4-1

ACCRUAL
ACCOUNTING
CONCEPTS

Financial Accounting, Seventh Edition

4-2
 L
earning Objectives
After studying this chapter, you should be able to:
1. Explain the revenue recognition principle and the expense recognition
principle.
2. Differentiate between the cash basis and the accrual basis of
accounting.
3. Explain why adjusting entries are needed, and identify the major types of
adjusting entries.
4. Prepare adjusting entries for deferrals.
5. Prepare adjusting entries for accruals.
6. Describe the nature and purpose of the adjusted trial balance. 7.
Explain the purpose of closing entries.
8. Describe the required steps in the accounting cycle.
9. Understand the causes of differences between net income and cash
provided by operating activities.
4-3
 Preview of Chapter 4

Financial Accounting
Seventh Edition
Kimmel Weygandt Kieso
4-4

Timing Issues
 Accountants divide the economic life of a business into
artificial time periods (Periodicity Assumption).
.....
Jan. Feb. Mar. Apr. Dec. ◆ Generally a month, a

quarter, or a year.

◆ Fiscal year vs. calendar year

LO 1 Explain the revenue recognition principle

4-5
 and the expense recognition principle.

Timing Issues
Review Question
What is the periodicity
assumption?
a. Companies should
recognize revenue in the
accounting period in which it is earned.
b. Companies should match expenses with revenues.
c. The economic life of a business can be divided into
artificial time periods.
d. The fiscal year should correspond with the calendar
year.
 LO 1 Explain the revenue recognition principle
4-6
and the expense recognition principle.

Timing Issues
The Revenue Recognition Principle

Companies recognize
revenue in the accounting
period in which the
performance obligation is
satisfied.

LO 1 Explain the revenue recognition principle

4-7
and the expense recognition principle.

Timing Issues
Illustration: Assume Conrad Dry Cleaners cleans clothing
on June 30, but customers do not claim and pay for their
clothes until the first week of July. The journal entries for
June and July would be:

LO 1 Explain the revenue recognition principle

4-8
and the expense recognition principle.
 Issues

Timing Illustration 4-1 (Partial)

“Let the expenses follow the revenues.”

LO 1 Explain the revenue recognition principle

4-9
and the expense recognition principle.

Timing Issues 4-

10

Illustration 4-1 GAAP

relationships in revenue
and expense recognition
LO 1 Explain the revenue recognition principle and the expense recognition principle.

4-11
 Timing Issues
Accrual versus Cash Basis of Accounting
Accrual-Basis Accounting
► Transactions recorded in the periods in which the
events occur.

► Revenues are recognized when services performed,

even if cash was not received.

► Expenses are recognized when incurred, even if cash

was not paid.

LO 2 Differentiate between the cash basis

4-12
and the accrual basis of accounting.
 Timing Issues
Accrual versus Cash Basis of Accounting
Cash-Basis Accounting
► Revenues are recognized only when cash is received.

► Expenses are recognized only when cash is paid.

► Prohibited under generally accepted accounting

principles (GAAP).

LO 2 Differentiate between the cash basis

4-13
and the accrual basis of accounting.
 Timing Issues
Illustration: Suppose that Fresh Colors paints a large building
in 2013. In 2013, it incurs and pays total expenses (salaries and
paint costs) of $50,000. It bills the customer $80,000, but does
not receive payment until 2014. Illustration 4-2 (Partial)
2013 2014

4-14 the accrual basis of accounting.

LO 2 Differentiate between the cash basis and
 Timing Issues
Review Question
Which one of these statements about the accrual basis of
accounting is false?
a. Companies record events that change their financial
statements in the period in which events occur, even if cash
was not exchanged.
b. Companies recognize revenue in the period in which the
performance obligation is satisfied.
c. This basis is in accord with generally accepted accounting
principles.
d. Companies record revenue only when they receive cash, and
record expense only when they pay out cash. (FALSE)

LO 2 Differentiate between the cash basis

4-15
and the accrual basis of accounting.
 4-16

The Basics of
 Adjusting Entries
Adjusting entries
◆ ensure that the revenue recognition and expense
recognition principles are followed.

