1. Chapter 3! The Adjusting Entry Unit 1 Test (cover chapter 1 to 4) will occur on Friday September 26!

2.  Revenue Recognition: You recognize the revenue when it is earned not when you get paid.  Matching Principle: Accountants have to match the expense with revenue (that it helped to generate) in the same fiscal period. Reasons for making Adjusting Entries

3.  Cost Principle: Assets must be shown in balance sheet at their original cost. (not current price)  Principles of Conservatism: Assets should be neither overstated nor understated. ( Fair)  For example, if my business paid $15 000 for land 30 years ago, and the land is now worth $500 000. How should my balance sheet show the value of the land?  Balance sheet should show $15 000 because of cost principle. Reasons for making Adjusting Entries

4.  There are many different types of adjusting entries accountants make at the end of the fiscal period :  Prepaid Expense  Prepaid Insurance  Supplies adjustment  Unearned Revenue  Late-Arriving Purchase Invoice Adjusting Entry

5.  My supplies account has a beginning balance of 200.  On June 1, we purchased $350 worth of office supplies. (paper, ink cartridge, pens and pencils)  On October 1, we purchased $250 worth of office supplies. (similar to above)  As a result, my ending balance for supplies account is 800.  Even though supplies were used everyday, accountant did not make journal entries to record these usages everyday. (Doing so would have taken too much time and effort. ) Adjusting Entry for Supplies account

6.  If noone makes any adjusting entry, the balance sheet would show $800 for supplies account in balance sheet. Is this fair to the reader?  No it is not fair. Since we used up a lot of office supplies everyday, we are violating principles of conservatism, if supplies account shows and ending balance of $800.  Therefore we have to make an adjusting entry.  The first step: someone counts how much worth of supplies are left. This procedure is called, “taking inventory” Adjusting Entry for Supplies account

7.  Suppose an accounting clerk counted the supplies left in the office and discovered that there was actually $200 worth of supplies left.  Accountant must make an adjusting entry, which would reduce the ending balance of supplies account from $800 to $200, so he or she must credit $600 to supplies account. Adjusting Entry for Supplies account

8.  We now need a debit entry. Which account should we debit for $600?  We would debit Supplies Expense account.  The adjusting entry would be: Dr.Cr. Dec 31 Supplies Expense600 Supplies600 Adjusting entry for supplies account Adjusting Entry for Supplies account

9.  After the adjustment, the supplies ledger (asset) account reflects the true value. (honoring Principle of Conservatism)  Supplies account (T account) Summary:

10.  The financial statements are usually prepared two to three weeks after the fiscal year end. For example, if the fiscal year is from Jan 1 to December 31, then the company would make financial statement in the second week of January. (Let’s say that they finished making financial statements on January 15 ) Adjusting Entry for Late-Arriving Purchase Invoices

11.  Let’s say we receive Utility (Electricity) Bill on January 17, but the bill is for the utility usage in December. (Amount is 450$)  If we do not make any adjusting entry, then the income statement indicates lower total expense  Net income is too overstated. Adjusting Entry for Late-Arriving Purchase Invoices

12.  As an accountant, you must apply matching principle, so you will enter the following adjusting entry: Dr.Cr. Dec 31Utilities Expense450 Accounts Payable450 Adjusting Entry, Utilities Bill Invoice #1234 Jan 17 Accounts Payable450 Bank450 Paying for Utilities Bill Check #5678 Adjusting Entry for Late-Arriving Purchase Invoices

13.  Sometimes customer pays for service on December 15 for the service you will provide in January. Then Revenue Recognition Principle says that accountant must make an adjusting entry because revenue is not earned yet. Adjusting Entry for Unearned Revenue

14.  For example, We to Me Care (client for Park Accounting) paid $1500 on December 29 2013 for accounting service which will be performed in January 2014. Dr.Cr. Dec 29 Bank1500 Fees earned (Rev)1500 Received fee for accounting service from We to Me Adjusting Entry for Unearned Revenue

15. Dec 31 Fees earned 1500 Unearned Revenue 1500 Adjusting Entry for Unearned Revenue (We to Me)  If I did not make the adjusting entry, then my revenue is too high for 2013 Income statement  Net Income is overstated.  This Unearned Revenue account is a liability to We to Me Care. Adjusting Entry for Unearned Revenue

16. T account for Unearned Revenue

17. P136 E3-1, E3-3d, e, I, E3-4, P141 P3-2, P3-3 Classwork / Homework