Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Prepared by
Coby Harmon
University of California, Santa Barbara
3-1 Copyright ©2015 Pearson Education Inc. All rights reserved. Westmont College
3
Learning Objective
1. Explain how accrual accounting differs from cash-

basis accounting
3-2 Copyright ©2015 Pearson Education Inc. All rights reserved.

EXPLAIN HOW ACCRUAL ACCOUNTING
DIFFERS FROM CASH-BASIS ACCOUNTING
Accrual Accounting Cash-Basis Accounting
 Records impact of  Records only cash

transactions when they occur transactions
 Required by Generally ► Cash receipts
Accepted Accounting ► Cash payments
Principles (GAAP)  Ignores important information
 Records:  Results in incomplete financial
► Revenue when earned statements
► Expenses when incurred  Only used by the smallest
businesses

LO 1
Accrual Accounting and Cash Flows
Accrual accounting records cash transactions, such as the
following:
■ Collecting cash from customers
■ Receiving cash from interest earned
■ Paying salaries, rent, and other expenses
■ Borrowing money
■ Paying off loans
■ Issuing stock

LO 1
Accrual Accounting and Cash Flow
Accrual accounting also records noncash transactions,
such as the following:
■ Sales on account
■ Purchases of inventory on account
■ Accrual of expenses incurred but not yet paid
■ Depreciation expense
■ Usage of prepaid rent, insurance, and supplies
■ Earning of revenue when cash was collected in advance

LO 1
The Time-Period Concept
 Accounting information is reported at regular intervals.
 The basic accounting period is one year.
 Around 60% of large companies use the calendar year
from January 1 through December 31.
 A fiscal year may end on a date other than December 31.
 Companies also prepare financial statements for interim
periods of less than a year (month, quarter, semi-annual).

LO 1
3
Learning Objective
2. Apply the revenue and expense recognition

principles

APPLY THE REVENUE AND EXPENSE
RECOGNITION PRINCIPLES
The Revenue Principle
Deals with two issues:
1. When to record (recognize) revenue
2. What amount of revenue to record
Revenue is recognized when the business transfers promised

goods or services to a customer in an amount that reflects the cash
(or fair market value of other consideration) that the entity expects
to receive in exchange for those goods or services.

LO 2
The FASB and IASB have issued a joint standard that
provides a consistent, converged, and simplified way to
recognize revenue. The selling entity must:
(1) identify the contract with the customer;
(2) identify the separate performance obligations in the

contract;
(3) determine the transaction price;
(4) allocate the transaction price to the separate performance

obligations in the contract; and
(5) recognize revenue when (or as) the entity satisfies the
performance obligation.

LO 2
Exhibit 3-1 shows two situations that provide guidance on when to
record revenue for Starbucks Corporation.
Exhibit 3-1 | When to Record Revenue

LO 2
The Expense Recognition Principle
Includes two steps:
1. Identify all the expenses incurred during the accounting
period.
2. Measure the expenses and recognize them in the same

period in which any related revenues are earned.

LO 2
Exhibit 3-2 illustrates the expense recognition (sometimes referred
to as matching) principle.
Exhibit 3-2 | The Expense Recognition Principle

LO 2
(1) A customer pays Starbucks $250 on March 15 for coffee to be served at a
party in April. Has Starbucks earned revenue on March 15? When will
Starbucks earn the revenue?
(2) Starbucks pays $6,000 on July 1 for store rent for the next three months.
Has Starbucks incurred an expense on July 1?
Answers:
(1) No. Starbucks has received the cash but will not deliver the coffee until later.
Starbucks earns the revenue when it delivers the product to the customer and the
customer assumes control over it.
(2) No. Starbucks has paid cash for rent in advance. No expense has yet been
incurred because the company has not yet occupied the space. This prepaid rent is
an asset because Starbucks has acquired the use of a store location in the future.
3-13 Advance slide in presentation mode to reveal answers LO 2

Copyright ©2015 Pearson Education Inc. All rights reserved.
3
Learning Objective
3. Adjust the accounts

ADJUST THE ACCOUNTS
Adjusting entries:
 Journal entries made to ensure that revenues and
expenses are recognized in the proper accounting
period.
 Generally made at the end of the accounting period.
 Include at least one income statement account and one
balance sheet account.