◆ are required every time a company prepares financial

statements.

◆ includes one income statement account and one

balance sheet account.

◆ never include cash.

LO 3 Explain why adjusting entries are needed, and

4-17
identify the major types of adjusting entries
 The Basics of
Adjusting Entries
Review Question
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they
are incurred.
b. revenues are recognized in the period in which the
performance obligation is satisfied.
c. balance sheet and income statement accounts have
correct balances at the end of an accounting period.
 d. All of the above.

LO 3 Explain why adjusting entries are needed, and

4-18
identify the major types of adjusting entries

Type
s of
Adju
sting
Entri
es
Illustration 4-
3
Categories of adjusting entries
Deferrals:
 1. Prepaid expenses: Expenses paid in cash and recorded as
assets before they are used or consumed. (tại thời điểm giao
dịch chưa sd dvu, vd: prepaid insurance => đối chiếu hợp
đồng, nếu sd rồi thì tích một phần prepaid sang chi phí)
=> tăng expense, giảm prepaid
2. Unearned revenues: Cash received before service are
performed. (đã nhận tiền nhưng chưa cung cấp dvu
cho kh. Khi lập bc ph rà soát lại đến thời điểm này cty
đã hoàn thành chưa0
=> Tăng (credit) revenue, giảm (debit) unearned service
revenue
Accruals: (ĐÃ CUNG CẤP DVU NHƯNG CHƯA CHI/ TRẢ TIỀN)
=> tăng revenue, tăng account receivable
1. Accrued revenues: Revenues for services performed but not
yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in
cash or recorded. (các khoản chi phí đã dùng dvu nhưng
chưa chi ra)
=> tăng chi phí, tăng một khoản chi phí phải trả (debit expense,
 creit accured expense)

LO 3 Explain why adjusting entries are needed, and

4-19
identify the major types of adjusting entries
 Types of Adjusting
Entries
Trial Balance –
Each account is
analyzed to
determine
whether it is
complete and up
to-date.
 Illustration 4-4

4-20 and identify the major types of adjusting

LO 3 Explain why adjusting entries are needed, entries

Adjusting
Entries for Deferrals
Deferrals are either:

◆ Prepaid expenses

OR

◆ Unearned revenues.
 LO 4 Prepare adjusting entries for deferrals.
4-21

Adju
sting Entries for “Prepaid Expenses”
Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

◆ insurance ◆ advertising
◆ supplies
4-22 LO 4 Prepare adjusting entries for deferrals.
◆ rent
◆ equipment
◆ buildings

Adjusting Entries for “Prepaid Expenses”

Prepaid Expenses
◆ Costs that expire either with the passage of time or
through use.

◆ Adjusting entry results in an increase (a debit) to an

expense account and a decrease (a credit) to an asset
account.
 LO 4 Prepare adjusting entries for deferrals.
4-23

Adjusting Entries for “Prepaid Expenses”

Adjusting entries for prepaid expenses

Illust

Increases (debits) an expense account and

ration 4-5◆

◆ Decreases (credits) an asset account.

 LO 4 Prepare adjusting entries for deferrals.
4-24

Adjusting Entries for “Prepaid Expenses”

Illustration: Sierra Corporation purchased supplies costing $2,500
on October 5. Sierra recorded the purchase by increasing (debiting)
the asset Supplies. This account shows a balance of $2,500 in the
October 31 trial balance. An inventory count at the close of business
on October 31 reveals that $1,000 of supplies are still on hand.

Oct. 31 Supplies Expense 1,500 Supplies 1,500

($2,500 – 1,000 = $1,500)
Illustration 4-6 (Partial)
4-25 LO 4 Prepare adjusting entries for deferrals.

Adjusting Entries for “Prepaid Expenses”

Illustration: On October 4, Sierra Corporation paid $600 for a one
year fire insurance policy. Coverage began on October 1. Sierra
recorded the payment by increasing (debiting) Prepaid Insurance.
This account shows a balance of $600 in the October 31 trial balance.
Insurance of $50 ($600 ÷ 12) expires each month.

