Chapter 3 Adjusting the Accounts ( 帳戶之調整 ) Prepared by Chih-Liang Julian Liu Department of Industrial and Business Management Chang Gung University

Learning Objectives 1.Explain the time period assumption ( 會計期間假設 ). 2.Explain the accrual basis of accounting ( 會計之應 計基礎 ). 3.Explain the reasons for adjusting entries ( 調整分 錄 ). 4.Identify the major types of adjusting entries.

Learning Objectives 5.Prepare adjusting entries for deferrals ( 遞延項 目 ). 6.Prepare adjusting entries for accruals ( 應計項目 ). 7.Describe the nature and purpose of an adjusted trial balance ( 調整後試算表 ).

Preview of Chapter 3

 Generally a month, a quarter, or a year.  Also known as the “Periodicity Assumption” Timing Issues Accountants divide the economic life of a business into artificial time periods (Time Period Assumption ; 會計期間 假設 ). Jan.Feb.Mar.Apr.Dec......

 Monthly and quarterly time periods are called interim periods.  Most large companies must prepare both quarterly and annual financial statements.  Fiscal Year = Accounting time period that is one year in length.  Calendar Year = January 1 to December 31. Timing Issues Fiscal ( 會計年 ) and Calendar ( 曆年制 ) Years

The time period assumption states that: a.revenue should be recognized in the accounting period in which a performance obligation is satisfied. b.expenses should be matched with revenues. c.the economic life of a business can be divided into artificial time periods. d.the fiscal year should correspond with the calendar year. Timing Issues Question

Accrual-Basis Accounting ( 應計基礎會計 )  Transactions recorded in the periods in which the events occur ( 期間內所發生事件必須記錄 ).  Revenues are recognized when the services are performed ( 已賺得 ), rather than when cash is received ( 已收現 ).  Expenses are recognized when incurred ( 發生 ), rather than when paid ( 付現 ). Accrual- vs. Cash-Basis Accounting Timing Issues

Cash-Basis Accounting ( 現金基礎會計 )  Revenues recognized when cash is received.  Expenses recognized when cash is paid.  Cash-basis accounting is not in accordance with International Financial Reporting Standards (IFRS). Accrual- vs. Cash-Basis Accounting Timing Issues

Revenue Recognition Principle ( 收入認列原則 ) Recognizing Revenues and Expenses Recognize revenue in the accounting period in which the performance obligation is satisfied. In a service enterprise, revenue is considered to be earned ( 已賺得 ) at the time the service is performed ( 完成服務的時間點 ). Timing Issues

Expense Recognition Principle ( 費用認列原則 ) Recognizing Revenues and Expenses Match expenses with revenues ( 費用配合收入 ) in the period when the company makes efforts to generate those revenues. “Let the expenses follow the revenues.” Timing Issues

Illustration 3-1 IFRS relationships in revenue and expense recognition

Which of the following statements about the accrual basis of accounting is false. a.Events that change a company’s financial statements are recorded in the periods in which the events occur. b.Revenue is recognized in the period in which services are performed. c.The accrual basis is in accord with IFRS. d.Revenue is recorded only when cash is received, and expenses are recorded only when cash is paid. Timing Issues Question

A list of concepts is provided in the left column below, with a description of the concept in the right column below. There are more descriptions provided than concepts. Match the description of the concept to the concept. f e c b

Adjusting Entries ( 調整分錄 )  Ensure that the revenue recognition and expense recognition principles are followed.  Necessary because the trial balance may not contain up-to-date and complete data.  Required every time a company prepares financial statements ( 編製財務報表都需進行調整 ).  Will include one income statement account and one statement of financial position account. The Basics of Adjusting Entries

Adjusting entries are made to ensure that: a.expenses are recognized in the period in which they are incurred. b.revenues are recorded in the period in which services are provided. c.statement of financial position and income statement accounts have correct balances at the end of an accounting period. d.all of the above. The Basics of Adjusting Entries Question