LO 3
ADJUST THE ACCOUNTS
Which
Accounts
Need to Be
Updated
(Adjusted)?
Exhibit 3-3 gives
the unadjusted trial
balance of Freddy’s
Auto Service, Inc.
3-16
ADJUST THE ACCOUNTS
Categories of Adjusting Entries
Three basic categories:
 Deferrals, A deferral is an
adjustment for payment of
 Depreciation, and an item or receipt of cash
in advance.
 Accruals Deferrals are prepaid
expenses or unearned
revenue.

LO 3
ADJUST THE ACCOUNTS
 Deferrals, Depreciation allocates
the cost of a plant asset to
 Depreciation, and
expense over the asset’s
 Accruals useful life.

LO 3
ADJUST THE ACCOUNTS
 Deferrals,
An accrual is the opposite
 Depreciation, and of a deferral. For an
accrued expense, the
 Accruals company records
the expense before paying
cash. For an accrued
revenue, the company
records the revenue
before collecting cash.

LO 3
ADJUST THE ACCOUNTS
Prepaid Expenses
An expense paid in advance. Prepaid expenses are assets
because they provide a future benefit for the owner.
Cash Payment BEFORE Expense Recorded
Prepayments often occur in regard to:

 Rent  Insurance
 Supplies  Advertising

LO 3
Prepaid Expenses
Prepaid Rent. Suppose Freddy’s Auto Service, Inc. prepays
three months’ store rent ($3,000) on June 1. The entry for the
prepayment of three months’ rent is as follows:
A B C D
1 Jun 1 Prepaid Rent ($1,000 x 3) 3,000
2 Cash 3,000
3
Prepaid Rent Cash

Jun 1 Jun 1
3,000 3,000
LO 3
Prepaid Expenses
Prepaid Rent. Throughout June, Prepaid Rent carries the
balance of $3,000. At June 30, an adjusting entry is required to
transfer $1,000 ($3,000 ÷ 3) from Prepaid Rent to Rent Expense.
A B C D
1 Jun 30 Rent Expense 1,000
2 Prepaid Rent 1,000
3
Prepaid Rent Rent Expense

Jun 1 Jun 30 Jun 30
Bal
3,000 1,000 1,000
LO 3
Prepaid Expenses
Supplies. On June 2, Freddy’s Auto Service paid cash of $700
for cleaning supplies:
A B C D
1 Jun 2 Supplies 700
2 Cash 700
3
Supplies Cash
Jun 2 Jun 2
700 700
LO 3
Prepaid Expenses
Supplies. A count at June 30 indicates that $400 of supplies
remain on hand. Freddy makes the following adjusting entry.
A B C D
1 Jun 30 Supplies Expense 300
2 Supplies 300
3
Supplies Supplies Expense

Jun 2 Jun 30 Jun 30
Bal
700 300 300
400
LO 3
At the beginning of the month, supplies were $5,000. During the
month, $7,000 of supplies were purchased. At month’s end, $3,000 of
supplies are still on hand. What is the
■ adjusting entry?
■ ending balance in the Supplies account?
Answer:
3-25 Advance slide in presentation mode to reveal answers LO 3

Depreciation of Plant Assets
Plant assets
 Long-lived tangible assets, such as land, buildings,
furniture, and equipment.
 Recorded as an asset when purchased.
 With the exception of land
► Decline in usefulness.
► Record depreciation expense over the asset’s useful life.
► Depreciation is the process of allocating cost to expense
for a long-term plant asset.

LO 3
To illustrate, suppose that on June 3 Freddy’s Auto Service
purchased equipment on account for $24,000:
A B C D
1 Jun 3 Equipment 24,000
2 Accounts Payable 24,000
3
Equipment Accounts Payable

Jun 3 Jun 3
24,000 24,000
LO 3
Freddy’s equipment will remain useful for five years and then be
worthless. One way to compute the amount of depreciation for
each year is to divide the cost of the asset ($24,000 in our
example) by its expected useful life (five years). This procedure—
called the straight-line depreciation method—gives annual
depreciation and monthly depreciation as follows:
Annual Depreciation Monthly depreciation

$24,000 ÷ 5 years = $4,800 ÷ 12 months =
$4,800 per year $400 per month

LO 3
Depreciation expense for June is recorded as follows:
A B C D
1 Jun 30 Depreciation Expense-Equipment 400
2 Accumulated Depreciation-Equipment 400
3
Equipment Depreciation Expense-Equipment
Jun 3 Jun 30
Accumulated Depreciation-
24,000 400
Equipment
Jun 30
LO 3
The Accumulated Depreciation account
 Shows the sum of all depreciation expense.
 The balance increases over the asset’s life.
 Is a contra asset account, a normal credit balance.
 A contra account has two distinguishing characteristics:
1. It always has a companion account.
2. Its normal balance is opposite that of the companion

account.

