Principles of Accounting

(MTL 1111)
Spring- 2025
1
 Assistant Professor
Abid Hasan ACMA
Associate Cost and Management Accountant
The Institute of Cost and Management Accountants of Bangladesh

Contact Detail:
Email: [email protected]
Learning Objectives

LO 1 Explain the accrual basis of accounting and the reasons

for adjusting entries.
LO 2 Prepare adjusting entries for deferrals.
LO 3 Prepare adjusting entries for accruals.
LO 4 Describe the nature and purpose of an adjusted trial
balance.

3
Fiscal and Calendar Years
• Monthly and quarterly time periods are called interim
periods
• Most large companies must prepare both quarterly
and annual financial statements
• Fiscal Year = Accounting time period that is one year
in length
• Calendar Year = January 1 to December 31

LO 1 4
Accrual- versus Cash-Basis Accounting
Accrual-Basis Accounting
• Transactions recorded in the periods in which the events
occur
• Companies recognize revenues when they perform
services (rather than when they receive cash)
• Expenses are recognized when incurred (rather than when
paid)
• In accordance with generally accepted accounting
principles (GAAP) and also IFRS.

LO 1 5
Accrual- versus Cash-Basis Accounting
Cash-Basis Accounting
• Revenues recognized when cash is received
• Expenses recognized when cash is paid
• Cash-basis accounting is not in accordance with generally
accepted accounting principles (GAAP) and IFRS.

LO 1 6
Recognizing Revenues and Expenses
Revenue Recognition Principle
Recognize revenue in the
accounting period in which the
performance obligation is
satisfied.

LO 1 7
Recognizing Revenues and Expenses
Expense Recognition Principle
Companies recognize expenses
in the period in which they
make efforts (consume assets
or incur liabilities) to generate
revenue.
“Let the expenses follow
the revenues.”

LO 1 8
The Need for Adjusting Entries
Adjusting Entries
• Ensure that the revenue recognition and expense
recognition principles are followed.
• Necessary because the trial balance may not contain
up-to-date and complete data.
• Required every time a company prepares financial
statements.
• Will include one income statement account and one
balance sheet account.

LO 1 9
Types of Adjusting Entries
Deferrals Accruals
1. Prepaid Expenses. Expenses 1. Accrued Revenues. Revenues
paid in cash before they are for services performed but not
used or consumed. yet received in cash or recorded.
2. Unearned Revenues. Cash 2. Accrued Expenses. Expenses
received before services are incurred but not yet paid in cash
performed. or recorded.

LO 1 10
Prepaid Expenses
Payments of expenses that are recorded as an asset to show
the service or benefit the company will receive in the future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

• insurance • rent

• supplies • equipment

• advertising • buildings

LO 2 11
Supplies
Illustration: Pioneer Advertising 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.

Oct. 31 Supplies Expense 1,500

Supplies 1,500

LO 2 12
Supplies

LO 2 13
Insurance
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.

Oct. 31 Insurance Expense 50

Prepaid Insurance 50

LO 2 14
Insurance

LO 2 15
Depreciation
• Buildings, equipment, and motor vehicles (assets that
provide service for many years) are recorded as assets,
rather than an expense, on the date acquired.
• Depreciation is the process of allocating the cost of an
asset to expense over its useful life.
• Depreciation does not attempt to report the actual
change in the value of the asset.
o Allocation concept, not a valuation concept

LO 2 16
Depreciation
Illustration: For Pioneer Advertising, assume
that depreciation on the equipment is $480 a
year, or $40 per month.

Oct. 31

Depreciation Expense 40

Accumulated Depreciation 40

Accumulated Depreciation is called a

contra asset account.

LO 2 17
Depreciation

LO 2 18
Depreciation
Statement Presentation
• Accumulated Depreciation is a contra asset account (credit)
• Offsets related asset account on the balance sheet
• Book value is the difference between the cost of any
depreciable asset and its accumulated depreciation
Equipment $5,000
Less: Accumulated depreciation—equipment 40
$4,960

$4, 960

LO 2 19
Prepaid Expenses
Accounting for Prepaid Expenses
Accounts
Reason for Before Adjusting
Examples Adjustment Adjustment Entry
Insurance, Prepaid expense Assets Dr. Expenses
supplies, originally overstated. Cr. Assets or
advertising, rent, recorded Expenses Contra Assets
Depreciation in asset accounts understated.
have been used.

LO 2 20
Unearned Revenues
Receipt of cash that is recorded as a liability because the
service has not been performed.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

• Rent • Magazine subscriptions
• Airline tickets • Customer deposits

LO 2 21
Unearned Revenues
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
performed $400 of services in October.

Oct. 31 Unearned Service Revenue 400

Service Revenue 400

LO 2 22
Unearned Revenues

LO 2 23
Unearned Revenues
Accounting for Unearned Revenue
Accounts
Reason for Before Adjusting
Examples Adjustment Adjustment Entry
Rent, magazine Unearned revenues Liabilities Dr. Liabilities
subscriptions, recorded in liability overstated. Cr. Revenues
customer deposits accounts are now Revenues
for future service recognized as understated.
revenue for services
performed.

LO 2 24
Do It! 1: Adjusting Entries for Deferrals
The ledger of Hammond Company, on March 31, 2020, includes these selected accounts before
adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200

An analysis of the accounts shows the following.

1. Insurance expires at the rate of $100 per month.
2. Supplies on hand total $800.
3. The equipment depreciates $200 a month.
4. During March, services were performed for $4,000 of the unearned service revenue reported.

Prepare the adjusting entries for the month of March.

LO 2 25
Do It! 1: Adjusting Entries for Deferrals
The ledger of Hammond Company, on March 31, 2020, includes these selected accounts before
adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200

Prepare the adjusting entries for the month of March.

