Chapter 8 – Adjusting Entries Accounting Principles & Standards Goal of the accountant is to produce financial statements that are ________. They must be: Relevant – Reliable – Comparable -

Accrual Accounting Definition – attempting to record revenues & expenses ____________, _______________ ____________________. At the end of the fiscal period, financial changes have happened in a business without the accountants knowledge. Examples:

________Financial Statements Income Statement Perspective Revenue Recognition – Matching Principle – Balance Sheet Perspective Cost Principle – Principle of Conservatism – .

Adjusting Entry _____________________________ Made at the end of the __________ to bring the ____________in order to _____________________________ __________________________ https://www.youtube.com/watch?v=ONkJXfvrAkc https://www.youtube.com/watch?v=hPq1Mv2gIec Let’s look at some examples…

Adjusting Entries for Supplies When supplies are purchased, their cost is debited correctly to the Supplies account. _________ ____________________________. At the end of the year we need to assess how much supplies are remaining and make an adjusting entry. Supplies Supplies Expense 7900 6514 6514 1386 6514 Expense that matches the year’s revenue Balance at the end of the year. Adjusting Entry

Adjusting Entries for Prepaid Expenses Prepaid expense is an item paid for in advance, but the benefits are extended into the future. Ex. Insurance. The accountant must adjust the prepaid for the amount of the prepaid that is used for the year. Example: On September 30 the company paid $1800 for insurance for the year. The company’s year end is December 31. How much insurance did they use up?

Adjusting Entries for Prepaids Calculation: 1800 divided by 12 months to get the monthly insurance cost. = $150 Between Oct – Dec 3 months of insurance has been used - $150 X 3 months = $450 Prepaid Insurance Insurance Expense 1800 450 450 1350 450 Expense that matches the year’s revenue Balance at the end of the year. Adjusting Entry

Adjusting Entries for Late-Arriving Purchase Invoices or Bills A good or service may be received before the end of the fiscal period, however the invoice may not arrive until after the last day of the fiscal period. These invoices still need to be included in the financial records for that fiscal period. At this point you need to make an adjusting entry to record the late arriving invoices.

Adjusting Entries for Late-Arriving Purchase Invoices or Bills Example: On January 15 the company received a telephone bill for $212 plus $15 in HST for telephone services ended on December 31. The accounting entry: DR Telephone Expense 212 DR HST Recoverable 15 CR A/P Bell Canada 227

Adjusting Entries for Unearned Revenue Example: On November 1st, $500 is paid to a snow plough company for the next 5 months worth of snow ploughing. The company’s year end is Dec. 31. What is the adjusting entry: Nov 1 entry – Debit Bank, Credit Revenue. Dec 31 adjusting entry: DR. Revenue $300 CR. Unearned Revenue $300 (Liability)

Adjusting Entries Recap So far we have learned about 4 common adjusting entries: Supplies Insurance (Prepaid) Late invoices Unearned Revenue No matter how complex the adjustment appears, you will be able to do it correctly if you use good common sense and match the revenue to the expenses for the year.