Oct. 31 Insurance Expense 50

Prepaid Insurance 50

Illustration 4-7 (Partial)

4-26 LO 4 Prepare adjusting entries for deferrals.

Adjusting Entries for “Prepaid Expenses”

Depreciation
◆ Buildings, equipment, and motor vehicles (long-lived
assets) are recorded as assets, rather than an expense,
in the year acquired.

◆ Companies report a portion of the cost of a long-lived

asset as an expense (depreciation) during each period of
the asset’s useful life.
 ◆ Depreciation does not attempt to report the actual
change in the value of the asset.

LO 4 Prepare adjusting entries for deferrals.

4-27

Adjusting Entries for “Prepaid Expenses”

Illustration: For Sierra Corporation, assume that depreciation on
the office equipment is $480 a year, or $40 per month.

Oct. 31 Depreciation Expense 40 Accumulated Depreciation-

Equipment 40
 Illustration 4-8
(Partial)

LO 4 Prepare adjusting entries for deferrals.

4-28

Adjusting Entries for “Prepaid Expenses”

Statement Presentation
◆ Accumulated Depreciation
Equipment is a contra asset
account.
 ◆ Appears just after the account it
offsets (Equipment) on the
balance sheet.
Illustration 4-9

L
O 4 Prepare adjusting entries for deferrals.
4-29

Adjusting Entries for “Prepaid Expenses”

Summary
Illustration 4-10
4-30 LO 4 Prepare adjusting entries for deferrals.

Adju
sting Entries for “Unearned Revenues”
 Receipt of cash recorded as a liability before services are
performed.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

◆ rent ◆ magazine subscriptions ◆

◆ airline tickets customer deposits

4-31 LO 4 Prepare adjusting entries for deferrals.

Adjusting Entries for “Unearned
Revenues”Unearned Revenues
◆ Adjusting entry to record the revenue that has been
earned and to show the liability that remains.

◆ Adjusting entry results in a decrease (a debit) to a liability

account and an increase (a credit) to a revenue
account.
4-32 LO 4 Prepare adjusting entries for deferrals.

Adjusting Entries for “Unearned

Revenues”Adjusting entries for unearned revenues

Illustration 4-11
 ◆ Decrease (a debit) to a liability account and
◆ Increase (a credit) to a revenue account.

4-33
LO 4 Prepare adjusting entries for deferrals.

Adjusting Entries for “Unearned

Revenues”Illustration: Sierra Corporation received $1,200 on
October 2 from R. Knox for guide services for multi-day trips
expected to be completed by December 31. Unearned Service
Revenue shows a balance of $1,200 in the October 31 trial balance.
From an evaluation of the service Sierra performed for Knox during
October, the company determines that it has earned $400 in October.

Oct. 31 Unearned Service Revenue 400

 Service Revenue 400
Illustration 4-12 (Partial)

4-34

LO 4 Prepare adjusting entries for deferrals.

Adju
sting Entries for “Unearned Revenues”
Summary
Illustration 4-13

ACCOUNTING FOR UNEARNED REVENUES

Reason for Accounts Before

Examples
Adjustment
Adjustment Adjusting Entry
Rent, magazine Unearned recognized as Liabilities overstated.
subscriptions, customer Revenues recorded in revenue for Revenues understated.
deposits for future liability services performed Dr. Liabilities Cr.
service accounts are now Revenues

4-35

LO 4

Prepare adjusting entries for deferrals.

 4-36

Adjusting
 Entries for Accruals
Made to record:

◆ Revenues earned and

OR

◆ Expenses incurred

in the current accounting period that have not been

recognized through daily entries.

LO 5 Prepare adjusting entries for accruals.

