3-1
Financial Accounting
IFRS Edition, 2e
Weygandt Kimmel Kieso
Preview of Chapter 3
3-2
Cash-Basis Accounting

Revenues recognized when cash is received.

Expenses recognized when cash is paid.

Cash-basis accounting is not in accordance with
International Financial Reporting Standards (IFRS).
Accrual- vs. Cash-Basis Accounting
LO 2 Explain the accrual basis of accounting.
Timing Issues
3-3
Accrual-Basis Accounting

Transactions recorded in the periods in which the
events occur.

Revenues are recognized when the services are
performed, rather than when cash is received.

Expenses are recognized when incurred, rather than
when paid.
Accrual- vs. Cash-Basis Accounting
LO 2 Explain the accrual basis of accounting.
Timing Issues

3-4
Revenue Recognition Principle
Recognizing Revenues and Expenses
LO 2 Explain the accrual basis of accounting.
Recognize revenue in the
accounting period in which the
performance obligation is
satisfied.
In a service enterprise,
revenue is considered to be
earned at the time the service
is performed.
Timing Issues
3-5
Expense Recognition Principle
Recognizing Revenues and Expenses
LO 2 Explain the accrual basis of accounting.
Match expenses with
revenues in the period when
the company makes efforts to
generate those revenues.
“Let the expenses follow
the revenues.”
Timing Issues
3-6
1. Prepaid Expenses.


Expenses paid in cash before
they are used or consumed.

Deferrals
3. Accrued Revenues.
Revenues for services
performed but not yet received
in cash or recorded.
4. Accrued Expenses.
Expenses incurred but not yet
paid in cash or recorded.
2. Unearned Revenues.
Cash received before services
are performed.
Accruals
Illustration 3-2
Categories of adjusting entries
The Basics of Adjusting Entries
LO 4 Identify the major types of adjusting entries.
Types of Adjusting Entries
3-7
Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.

insurance

supplies

advertising
Cash Payment
Cash Payment
Expense Recorded
Expense Recorded

BEFORE

rent

equipment

buildings
Prepayments often occur in regard to:
LO 5 Prepare adjusting entries for deferrals.
The Basics of Adjusting Entries
Prepaid Expenses
3-8
Illustration: Pioneer Advertising Agency
purchased supplies costing $2,500 on
October 5. Pioneer recorded the payment
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.
Supplies 1,500
Supplies expense 1,500Oct. 31
LO 5 Prepare adjusting entries for deferrals.
The Basics of Adjusting Entries
3-9
Illustration: On October 4, Pioneer
Advertising paid $600 for a one-year fire
insurance policy. Coverage began on
October 1. Pioneer 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.
Prepaid insurance 50
Insurance expense 50Oct. 31
LO 5 Prepare adjusting entries for deferrals.
The Basics of Adjusting Entries
3-10
Receipt of cash that is recorded as a liability because service
has not be performed.

Rent

Airline tickets
Cash Receipt
Cash Receipt
Revenue Recorded
Revenue Recorded
BEFORE

Magazine subscriptions

Customer deposits
Unearned revenues often occur in regard to:
LO 5 Prepare adjusting entries for deferrals.
The Basics of Adjusting Entries
Unearned Revenues
3-11

Illustration: Pioneer Advertising received $1,200 on October 2
from R. Knox for advertising services expected to be completed by
December 31. Unearned Service Revenue shows a balance of
$1,200 in the October 31 trial balance. Analysis reveals that the
company earned $ 400 of those fees in October.
Service revenue 400
Unearned service revenue 400Oct. 31
LO 5 Prepare adjusting entries for deferrals.
The Basics of Adjusting Entries
3-12
Revenues for services performed but not yet received in cash
or recorded.

Interest

Services performed

Rent
Accrued revenues often occur in regard to:
The Basics of Adjusting Entries
Accrued Revenues
LO 6 Prepare adjusting entries for accruals.
BEFORE
Cash Receipt
Cash Receipt
Revenue Recorded
Revenue Recorded
3-13
Illustration: In October Pioneer Advertising
Agency recognized $200 for advertising

services performed but not recorded.
Accounts receivable 200
Cash 200Nov. 10
The Basics of Adjusting Entries
LO 6 Prepare adjusting entries for accruals.
200
Service revenue 200
Accounts receivable
Oct. 31
On November 10, Pioneer receives cash of
$ 200 for the services performed.
3-14
Expenses incurred but not yet paid in cash or recorded.

Rent

Interest

Taxes

Salaries
Accrued expenses often occur in regard to:
The Basics of Adjusting Entries
Accrued Expenses
BEFORE
Cash Payment
Cash Payment
Expense Recorded
Expense Recorded
LO 6 Prepare adjusting entries for accruals.

3-15
Illustration: Pioneer Advertising signed a three-month note
payable in the amount of $5,000 on October 1. The note requires
Pioneer to pay interest at an annual rate of 12%.
Interest payable 50
Interest expense 50Oct. 31
The Basics of Adjusting Entries
LO 6 Prepare adjusting entries for accruals.
Illustration 3-17
3-16
Team Quiz #1
3-17
B
A
B
C
D
C
A
D
3-18
Micro Computer Services Inc. began operations on August 1,
2014. At the end of August 2014, management attempted to
prepare monthly financial statements. The following information
relates to August. Prepare the adjusting journal entries needed at
August 31, 2014. (Amounts are in Chinese yuan.)
1. At August 31, the company owed its employees ¥8,000 in
salaries and wages that will be paid on September 1.
LO 6
Salaries and wages expense 8,000

Salaries and wages payable 8,000
3-19
LO 6
Interest expense (¥ 300,000 x 10% x 1/12) 2,500
Interest payable 2,500
Micro Computer Services Inc. began operations on August 1,
2014. At the end of August 2014, management attempted to
prepare monthly financial statements. The following information
relates to August. Prepare the adjusting journal entries needed at
August 31, 2014. (Amounts are in Chinese yuan.)
2. At August 1, the company borrowed ¥300,000 from a local
bank on a 15-year mortgage. The annual interest rate is 10%.
3-20
LO 6
Accounts receivable 11,000
Service revenue 11,000
Micro Computer Services Inc. began operations on August 1,
2014. At the end of August 2014, management attempted to
prepare monthly financial statements. The following information
relates to August. Prepare the adjusting journal entries needed at
August 31, 2014. (Amounts are in Chinese yuan.)
3. Revenue for services performed but unrecorded for August
totaled ¥11,000.
3-21
Team Quiz #2
3-22
3-23
3-24

Prepared after all adjusting entries are journalized and

posted.

Purpose is to prove the equality of debit balances and
credit balances in the ledger.

Is the primary basis for the preparation of financial
statements.
LO 7 Describe the nature and purpose of an adjusted trial balance.
The Adjusted Trial Balance
Adjusted Trial Balance
3-25
Illustration 3-25