1. Insurance expires at the rate of $100 per month.

Insurance Expense 100

Prepaid Insurance 100

LO 2 26
Do It! 1: Adjusting Entries for Deferrals
The ledger of Hammond Company, on March 31, 2020, includes these selected accounts before
adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200

Prepare the adjusting entries for the month of March.

2. Supplies on hand total $800.

Supplies Expense ($2,800 - $800) 2,000

Supplies 2,000

LO 2 27
Do It! 1: Adjusting Entries for Deferrals
The ledger of Hammond Company, on March 31, 2020, includes these selected accounts before
adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200

Prepare the adjusting entries for the month of March.

3. The equipment depreciates $200 a month.

Depreciation Expense 200

Accumulated Depreciation—Equipment 200

LO 2 28
Do It! 1: Adjusting Entries for Deferrals
The ledger of Hammond Company, on March 31, 2020, includes these selected accounts before
adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200

Prepare the adjusting entries for the month of March.

4. During March, services were performed for $4,000 of the unearned service revenue reported.

Unearned Service Revenue 4,000

Service Revenue 4,000

LO 2 29
Adjusting Entries for Accruals

LEARNING OBJECTIVE 3
Prepare adjusting entries for accruals.

Accruals are made to record,

• Revenues for services performed but not yet recorded
at the statement date
• Expenses incurred but not yet paid or recorded at the
statement date

LO 3 30
Accrued Revenues
Revenues for services performed but not yet received in cash
or recorded.

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

• Rent

• Interest
• Services

LO 3 31
Accrued Revenues
Illustration: In October, Pioneer Advertising
performed services worth $200 that were
not billed to clients on or before October 31.
Oct. 31
Accounts Receivable 200
Service Revenue 200
On November 10, Pioneer receives cash of $200 for the services
performed. The journal entry on the 10th is:
Cash 200

Accounts Receivable 200

LO 3 32
Accrued Revenues

LO 3 33
Accrued Revenues
Accounting for Accrued Revenues
Accounts
Reason for Before Adjusting
Examples Adjustment Adjustment Entry
Interest, Services performed Assets Dr. Assets
rent, services but not yet received understated. Cr. Revenues
in cash or recorded. Revenues
understated.

LO 3 34
Accrued Expenses
Expenses incurred but not yet paid in cash or recorded.

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

• Rent • Taxes

• Interest • Salaries

LO 3 35
Accrued Expenses
Accrued Interest
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%.

Face Value Annual Time in Terms

of Note × Interest Rate × of One Year = Interest
$5,000 × 12% × 1 over 12
1
= $50
12

Oct. 31 Interest Expense 50

Interest Payable 50

LO 3 36
Accrued Expenses

LO 3 37
Accrued Expenses
Accrued Salaries and Wages
Illustration: Pioneer Advertising paid salaries and wages on
October 26; the next payment of salaries will not occur until
November 9. The employees receive total salaries of $2,000
for a five-day work week, or $400 per day.

LO 3 38
Accrued Expenses

LO 3 39
Accrued Expenses
Accounting for Accrued Revenues
Accounts
Reason for Before Adjusting
Examples Adjustment Adjustment Entry
Interest, Expenses have Expenses Dr. Expenses
rent, salaries been incurred but understated. Cr. Liabilities
not yet paid in Liabilities
cash or recorded. understated.

LO 3 40
Summary of Basic Relationships
Accounts Before
Type of Adjustment Adjustment Adjusting Entry
Prepaid expenses Assets overstated. Dr. Expense
Expenses understated. Cr. Assets or Contra
Assets
Unearned revenues Liabilities overstated. Dr. Liabilities
Revenues understated. Cr. Revenues
Accrued revenues Assets understated. Dr. Assets
Revenues understated. Cr. Revenues
Accrued expenses Expenses understated. Dr. Expenses
Liabilities understated. Cr. Liabilities

LO 3 41
Do It! 2: Adjusting Entries Accruals
Micro Computer Services began operations on August 1, 2020. At
the end of August 2020, management prepares monthly financial
statements. The following information relates to August.
1. At August 31, the company owed its employees $800 in salaries
and wages that will be paid on September 1.
2. On August 1, the company borrowed $30,000 from a local bank
on a 15-year mortgage. The annual interest rate is 10%.
3. Revenue for services performed but unrecorded for August
totaled $1,100.

Prepare the adjusting entries needed at August 31, 2020.

LO 3 42
Do It! 2: Adjusting Entries Accruals
Prepare the adjusting entries needed at August 31, 2020.
1. At August 31, the company owed its employees $800 in salaries
and wages that will be paid on September 1.
Salaries and Wages Expense 800
Salaries and Wages Payable 800

2. On August 1, the company borrowed $30,000 from a local bank

on a 15-year mortgage. The annual interest rate is 10%.
Interest Expense ($30,000 .10 x 1/12) 250
Interest Payable 250

LO 3 43
Do It! 2: Adjusting Entries Accruals
Prepare the adjusting entries needed at August 31, 2020.
3. Revenue for services performed but unrecorded for August
totaled $1,100.
Accounts Receivable 1,100
Service Revenue 1,100

LO 3 44
Adjusted Trial Balance

LEARNING OBJECTIVE 4
Describe the nature and purpose of an adjusted trial balance.

• Prepared after adjusting entries are journalized and

posted
• Proves equality of debit and credit balances
• Basis for the preparation of financial statements

LO 4 45
 Prepare a trial balance.

LO 4 46
Adjusted Trial Balance

LO 4 47
Preparing Financial Statements

LO 4 48
Preparing Financial Statements

LO 4 49
Preparing Financial Statements

LO 4 50
Practice Exercises

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E 3-5 Continue….

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