4-37
 Adju
sting Entries for “Accrued Revenues”
Revenues for services performed but not yet received in
cash or recorded.
Adjusting entry results in:

Revenue Recorded Cash Receipt BEFORE

Accrued revenues often occur in regard to:

◆ rent
◆ interest
◆ services performed

4-38 LO 5 Prepare adjusting entries for accruals.

Adjusting Entries for “Accrued
Revenues”Accrued Revenues
An adjusting entry serves two purposes:

(1) Shows the receivable that exists, and (2)

Records the revenues for services performed.

4-39 LO 5 Prepare adjusting entries for accruals.

Adjusting Entries for “Accrued

Revenues”Adjusting entries for accrued revenues

Illu

stration 4-14 ◆ Increases (debits) an asset account and

◆ Increases (credits) a revenue account.
4-40 LO 5 Prepare adjusting entries for accruals.

Adju
sting Entries for “Accrued Revenues”
Illustration: In October, Sierra Corporation performed guide
services for $200 that were not billed to clients before October
31.

Oct. 31 Accounts Receivable 200

Service Revenue 200

Illustration 4-15
4-41 LO 5 Prepare adjusting entries for accruals.

Adju
sting Entries for “Accrued Revenues”
Summary
-16
Illustration 4-16

ACCOUNTING FOR ACCRUED REVENUES

Reason for Accounts Before

Examples
Adjustment
Adjustment Adjusting Entry
 Cr.

services performed but Services performed but Assets understated. Revenues

not collected not yet received in cash or Revenues understated.
recorded Dr. Assets

4-42 LO 5 Prepare adjusting entries for accruals.

 Adjusting Entries for “Accrued
Expenses”Expenses incurred but not yet paid in
cash or recorded.
Adjusting entry results in:

Expense Recorded Cash Payment BEFORE

Accrued expenses often occur in regard to:

◆ rent ◆ taxes
◆ interest ◆ salaries

4-43
LO 5 Prepare adjusting entries for accruals.

Adjusting Entries for “Accrued

Expenses”Accrued Expenses
An adjusting entry serves two purposes:

(1) Records the obligations, and

(2) Recognizes the expenses.

4-44 LO 5 Prepare adjusting entries for accruals.

Adjusting Entries for “Accrued

Expenses”Adjusting entries for accrued expenses

Illustra

tion 4-17 ◆ Increases (debits) an expense account and

◆ Increases (credits) a liability account.
4-45 LO 5 Prepare adjusting entries for accruals.

Adjusting Entries for “Accrued

Expenses”Illustration: Sierra Corporation signed a three-
month note payable in the amount of $5,000 on October 1. The
note requires Sierra to pay interest at an annual rate of 12%.

Illustration 4-18

Oct. 31 Interest Expense 50

Interest Payable 50
Illustration 4-19 (Partial)
 4-46

LO 5 Prepare adjusting entries for accruals.

4-47
Adjusting Entries for “Accrued
Expenses”Illustration: Sierra Corporation last paid salaries
on October 26; the next payment of salaries will not occur until
November 9. The employees receive total salaries of $2,000 for
a five-day work week, or $400 per day. Thus, accrued salaries at
October 31 are $1,200 ($400 × 3 days).
 Illustration 4-20
4-48
LO 5 Prepare adjusting entries for accruals.

Adjusting Entries for “Accrued

Expenses”Illustration: Sierra Corporation last paid salaries
on October 26; the next payment of salaries will not occur until
November 9. The employees receive total salaries of $2,000 for
a five-day work week, or $400 per day. Thus, accrued salaries at
October 31 are $1,200 ($400 x 3 days).

Oct. 31 Salaries and Wages Expense 1,200

Salaries and Wages Payable 1,200
Illustration 4-21

4-

49
LO 5 Prepare adjusting entries for accruals.

Adjusting Entries for “Accrued Expenses”

Summary
Illustration 4-22
4-50 LO 5 Prepare adjusting entries for accruals.

Summary of
Basic Relationships
Illustration 4-23
 Summary of adjusting
entries

4-51 LO 5 Prepare adjusting entries for accruals.