LO 3
Book Value. Cost of the asset minus accumulated depreciation,
also known as carrying amount.
Exhibit 3-4 | Plant Assets on the Balance Sheet of Freddy’s Auto Service

LO 3
What will be the book value of Freddy’s equipment at the end of July?
Answer: $24,000 – $400 – $400 = $23,200.
Exhibit 3-4 | Plant Assets on the Balance Sheet of Freddy’s Auto Service
3-32 Advance slide in presentation mode to reveal answer. LO 3

Depreciation of Plant Assets Exhibit 3-5 | Starbucks Corporation’s
Reporting of Property, Plant, and
Equipment (Adapted, in millions)

LO 3
ADJUST THE ACCOUNTS
Accrued Expenses
Expenses incurred but not yet paid in cash.
Expense Recorded BEFORE Cash Payment
Accrued expenses often occur in regard to:

 Salaries  Taxes
 Interest  Rent
Recorded at the end of the period using an adjusting entry.

LO 3
Accrued Expenses
To illustrate, suppose Freddy’s Auto Service, Inc. pays its employee a
monthly salary of $1,800, half on the 15th and half on the last day of
the month. The following calendar for June has the paydays circled:
Assume that if a payday falls on a Sunday, Freddy’s pays the employee

on the following Monday.
LO 3
Accrued Expenses
During June, Freddy’s paid
its employees the first half-
month salary of $900 and made the following entry:
A B C D
1 Jun 15 Salary Expense 900
2 Cash 900
3
Salary Expense Cash

Jun 15 Jun 15
900 900
LO 3
Accrued Expenses
Since the second half-month
amount of $900 will be paid
on July 1, Freddy makes an adjusting entry on June 30 as follows:
A B C D
1 Jun 30 Salary Expense 900
2 Salaries Payable 900
3
Salary Expense Salary Payable

Jun 15 Jun 30
Jun 30
900 900
900
LO 3
ADJUST THE ACCOUNTS
Accrued Revenues
Revenue that has been earned but not yet collected is called an
accrued revenue.
Revenue Recorded BEFORE Cash Receipt
Accrued revenues often occur in regard to:

 Services performed
 Rent
 Interest

LO 3
Accrued Revenues
Assume that FedEx hires Freddy’s on June 15. FedEx will pay
Freddy’s $600 monthly, with the first payment on July 15. During June,
Freddy’s will earn half a month’s fee for work done June 15 through
June 30. On June 30, Freddy’s makes the following adjusting entry:
A B C D
1 Jun 30 Accounts Receivable 300
2 Service Revenue 300
Accounts Receivable Service Revenue
2,200
Jun 30 7,000
Jun 30
300
3-39 Copyright ©2015 Pearson Education Inc. All rights reserved. 300 LO 3
Suppose Freddy’s Auto Service, Inc. holds a note receivable
as an investment. At the end of June, $100 of interest revenue
has been earned. Journalize the accrued revenue adjustment
at June 30.
Answer:
3-40 Advance slide in presentation mode to reveal answer LO 3

ADJUST THE ACCOUNTS
Unearned Revenues
Receipt of cash before earning the revenue is recorded as a
liability called unearned revenues.
Cash Receipt BEFORE Revenue Recorded
Unearned revenues often occur in regard to:
 Customer deposits  Magazine subscriptions

 Airline tickets  Rent

LO 3
Unearned Revenues
Suppose Home Depot engages Freddy’s Auto Service, Inc. to perform
routine oil changes on Home Depot trucks, agreeing to pay Freddy’s
$400 monthly, beginning immediately. If Freddy’s collects the first
amount on June 15, then Freddy’s records this transaction as follows:
A B C D
1 Jun 15 Cash 400
2 Unearned Service Revenue 400
Cash Unearned Service Revenue

Jun 15 Jun 15
400 400
LO 3
Unearned Revenues
The June 30 unadjusted trial balance lists Unearned Service Revenue
with a $400 credit balance. During the last 15 days of the month,
Freddy’s will earn one-half of the $400, or $200. On June 30, Freddy’s
makes the following adjustment:
A B C D
1 Jun 30 Unearned Service Revenue 200
2 Service Revenue 200
Service Revenue Unearned Service Revenue

