ppt_03 adjusting the accounts

8/16/2019 Ppt_03 Adjusting the Accounts

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AccountingAccounting

PrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition

Prepared by:

Carole Bowman, Sheridan College

Weygandt · Kieso · Kimmel ·Trenholm


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1. Analyze

transactions 2. Journalize the

transactions

3. Post to ledgeraccounts

4. Prepare a

trial balance

5. Journalize

and post

adjusting

entries6. Prepare

adjusted trial

balance

7. Prepare

inancial

state!ents

". #o!ing

ne$t chapter

%. #o!ing

ne$t chapter

STEPS IN THE ACCOUNTING CYCLESTEPS IN THE ACCOUNTING CYCLE


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ADJUSTING THE ACCOUNTSADJUSTING THE ACCOUNTS

CHAPTERCHAPTER

33


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TIME PERIOD ASSUMPTION

The time period (or periodicity) assumption assumesthat the economic life of a business can be divided into

artificial time periods — generally a month, a quarter,or a year.

Periods of less than one year are calledinterim periods.

The accounting time period of one year inlength is usually known as a fiscal year.


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REVENUE RECOGNITIONPRINCIPLE

The revenue recognition principle states thatrevenue should be recognied in the accountingperiod in which it is earned.

!n a service business, revenue is usually consideredto be earned at the time the service is performed.

!n a merchandising business, revenue is usuallyearned at the time the goods are delivered.


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THE MATCHING PRINCIPLE

The practice of e"pense recognition is

referred to as the matching principle.

The matching principle dictates that efforts

(e"penses) be matched with

accomplishments (revenues).

Revenuesearned

ths !"nth

are "##seta$anst%%%%

e&'ensesn(urred nearnn$ the

revenue


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ACCRUAL )ASIS O*ACCOUNTING

#dheres to the$evenue recognition principle

%atching principle

$evenue recorded when earned, not onlywhen cash received.

&"pense recorded when services or goodsare used or consumed in the generationof revenue, not only when cash paid.

G A

A P


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$evenue recorded

only when cash

received.

&"pense recorded

only when cash

paid.

' ( T

)

# # P

CASH )ASIS O*ACCOUNTING


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#d*usting entries make the revenue

recognition and matching principles

HAPPEN!

ADJUSTING ENTRIES


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ILLUSTRATIONILLUSTRATION 3+33+3

TRIAL )ALANCETRIAL )ALANCE

&ebit #redit

#ash 15'2(()

Ad*ertising +upplies 2'5(( Prepaid ,nsurance 6((

-ice /uip!ent 5'(((

0otes Payable 5'((()

Accounts Payable 2'5((

nearned e*enue 1'2((

#.. yrd' #apital 1('(((

#.. yrd' &raings 5((

+er*ice e*enue 1('(((

+alaries $pense 4'(((

ent $pense %((

2"'7(() 2"'7(()

Pioneer Ad*ertising Agency

rial alance

-ctober 31' 2((2

The Trial +alance

is analysed to

determine the

need for ad*ustingentries.

The Trial +alance

is analysed to

determine the

need for ad*ustingentries.


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#d*usting entries are required each time financialstatements are prepared.

#d*usting entries can be classified as

. prepayments ( prepaid expenses or unearnedrevenues),

-. accruals (accrued revenues or accruedexpenses), or

. estimates (amortization).

ADJUSTING ENTRIES


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TYPES O* ADJUSTING ENTRIES

Prepayments

. Prepaid &"penses — &"penses paid in cash

and recorded as assets before they are used or

consumed.

-. /nearned $evenues — $evenues received in

cash and recorded as liabilities before they areearned.


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TYPES O* ADJUSTING ENTRIES

#ccruals

. #ccrued $evenues — $evenues earned but not

yet received in cash or recorded.

-. #ccrued &"penses — &"penses incurred but

not yet paid in cash or recorded.


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TYPES O* ADJUSTING ENTRIESTYPES O* ADJUSTING ENTRIES

&stimates

. #mortiation — #llocation of the cost of

capital assets to e"pense over their useful

lives.


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PREPAYMENTS

Prepayments are either prepaid e"penses orunearned revenues.

#d*usting entries for prepayments arerequired to record the portion of theprepayment that represents

. the e"pense incurred or,

-. the revenue earned in the currentaccounting period.


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Prepaid e"penses are e"penses paid in cash

and recorded as assets before they are used

or consumed.Prepaid e"penses e"pire with the passage of

time or through use and consumption.

#n asset-expense account relationship e"istswith prepaid e"penses.

PREPAID E,PENSES


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Prior to ad*ustment, assets are overstated and

e"penses are understated.

The ad*usting entry results in a debit to an

e"pense account and a credit to an asset

account.

&"amples of prepaid e"penses includesupplies, rent, insurance, and property ta".

PREPAID E,PENSES


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Prior to ad*ustment, liabilities are

overstated and revenues are understated.

The ad*usting entry results in a debit to aliability account and a credit to a revenue

account.

&"amples of unearned revenues includerent, magaine subscriptions, airplane

tickets, and tuition.