The Adjusted Trial

 Balance
After all adjusting entries are journalized and posted the
company prepares another trial balance from the ledger
accounts (Adjusted Trial Balance).

The adjusted trial balance’s purpose is to prove the equality of

debit balances and credit balances in the ledger.

The adjusted trial balance is the primary basis for the

preparation of the financial statements.

LO 6 Describe the nature and purpose of the adjusted trial balance.4-

52
 The Adjusted Trial
Balance

4-53
Illustration 4-26
Adjusted trial balanceLO 6
 The Adjusted Trial
Balance
Review Question
Which of the following statements is incorrect concerning the
adjusted trial balance?
a. An adjusted trial balance proves the equality of the total
debit balances and the total credit balances in the ledger
after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the
preparation of financial statements.
c. The adjusted trial balance lists the account balances
 segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the adjusting
entries have been journalized and posted.

LO 6 Describe the nature and purpose of the adjusted trial balance.4-

54

Preparing
Financial Statements
Financial statements are prepared directly from the
Adjusted Trial Balance.
 Income Retained Balance
Statement Earnings Sheet
Statement

LO 6 Describe the nature and purpose of the adjusted trial balance.4-

55
 4-56

4-57
 Preparing

Financial Statements Illustration 4-28

 Qu
ality of Earnings
Quality of Earnings – company provides full and transparent
information.

Earnings Management - the planned timing of revenues,

expenses, gains, and losses to smooth out bumps in net income.
Companies may manage earnings by:

◆ one-time items to prop up earnings numbers.

◆ inflate revenue numbers in the short-run.
◆ improper adjusting entries.

As a result of the Sarbanes-Oxley Act, many companies are trying to

improve the quality of their financial reporting.

LO 6 Describe the nature and purpose of the adjusted trial balance.4-

 58

Closi
ng the Books
At the end of the accounting period, companies transfer the
temporary account balances to the permanent stockholders’
equity account—Retained Earnings.

Illustration 4-29

4-59 LO 7 Explain the purpose of closing entries.

 Closi
ng the Books
In addition to updating Retained Earnings to its correct ending
balance, closing entries produce a zero balance in each
temporary account.

Illustration 4-30
LO 7 Explain the purpose of closing entries.
4-60
 Closing the Books
2014
Illustration 4-31
 4-61

4-62
 Illustration 4-32
Posting of
closing entries

Clo
sing the Books
LO 7 Explain the purpose of closing entries.

Preparing a Post-Closing Trial Balance

The purpose of
the post-closing trial balance is to prove the equality of
 the permanent account balances that the company
carries forward into the next accounting period.

All temporary accounts will have zero balances.

LO 7 Explain the purpose of closing entries.

4-63

Summary of the
Accounting Cycle 1. Analyze
business transactions
Illustration 4-33 3. Post to ledger accounts
Required steps in the accounting cycle

9. Prepare a post-closing trial

balance 4. Prepare a trial balance

8. Journalize and post closing 5. Journalize and post adjusting

entries entries:
Deferrals/Accruals
7. Prepare financial
statements

6. Prepare an adjusted trial balance 4-64

2. Journalize the LO 8 Describe the required steps in the
transactions accounting cycle.

Keep an Eye on Cash

Sierra Corporation’s income statement shows net income of
$2,860. Net income and net cash provided by operating
 activities often differ.

✓ Net income on a cash basis is

referred to as “Net cash
provided by operating
activities.”

✓ The statement of cash flows,

reports net cash provided by
operating activities.

Illustration 4-27

LO 9 Understand the causes of differences between net

4-65
income and cash provided by operating activities.

Keep an Eye on Cash

The difference for Sierra is $2,840
($5,700 - $2,860). The following LO 9

summary shows the causes of this

difference.

4-66

Appendix 4A
 Adjusting Entries in an Automated World— Using a

Worksheet

Trial Balance –
 Each account is
analyzed to
determine whether
it is complete and
up-to-date.