Jun 30 Jun 15
7,000
Jun 30
Jun 30 200 Bal
400
3-43 300 Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
ADJUST THE ACCOUNTS
Exhibit 3-6 | Prepaid Adjustments
PREPAIDS—Cash First
Prepaid Expenses
First – Pay cash and record an Later – Record an expense and

asset: decrease the asset:
Prepaid Expense XXX Expense XXX
Cash XXX Prepaid Expense XXX
Unearned Revenues
First – Receive cash and record Later – Record revenue and

unearned revenue: decrease unearned revenue:
Cash XXX Unearned Revenue XXX
Unearned Revenue XXX Revenue XXX

LO 3
ADJUST THE ACCOUNTS
Exhibit 3-6 | Accrual Adjustments
ACCRUALS—Cash Later
Accrued Expenses
First – Accrue expense and a Later – Pay cash and decrease the
payable: payable:
Expense XXX Payable XXX
Payable XXX Cash XXX
Accrued Revenues
First – Accrue revenue and a Later – Receive cash and decrease the
receivable: receivable:
Receivable XXX Cash XXX
Revenue XXX Receivable XXX

LO 3
ADJUST THE ACCOUNTS
Summary of the Adjusting Process
Two purposes of the adjusting process are to
■ measure income, and
■ update the balance sheet.
Therefore, every adjusting entry affects both of the following:

■ Revenue or expense—to measure income
■ Asset or liability—to update the balance sheet

LO 3
Summary of Adjusting Process
Exhibit 3-7 | Summary of Adjusting Entries

LO 3
Summary of Adjusting Process
Freddy’s Auto Service, Inc. would make an additional adjusting entry
to accrue income tax expense and the related income tax payable as
the final adjusting entry of the period. Freddy’s Auto Service, Inc.
accrues income tax expense as follows:
A B C D
1 Jun 30 Income Tax Expense 600
2 Income Tax Payable 600
3
The income tax accrual follows the pattern for accrued expenses.

LO 3
Exhibit 3-8 | The Adjusting Process of Freddy’s Auto Service, Inc.
3-49 LO 3
LO 3
ADJUST THE ACCOUNTS
The Adjusted Trial Balance
 Summarizes all accounts and their final balances after
all adjusting entries have been journalized and posted.
 Source for the preparation of the financial statements.
► Income statement
► Balance sheet
► Statement of retained earnings
3-51 LO 3
Exhibit 3-9 | Trial Balance Worksheet
3-52
Illustration
Phoenix Equipment Rentals Company faced the following
situations. Journalize the adjusting entry needed at December
31, 2014, for each situation.
a. The business has interest expense of $1,200 that it must

pay early in January 2015.
A B C D
1 Dec Interest Expense 1,200
31
Interest Payable 1,200
2
3

LO 3
Illustration
Journalize the adjusting entry needed at December 31, 2014,
for each situation.
b. The unadjusted balance of the Supplies account is $3,200.

The total cost of supplies on hand is $1,500.
A B C D
1 Dec Supplies Expense 1,700
31
Supplies 1,700
2
3
Expense Recognized = $3,200 - $1,500 = $1,700

3-54 LO 3
Illustration
for each situation.
c. Salary expense is $7,000 per day—Monday through Friday

—and the business pays employees each Friday. This year,
December 31 falls on a Wednesday.
A B C D
1 Dec Salary Expense 21,000
31
Salary Payable 21,000
2
3
Expense Recognized = $7,000 x 3 days = $21,000

3-55 LO 3
Illustration
for each situation.
d. On July 1, 2014, when the business collected $15,000 rent

in advance, it debited Cash and credited Unearned Rent
Revenue. The tenant was paying for one years’ rent.
A B C D
1 Dec Unearned Rent Revenue 7,500
31
Rent Revenue 7,500
2
3
Revenue Recognized = $15,000 x ½ year = $7,500

3-56 LO 3
Illustration
for each situation.
e. Interest revenue of $900 has been earned but not yet

received.
A B C D
1 Dec Interest Receivable 900
31
Interest Revenue 900
2
3

LO 3
Illustration
for each situation.
f. Equipment was purchased at the beginning of this year at a

cost of $50,000. The equipment’s useful life is five years.
There is no residual value. Record depreciation for this year.
A B C D
1 Dec Depreciation Expense 10,000
31
Accumulated Depreciation 10,000
2
3
Expense Recognized = $50,000 ÷ 5 years = $10,000