UNEARNED REVENUES


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ILLUSTRATIONILLUSTRATION 3+-3+-

ADJUSTING ENTRIES *OR PREPAYMENTSADJUSTING ENTRIES *OR PREPAYMENTS

#d*usting &ntries

#sset

/nad*usted

+alance

0redit

#d*usting

&ntry (1)

&"pense

2ebit

#d*usting

&ntry (3)

Prepaid &"penses

4iability

/nad*usted

+alance

2ebit

#d*usting

&ntry (1)

$evenue

0redit

#d*usting

&ntry (3)

/nearned $evenues


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ACCRUALS

# different type of ad*usting entry is

accruals.

#d*usting entries for accruals are requiredto record revenues earned and e"penses

incurred in the current period.

The ad*usting entry for accruals willincrease both a balance sheet and an

income statement account.


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#ccrued revenues may accumulate with thepassing of time or through services performed butnot billed or collected.

#n asset-revenue account relationship e"ists withaccrued revenues.

Prior to ad*ustment, assets and revenues areunderstated.

The ad*usting entry requires a debit to an assetaccount and a credit to a revenue account.

&"amples of accrued revenues include accountsreceivable, rent receivable, and interest

receivable.

ACCRUED REVENUES


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#ccrued e"penses are e"penses incurred but notyet paid.

# liability-expense account relationship e"ists.

Prior to ad*ustment, liabilities and e"penses areunderstated.

The ad*usting entry results in a debit to ane"pense account and a credit to a liability

account. &"amples of accrued e"penses include accounts

payable, rent payable, salaries payable, andinterest payable.

ACCRUED E,PENSES


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ILLUSTRATIONILLUSTRATION 3+.3+.

*ORMULA TO CALCULATE*ORMULA TO CALCULATE

INTERESTINTEREST

*a(e

Va/ue "#N"te

Annua/

InterestRate

T!e

0n Ter!s "#One Year1 & & Interest

24555 & .6 & 7879 : 29

:


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#d*usting &ntries

#sset2ebit

#d*usting

&ntry (3)

#ccrued $evenues

$evenue0redit

#d*usting

&ntry (3)

#ccrued &"penses

&"pense

2ebit

#d*usting

&ntry (3)

4iability

0redit

#d*usting

&ntry (3)

ILLUSTRATIONILLUSTRATION 3+3+

ADJUSTING ENTRIES *OR ACCRUALSADJUSTING ENTRIES *OR ACCRUALS


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#mortiation is the process of allocating

the cost of certain capital assets to e"pense

over their useful life in a rational and

systematic manner.

#mortiation attempts to match the cost of

a long1term, capital asset to the revenue it

generates each period.

AMORTI;ATION


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AMORTI;ATION

#mortiation is an estimate rather

than a factual measurement of the cost

that has e"pired.

Were not attempting to reect the

actual change in "alue o# an asset!


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A((u!u/ated A!"rt


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AMORTI;ATIONAMORTI;ATION

+alance 5heet Presentation

ffice equipment 67,888

4ess9 #ccumulated

amortiation :

'et book value 6;,


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ILLUSTRATIONILLUSTRATION 3+=3+=

SUMMARY O* ADJUSTING ENTRIESSUMMARY O* ADJUSTING ENTRIES

.Prepaid #ssets and #ssets overstated 2r. &"pensese"penses e"penses &"penses understated 0r. #ssets

-./nearned 4iabilities and 4iabilities overstated 2r. 4iabilitiesrevenues revenues $evenues understated 0r. $evenues

.#ccrued #ssets and #ssets understated2r. #ssets revenuesrevenues $evenues understated 0r. $evenues

;.#ccrued &"penses and &"penses understated 2r. &"pensese"penses liabilities 4iabilities understated 0r. 4iabilities

7.#mortiation&"pense and &"penses understated 2r. #mort. &"pcontra asset #ssets overstated 0r. #ccum. #mortiation

.Prepaid #ssets and #ssets overstated 2r. &"pensese"penses e"penses &"penses understated 0r. #ssets

-./nearned 4iabilities and 4iabilities overstated 2r. 4iabilitiesrevenues revenues $evenues understated 0r. $evenues

.#ccrued #ssets and #ssets understated2r. #ssets revenuesrevenues $evenues understated 0r. $evenues

;.#ccrued &"penses and &"penses understated 2r. &"pensese"penses liabilities 4iabilities understated 0r. 4iabilities

7.#mortiation&"pense and &"penses understated 2r. #mort. &"pcontra asset #ssets overstated 0r. #ccum. #mortiation

Type of #ccount #ccounts before #d*usting

#d*ustment $elationship #d*ustment &ntry


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ADJUSTED TRIAL )ALANCE

#n #d*usted Trial +alance is prepared after allad*usting entries have been *ournalied and posted.

!t shows the balances of all accounts at the end of

the accounting period and the effects of all financial

events that have occurred during the period. !t proves the equality of the total debit and credit

balances in the ledger after all ad*ustments have

been made.

>inancial statements can be prepared directly from

the ad*usted trial balance.


