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1、Adjusting the Accounts,Learning Objectives,Describe the steps in the accounting cycle. Revisit, learn, and apply the definitions of income and expense and the criteria for income and expense recognition. Explain why adjusting entries are needed and identify the major types of adjusting entries. Prep
2、are adjusting entries and an adjusted trial balance. Show how an adjusted trial balance can be used to prepare end of period financial statements.,Record accounting events in journal; post to General Ledger. Prepare Trial Balance. Record adjusting journal entries; post to Ledger; prepare Adjusted Tr
3、ial Balance. Prepare Financial Statements. Record closing journal entries; post to Ledger; prepare Post Closing Trial Balance. Begin the new accounting period by returning to the first step.,LO 1: The Accounting Cycle,The story begins with the accounting period The length of the accounting period an
4、d when it ends affects the amount of income and expenses recognised. But what IS an accounting period?,LO 2: Recording Income and Expenses,Generally a month, a quarter, or a year Fiscal or financial year vs. calendar year Also known as the “Periodicity Assumption”,Accountants divide the economic lif
5、e of a business into artificial time periods (Time Period Assumption).,Jan.,Feb.,Mar.,Apr.,Dec.,. . . . .,LO 2: Recording Income and Expenses,During the accounting period, we record all accounting events (including those affecting income and expense accounts) according to the rules of accrual accoun
6、ting. What is income? Recall Increases in economic assets increase. Resulting in equity increases (other than owner contributions) Income includes both revenues and gains.,LO 2: Recording Income and Expenses,What are expenses? Recall Decreases in economic assets decrease. Resulting in equity decreas
7、es (other than owner distributions). Expenses include losses.,LO 2: Recording Income and Expenses,When? The assessment of whether/not to recognise revenues and expenses is made as accounting events occur. BUT A REASSESSMENT MUST TAKE PLACE AT THE END OF THE ACCOUNTING PERIOD. ADJUSTING ENTRIES RESUL
8、T FROM THAT REASSESSMENT. The effects of the adjustments must faithfully represent the economic substance of the underlying events, as summarised in end of period balances.,LO 2: Recording Income and Expenses,Asset and liability balances usually need to be reassessed for these common reasons: Some e
9、vents are not journalised daily because to do so would be inefficient. Some events are not reliably known until the end of the accounting period. Some items were not recorded because they are invoice based, and no invoice was received or sent. Sometimes, businesses follow the cash basis of accountin
10、g during the period, thus overstating revenues and/or expenses, prior to adjustment.,LO 3: Why Adjusting Entries?,Adjustment for asset or liability overstatement: Certain assets have been at least partially used or consumed. Unearned revenue (customer prepayments) now may be at least partially earne
11、d. Adjustment for asset or liability understatement: Service or goods provided and customer has not yet paid: called a revenue accrual. No payment has been made or liability recorded for benefits consumed: called an expense accrual. Revenue recorded when cash was received, but obligation to customer
12、 not yet satisfied. Expense recorded when cash was paid, but future benefits still exist as of the BS date.,LO 3: Adjusting EntriesCommon Types,Two typical adjustments for asset and/or liability overstatements: consumed (or used) asset revenues received in advance (now earned),LO 4: Prepare Adjustin
13、g Entries,1. Supplies Beginning balance of supplies, an asset: $500. Cash purchase of supplies during the period: $2000. Supplies on hand at period end: $1000. Adjusting journal entry:,Date Supplies Expense,LO 4: Prepare Adjusting Entries,Date Supplies 2 000 Cash2 000,Posting:,Supplies Balance 500 O
14、ct. 31 Cash 2 000 Supplies Expense Oct. 31,LO 4: Prepare Adjusting Entries,2. Insurance Oct 4: Insurance paid for 1 year in advance: $600 Insurance for October $600/12 = $50 Adjusting journal entry, assuming monthly periods: Posting:,Oct. 31,LO 4: Prepare Adjusting Entries,Oct. 4,3. Depreciation All
15、ocation of the depreciable cost of the asset to expense over its useful life. Assume asset purchased 2 October for $5000. Depreciation of office equipment: $480 p.a. or $40 monthly Journal entry, assuming monthly periods:,Oct. 31,LO 4: Prepare Adjusting Entries,Posting: Balance Sheet,Office Equipmen
16、t Oct. 2 Cash 5 000 Accumulated Depreciation - Office Equipment Depreciation Expense Oct. 31 Oct. 31,Office Equipment$ Less: Accumulated Depreciation,LO 4: Prepare Adjusting Entries,Unearned revenue example: $1200 received 2 October for advertising services to be completed by 31 December. Journal en
17、try, assuming monthly accounting periods and $400 earned during October: Posting:,Oct. 31,LO 4: Prepare Adjusting Entries,Oct. 2 Cash1 200 1 200,Accruals may be either: Accrued revenues: Debit a receivableXXX Credit a revenueXXX Accrued expenses: Debit an expenseXXX Credit a liabilityXXX,LO 4: Prepa
18、re Adjusting Entries-Accruals,At month end, Commission Revenue earned, but not yet received or recorded: $200. Journal entry, assuming monthly periods: Posting:,Oct. 31,Commissions Rec. Commissions Revenue Oct. 31 C. Rev 200 Oct. 31 C. Rec 200,LO 4: Prepare Adjusting Entries Accruals,Summary,Illustr
19、ation 3-15,LO 4: Adjusting Entries for “Accrued Revenues”,Accrued expenses are expenses not yet paid or recorded at balance date. Example: Accrued Interest Borrowed $5000 from bank on 1 October, interest payable quarterly. Interest rate: 12% p.a. Monthly interest expense: $5000 x 12% x 1/12 = $50,LO
20、 4: Prepare Adjusting EntriesAccruals,Journal entry, assuming monthly accounting periods: Posting:,Oct. 31,LO 4: Prepare Adjusting EntriesAccruals,Accrued Salaries: $4000 of salaries are paid every two weeks for 10 days of work: $400/day. Obligation at 31 October: 3 days X $400 = $1200.,LO 4: Prepar
21、e Adjusting EntriesAccruals,Journal entry on Oct 26: Adjusting journal entry, assuming monthly accounting periods: Posting:,Oct. 31,LO 4: Prepare Adjusting EntriesAccruals,Oct. 26 Salaries Expense Cash,Summary,Illustration 3-21,LO: 4 Adjusting Entries for “Accrued Expenses”,LO 4: Prepare Adjusting E
22、ntries E3-7 (adapted),LO 4: Prepare Adjusting Entries E3-7 (adapted),The Adjusted Trial Balance: Prepared after all adjusting entries have been journalised and posted. Debit/Credit check. Next step: financial statements.,LO 4: Preparing an ATB,LO 5: Preparing Financial Statements,Statement of Comprehensive Income For the Month Ending 31/10/2011,Profit and TCI,Profit,LO 5: Preparing Financial Statements,Illustration 3-26,LOs 4 & 5: E3-10 (adapted),1. Insurance Expense300 Prepaid Insurance300 2. 400 400 3. 150 150 4. 300 300 5. 800 800,LOs 4 & 5: E3-10 (adapted),LOs 4 & 5: E3-10 (adapted),