Accounting for Deferrals
The company paid for one-year insurance coverage (transaction No. 2). The cost of insurance coverage per month is $100 ($1,200 / 12 months). By the end of the accounting period, 9 months of coverage have been used, and 3 months will be available for the next period. So, $900 (9 months x $100) is to be charged to the insurance expense at the end of 20X8 accounting period:
Illustration 3-21: Effect of recognizing insurance expense
|
Assets |
... |
Equity |
|
Prepaid Insurance |
... |
Insurance Expense |
Beginning Balances |
$1,200 |
|
$ 0 |
11) Insurance Expense |
(900) |
|
(900) |
Ending Balances |
300 |
|
(900) |
Now, when we have seen the effects of all transactions on the accounting equation, let us look at the ending balances of all accounts:
Illustration 3-22: 20X8 ending account balances
Cash |
6,700 |
Account Receivable |
1,000 |
Prepaid Insurance |
300 |
Supplies |
200 |
Car |
4,000 |
Accumulated Depreciation |
(1,400) |
Land |
0 |
Total Assets |
10,800 |
Unearned Revenue |
0 |
Contributed Capital |
7,400 |
Beginning Retained Earnings |
500 |
Revenues |
6,500 |
Operating Expense |
(1,400) |
Depreciation Expense |
(700) |
Supplies Expense |
(300) |
Insurance Expense |
(900) |
Loss |
(300) |
Total Liabilities & Equity |
10,800 |
As you can see, the total assets and claims (liabilities and equity) are equal, or balance. The reason is that even though we did not show the full accounting equation in analyzing 20X8 transactions, we still involved at least two accounts in a transaction (except Event No. 7, when we involved three accounts) and applied double-entry accounting.
Also pay attention to the way we showed retained earnings and revenues and expenses. We carried forward the beginning balance of retained earnings and then listed all revenues and expenses for the period 20X8. The reason is that all revenues and expenses are closed to retained earnings at period end. The ending balance of retained earnings would be $3,400 if you added the beginning retained earnings and all revenues and expenses for the period.
3.2.12 Financial statements for SuperDels for 20X8
Finally, financial statements. One important moment is that all revenue and expense accounts are closed to the Retained Earnings account (see the balance sheet and statement of changes in equity).
Illustration 3-23: SuperDels financial statements for 20X8
SuperDels Income Statement For the Period Ended 20X8 |
|
|
|
Services Revenue |
$6,500 |
|
|
Operating Expenses |
(1,400) |
Depreciation Expense |
(700) |
Supplies Expense |
(300) |
Insurance Expense |
(900) |
Total Expenses |
(3,300) |
|
|
Net Operating Income |
3,200 |
|
|
Loss from Land Sale |
(300) |
|
|
Net Income |
2,900 |
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