

     

    To record depreciation ($200,000 - $10,000 / 40 years).

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    31

    Salaries Expense

     

     

     

    6

    0

    0

    0

     

     

     

     

     

     

     

     

     

     

    Salaries Payable

     

     

     

     

     

     

     

     

     

     

    6

    0

    0

    0

     

     

     

    To record accrued salaries.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    31

    Unearned Delivery Fees

     

     

     

    1

    0

    0

    0

     

     

     

     

     

     

     

     

     

     

    Service Revenue

     

     

     

     

     

     

     

     

     

     

    1

    0

    0

    0

     

     

     

    To record delivery fees earned.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    31

    Accounts Receivable

     

     

     

     

    6

    0

    0

     

     

     

     

     

     

     

     

     

     

    Service Revenue

     

     

     

     

     

     

     

     

     

     

     

    6

    0

    0

     

     

     

    To record delivery fees earned.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Eight years; computed as:

    \begin{equation}
    \frac{\text { Totalaccumulateddeprecation }}{\text { Annualdeprecationexpense }}=\frac{\text { USD33,250+USD4,750 }}{\text { USD4,750 }}
    \end{equation}