4-67 Illustration 4-4

Steps in
Preparing a Worksheet 1. Prepare a Trial Balance
on the Worksheet Illustration 4A-1
 Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Revenue 1,200
Common Stock 10,000
Dividends 500
Service Revenue 10,000

Salaries & Wages Exp. 4,000

Rent Expense 900
Totals 28,700 28,700

LO 10 Describe the purpose and the basic form of a worksheet.

4-68
 Adjusted Income
Trial Balance Adjustments Trial Balance Statement

Steps in Preparing a
Worksheet 1. Prepare a Trial Illustration 4A-1 Balance Sheet
Balance on the Worksheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Revenue 1,200
Common Stock 10,000
Dividends 500
Service Revenue 10,000

Salaries & Wages Exp. 4,000

Rent Expense 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

LO 10 Describe the purpose and the basic form of a worksheet.

 4-69

Using a Worksheet
Illustration 4-24
General journal
showing adjusting
entries

Adjusting Journal Entries

 2012

4-70
2. Enter the
Adjustments in the
Adjustments
Steps in Preparing a Columns
Worksheet
Adjusted Income Balance Sheet
Trial Balance Adjustments Trial Balance Statement
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200
(a)
Supplies 2,500 1,500
(b)
Prepaid Insurance 600 50 Equipment 5,000 (g)
Notes Payable 5,000 Salaries & Wages Exp. 4,000 1,200 Rent Expense 900
Accounts Payable 2,500 Totals 28,700 28,700
(d) (a)
Unearned Service Revenue 1,200 400 Common Stock 10,000 Supplies Expense 1,500 (b)
Dividends 500 Adjustments Key:
(a) Supplies Used.
(b) Insurance Expired.
(c) Depreciation Expensed. (d) Service Revenue
Earned. (e) Service Revenue Accrued. (f) Interest
(d) Accrued.
Service Revenue 10,000 400 200
(e) (g) Salaries Accrued.
Insurance Expense 50 (c)
Accumulated Depreciation 40 (c)
Depreciation Expense 40 (e) LO 10 Describe the purpose and the
Accounts Receivable 200 (f)

Enter adjustment amounts,

total
Interest Expense 50 (f)
adjustments columns, basic form of a worksheet.
Interest Payable 50 (g)
Salaries and Wages Payable 1,200 Totals 3,440 3,440 Steps in Preparing a
Add additional accounts as [Link]
4-71

and check for equality. 3. Complete the Adjusted Trial

 Trial Balance Adjustments Trial Balance Statement
Balance Columns

Adjusted Income Balance Sheet

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200
(a)
Supplies 2,500 1,500 1,000
(b)
Prepaid Insurance 600 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
(d)
Unearned Service Revenue 1,200 400 800
Common Stock 10,000 10,000
Dividends 500 500
(d)
Service Revenue 10,000 400 10,600
200
(e)
(g)
Salaries & Wages Exp. 4,000 1,200 5,200
Rent Expense 900 900
Totals 28,700 28,700
(a)
Supplies Expense 1,500 1,500
(b)
Insurance Expense 50 50
(c)
Accumulated Depreciation 40 40
(c)
Depreciation Expense 40 40
(e)
Accounts Receivable 200 200
(f)
Interest Expense 50 50
(f)
 Interest Payable 50 50
(g)
Salaries and Wages Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190

Total the adjusted trial balance

columns and check for equality. LO 10 Describe the purpose and the 4-72
basic form of a worksheet.
Adjusted Income
Trial Balance Adjustments Trial Balance
Statement

Steps in Preparing a
Worksheet
Balance Sheet

4. Extend Amounts to Financial

Statement Columns
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200
(a)
Supplies 2,500 1,500 1,000
(b)
Prepaid Insurance 600 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
(d)
Unearned Service Revenue 1,200 400 800
Common Stock 10,000 10,000
Dividends 500 500
(d)
Service Revenue 10,000 400 10,600 10,600 200
(e)
 (g)
Salaries & Wages Exp. 4,000 1,200 5,200 5,200 Rent Expense 900 900 900 Totals 28,700 28,700
(a)
Supplies Expense 1,500 1,500 1,500 (b)
Insurance Expense 50 50 50 (c)
Accumulated Depreciation 40 40
(c)
Depreciation Expense 40 40 40 (e)
Accounts Receivable 200 200
(f)
Interest Expense 50 50 50 (f)
Interest Payable 50 50
(g)
Salaries and Wages Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 Extend all revenue and expense account

