Ch 3 Handout

7/23/2019 Ch 3 Handout

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Chapter3-1

CHAPTERCHAPTER 33

ADJUSTING THEADJUSTING THE

ACCOUNTSACCOUNTS

Financial Accounting, Sixth Edition


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Chapter3-2

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.

. Prepare adjusting entries for accruals.

!. "escribe the nature and purpose of an adjustedtrial balance.

Study ObjectivesStudy Objectives

Study ObjectivesStudy Objectives


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Chapter3-3

Adjusting the AccountsAdjusting the Accounts

Adjusting the AccountsAdjusting the Accounts

Timing IssuesTiming Issues


The Basis !"The Basis !"

A#$ustingA#$usting

EntriesEntries

The Basis !"The Basis !"

A#$ustingA#$usting

EntriesEntries

The A#$uste# Tria%The A#$uste# Tria%

Ba%ane an#Ba%ane an#

&inania%&inania%

StatementsStatements

The A#$uste# Tria%The A#$uste# Tria%

Ba%ane an#Ba%ane an#

&inania%&inania%

StatementsStatements

Time periodTime period

assumptionassumption

Fiscal andFiscal and

calendar yearscalendar years

Accrual- vs. cash-Accrual- vs. cash-

basis accountingbasis accounting

RecognizingRecognizing

revenues andrevenues and

expensesexpenses

Types of adjustingTypes of adjusting

entriesentries

Adjusting entriesAdjusting entries

for deferralsfor deferrals

Adjusting entriesAdjusting entries

for accrualsfor accruals

Summary ofSummary of

journalizing andjournalizing and

postingposting

reparing thereparing the

adjusted trialadjusted trial

balancebalance

reparingreparing

financialfinancialstatementsstatements


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Chapter3-'

#enerally a month$ a quarter$ or a year.

%iscal year &s. calendar year

'lso (no)n as the *Periodicity 'ssumption+



'ccountants di&ide the economic life of abusiness into artificial time periods,-ime Period 'ssumption.

O ! E"#$ain the time #eriod assum#tion%O ! E"#$ain the time #eriod assum#tion%

Jan( &e)( *ar( Apr( De(. . . . .


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Chapter3-+

-he time period assumption states that/-he time period assumption states that/

a.a. re&enue should be recogni0ed in the accountingperiod in )hich it is earned.

b. expenses should be matched )ith re&enues.

c. the economic life of a business can be di&ided intoartificial time periods.

d. the fiscal year should correspond )ith thecalendar year.

Revie&Revie&



O ! E"#$ain the time #eriod assum#tion%O ! E"#$ain the time #eriod assum#tion%


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Chapter3-,

Accrua$'(asis Accounting

-ransactions recorded in the periods in )hich

the e&ents occur

e&enuesare recogni0ed )hen earned$ ratherthan )hen cash is recei&ed.

Expensesare recogni0ed )hen incurred$ ratherthan )hen paid.



Accrua$' vs% Cash'(asis Accounting

O ) E"#$ain the accrua$ basis o* accounting%O ) E"#$ain the accrua$ basis o* accounting%


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Chapter3-

Cash'(asis Accounting

e&enuesare recogni0ed )hen cash is recei&ed.

Expensesare recogni0ed )hen cash is paid.

ashbasis accounting is not in accordance )ithgenerally accepted accounting principles ,#''P.

Timing IssuesTiming IssuesTiming IssuesTiming Issues

Accrua$' vs% Cash'(asis Accounting



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Chapter3-.

Revenue Recognition Princi#$e


Recogni+ing Revenues and E"#enses


ompanies recogni0e

re&enue in the accountingperiod in )hich it isearned.

In a ser&ice enterprise$re&enue is considered tobe earned at the time theser&ice is performed.


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Chapter3-/

,atching Princi#$e


Recogni+ing Revenues and E"#enses


atch expenses )ith

re&enues in the period)hen the company ma(esefforts to generatethose re&enues.

-et the e"#enses *o$$o&the revenues%.


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Chapter3-10



/AAP re$ationshi#sin revenue ande"#ense recognition

/AAP re$ationshi#sin revenue ande"#ense recognition

I$$ustration 3'!I$$ustration 3'!