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&ebit #redit &ebit #redit

#ash 15'2(() 15'2(()

Accounts ecei*able 955

Ad*ertising +upplies 2'5(( 74555

Prepaid ,nsurance 6(( 5

-ice /uip!ent 5'((( 5'(((

Accu!ulated A!ortn. =32

0otes Payable 5'((() 5'(((

Accounts Payable 2'5(( 2'5((

nearned e*enue 1'2(( =55

+alaries Payable 74955

,nterest Payable 9

#.. yrd' #apital 1('((( 1('(((

#.. yrd' &raings 5(( 5(( +er*ice e*enue 1('((( 754.55

Ad*. +upplies $pense 7455

A!ortization $pense =3

,nsurance $pense 5

+alaries $pense 4'((( 4955

ent $pense %(( >55

,nterest $pense 9

2"'7(() 2"'7(() 3('2(") 3('2(")


rial alance

-ctober 31' 2((2eore Adjust!ent Ater Adjust!ent

ILLUSTRATIONILLUSTRATION 3+773+77TRIAL )ALANCE AND ADJUSTED TRIAL )ALANCE COMPAREDTRIAL )ALANCE AND ADJUSTED TRIAL )ALANCE COMPARED


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PREPARING *INANCIAL STATEMENTSPREPARING *INANCIAL STATEMENTS

>inancial statements can be prepared directly froman ad*usted trial balance.

. The income statement is prepared from the revenueand e"pense accounts.

-. The statement of owner’s equity is derived from theowner?s capital and drawings accounts and the netincome (or net loss) shown in the income statement .

. The balance sheet is then prepared from the asset

and liability accounts and the ending owner?s capitalbalance as reported in the statement of owner’s equity.

ILLUSTRATIONILLUSTRATION 3+793+79


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ILLUSTRATIONILLUSTRATION 3+793+79 PREPARATION O* THE INCOME STATEMENT AND THEPREPARATION O* THE INCOME STATEMENT AND THE

STATEMENT O* O?NER@S EUITY *ROM THESTATEMENT O* O?NER@S EUITY *ROM THE

ADJUSTED TRIAL )ALANCEADJUSTED TRIAL )ALANCE

e*enues

+er*ice e*enue 754.552

$penses



,nsurance $pense 5 +alaries $pense 4955

ent $pense >55

,nterest $pense 9

otal $penses B4B=

0et ,nco!e 94=-92


,nco!e +tate!ent

7or the 8onth nded -ctober 31' 2((2

#.. yrd' #apital' -ctober 1 9)

Add: ,n*est!ents 754555

0et inco!e 94=-9

12'"42

;ess: &raings 55

#.. yrd' #apital' -ctober 31 12'342)

+tate!ent o -ners /uity

or the 8onth nded -ctober 31' 2((2


&ebit #redit

#ash 15'2(()

Accounts ecei*able 2((

Ad*ertising +upplies 1'(((

Prepaid ,nsurance 55(

-ice /uip!ent 5'(((

Accu!ulated A!ort6n. "3)

0otes Payable 5'(((

Accounts Payable 2'5((

nearned e*enue "((

+alaries Payable 1'2((

,nterest Payable 25

#.. yrd' #apital 754555

#.. yrd' &ra4ings 55

+er*ice e*enue 754.55



,nsurance $pense 5

+alaries $pense 4955

ent $pense >55

,nterest $pense 9

3('2(") 3('2(")


Adjusted rial alance

-ctober 31' 2((2


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&ebit #redit

#ash 749552


Ad*ertising +upplies 74555

Prepaid ,nsurance 5

-ice /uip!ent 4555 Accu!ulated A!ortn. =32

0otes Payable 4555

Accounts Payable 9455

nearned e*enue =55


,nterest Payable 9

#.. yrd' #apital 1('(((

#.. yrd' &raings 5(( +er*ice e*enue 1('6((

Ad*. +upplies $pense 1'5((

A!ortization $pense "3

,nsurance $pense 5(

+alaries $pense 5'2((

ent $pense %((

,nterest $pense 25

3('2(") 3('2(")


Adjusted rial alance

-ctober 31' 2((2

#ash 749552


Ad*ertising +upplies 74555

Prepaid ,nsurance 5

-ice /uip!ent 45552

;ess: Accu!ulated A!ortization =3 -4>7B

otal Assets 21'"67)

;iabilities and -4ners /uity

;iabilities

0otes Payable 45552

Accounts Payable 9455

nearned e*enue =55


,nterest Payable 9

otal ;iabilities %'525)

-4ners /uity

#.. yrd' #apital 7943-9

otal ;iabilities and -4ners /uity 21'"67)

-ctober 31' 2((2

Assets


alance +heet

ILLUSTRATIONILLUSTRATION 3+733+73 PREPARATION O* THE )ALANCE SHEET *ROMPREPARATION O* THE )ALANCE SHEET *ROM

THE ADJUSTED TRIAL )ALANCETHE ADJUSTED TRIAL )ALANCE

*r"!State!ent"# Oner@s

Eut

*r"!State!ent"# Oner@s

Eut


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errors) omissions) or damages) caused /y the use o# these

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