1. Adjusting Entries

2. Measuring Business Income n Accounting period assumption n Cash accounting versus accrual accounting n Matching principle n Materiality concept

3. Adjusting Entries n Journal entries that update the general ledger accounts to state revenues, expenses, assets, and liabilities more accurately n Involve –One balance sheet account –One income statement account –Never cash

4. Adjusting Process n Identify the accounts requiring adjustment n Determine unadjusted balances n Determine correct (adjusted) balances for each account n Prepare adjusting entry to bring accounts in agreement with adjusted balances

5. Deferrals n A cash payment or receipt occurred in current period n Must defer a portion of expense or revenue until a future period

6. Deferrals n Two situations –Pay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit

7. Deferrals n Two situations –Pay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit –Receive a cash revenue in advance and allocate amounts as revenues to periods in which revenues earned

8. Prepaid Insurance n Dec. 1, paid $600 for 12 month insurance premium recording as asset, Prepaid Insurance n At Dec. 31 –Prepaid Insurance balance $600 –Insurance Expense balance $0

9. Prepaid Insurance n As of Dec. 31, one month’s insurance has expired and become expense n Correct Dec. 31 balance –Prepaid Insurance $550 –Insurance Expense $50

10. Prepaid Insurance n Adjusting entry –Debit Insurance Expense $50 »Increases Insurance Expense to correct balance $50 –Credit Prepaid Insurance $50 »Decreases Prepaid Insurance to correct balance $550

11. Depreciation Expense n Similar to prepaid insurance but for long-term asset n Decrease in asset not recorded in asset account n Recorded as increase in contra asset - Accumulated Depreciation

12. Depreciation Expense BeforeAfter Balance Sheet Trucks Accum Deprec $26,000 400 $26,000 800 Income Statement Depreciation expense$0$400

13. Unearned Revenues n Dec. 1, received $600 for 6 month rent recording as liability, Unearned Rent n At Dec. 31 –Unearned Rent balance $600 –Rent Revenue balance $0

14. Unearned Revenues n As of Dec. 31, one month’s rent has been earned and become revenue n Correct Dec. 31 balance –Unearned Revenue $500 –Rent Revenue $100

15. Unearned Revenues n Adjusting entry –Debit Unearned Rent $100 »Decreases Unearned Rent to correct balance $500 –Credit Rent Revenue $100 »Increases Rent Revenue to correct balance $100

16. Accruals n Recognize revenues and expenses that have accumulated (accrued) during the accounting period but have not been recorded

17. Accrued Revenues n Dec.11, received 30-day, 15% note from customer. n At Dec. 31 –Interest Revenue balance $0 –Interest Receivable balance $0

18. Accrued Revenues n As of Dec. 31, 20 days interest has been earned and become revenue n $1,200 x 0.15 x 20/360 = $10 n Correct Dec. 31 balance –Interest Revenue $10 –Interest Receivable $10

19. Accrued Revenues n Adjusting entry –Debit Interest Receivable $10 »Increases Interest Receivable to correct balance $10 –Credit Interest Revenue $10 »Increases Interest Revenue to correct balance $10

20. Accrued Expenses n Employees paid Friday for 5-day work week at $1,000 per week n At Dec. 31, a Tuesday –Wages Expense balance $50,000 - represents past weeks wages –Wages Payable balance $0

21. Accrued Expenses n As of Dec. 31, 2 days wages have been incurred and become expense n Correct Dec. 31 balance –Wages Expense $50,200 –Wages Payable $200

22. Accrued Expenses n Adjusting entry –Debit Wages Expense $200 »Increases Wages Expense to correct balance $50,200 –Credit Wages Payable $200 »Increases Wages Payable to correct balance $200

23. Summarize Adjustments

24. Analyzing Information n Use questions to compare companies

25. Income Statement n Which company has the higher revenues? n Which company has the higher percentage change in revenues? n Which company has the lower percentage of expenses to revenues?

26. Balance Sheet n Which company has the higher assets? n What is the percentage change in assets for each company? n Is the percent of total liabilities to total liabilities plus owners’ equity increasing or decreasing? Which company is more risky?

27. Integrative Analysis n Are companies operating efficiently by using least amount of assets to generate a given level of revenues? –Calculate total asset turnover n Are companies operating efficiently by using least amount of assets to generate a given net income? –Calculate return on assets