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Chapter3-11

ne of the follo)ing statements about the accrual basisof accounting is false. -hat statement is/

a. E&ents that change a company6s financial

statements are recorded in the periods in )hichthe e&ents occur.

b. e&enue is recogni0ed in the period in )hich it isearned.

c. -he accrual basis is in accord )ith generallyaccepted accounting principles.

d. e&enue is recorded only )hen cash is recei&ed$ andexpense is recorded only )hen cash is paid.

Revie&Revie&




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Chapter3-12

'djusting entries ma(e it possible to reportcorrect amounts on the ba$ance sheetandon the income statement.

' company must ma(e adjusting entriese&ery time it prepares financial statements.

The (asics o* Adjusting EntriesThe (asics o* Adjusting EntriesThe (asics o* Adjusting EntriesThe (asics o* Adjusting Entries

O 3 E"#$ain the reasons *or adjusting entries%O 3 E"#$ain the reasons *or adjusting entries%


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Chapter3-13

RevenuesRevenues recorded in the period in )hich recorded in the period in )hichthey are earnedthey are earned.

E"#ensesE"#enses recogni0ed in the period in )hich recogni0ed in the period in )hich

they are incurredthey are incurred.

Adjusting entriesAdjusting entries needed to ensure that needed to ensure thatthethe re&enue recognitionre&enue recognitionandand matchingmatching

principlesprinciplesare follo)ed.are follo)ed.

The (asics o* Adjusting EntriesThe (asics o* Adjusting EntriesThe (asics o* Adjusting EntriesThe (asics o* Adjusting Entries



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Chapter3-1'

'djusting entries are made to ensure that/

a. expenses are recogni0ed in the period in )hich

they are incurred.b. re&enues are recorded in the period in )hich

they are earned.

c. balance sheet and income statement accounts

ha&e correct balances at the end of anaccounting period.

d. all of the abo&e.

Revie&Revie&




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Chapter3-1+

Ty#es o* Adjusting EntriesTy#es o* Adjusting EntriesTy#es o* Adjusting EntriesTy#es o* Adjusting Entries

0e*erra$s

!% Pre#aid E"#enses%Expenses paid in cash and recorded asassets before they are used or consumed.

)% 1nearned Revenues% ash recei&ed and recorded asliabilities before re&enue is earned.

Accrua$s

!% Accrued Revenues%e&enues earned but not yet recei&ed incash or recorded.

)% Accrued E"#enses% Expenses incurred but not yet paid incash or recorded.

O 2 Identi*y the major ty#es o* adjusting entries%O 2 Identi*y the major ty#es o* adjusting entries%


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Chapter3-1,

Tria$ (a$anceTria$ (a$ance7 Each account is analy0ed to determine)hether it is complete and uptodate.

Tria$ (a$anceTria$ (a$anceTria$ (a$anceTria$ (a$ance

O 2 Identi*y the major ty#es o* adjusting entries%O 2 Identi*y the major ty#es o* adjusting entries%

PIONEER ADVERTISING AGENCY INC.

Trial Balance

October 31, 2008

Account Debit Credit

Cash $ 15,200Advertising Supplies 2,500

Prepaid Insurance 600

!!ice "#uipent 5,000

%otes Pa&able $ 5,000

Accounts Pa&able 2,500

'nearned (evenue 1,200

Coon Stoc) 10,000

(etained "arnings 0

Dividends 500

Service (evenue 10,000

Salaries "*pense +,000

(ent "*pense 00

$2-,.00 $ 2-,.00


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Chapter3-1

0e*erra$sare either/

Prepaid expenses or

8nearned re&enues.

Adjusting Entries *or 0e*erra$sAdjusting Entries *or 0e*erra$sAdjusting Entries *or 0e*erra$sAdjusting Entries *or 0e*erra$s

O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%


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Chapter3-1.

Payment of cash$ that is recorded as an asset becausePayment of cash$ that is recorded as an asset becauseser&ice or benefit )ill be recei&ed in the future.ser&ice or benefit )ill be recei&ed in the future.

Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.

insuranceinsurance

suppliessupplies'd&ertising'd&ertising

rentrent

ash Paymentash Payment Expense ecordedExpense ecorded(E4ORE


Prepayments often occur in regard to/Prepayments often occur in regard to/

buildingbuilding

purchasespurchasese9uipmente9uipmentpurchasespurchases


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Chapter3-1/

Pre#aid E"#ensesosts that expire either )ith the passage of timeor through use.

