DELTA UNIVERSITY FOR SCIENCE & TECHNOLOGY Introduction to Accounting 1 Section 7 Mr. Omar Ahmed Hashish 11/30/2017.
Adjusting the Accounts (Continue) Unearned Revenues: - They are those types of revenues in which Cash is received before performance of service. - On the day of cash payment the cash received is debited and the unearned revenues are credited because they are treated as liabilities. - Then on the day of adjustment the unearned revenues are debited in the amount which are really earned and an equal amount of revenues are credited. - Examples of unearned revenues: Rent Airline tickets School fees Etc.. Example 1: On February 1 st a client reserved a ticket for a flight from Egypt to France and paid the price of the ticket which was $ 3,000. The flight will be on February 22 nd. Journalize the necessary journal entries on the dates (February 1 st & February 22 nd ). - On February 1 st the client paid to us cash amount of $3,000 for a flight which will be later so the cash balance in our records increased so it will be debited and this amount of money is considered liability on us (the company) because the client didn't get his service yet and the revenues is considered not earned yet until he has his flight so an equal amount of unearned revenues will be credited so the journal entry will be as follows: February 1 st Cash 3000 Unearned Service Revenues 3000 - On February 22 nd the client had his flight so the unearned revenues which were recorded on February 1 st are considered to be earned so the unearned revenues will be debited because they decrease (treated as liabilities) and the service revenues are credited so the journal entry will be as follows: February 22 nd Unearned Service Revenues 3000 Service Revenues 3000
Example 2: On May 1 st one of our apartments was rented for an upcoming year for a value of $24,000. Journalize the necessary journal entries on the dates (May 1 st, June 1 st & July 1 st ) - The same illustration as the previous example for the first date May 1 st Cash 24,000 Unearned Rent Revenue 24,000 - On the date June 1 st one month of the rent passed so the client is said to have service of one month so the rent of one month is considered as earned revenue which is calculated as (24,000/12=2,000) so the journal entry on this date will be as follows: June 1 st Unearned rent revenues 2,000 Rent Revenues 2,000 July 1 st Unearned Rent Revenues 2,000 Rent Revenues 2,000 2- Accruals: Accrued Expenses: - They are those types of expenses in which we receive service before we pay cash. - So on the date of having the service we record expenses as debit because they are incurred and record and equal amount of Accounts Payable as credit - Then on the date of Adjustment (payment of cash) we record the amount of cash paid as a credit and an equal amount of accounts payable as debit. Example: On October 17 th Amr Company had advertising services from an advertising company valued for $7,000, but the company didn't paid for these services until October 31 st. Journalize the necessary journal entries on the date (October 1 st & October 31 st ).
October 17 th Advertising Expenses 7,000 Accounts Payable 7,000 October 31 st Accounts Payable 7,000 Cash 7,000 Accrued Revenues: - They are this type of revenues when we perform service before we receive cash. - So on the date of performing service we record the value of the service as revenue in the credit side and an equal amount of accounts receivable in the debit side. - On the date of adjustment the amount of cash received is recorded in the debit side and an equal amount of accounts receivable is recorded in the credit side. Example: On April 5 th Ahmed Company performed computer services for a client valued for $800 but money was received on May 10 th. Journalize necessary journal entries on dates (April 5 th & May 10 th ). April 5 th Accounts Receivable 800 Service Revenues 800 May 10 th Cash 800 Accounts Receivable 800
- After making the needed adjustments in the accounting period the company should prepare a trial balance including these adjustments in order to record correct and reliable balances for the accounts this new trial balance is called Adjusted Trial Balance. - From this adjusted trial balance the company can prepare the financial statements (Income Statement, Owner's Equity Statement & Balance Sheet) - Income Statement is prepared by moving the amounts of Revenues and expenses from the adjusted trial balance to the income statement, if revenues are more than expenses so the result is a net profit, while if expenses are more than revenues so the result is a net loss. - Then to prepare the owner's equity statement we record the beginning balance of the owner's equity as usual then in the Addition part we move the amounts of investments from the adjusted trial balance and the amount of net income from the income statement (if present) then in the deducting part we move the amounts of withdrawals from the adjusted trial balance and the amount of net loss from the income statement (if present) to calculate the ending balance of owner's equity. - Then to prepare the balance sheet we move the amounts of assets and liabilities from the adjusted trial balance each in its side and move the ending balance of the owner's equity from the owner's equity statement to the balance sheet. - These steps are performed as follows:
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