3-58 LO 3
Illustration
for each situation.
f. Equipment was purchased at the beginning of this year at a

cost of $50,000. Determine the equipment’s book value.
Phoenix Equipment Rental Equipment at December 31, 2014
Equipment $ 50,000
Less: Accumulated Depreciation 10,000
Book value of equipment $ 40,000

LO 3
3
Learning Objective
4. Construct the financial statements

CONSTRUCT
THE
FINANCIAL
STATEMENTS
The June
financial
statements of
Freddy’s Auto
Service, Inc. can
be prepared from
the adjusted trial
balance.
Exhibit 3-10 | Income Statement

Exhibit 3-11 | Statement of
Retained Earnings
3-61
CONSTRUCT THE FINANCIAL STATEMENTS
Exhibit 3-11 | Statement of

Retained Earnings
Exhibit 3-12 | Balance Sheet
3-62 LO 4
3
Learning Objective
5. Close the books

CLOSE THE BOOKS

LO 5
Exhibit 3-9 | Trial Balance Worksheet
Accounts
and
Balances
to be
closed.
3-65
Exhibit 3-13 PANEL A—Journalizing the Closing Entries
CLOSE
THE
BOOKS
Retained Earnings
Expenses Beginning balance
Dividends Revenues
4,600 18,800
3,200 Ending
7,500 balance
LO 5
18,500
CLOSE
THE
BOOKS
Exhibit 3-13 PANEL B—Posting to the Accounts

3-67 LO 5
Illustration
Prepare the closing entries from the following selected
accounts from the records of Westmont Services Corporation at
December 31, 2014:
Cost of services sold $28,600 Service revenue $63,800

Accumulated depreciation 82,200 Depreciation expense 8,200
Selling, general, and Interest revenue 800
administrative expenses 12,800 Dividends 600
Retained earnings, Income tax expense 1,200
December 31, 2013 5,200
Accounts payable 2,400

LO 5
Illustration Close Revenue Accounts

December 31, 2013 5,200 Accounts payable 2,400
Account Debit Credit
Dec 31 Service Revenue 63,800

Interest Revenue 800
Retained Earnings 64,600

LO 5
Illustration Close Expense Accounts

Dec 31 Retained Earnings 50,800

Cost of Services Sold 28,600
Selling, General, and Admin. Expense 12,800
Depreciation Expense 8,200
Income Tax Expense 1,200
LO 5
Illustration Close Dividend Account

Dec 31 Retained Earnings 600

Dividends 600

LO 5
Illustration
How much net income did Westmont Services earn during

2014?
Total revenues $ 64,600
Total expenses
Net income 50,800
$ 13,800

LO 5
Illustration
Prepare a T-account for Retained Earnings to show the
December 31, 2014, balance of Retained Earnings.
Retained Earnings
Expenses 50,800 5,200 Dec. 31, 2013
Dividends 600 64,600 Revenues
18,400 Dec. 31, 2014

LO 5
Classifying Assets and Liabilities Based on
Their Liquidity
 Cash is the most liquid asset.
 Accounts receivable are relatively liquid because cash

collections usually follow quickly.
 Inventory is less liquid because inventory must be sold.
 Equipment and buildings are even less liquid because

these assets are not for sale.
 Assets and liabilities are presented in order of liquidity.

LO 5
Their Liquidity
► Converted to cash, sold,
 Currents Assets
or consumed during the
 Long-Term Assets next 12 months or within
the business’s normal
 Current Liabilities operating cycle if longer
than a year.
 Long-Term Liabilities

LO 5
Their Liquidity
► Land, Buildings, Furniture
 Currents Assets
and Fixtures, and
 Long-Term Assets Equipment are plant
assets.
 Current Liabilities ► Long-Term Investments,
Intangible Assets, and
Other Assets are also
long-term.

LO 5
Their Liquidity
► Debts that must be paid
 Currents Assets
within one year or within
 Long-Term Assets the operating cycle if
longer than a year.
 Current Liabilities ► Accounts Payable, Notes
Payable due within one
year, Salary Payable,
Unearned Revenue,
Interest Payable, and
Income Tax Payable are
current liabilities.

LO 5
Their Liquidity
 Currents Assets
 Long-Term Assets
 Current Liabilities ► All liabilities that are not

current are classified as
 Long-Term Liabilities long-term liabilities.
► Many notes payable are
long term.