'djusting entries

,1to record the expenses that apply to thecurrent accounting period$ and

,2to sho) the unexpired costs in the assetaccounts.




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Chapter3-20



I$$ustration 3'2'djusting entries for prepaid expenses

Increases ,debits an expense account and

"ecreases ,credits an asset account.


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Chapter3-22

E"am#$eE"am#$e 5Insurance65Insurance677n ct/ +th, Pioneer Advertising paidn ct/ +th, Pioneer Advertising paid$600 !or a one&ear !ire insurance polic&/$600 !or a one&ear !ire insurance polic&/


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Chapter3-23

0e#reciation=uildings$ e9uipment$ and &ehicles ,longli&edassets are recorded as assets$ rather than anexpense$ in the year ac9uired.

ompanies report a portion of the cost of a longli&ed asset as an expense ,depreciation duringeach period of the asset6s useful life ,atching

Principle.




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Chapter3-2'

E"am#$eE"am#$e 50e#reciation650e#reciation677n ct. 2n ct. 2ndnd

$ Pioneer 'd&ertising$ Pioneer 'd&ertisingpaid :5$;;; for office e9uipment that has an expectedpaid :5$;;; for office e9uipment that has an expecteduseful life of 1; years.


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Chapter3-2+

E"am#$eE"am#$e 50e#reciation650e#reciation677n ct. 2n ct. 2ndnd$ Pioneer 'd&ertising$ Pioneer 'd&ertisingpaid :5$;;; for office e9uipment that has an expected usefulpaid :5$;;; for office e9uipment that has an expected usefullife of 1; years. 92;6

'ccumulated depreciation 4;

"epreciation expense 4;>an. 31

"ebit redit

"epreciation Expense

4;4; 4;4;

"ebit redit

'ccumulated "epreciation

4;4;




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Chapter3-2,

0e#reciation 5Statement Presentation6'ccumulated "epreciation?is a contra assetaccount.

'ppears just after the account it offsets,E9uipment on the balance sheet.



Office equipment $5,000

Less: Accumulated depeciation!Office Equipment "0 $",#0


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Chapter3-2

eceipt of cash that is recorded as a liability becauseeceipt of cash that is recorded as a liability becausethe re&enue has not been earned.the re&enue has not been earned.

Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.

rentrent

maga0ine subscriptionsmaga0ine subscriptionscustomer deposits forcustomer deposits forfuture ser&icefuture ser&ice

ash eceiptash eceipt e&enue ecordede&enue ecorded(E4ORE

sale of airline tic(etssale of airline tic(ets

school tuitionschool tuition

8nearned re&enues often occur in regard to/8nearned re&enues often occur in regard to/



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Chapter3-2.

1nearned Revenuesompany ma(es an adjusting entry to record there&enue that has been earned and to sho) the

liability that remains.-he adjusting entry for unearned re&enues resultsin a decrease ,a debit to a liability account and anincrease ,a credit to a re&enue account.




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Chapter3-2/ O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%

I$$ustration 3'!;'djusting entries for unearned re&enues

"ecrease ,a debit to a liability account and

Increase ,a credit to a re&enue account.



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Chapter3-30

E"am#$e7E"am#$e7n ct. 2n ct. 2ndnd

$ Pioneer 'd&ertising recei&ed :1$2;;$ Pioneer 'd&ertising recei&ed :1$2;;from . @nox for ser&ices to be completed by "ecember 31.from . @nox for ser&ices to be completed by "ecember 31.


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Chapter

3-31

E"am#$e7E"am#$e7n ct/ 2nd, Pioneer Advertising received $1,200n ct/ 2nd, Pioneer Advertising received $1,200!ro (/ no* !or services to be copleted b& Deceber 1/!ro (/ no* !or services to be copleted b& Deceber 1/


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Chapter

3-32

ade to record/

e&enues earned and

Expenses incurredin the current accounting period that ha&e notbeen recogni0ed through daily entries.

Adjusting Entries *or Accrua$sAdjusting Entries *or Accrua$sAdjusting Entries *or Accrua$sAdjusting Entries *or Accrua$s

O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%


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Chapter

3-33

e&enues earned but not yet recei&ed in cash ore&enues earned but not yet recei&ed in cash orrecorded.recorded.

Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.

interestinterestrentrent

ser&ices performedser&ices performed

(E4ORE

'ccrued re&enues often occur in regard to/'ccrued re&enues often occur in regard to/

ash eceiptash eceipte&enue ecordede&enue ecorded

'djusting entry results in/'djusting entry results in/



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Chapter

3-3'

Accrued Revenues'n adjusting entry ser&es t)o purposes/

,1 It sho)s the recei&able that exists$ and

,2 It records the re&enues earned.




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Chapter

3-3+

I$$ustration 3'!3'djusting entries for accrued re&enues

Increases ,debits an asset account and

Increases ,credits a re&enue account.




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Chapter

3-3,

E"am#$e7E"am#$e7In ctober Pioneer 'd&ertising earned :2;; forctober Pioneer 'd&ertising earned :2;; forad&ertising ser&ices that ha&e not been recorded.


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Chapter

3-3

Expenses incurred but not yet paid in cash or recorded.Expenses incurred but not yet paid in cash or recorded.

Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.

interestinterestrentrent

(E4ORE

'ccrued expenses often occur in regard to/'ccrued expenses often occur in regard to/

ash Paymentash PaymentExpense ecordedExpense ecorded

taxestaxessalariessalaries

'djusting entry results in/'djusting entry results in/



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Chapter

3-3.

Accrued E"#enses'n adjusting entry ser&es t)o purposes/

,1It records the obligations$ and

,2It recogni0es the expenses.




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Chapter

3-3/

I$$ustration 3'!?'djusting entries for accrued expenses

Increases ,debits an expense account and

Increases ,credits a liability account.




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Chapter

3-'0

Botes payable 5$;;;

ash 5$;;;ct. 1

"ebit redit

ash

5$;;;5$;;; 5$;;;5$;;;

"ebit redit

Botes Payable

E"am#$e7E"am#$e7n ct 1n ct 1stst$ Pioneer 'd&ertising signed a :$5;;;$ 3$ Pioneer 'd&ertising signed a :$5;;;$ 3month note payable at a rate of 12C per year. -he totalmonth note payable at a rate of 12C per year. -he totalinterest due on the note at its due date is :15; ,:5$;;; Dinterest due on the note at its due date is :15; ,:5$;;; D12C D 312.


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Chapter

3-'1

E"am#$e7E"am#$e7n ct 1st, Pioneer Advertising signed a $,5000, n ct 1st, Pioneer Advertising signed a $,5000,

onth note pa&able at a rate o! 123 per &ear/ 4he total interestonth note pa&able at a rate o! 123 per &ear/ 4he total interestdue on the note at its due date isdue on the note at its due date is 9!; 589:;;; " !)@< = !)9!; 589:;;; " !)@< = !)

months6months6//


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Chapter

3-'2

Accrued E"#enses'n adjusting entry ser&es t)o purposes/

,1It records the obligations$ and

,2it recogni0es the expenses.




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Chapter

3-'3

'fter all adjusting entries are journali0ed andposted the company prepares another trialbalance from the ledger accounts ,Adjusted Tria$(a$ance.

Its purpose is to pro&e the e9uality of debitbalances and credit balances in the ledger.

The Adjusted Tria$ (a$anceThe Adjusted Tria$ (a$anceThe Adjusted Tria$ (a$anceThe Adjusted Tria$ (a$ance

O O 0escribe the nature and #ur#ose o* an adjusted tria$ ba$ance%0escribe the nature and #ur#ose o* an adjusted tria$ ba$ance%


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Chapter

3-''

Fhich of the follo)ing statements is incorrect concerningthe adjusted trial balanceG

a. 'n adjusted trial balance pro&es the e9uality of the

total debit balances and the total credit balances inthe ledger after all adjustments are made.

b. -he adjusted trial balance pro&ides the primary basisfor the preparation of financial statements.

c. -he adjusted trial balance lists the account balancesfrom largest to smallest.

d. -he adjusted trial balance is prepared after theadjusting entries ha&e been journali0ed and posted.

Revie&Revie&


O O 0escribe the nature and #ur#ose o* an adjusted tria$ ba$ance%0escribe the nature and #ur#ose o* an adjusted tria$ ba$ance%


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Chapter

3-'+

%inancial


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Chapter

3-',

Income


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Chapter

3-'

etained Earnings


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Chapter

3-'.

=alance


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Chapter

*opyright H 2;;A >ohn Filey

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Ch 3 Handout