1.Prepaid Expenses ( 預付費 用 ). Expenses paid in cash before they are used or consumed. Deferrals ( 遞延項目 ) 3. Accrued Revenues ( 應計收 入 ). Revenues for services performed but not yet received in cash or recorded. 4. Accrued Expenses ( 應計費 用 ). Expenses incurred but not yet paid in cash or recorded. 2. Unearned Revenues ( 預收收入 ). Cash received before services are performed. Accruals ( 應計項目 ) Illustration 3-2 Categories of adjusting entries The Basics of Adjusting Entries Types of Adjusting Entries

Trial Balance – Each account is analyzed to determine whether it is complete and up-to-date. Illustration 3-3 The Basics of Adjusting Entries Types of Adjusting Entries

Deferrals are either:  Prepaid expenses ( 預付費用 ) OR  Unearned revenues ( 預收收入 ). Adjusting Entries for Deferrals The Basics of Adjusting Entries

( ). Payment of cash, that is recorded as an asset because service or benefit will be received in the future ( 未來可以獲得 服務或效益 ).  Insurance ( 保險 )  Supplies ( 辦公用 品 )  Advertising ( 廣告 ) Cash Payment Expense Recorded BEFORE  Rent ( 租金 )  Equipment ( 設備 )  Buildings Prepayments often occur in regard to: The Basics of Adjusting Entries Prepaid Expenses

 Expire either with the passage of time or through use ( 隨時間的經過或使用而調整費用 ).  Adjusting entry: ► Increase (debit) to an expense account and ► Decrease (credit) to an asset account. The Basics of Adjusting Entries Prepaid Expenses Illustration 3-4

Illustration: Pioneer Advertising Agency purchased supplies costing $ 2,500 on October 5. Pioneer recorded the payment by increasing (debiting) the asset Supplies. This account shows a balance of $ 2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand. Supplies1,500 Supplies expense1,500Oct. 31 The Basics of Adjusting Entries

Illustration 3-5

Illustration: On October 4, Pioneer Advertising paid $ 600 for a one-year fire insurance policy. Coverage began on October 1. Pioneer recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $ 600 in the October 31 trial balance. Insurance of $ 50 ( $ 600 ÷ 12) expires each month. Prepaid insurance50 Insurance expense50Oct. 31 The Basics of Adjusting Entries

Prepaid insurance 50 Insurance expense Oct. 4 Oct. 31 Recorded assets Adjusting expense Prepaid insurance Cash 600

The Basics of Adjusting Entries Illustration 3-6

Depreciation ( 折舊 )  Buildings, equipment, and vehicles (assets with long lives) are recorded as assets, rather than an expense, in the year acquired ( 購買 ).  Depreciation allocates a portion of the asset’s cost as an expense (depreciation) during each period of the asset’s useful life. The Basics of Adjusting Entries

40 Illustration: For Pioneer Advertising, assume that depreciation on the equipment is $480 a year, or $40 per month. Accumulated depreciation40 Depreciation expense Oct. 31 The Basics of Adjusting Entries Accumulated Depreciation ( 累計折舊 ) is called a contra asset account ( 資產的 抵銷科目；資產減項 ).

Statement Presentation  Accumulated Depreciation is a contra asset account (credit balance).  Appears just after the account it offsets (Equipment) on the statement of financial position.  Book value is the difference between the cost of any depreciable asset and its accumulated depreciation. The Basics of Adjusting Entries Illustration 3-8

The Basics of Adjusting Entries Illustration 3-7

Illustration 3-9 The Basics of Adjusting Entries

Receipt of cash that is recorded as a liability because service has not be performed ( 收入未完成 而收取現金 ).  Rent  Airline tickets Cash Receipt Revenue Recorded BEFORE  Magazine subscriptions  Customer deposits Unearned revenues often occur in regard to: The Basics of Adjusting Entries Unearned Revenues

