ADJUSTING THE ACCOUNTS handout

chap 3

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Chapter

3-2

1. Explain the time period assumption

2. Explain the accrual basis of accounting

3. Explain the reasons for adjusting entries

4. Identify the major types of adjusting entries

5. Prepare adjusting entries for deferrals

6. Prepare adjusting entries for accruals

7. Describe the nature and purpose of an adjusted

trial balance

Study Objectives

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Chapter

3-3

Adjusting the Accounts

Timing Issues

The Basics of Adjusting Entries

The Adjusted Trial Balance and Financial Statements

Time period assumption Fiscal and calendar years Accrual- vs cash- basis accounting Recognizing revenues and expenses

Types of adjusting entries Adjusting entries for deferrals

Adjusting entries for accruals

Summary of journalizing and posting

Preparing the adjusted trial balance

Preparing financial statements

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Accountants divide the economic life of a

business into artificial time periods

( Time Period Assumption ).

LO 1 Explain the time period assumption.

Jan Feb Mar Apr. . Dec.

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Chapter

3-5

The time period assumption states that:

a.

a revenue should be recognized in the accounting

period in which it is earned.

b expenses should be matched with revenues.

c the economic life of a business can be divided into

artificial time periods.

d the fiscal year should correspond with the

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Accrual- vs Cash-Basis Accounting

LO 2 Explain the accrual basis of accounting.

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Chapter

3-7

Cash-Basis Accounting

Revenues are recognized when cash is received

Expenses are recognized when cash is paid

Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP)

Timing Issues

Accrual- vs Cash-Basis Accounting

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Recognizing Revenues and Expenses

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Recognizing Revenues and Expenses

Match expenses with

revenues in the period

when the company makes

efforts to generate

those revenues

“Let the expenses follow

the revenues.”

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Chapter

3-11

One of the following statements about the accrual basis

of accounting is false That statement is:

a Events that change a company’s financial statements are recorded in the periods in which the events occur.

b Revenue is recognized in the period in which it is earned.

c The accrual basis is in accord with generally accepted accounting principles.

d Revenue is recorded only when cash is received, and expense is recorded only when cash is paid.

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Chapter

3-12

Adjusting entries make it possible to report correct amounts on the balance sheet and

on the income statement

A company must make adjusting entries every time it prepares financial statements.

LO 3 Explain the reasons for adjusting entries.

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Chapter

3-13

Revenues - recorded in the period in which they are earned

they are earned.

Expenses - recognized in the period in which they are incurred

they are incurred.

Adjusting entries - needed to ensure that the revenue recognition and matching

principles are followed.

LO 3 Explain the reasons for adjusting entries.

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Chapter

3-14

Adjusting entries are made to ensure that:

a expenses are recognized in the period in which

they are incurred

b revenues are recorded in the period in which

they are earned

c balance sheet and income statement accounts

have correct balances at the end of an accounting period

d all of the above

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Chapter

3-15

Types of Adjusting Entries

Deferrals

1 Prepaid Expenses. Expenses paid in cash and recorded as

assets before they are used or consumed.

2 Unearned Revenues Cash received and recorded as

liabilities before revenue is earned.

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Chapter

3-16

Trial Balance – Each account is analyzed to determine

whether it is complete and up-to-date.

Trial Balance

LO 4 Identify the major types of adjusting entries.

PIONEER ADVERTISING AGENCY INC.

Trial Balance October 31, 2008

Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable $ 5,000 Accounts Payable 2,500 Unearned Revenue 1,200

Service Revenue 10,000 Salaries Expense 4,000

Rent Expense 900

$28,700 $ 28,700

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Chapter

3-17

Prepaid expenses or Unearned revenues.

Adjusting Entries for Deferrals

LO 5 Prepare adjusting entries for deferrals.

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Chapter

3-18

Payment of cash, that is recorded as an asset because service or benefit will be received in the future

Adjusting Entries for “Prepaid Expenses”

insurance supplies Advertising rent

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

building purchases equipment purchases

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(1) to record the expenses that apply to the

current accounting period, and

(2) to show the unexpired costs in the asset

accounts

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Chapter

3-20

Illustration 3-4

Adjusting entries for prepaid expenses

Increases (debits) an expense account and Decreases (credits) an asset account.

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Chapter

3-21

Example (Insurance): (Insurance) : On Oct 4 th , Pioneer Advertising

paid $600 for a one-year fire insurance policy Show the

journal entry to record the payment on Oct 4 th

Prepaid insurance 600 Oct 4

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Chapter

3-22

Example (Insurance): (Insurance) : On Oct 4th, Pioneer Advertising paid

$600 for a one-year fire insurance policy Show the adjusting Show the adjusting

journal entry required at Oct 31 st

550

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Companies report a portion of the cost of a lived asset as an expense (depreciation) during each period of the asset’s useful life (Matching Principle).

long-Adjusting Entries for “Prepaid Expenses”

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Chapter

3-24

Example (Depreciation): (Depreciation) : On Oct 2 nd , Pioneer Advertising paid $5,000 for office equipment that has an expected

useful life of 10 years Show the journal entry to record

the purchase of the equipment on Oct 2 nd

Debit Credit

Cash

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Chapter

3-25

Example (Depreciation): (Depreciation) : On Oct 2 nd , Pioneer Advertising paid $5,000 for office equipment that has an expected useful life of 10 years Show the

life of 10 years Show the adjusting journal entry adjusting journal entry required at Oct 31 st The equipment has a $200 salvage value.

