Adjusting Entries

1
Adjusting Entries
2
Measuring Business Income

• Accounting period assumption
• Cash accounting versus accrual accounting
• Matching principle
• Materiality concept

3
Adjusting Entries

• Journal entries that update the general ledger
  accounts to state revenues, expenses, assets, and
  liabilities more accurately
• Involve
• One balance sheet account
• One income statement account
• Never cash

4
Adjusting Process

• Identify the accounts requiring adjustment
• Determine unadjusted balances
• Determine correct (adjusted) balances for each
  account
• Prepare adjusting entry to bring accounts in
  agreement with adjusted balances

5
Deferrals

• A cash payment or receipt occurred in current
  period
• Must defer a portion of expense or revenue until
  a future period

6
Deferrals

• Two situations
• Pay a cost of benefit in advance and allocate
  cost as expenses to periods that receive benefit

7
Deferrals

• Two situations
• Pay a cost of benefit in advance and allocate
  cost as expenses to periods that receive benefit
• Receive a cash revenue in advance and allocate
  amounts as revenues to periods in which revenues
  earned

8
Prepaid Insurance

• Dec. 1, paid 600 for 12 month insurance premium
  recording as asset, Prepaid Insurance
• At Dec. 31
• Prepaid Insurance balance 600
• Insurance Expense balance 0

9
Prepaid Insurance

• As of Dec. 31, one months insurance has expired
  and become expense
• Correct Dec. 31 balance
• Prepaid Insurance 550
• Insurance Expense 50

10
Prepaid Insurance

• Adjusting entry
• Debit Insurance Expense 50
• Increases Insurance Expense to correct balance
  50
• Credit Prepaid Insurance 50
• Decreases Prepaid Insurance to correct balance
  550

11
Depreciation Expense

• Similar to prepaid insurance but for long-term
  asset
• Decrease in asset not recorded in asset account
• Recorded as increase in contra asset -
  Accumulated Depreciation

12
Depreciation Expense
Before
After
Balance Sheet
26,000 400
26,000 800
Trucks Accum Deprec
Income Statement
Depreciation expense
0
400
13
Unearned Revenues

• Dec. 1, received 600 for 6 month rent recording
  as liability, Unearned Rent
• At Dec. 31
• Unearned Rent balance 600
• Rent Revenue balance 0

14
Unearned Revenues

• As of Dec. 31, one months rent has been earned
  and become revenue
• Correct Dec. 31 balance
• Unearned Revenue 500
• Rent Revenue 100

15
Unearned Revenues

• Adjusting entry
• Debit Unearned Rent 100
• Decreases Unearned Rent to correct balance 500
• Credit Rent Revenue 100
• Increases Rent Revenue to correct balance 100

16
Accruals

• Recognize revenues and expenses that have
  accumulated (accrued) during the accounting
  period but have not been recorded

17
Accrued Revenues

• Dec.11, received 30-day, 15 note from customer.
• At Dec. 31
• Interest Revenue balance 0
• Interest Receivable balance 0

18
Accrued Revenues

• As of Dec. 31, 20 days interest has been earned
  and become revenue
• 1,200 x 0.15 x 20/360 10
• Correct Dec. 31 balance
• Interest Revenue 10
• Interest Receivable 10

19
Accrued Revenues

• Adjusting entry
• Debit Interest Receivable 10
• Increases Interest Receivable to correct balance
  10
• Credit Interest Revenue 10
• Increases Interest Revenue to correct balance 10

20
Accrued Expenses

• Employees paid Friday for 5-day work week at
  1,000 per week
• At Dec. 31, a Tuesday
• Wages Expense balance 50,000 - represents past
  weeks wages
• Wages Payable balance 0

21
Accrued Expenses

• As of Dec. 31, 2 days wages have been incurred
  and become expense
• Correct Dec. 31 balance
• Wages Expense 50,200
• Wages Payable 200

22
Accrued Expenses

• Adjusting entry
• Debit Wages Expense 200
• Increases Wages Expense to correct balance
  50,200
• Credit Wages Payable 200
• Increases Wages Payable to correct balance 200

23
Summarize Adjustments
24
Analyzing Information

• Use questions to compare companies

25
Income Statement

• Which company has the higher revenues?
• Which company has the higher percentage change in
  revenues?
• Which company has the lower percentage of
  expenses to revenues?

26
Balance Sheet

• Which company has the higher assets?
• What is the percentage change in assets for each
  company?
• Is the percent of total liabilities to total
  liabilities plus owners equity increasing or
  decreasing? Which company is more risky?

27
Integrative Analysis

• Are companies operating efficiently by using
  least amount of assets to generate a given level
  of revenues?
• Calculate total asset turnover
• Are companies operating efficiently by using
  least amount of assets to generate a given net
  income?
• Calculate return on assets

28
(No Transcript)