2 Accounting period concept: Cash basisRevenues and expenses are reporting the income statement in the period in which cash is receivedAccrual basisRevenues are reported in the income statement in the period they are earnedRevenue recognition conceptMatching concept
3 Adjusting ProcessThe updating of accounts prior to the preparation of financial statementsAdjusting entries
4 Adjusting ProcessEffect income statement account and at least one balance sheet accountsDebit expenseCredit asset/liabilities
5 Types of Accounts requiring adjustment Prepaid expensesDeferred expenses – or prepaid expenses – are items that have been initially recorded as assets but are expected to become expenses over time or through the normal operations of the business.Supplies and prepaid insurance
6 Types of Accounts requiring adjustment Unearned revenuesDeferred revenues or unearned revenues: are items that have been initially recorded as liabilities but are expected to become revenues over time or through the normal operations of the business. These are deposits by customers for work to be done in the future.Unearned rent
7 Types of Accounts requiring adjustment Accrued revenues:Accrued Revenues or Accrued Assets – some revenues are only recorded when cash is received. At the end of the accounting period, there may be items of revenues that have been earned but have not been recorded
8 Types of Accounts requiring adjustment Accrued expensesAccrued expenses or accrued liabilities – are expenses that have been incurred but have not been recorded in the accounts.Wages payable
9 SuppliesFor example: the general ledger shows a balance in the supplies account of $2,000. Inventory shows $500 of supplies still on handSuppliesBalance $2,000InventoryUsed up 1,500Supplies exp $1500Supplies $1500Try example 1
10 Example 1the general ledger shows that the balance in the supplies account is $4,000. An inventory is conducted of supplies and it is found that only $2,500 of supplies is still on hand. Record the adjusting entry for the use of supplies.
11 Prepaid insuranceThe G/L shows the balance are $6,000. The policy was purchased on May 1st for 12 months. Record the adjusting entry on Dec 31 for insurance expired.$6,000/12 = 500 per monthMay to Dec = 8 months x $500 =$4,000 is expired
17 Example 3the general ledger shows that the balance in the unearned fees account is $7,000. The balance should be $1,000. Record the adjusting entry.
18 Accrued expenseExpenses that have been incurred by have not been recorded in the accountsWages
19 Accrued wagesWages are paid on the second and fourth Fridays for the two week period. Payments were $950 on Dec 13 and $950 on Dec 27. The wages for Monday through Thursday is $250 Record the wages due.Wages expense $250Wages Payable $250
20 Example 4: Wages $5,000 per week. Dec 31 falls on Wed. Wages expense $3,000Wages payable $3,000
21 Accrued revenue Revenues not billed to customers $2,500 Accounts receivable $2,500fees earned $2,500
22 Fixed Assets Physical resources that are owned by a business DepreciationReduction in the value of an asset due to its use.Depreciation expense – one year reductionAccumulation depreciation: contra asset showing lifetime reductionsCredit – increases the account