([$5,000- $200 salvage value] / 10 yrs / 12 months = $40)

Accumulated depreciation 40

Depreciation expense 40 Jan 31

Debit Credit

Depreciation Expense

Debit Credit Accumulated Depreciation

40

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Chapter

3-26

Depreciation (Statement Presentation)

Accumulated Depreciation—is a contra asset account

Appears just after the account it offsets (Equipment) on the balance sheet

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Chapter

3-27

Receipt of cash that is recorded as a liability because the revenue has not been earned

Adjusting Entries for “Unearned Revenues”

rent magazine subscriptions customer deposits for future service

Cash Receipt BEFORE Revenue Recorded

sale of airline tickets school tuition

Unearned revenues often occur in regard to:

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The adjusting entry for unearned revenues results

in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account

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Chapter

3-29 LO 5 Prepare adjusting entries for deferrals.

Adjusting entries for unearned revenues

Decrease (a debit) to a liability account and Increase (a credit) to a revenue account.

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Chapter

3-30

Example: On Oct 2 nd , Pioneer Advertising received $1,200 from R Knox for services to be completed by December 31 Show the journal entry to record the receipt on Oct 2 nd

Debit Credit Unearned Rent Revenue

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Chapter

3-31

Example: On Oct 2nd, Pioneer Advertising received $1,200

from R Knox for services to be completed by December 31

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in the current accounting period that have not

been recognized through daily entries.

Adjusting Entries for Accruals

LO 6 Prepare adjusting entries for accruals.

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Chapter

3-33

Revenues earned but not yet received in cash or

recorded

Adjusting Entries for “Accrued Revenues”

interest rent

services performed

BEFORE

Accrued revenues often occur in regard to:

Cash ReceiptRevenue Recorded

Adjusting entry results in:

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Chapter

3-34

Accrued Revenues

An adjusting entry serves two purposes:

(1) It shows the receivable that exists, and (2) It records the revenues earned

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Chapter

3-35

Adjusting entries for accrued revenues

Increases (debits) an asset account and Increases (credits) a revenue account.

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Chapter

3-36

Example: In October Pioneer Advertising earned $200 for advertising services that have not been recorded Show the journal entry to record the accrued revenues in October

Accounts Receivable 200 Oct 31

Debit Credit

Accounts Receivable

Debit Credit Service Revenue

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Chapter

3-37

Expenses incurred but not yet paid in cash or

recorded

Adjusting Entries for “Accrued Expenses”

interest rent

BEFORE

Accrued expenses often occur in regard to:

Cash PaymentExpense Recorded

taxes salaries

Adjusting entry results in:

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Chapter

3-38

Accrued Expenses

(1) It records the obligations, and (2) It recognizes the expenses

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Chapter

3-39

Adjusting entries for accrued expenses

Increases (debits) an expense account and Increases (credits) a liability account.

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Debit Credit Notes Payable

Example: On Oct 1 st , Pioneer Advertising signed a $,5000, month note payable at a rate of 12% per year The total

3-interest due on the note at its due date is $150 ($5,000 X

12% X 3/12) Show the journal entry to record the borrowing

on Oct 1 st

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Chapter

3-41

Example: On Oct 1st, Pioneer Advertising signed a $,5000,

3-month note payable at a rate of 12% per year The total interest due on the note at its due date is $150 ([$5,000 x 12%] / 12

months) Show the adjusting journal entry Show the adjusting journal entry required on Oct

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Chapter

3-42

Accrued Expenses

(1) It records the obligations, and (2) it recognizes the expenses

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Chapter

3-43

After all adjusting entries are journalized and

posted the company prepares another trial

balance from the ledger accounts ( Adjusted Trial Balance ).

Its purpose is to prove the equality of debit

balances and credit balances in the ledger

The Adjusted Trial Balance

LO 7 Describe the nature and purpose of an adjusted trial balance.

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Chapter

3-44

Which of the following statements is incorrect

concerning the adjusted trial balance?

a An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.

b The adjusted trial balance provides the primary basis for the preparation of financial statements

c The adjusted trial balance lists the account balances from largest to smallest

d The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.

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Chapter

3-45

Financial Statements are prepared directly from the

Adjusted Trial Balance

Financial Statements are prepared directly from the

Adjusted Trial Balance

Balance Sheet

Income

Statement

of Cash Flows

Retained Earnings Statement

Preparing Financial Statements

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Chapter

3-46

Income Statement

Revenues Service Revenue 10,600

Expenses Salaries Expense 5,200 Advertising Supplies Expense1,500 Rent Expense 900 Insurance Expense 50 Interest Expense 50 Depreciation Expense 40 Total expenses 7,740 Net income $ 2,860

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Chapter

3-47

Retained Earnings

Statement

PIONEER ADVERTISING AGENCY INC.

Retained Earnings Statement For the Month Ended October 31, 2008

Retained earnings, October 1 $ 0 Add: Net income 2,860

2,860 Less: Dividends 500 Retained Earnings, October 31 2,360

Tiêu đề	Adjusting the Accounts
Trường học	University of Financial Accounting
Chuyên ngành	Financial Accounting
Thể loại	Handout
Năm xuất bản	2023
Thành phố	Hanoi

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Số trang	49
Dung lượng	624 KB