 Adjusting entry is made to record the revenue for services performed and to show the liability that remains.  Results in a decrease (debit) to a liability account and an increase (credit) to a revenue account. The Basics of Adjusting Entries Unearned Revenues Illustration 3-10

Illustration: Pioneer Advertising received $1,200 on October 2 from R. Knox for advertising services expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. Analysis reveals that the company earned $ 400 of those fees in October. Service revenue400 Unearned service revenue400Oct. 31 The Basics of Adjusting Entries

Service revenue 400 Unearned service revenue 400 Oct. 2Oct. 31 Unearned service revenue Cash1,200

The Basics of Adjusting Entries Illustration 3-11

Illustration 3-12 The Basics of Adjusting Entries

Accruals are made to record  Revenues for services performed ( 已完成 ) OR  Expenses incurred ( 已發生費用 ) in the current accounting period that have not been recognized through daily entries ( 當期未記錄的分錄 ). Adjusting Entries for Accruals ( 調整應計項目分錄 ) The Basics of Adjusting Entries

Revenues for services performed but not yet received in cash or recorded ( 已完成收入但還未收現 ).  Interest  Services performed  Rent Accrued revenues often occur in regard to: The Basics of Adjusting Entries Accrued Revenues ( 應計收入 ) BEFORE Cash Receipt Revenue Recorded

 Adjusting entry shows the receivable that exists ( 已存 在應收款項 ) and records the revenues for services performed ( 已提供服務收入 ).  Adjusting entry: ► Increases (debits) an asset account and ► Increases (credits) a revenue account. The Basics of Adjusting Entries Illustration 3-13 Accrued Revenues

Illustration: In October Pioneer Advertising Agency recognized $ 200 for advertising services performed but not recorded. Accounts receivable200 Cash200Nov. 10 The Basics of Adjusting Entries 200 Service revenue200 Accounts receivable Oct. 31 On November 10, Pioneer receives cash of $ 200 for the services performed.

The Basics of Adjusting Entries Illustration 3-14

Illustration 3-15 The Basics of Adjusting Entries

( ) Expenses incurred but not yet paid in cash or recorded ( 已發生費用但還未記錄 ).  Rent  Interest  Taxes  Salaries Accrued expenses often occur in regard to: The Basics of Adjusting Entries Accrued Expenses ( 應計費用 ) BEFORE Cash Payment Expense Recorded

 Adjusting entry records the obligation ( 負債 ) and recognizes the expense.  Adjusting entry: ► Increase (debit) an expense account and ► Increase (credit) a liability account. The Basics of Adjusting Entries Accrued Expenses Illustration 3-16

Illustration: Pioneer Advertising signed a three-month note payable in the amount of $5,000 on October 1. The note requires Pioneer to pay interest at an annual rate of 12%. Interest payable50 Interest expense50Oct. 31 The Basics of Adjusting Entries Illustration 3-17

The Basics of Adjusting Entries Illustration 3-18

Illustration: Pioneer Advertising last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($ 400 x 3 days). The Basics of Adjusting Entries Illustration 3-19

The Basics of Adjusting Entries Illustration 3-20

Illustration 3-21 The Basics of Adjusting Entries

Summary of Basic Relationships Illustration 3-22

 Prepared after all adjusting entries are journalized and posted.  Purpose is to prove the equality of debit balances and credit balances in the ledger.  Is the primary basis for the preparation of financial statements. The Adjusted Trial Balance Adjusted Trial Balance ( 調整後試算表 )

Illustration 3-25

Which of the following statements is incorrect concerning the adjusted trial balance? a.An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. b.The adjusted trial balance provides the primary basis for the preparation of financial statements. c.The adjusted trial balance lists the account balances segregated by assets and liabilities. d.The adjusted trial balance is prepared after the adjusting entries have been journalized and posted. The Adjusted Trial Balance Question

Financial Statements are prepared directly from the Adjusted Trial Balance. Statement of Financial Position Income Statement Retained Earnings Statement Preparing Financial Statements

Illustration 3-26

Illustration 3-27