Presentation is loading. Please wait.

Presentation is loading. Please wait.

Adjustments, Financial Statements, and the Quality of Earnings Chapter 4 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Similar presentations


Presentation on theme: "Adjustments, Financial Statements, and the Quality of Earnings Chapter 4 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc."— Presentation transcript:

1 Adjustments, Financial Statements, and the Quality of Earnings Chapter 4 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

2 Accounting Cycle l Prepare financial statements. l Disseminate statements to users. l Prepare financial statements. l Disseminate statements to users. l Close revenues, gains, expenses, and losses to Retained Earnings. During the period: l Analyze transactions. l Record journal entries. l Post amounts to general ledger. During the period: l Analyze transactions. l Record journal entries. l Post amounts to general ledger. At the end of the period: l Adjust revenues and expenses. At the end of the period: l Adjust revenues and expenses. Start of Period

3 Types of Adjustments There are four types of adjustments.ExpensesExpenses 3.Prepaid Expenses. 4.Accrued Expenses. 3.Prepaid Expenses. 4.Accrued Expenses.RevenuesRevenues 1.Unearned Revenues. 2.Accrued Revenues. 1.Unearned Revenues. 2.Accrued Revenues.

4 End of accounting period. Cash received.Revenues earned. Example includes rent received in advance (an unearned revenue). Unearned Revenues

5 On December 1, 2009, Tom’s Rentals received a check for $3,000, for the first four months’ rent from a new tenant. The adjustment on December 31, 2009, to reduce the liability and record the revenue earned would be: On December 1, 2009, Tom’s Rentals received a check for $3,000, for the first four months’ rent from a new tenant. The adjustment on December 31, 2009, to reduce the liability and record the revenue earned would be: $3,000 × 1/4 = $750 per month.

6 Unearned Revenues After we post the entry to the T-accounts, the account balances look like this: Unearned Rent Revenue 12/31 75012/1 3000 Bal. 2,250 Rent Revenue 12/31 750 Bal. 750

7 End of accounting period. Cash receivedRevenues earned Example includes interest earned during the period (accrued revenue). Accrued Revenue

8 At December 31 st, Matrix, Inc. earned, but has not received, interest on its money market account of $150. The adjustment is made to debit Interest Receivable and credit Interest Revenue. Interest Receivable 12/31 150 Bal. 150 Interest Revenue 12/31 150 Bal. 150

9 End of accounting period. Cash paid. Examples include prepaid rent, advertising, and insurance. Prepaid Expenses Expense incurred.

10 Prepaid Expenses On January 1, 2009, Matrix, Inc. paid $3,600 for a 3-year fire insurance policy. They are paying in advance for a resource they will use over a 3-year period. At December 31 st, Matrix must recognize the portion of the insurance that has been consumed and becomes an expense. $3,600 × 1/3 = $1,200 per year.

11 Prepaid Expenses After we post the entry to the T-accounts, the account balances look like this: Prepaid Insurance Expense 1/1 3,60012/31 1,200 Bal. 2,400 Insurance Expense 12/31 1,200 Bal. 1,200 Remaining two years of insurance at $1,200 per year.

12 End of accounting period. Expense incurred. Examples include accrued rent, accrued interest, and accrued wages. Accrued Expenses Expense paid.

13 Accrued Expenses As of 12/27/09, Denton, Inc. had already paid $1,900,000 in wages for the year. Denton pays its employees every Friday. Year-end, 12/31/09, falls on a Wednesday. The employees have earned total wages of $50,000 for Monday through Wednesday of the week ending 1/02/10.

14 Accrued Expenses After we post the entry to the T-accounts, the account balances look like this: Wages Payable 12/31 50,000 Bal. 50,000 Wages Expense $1,900,000 Bal. $1,950,000 As of 12/27 12/31 50,000

15 Certain circumstances require adjusting entries to record accounting estimates. Examples include... – Depreciation – Bad debts – Income taxes Certain circumstances require adjusting entries to record accounting estimates. Examples include... – Depreciation – Bad debts – Income taxes Accrued Expenses Involving Estimates

16 Depreciation A systematic and rational method of allocating the cost of a fixed asset over its expected period of benefit. Method of matching the cost of using a long term asset to generate revenue in a given period.

17 Calculating Depreciation Cost of asset: $100,000 Salvage Value (what it will be worth at the end of its useful life): $-0- Useful Life: 5 years How much of the asset should be expensed each year?

18 Recording Depreciation Always Debit DEPRECIATION EXPENSE CREDIT: Accumulated Depreciation (a contra asset – nets against the cost of the asset) Cost of asset LESS Accumulated Depreciation equals BOOK VALUE of asset. Amount of Accumulated Depreciation accumulates over the useful life of the asset so that at the end of the assets useful life the Book Value is equal to the Salvage Value.

19 Book Value over Assets Life YearDepreciation Expense Asset CostAccumulated Depreciation Book Value Year 1$20,000$100,000$20,000$80,000 Year 2$20,000$100,000$40,000$60,000 Year 3$20,000$100,000$60,000$40,000 Year 4$20,000$100,000$80,000$20,000 Year 5$20,000$100,000 $-0-

20 Book Value over Assets Life YearDepreciation Expense Asset CostAccumulated Depreciation Book Value Year 1$15,000$100,000$15,000$85,000 Year 2$15,000$100,000$30,000$70,000 Year 3$15,000$100,000$45,000$55,000 Year 4$15,000$100,000$60,000$40,000 Year 5$15,000$100,000$75,000$25,000 Assume that the Asset Cost is Still $100,000, Useful life is still 5 years, but Salvage Value is now $25,000.


Download ppt "Adjustments, Financial Statements, and the Quality of Earnings Chapter 4 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc."

Similar presentations


Ads by Google