Week 002

Review of the Accounting

Process
Week 002: Review of the Accounting Process

Objectives
• Prepare the trial balance

• Prepare the necessary adjusting entries and explain

the reasons for the entries

• Define the nature of accruals and deferrals

• Define the nature of asset depreciation and bad debts

• Prepare the adjusted trial balance Source:

https://cdn.lynda.com/course/441605/441605-
636269220092757522-16x9.jpg
Date of access:
10/5/2017
Week 002: Review of the Accounting Process

Course Outline
1.1 Preparing a trial balance

1.2 Journalizing and posting adjusting entries

1.3 Accrued expenses, accrued revenues, prepaid

expenses and unearned revenues

1.4 Asset depreciation and bad debts

Source:
1.5 Preparing adjusted trial balance https://www.accountingweb.com/sites/default/files/st
yles/banner/public/financial_statement_ivsigns.jpg?i
tok=ylGeWfhT
Date of access:
10/5/2017
Week 002: Review of the Accounting Process

Preparing a Trial Balance

- Trial balance – a list of accounts and their balances at
a given time. It is usually prepared at the end of an
accounting period.

- it is useful in the preparation of financial statements.

A trial balance does not prove that a company recorded

all transactions or that the ledger is correct.
Source:
https://www.beginner-
bookkeeping.com/images/Trial_Balance_Resized.jp
g
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Preparing a Trial Balance

Source:
https://www.beginner-
bookkeeping.com/images/Trial_Balance_Resized.jp
g
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Journalizing and Posting Adjusting Entries

- Adjusting entries are entries made at the end of an
accounting period to bring all accounts up to date on
an accrual basis, so that the company can prepare
correct financial statements.

Source:
https://www.move2clouds.com/wp-
content/uploads/2015/04/accounting-cycle-
1080x675.png
Date of access:
10/15/2017
Week 002: Review of the Accounting Process

Journalizing and Posting Adjusting Entries

The adjusting entries occur for the following reasons:
• Some events are not recorded daily because it is
not efficient to do so (supplies and wages)

• Some costs are not recorded during the because

these costs expire with the passage of time
(depreciation, rent and insurance)

Source:
https://www.move2clouds.com/wp-
content/uploads/2015/04/accounting-cycle-
1080x675.png
Date of access:
10/15/2017
Week 002: Review of the Accounting Process

Journalizing and Posting Adjusting Entries

• Some items may be unrecorded (utilities)

The adjusting entries are based on two assumptions:

the going concern and the accrual basis.

An adjusting entry affects at least one nominal account

and one real account.

Source:
https://www.move2clouds.com/wp-
content/uploads/2015/04/accounting-cycle-
1080x675.png
Date of access:
10/15/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

Types of adjusting entries
• Deferrals
1. Prepaid expenses - Paid in cash and recorded
as assets before they are used or consumed.

2. Unearned revenues - Received in cash and

recoded as liabilities before they are earned.

Source:
https://www.move2clouds.com/wp-
content/uploads/2015/04/accounting-cycle-
1080x675.png
Date of access:
10/15/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

• Accruals:
1. Accrued revenues - Revenues earned but not
yet received in cash or recorded.

2. Accrued expenses - Expenses incurred but

not yet paid in cash or recorded

Source:
https://www.move2clouds.com/wp-
content/uploads/2015/04/accounting-cycle-
1080x675.png
Date of access:
10/15/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

• Deferrals are expenses or revenues that are
recognized at a date later than the point when
cash was originally exchanged

• If no adjusting entry was made, asset and liability

are overstated and related expense and revenue
are understated

Source:
https://www.mossadams.com/getmedia/e34f48c9-
8166-4e8e-9953-5ff1d30cc8f5/Tax-Deferrals-in-
Transactions-IMG
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

Source:
https://www.mossadams.com/getmedia/e34f48c9-
8166-4e8e-9953-5ff1d30cc8f5/Tax-Deferrals-in-
Transactions-IMG
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

Prepaid expenses
• asset paid for and recorded before it is used

• examples are insurance, supplies, advertising and

rent

• expires either through passage of time or through

use and consumption
Source:
https://www.mossadams.com/getmedia/e34f48c9-
8166-4e8e-9953-5ff1d30cc8f5/Tax-Deferrals-in-
Transactions-IMG
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

Unearned revenues
• receive cash before services are performed

• a company now has a performance obligation to

provide services to its customers

• examples are rent, magazine subscriptions, and

customer deposits for future services
Source:
https://www.mossadams.com/getmedia/e34f48c9-
8166-4e8e-9953-5ff1d30cc8f5/Tax-Deferrals-in-
Transactions-IMG
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

• Adjusting entries for accruals are made to record
revenues for services performed and expenses
incurred in the current accounting period but
cash was not yet paid or received.