LO 5
Format for the Financial Statements
 Balance Sheet Formats
► Report
► Account
 Income Statement Formats

► Single-step
► Multi-step

LO 5
Balance
Sheet
Report
Format
3-80 LO 5
Balance Sheet Account Format

LO 5
Income Statement Single-Step Format
Income tax expense may also be included with the expenses thus
eliminating the income before tax line.
LO 5
Income Statement Multiple-Step Format
3-83
3
Learning Objective
6. Analyze and evaluate a company’s debt-paying

ability

Analyze and Evaluate a Company’s
Debt-Paying Ability
Net Working Capital
 Total current assets - Total current liabilities
 To be considered sufficiently liquid, entities should

have a sufficient excess of current assets over
current liabilities.

LO 6
Debt-Paying Ability
Current Ratio
 Total current assets ÷ Total current liabilities
 Measures the company’s ability to pay current

liabilities with current assets.
 Most successful businesses operate with current
ratios between 1.20 and 1.50.

LO 6
How Do Transactions Affect the Ratios?
Current Ratio
a. Issued stock and received cash of $50 million.
A B C D
1 Cash 50
2 Common Stock 50
Cash, a current asset, affects the current ratio as follows:
Before After
LO 6
Debt-Paying Ability
Debt Ratio
 Total liabilities ÷ Total assets
 Indicates the proportion of a company’s assets that is

financed with debt.
 Measures a business’s ability to pay both current and
long-term debts (total liabilities).
 A low debt ratio is safer than a high debt ratio.

LO 6
How Do Transactions Affect the Ratios?
Debt Ratio
a. Issued stock and received cash of $50 million.
A B C D
1 Cash 50
2 Common Stock 50
Cash, a current asset, affects the debt ratio as follows:
Before After
LO 6
Debt-Paying Ability
Do These Transactions Affect the Ratios?
b. Paid cash to purchase buildings for $20 million.
c. Made a $30 million sale on account to a grocery chain.
d. Collected the account receivable, $30 million.
e. Accrued expenses at year end, $40 million.
f. Recorded depreciation, $80 million.
g. Earned interest revenue and collected cash, $40

million.

LO 6
Copyright
This work is protected by United States copyright law and is

provided solely for the use of instructors in teaching their courses
and assessing student learning. Dissemination or sale of any part of
this work (including on the World Wide Web) will destroy the integrity
of the work and is not permitted. The work and materials from it
should never be made available to students except by instructors
using the accompanying text in their classes. All recipients of this
work are expected to abide by these restrictions and to honor the
intended pedagogical purposes and the needs of other instructors
who rely on these materials.

Prepared by Coby Harmon University of California, Santa Barbara Westmont College

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1. Explain how accrual accounting differs from cash-

3-2 Copyright ©2015 Pearson Education Inc. All rights reserved.

Accrual Accounting Cash-Basis Accounting

 Records impact of  Records only cash

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2. Apply the revenue and expense recognition

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2. What amount of revenue to record

Revenue is recognized when the business transfers promised

3-8 Copyright ©2015 Pearson Education Inc. All rights reserved.

(1) identify the contract with the customer;

(2) identify the separate performance obligations in the

(3) determine the transaction price;

(4) allocate the transaction price to the separate performance

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2. Measure the expenses and recognize them in the same

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3-13 Advance slide in presentation mode to reveal answers LO 2

3. Adjust the accounts

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Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

3-20 Copyright ©2015 Pearson Education Inc. All rights reserved.

Prepaid Rent Cash

Prepaid Rent Rent Expense

Supplies Supplies Expense

3-25 Advance slide in presentation mode to reveal answers LO 3

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Equipment Accounts Payable

Annual Depreciation Monthly depreciation

3-28 Copyright ©2015 Pearson Education Inc. All rights reserved.

Equipment Depreciation Expense-Equipment

1. It always has a companion account.

2. Its normal balance is opposite that of the companion

3-30 Copyright ©2015 Pearson Education Inc. All rights reserved.

3-31 Copyright ©2015 Pearson Education Inc. All rights reserved.

Answer: $24,000 – $400 – $400 = $23,200.

3-32 Advance slide in presentation mode to reveal answer. LO 3

3-33 Copyright ©2015 Pearson Education Inc. All rights reserved.

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

Recorded at the end of the period using an adjusting entry.

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Assume that if a payday falls on a Sunday, Freddy’s pays the employee

Salary Expense Cash

Salary Expense Salary Payable

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

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Accounts Receivable Service Revenue

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Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to: