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1、Unit Four Accounting Cycle (3)Adjustments Objectives:1 Explain how the matching concept relates 1 Explain how the matching concept relates to the accrual basis of accounting.to the accrual basis of accounting.2 Explain why adjustments are necessary 2 Explain why adjustments are necessary and list th
2、e characteristic of adjusting and list the characteristic of adjusting entries.entries.3 Journalize entries for accounts requiring 3 Journalize entries for accounts requiring adjustment.adjustment.4 Summarize the adjustment process and 4 Summarize the adjustment process and prepare an adjustment tri
3、al balance.prepare an adjustment trial balance.一一一一 accounting period accounting period cash basis(received or paid)cash basis(received or paid)accrual basis(earned or relate):accrual basis(earned or relate):revenue recognition concept revenue recognition concept matching principle matching principl
4、eGAAP require the use of the accrual basis,GAAP require the use of the accrual basis,small service businesses may use the cash small service businesses may use the cash basis because they have few receivables and basis because they have few receivables and payables.payables.The matching principle su
5、pports recording The matching principle supports recording revenues and relate expenses in the same revenues and relate expenses in the same period.period.二二二二 At the end of an accounting period,some At the end of an accounting period,some accounts in the ledger require updating.accounts in the ledg
6、er require updating.The journal entries that bring the accounts The journal entries that bring the accounts up to gate at the end of the accounting up to gate at the end of the accounting period are called period are called adjusting entriesadjusting entries.三三 Four typical adjusting entries:Deferra
7、ls-are created by recording a transaction in a way that delays or defers the recognition of an expense or a revenue.Deferred expenses(prepaid expenses)become expense over time(1)supplies(2)prepaid insurance(3)prepaid advertising(4)prepaid interest Deferred revenues(unearned revenue)become revenues o
8、ver time(1)unearned rent(1)unearned rent(2)tuition(2)tuition(3)annual retailer fee(3)annual retailer fee(4)premium(4)premium(5)magazine subscriptions(5)magazine subscriptionsAccruals-are created by an Accruals-are created by an unrecorded expense that has been unrecorded expense that has been incurr
9、ed or an unrecorded revenue that incurred or an unrecorded revenue that has been earned.has been earned.Accrued expenses(accrued liabilities)expense have been incurred but not recorded(1)accrued wages(2)accrued interest on notes payable(3)accrued taxes Accrued revenues(accrued assets)revenues earned
10、 but not recorded(1)fees for services(2)unbilled commissions(3)accrued interest on notes receivable(4)accrued rentSummarize:1 How do you tell the difference between 1 How do you tell the difference between deferrals and accruals?deferrals and accruals?If cash is received or paid in the current If ca
11、sh is received or paid in the current period,but the revenue or expense relates period,but the revenue or expense relates to a future period,the revenue or expense is to a future period,the revenue or expense is a deferred item.If cash will not be received a deferred item.If cash will not be receive
12、d or paid until a future period,but the revenue or paid until a future period,but the revenue or expense relates to the current period,the or expense relates to the current period,the revenue or expense is an accrued item.revenue or expense is an accrued item.Current accounting period Current accoun
13、ting period(cash received or paid)(cash received or paid)(revenue or expense incurred)revenue or expense incurred)future accounting periodfuture accounting period(revenue or expense incurred)(revenue or expense incurred)(cash received or paid)cash received or paid)2 All adjusting entries affect at l
14、east one 2 All adjusting entries affect at least one income statement account and one balance income statement account and one balance sheet account.sheet account.四四 Examples:1 Assuming that on December 31 the amount of supplies on hand is$760,the amount to be transferred from the asset account to t
15、he expense account is$1240.(supplies used is the amount of adjustment)Dr.Supplies Expense$1240 Cr.Supplies$12402 The debit balance of$2400 in A prepaid insurance account represents a December 1 prepayment of insurance for 24 months.At the end of December the insurance for one month turn into reality
16、.Dr.Insurance Expense$100 Cr.Prepaid Insurance$100Attention:(1)the balance of a prepaid(deferred)(1)the balance of a prepaid(deferred)expense is an asset that will become an expense is an asset that will become an expense in a future period.expense in a future period.(2)What is the effect of omittin
17、g adjusting(2)What is the effect of omitting adjusting entries?entries?On the income statement,Supplies On the income statement,Supplies Expense and Insurance Expense will be Expense and Insurance Expense will be understated by a total of$1340.understated by a total of$1340.On the balance sheet,Supp
18、lies and Prepaid On the balance sheet,Supplies and Prepaid Insurance will be overstated by a total of Insurance will be overstated by a total of$1340.$1340.(3)(3)Prepayments of expenses are sometimes Prepayments of expenses are sometimes made at the beginning of the period in made at the beginning o
19、f the period in which they will be entirely consumed.which they will be entirely consumed.3 According to As trial balance on December 3 According to As trial balance on December 31,the balance in the unearned rent 31,the balance in the unearned rent account is$360.This represents the receipt account
20、 is$360.This represents the receipt of three months rent on December 1 for of three months rent on December 1 for Dec.Jan.Feb,At the end of December$120 Dec.Jan.Feb,At the end of December$120 rent should be turn into reality.rent should be turn into reality.Dr.Unearned Rent$120 Cr.Rent Revenue$120In
21、 the case of wages expense,if the last day of a paid period is not the last day of the accounting period,the accrued wages expense and the related liability must be recorded in the accounts by an adjusting entry.4 At the end of December,accrued wages 4 At the end of December,accrued wages for A were
22、$250.for A were$250.Dr.Wages Expense$250Dr.Wages Expense$250 Cr.Wages Payable$250 Cr.Wages Payable$250(1)wages are paid on the second and fourth(1)wages are paid on the second and fourth Fridays for the two-week period ending on Fridays for the two-week period ending on those Fridays.The payments we
23、re$950 on those Fridays.The payments were$950 on December 13 and$1200 on December 27.December 13 and$1200 on December 27.(2)The wages accrued for Monday and Tuesday,December 30 and 31,are$250.(3)Wages paid on Friday,January 10,totals$1275.SundSundayayMondMondayayTuesTuesdaydayWednWednesdayesdayFourt
24、Fourth dayh dayFridaFriday ySaturSaturdayday1 12 23 34 45 56 67 78 89 9101011111212131314141515161617171818191920202121222223232424252526262727282829293030313113-wages expense(paid)$95027-wages expense(paid)$120030,31-wages expense(accrued)$250Jan,10:Dr.Wages Payable$250 Cr.Cash$2505 Assume that A s
25、igned an agreement with B on December 15.The agreement provides that A will be on call to answer computer questions and render assistance to Bs employees.The services provided will be billed to B on the fifteenth of each month at a rate of$20 per hour.As of December 31,A had provided 25 hours of ass
26、istance to B.Dr.Accounts Receivable$500Dr.Accounts Receivable$500 Cr.Fees Earned$500 Cr.Fees Earned$5006 6 Fixed assetsFixed assets are a type of long-term are a type of long-term deferred expense.The decreases in deferred expense.The decreases in usefulness is called depreciation.All fixed usefulne
27、ss is called depreciation.All fixed asset,expect land,lose their usefulness.asset,expect land,lose their usefulness.The estimated amount of depreciation for The estimated amount of depreciation for the month is assumed to be$50 in Dec.of A.the month is assumed to be$50 in Dec.of A.Dr.Depreciation Ex
28、pense$50Dr.Depreciation Expense$50 Cr.Accumulated Depreciation Cr.Accumulated Depreciation _ office equipment$50 _ office equipment$50 (contra accountcontra account or or contra asset accountcontra asset account)The reminder value of office equipment The reminder value of office equipment$1750 is ca
29、lled$1750 is called the book value of the assetthe book value of the asset or or net book valuenet book value.Result:depreciation allocates the cost of a Result:depreciation allocates the cost of a fixed asset to expense over its estimated fixed asset to expense over its estimated life.life.Question
30、:1 If As adjustment for unearned rent had 1 If As adjustment for unearned rent had incorrectly been made for$180 instead of incorrectly been made for$180 instead of$120,what would have been the effect on$120,what would have been the effect on the financial statements?the financial statements?Revenue
31、 would have been overstated by Revenue would have been overstated by$60;net income would have been$60;net income would have been overstated by$60;liability would have been overstated by$60;liability would have been understated by$60;and Owners equity understated by$60;and Owners equity would have be
32、en overstated by$60.would have been overstated by$60.2 which of the accounts _ fees earned;2 which of the accounts _ fees earned;misc.expenses;cash;wages expense;misc.expenses;cash;wages expense;supplies;accounts receivable;drawing;supplies;accounts receivable;drawing;equipment;accumulated depreciat
33、ion equipment;accumulated depreciation _ would normally require an adjusting _ would normally require an adjusting entry?entry?fees earned;fees earned;wages expense;wages expense;supplies;supplies;accounts receivable;accounts receivable;accumulated depreciationaccumulated depreciationSummary of basi
34、c adjustmentsTypes of Types of adjustmenadjustment t Adjusting entryAdjusting entry Effect of omitting Effect of omitting it on BS and on it on BS and on ISIS Deferred Deferred expenseexpense Dr.ExpenseDr.Expense Cr.Assets Cr.Assets Expense Expense understated and understated and net income net inco
35、me overstatedoverstatedAssets Assets overstated and overstated and owners equity owners equity overstatedoverstated DeferreDeferred d revenuerevenue Dr.LiabilityDr.Liability Cr.Cr.RevenueRevenue Liabilities overstated Liabilities overstated and owners equity and owners equity understatedunderstatedR
36、evenues understated Revenues understated and net income and net income understatedunderstated Accrued Accrued expenseexpense Dr.Expense Dr.Expense Cr.Liability Cr.Liability Expense understated Expense understated and net income and net income overstatedoverstatedLiabilities understated Liabilities u
37、nderstated and owners equity and owners equity overstatedoverstated AccruAccrued ed revenrevenueue Dr.AssetsDr.Assets Cr.Cr.RevenueRevenue Assets understated and Assets understated and owners equity owners equity understated understated Revenues understated Revenues understated and net income and net income understatedunderstated Fixed Fixed AssetsAssets Dr.Expense Dr.Expense Cr.Contra Cr.Contra AssetAsset Expense understated Expense understated and net income and net income overstatedoverstatedAssets overstated and Assets overstated and owners equity owners equity overstatedoverstated