Source:
http://i.investopedia.com/thumbnails/live/141_accru
alaccounting_421x236.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

• Without an accrual adjustment, the revenue
account (and the related asset account) or the
expense account (and the related liability
account) are understated.

Source:
http://i.investopedia.com/thumbnails/live/141_accru
alaccounting_421x236.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

Source:
http://i.investopedia.com/thumbnails/live/141_accru
alaccounting_421x236.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

Accrued revenues
• revenues for services performed but not yet
recorded at the statement date

• may accumulate (accrue) with the passing of time

(interest revenue) or from services that have
been performed but not yet billed nor collected

Source:
http://i.investopedia.com/thumbnails/live/141_accru
alaccounting_421x236.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Accrued expense, Accrued revenues, Prepaid expenses and Unearned revenues

Accrued expenses
• expenses incurred but not yet paid or recorded at
the statement date

• examples are interest, rent, taxes and salaries

• accrued expenses result from the same causes as

accrued revenues.

Source:
http://i.investopedia.com/thumbnails/live/141_accru
alaccounting_421x236.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Asset Depreciation and Bad Debts

Depreciation
• is the process of allocating the cost of an asset to
expenses over its useful life in a rational and
systematic manner.

• adjusting entries is the same as described for

prepaid expenses

Source:
http://www.imsolutions.net/wp-
content/uploads/2015/07/lifecycle455.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Asset Depreciation and Bad Debts

Depreciation
• a company recognizes the expired cost during the
period and reports the unexpired cost at the end
of the period

• primary causes are actual use, deterioration due

to the elements, and obsolescence

Source:
http://www.imsolutions.net/wp-
content/uploads/2015/07/lifecycle455.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Asset Depreciation and Bad Debts

Depreciation
• to record depreciation, the company debits
depreciation expense and credits accumulated
depreciation

• accumulated depreciation is a contra-asset

account. It means it offset the balance of an asset.

Source:
http://www.imsolutions.net/wp-
content/uploads/2015/07/lifecycle455.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Asset Depreciation and Bad Debts

Bad debts
• an entity that sells on credit assumes the risk that
some customers will not pay their accounts

• when an account becomes uncollectible, the

entity has sustained a bad debt loss.

Source:
https://cbsnews1.cbsistatic.com/hub/i/2017/01/19/6
d7ec17d-7e21-4161-b5b3-1ce7fad03524/istock-
000014665454-medium.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Asset Depreciation and Bad Debts

Bad debts
• an estimate of the amount of receivables at year
end that will later prove to be uncollectible

• bad debts are recognized when the loss is

probable and the amount can be estimated
reliably

Source:
https://cbsnews1.cbsistatic.com/hub/i/2017/01/19/6
d7ec17d-7e21-4161-b5b3-1ce7fad03524/istock-
000014665454-medium.jpg
Date of access:
10/18/2017
Week 002: Review of the Accounting Process

Asset Depreciation and Bad Debts

There are three methods of estimating bad debts,
namely:
1. aging the accounts receivable or “statement of
financial position approach”

2. percent of accounts receivable

3. percent of sales or “income statement approach”

Source:
https://www.move2clouds.com/wp-
content/uploads/2015/04/accounting-cycle-
1080x675.png
Date of access:
10/15/2017
Week 002: Review of the Accounting Process

Preparing the Adjusted Trial Balance

- adjusted trial balance shows the balance of all
accounts, after journalizing and posting all adjusting
entries, at the end of the accounting period.

- the balances are presented in the financial

statements

Source:
https://theegeek.com/wp-
content/uploads/2013/06/Transaction_Management.
jpg
Date of access:
10/15/2017
Week 002: Review of the Accounting Process
In summary:

Adjusting entries are entries made at the end of an

accounting period to bring all accounts up to date on an
accrual basis, so that the company can prepare correct
financial statements.

Types of adjusting entries:

Deferrals
1. Prepaid expenses
2. Unearned revenues
Source:
Accruals https://theegeek.com/wp-
1. Accrued expenses content/uploads/2013/06/Transaction_Management.
jpg
2. Accrued revenues Date of access:
10/15/2017