4-73 columns. LO 10
balances to the income statement
Adjusted Income
Trial Balance Adjustments Trial Balance
Statement

Steps in Preparing a
Worksheet
Balance Sheet

5. Total Columns, Compute Net

Income (Loss)
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 15,200 (a)
Supplies 2,500 1,500 1,000 1,000 (b)
Prepaid Insurance 600 50 550 550 Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 (d)
Unearned Service Revenue 1,200 400 800 800 Common Stock 10,000 10,000 10,000 Dividends 500 500 500 (d)
Service Revenue 10,000 400 10,600 10,600 200
(e)
(g)
 Salaries & Wages Exp. 4,000 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
(a)
Supplies Expense 1,500 1,500 1,500
(b)
Insurance Expense 50 50 50
(c)
Accumulated Depreciation 40 40 40 (c)
Depreciation Expense 40 40 40
(e)
Accounts Receivable 200 200 200 (f)
Interest Expense 50 50 50
(f)
Interest Payable 50 50 50 (g)
Salaries and Wages Payable 1,200 1,200 1,200 Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590 Net Income 2,860 2,860 Totals
10,600 10,600 22,450 22,450

4-74 Compute Net Income or Net Loss. LO 10

Key Points
◆ Companies applying IFRS use accrual-basis accounting.
◆ Similar to GAAP, cash-basis accounting is not in accordance with
IFRS.
◆ IFRS also divides the economic life of companies into artificial time
periods. Under both GAAP and IFRS, this is referred to as the
periodicity assumption.
 ◆ IFRS requires that companies present a complete set of financial
statements, including comparative information annually.

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Key Points
◆ GAAP has more than 100 rules dealing with revenue recognition. In
contrast, revenue recognition under IFRS is determined primarily by
a single standard.
◆ Revenue recognition fraud is a major issue in U.S. financial
reporting. The same situation occurs in other countries, as
evidenced by revenue recognition breakdowns at Dutch software
company Baan NV, Japanese electronics giant NEC, and Dutch
grocer AHold NV.
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Key Points
◆ A specific standard exists for revenue recognition under IFRS (IAS
18). In general, the standard is based on the probability that the
economic benefits associated with the transaction will flow to the
company selling the goods, providing the service, or receiving
investment income. In addition, the revenues and costs must be capable
of being measured reliably. GAAP uses concepts such as realized,
realizable (that is, it is received, or expected to be
received), and earned as a basis for revenue recognition.
◆ Under IFRS, revaluation of items such as land and buildings is
permitted. IFRS allows depreciation based on revaluation of
assets, which is not permitted under GAAP.

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Key Points
◆ The terminology used for revenues and gains, and expenses and
losses, differs somewhat between IFRS and GAAP. For example,
income is defined as:
Increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those
relating to contributions from shareholders.

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 Key Points
◆ Income includes both revenues, which arise during the normal course
of operating activities, and gains, which arise from activities outside
of the normal sales of goods and services. Instead, under GAAP
income refers to the net difference between revenues and
expenses. Expenses are defined as: Decreases in economic
benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in
decreases in equity other than those relating to distributions to
shareholders.
◆ Procedures of the closing process are applicable to all companies
whether they are using IFRS or GAAP.

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 Looking to the Future
The IASB and FASB are now involved in a joint project on revenue
recognition. The purpose of this project is to develop comprehensive
guidance on when to recognize revenue. Presently, the Boards are
considering an approach that focuses on changes in assets and
liabilities (rather than on earned and realized) as the basis for revenue
recognition. It is hoped that this approach will lead to more consistent
accounting in this area. For more on this topic, see
[Link]/project/revenue_recognition.shtml.

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