The Accounting Cycle:

Accruals and Deferrals

Chapter 4

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All

Adjusting Entries

Adjusting Every
entries are adjusting
needed whenever entry involves a
revenue or expenses change in either a
affect more than one revenue or expense
accounting and an asset
period. or liability.

4-2
Converting Assets to
Expenses
End of Current Period

Prior Periods Current Period Future Periods

Transaction
Transaction Adjusting
AdjustingEntry
Entry
Paid
Paidcash
cashin in Recognizes
 Recognizesportion
portion
advance
advanceof of of
ofasset
assetconsumed
consumed
incurring
incurring as
asexpense,
expense,and
and
expense
expense Reduces
 Reducesbalance
balanceofof
(creates
(createsan an asset
assetaccount.
account.
asset).
asset).
4-3
 The Concept of
Depreciation
Depreciation
Depreciation is is the
the systematic
systematic allocation
allocation of
of
the
the cost
cost of
of aa depreciable
depreciable asset
asset to
to expense.
expense.

Fixed
Fixed The asset’s Depreciation
usefulness is Depreciation
Asset
Asset Expense
partially Expense
(debit)
(debit) (debit)
consumed (debit)
On date during the At end of
when initial period. period . . .
payment is
made . . . Accumulated
Accumulated
Cash
Cash Depreciation
Depreciation
(credit)
(credit) (credit)
(credit)
4-4
Depreciation Is Only an
Estimate
On May 2, 2009, JJ’s Lawn Care
Service purchased a lawn
mower with a useful life of 50
months for $2,500 cash.
Using the straight-line method,
calculate the monthly
depreciation expense.
Depreciation
Cost of the asset
expense (per =
Estimated useful life
period)

$50 = $2,500
50
4-5
Depreciation Is Only an
Estimate
JJ’s
JJ’s Lawn
Lawn Care
Care Service
Service would
would make
make the
the
following
following adjusting
adjusting entry.
entry.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 31 Depreciation Expense: Equipment 50
Accumulated Depreciation: Equipment 50
To record one month's depreciation.

Contra-asset
Contra-asset 4-6
Depreciation Is Only an
Estimate
JJ’s $15,000 truck is depreciated over 60
months. Calculate monthly depreciation and
make the journal entry.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 31 Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
To record one month's depreciation.

$15,000 ÷÷ 60
$15,000 60 months
months == $250
$250 per
per month
month
4-7
Depreciation Is Only an
Estimate
Accumulated
Accumulated depreciation
depreciation would
would
appear
appear on
on the
the balance
balance sheet
sheet as
as
follows:
follows:

Cost - Accumulated Depreciation = Book Value

4-8
Converting Liabilities to
Revenue
End of Current Period

Prior Periods Current Period Future Periods

Transaction
Transaction Adjusting
AdjustingEntry
Entry
Collect
Collectcash
cashin in Recognizes
 Recognizesportion
portion
advance
advanceof of earned
earnedas asrevenue,
revenue,
earning
earningrevenue
revenue and
and
(creates
(createsaa Reduces
 Reducesbalance
balanceofof
liability).
liability). liability
liabilityaccount.
account.

4-9
Accruing Unpaid Expenses
End of Current Period

Prior Periods Current Period Future Periods

Transaction
Transaction
Pay
Paycash
cashin in
settlement
settlementof of
liability.
liability.

4-10
Accruing Uncollected
Revenue
End of Current Period

Prior Periods Current Period Future Periods

Adjusting
AdjustingEntry
Entry Transaction
Transaction
Recognizes
 Recognizesrevenue
revenue Collect
Collectcash
cashinin
earned
earnedbut
butnot
notyet
yet settlement
settlementof
of
recorded,
recorded,and
and receivable.
receivable.
Records
 Recordsreceivable.
receivable.

4-11
Adjusting Entries and
Accounting Principles
Costs
Costs are
are matched
matched with
with revenue
revenue
in
in two
two ways:
ways:

 Direct
 Direct association
association of
of costs
costs
with
with specific
specific revenue
revenue
transactions.
transactions.

 Systematic
 Systematic allocation
allocation ofof costs
costs
over
over the
the “useful
“useful life”
life” of
of the
the
expenditure.
expenditure.
4-12
Effects of the Adjusting
Entries

Adju
4-13
Adjusted Trial Balance
JJ's La w n Ca re S e rvice
Adjuste d Tria l Ba la nce
M a y 31, 2009
All balances
Ca sh
Accounts re ce iva ble
$ 3,925
75
are taken from
Tools & e quipm e nt 2,650 the ledger
Accum . de pre cia tion: tools & e q. $ 50
Truck 15,000 accounts on
Accum . de pre cia tion: truck 250
Note s pa ya ble 13,000 May 31 after
Accounts pa ya ble
Ca pita l stock
150
8,000 preparing the
Divide nds
S a le s re ve nue
200
750
two
Ga soline e x pe nse
De pre cia tion e x p.: tools & e q.
50
50
depreciation
De pre cia tion e x p.: truck 250 adjusting
Tota l $ 22,200 $ 22,200
entries.

4-14
End of Chapter 4

4-15