Presentation on theme: "3 Adjusting Accounts for Financial Statements CHAPTER."— Presentation transcript:
1 3Adjusting Accounts for Financial StatementsCHAPTER
2 Time period conceptStart upDefinition: The life of a business is divisible into time periods of equal lengthAnnual financial reports once a yearInterim financial reports –monthly, quarterly or semi-annuallyAnnual accounting periods are the normFiscal year – any 12 consecutive monthsCalendar year – 12 months ending December 31Natural business year – ends when inventories and business activities are at their lowest point
3 Need for adjustment at the end of the period Purposemakes the information on the accounting statements comparable from period to periodThe revenue recognition principlerequires that revenue be assigned to the accounting period in which it is earned, rather than the period in which it is collected in cashThe matching principlerequires that expenses be matched to the period the revenue was earnedPeriod 1Period 2Period 3RevenueOrderTakenServices Performed- recognize revenueMatch ExpensesCash Collected
4 Accrual Basis Vs. Cash Basis Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred.Accounting
5 Accrual Basis Vs. Cash Basis Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred.Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.Not GAAPAccounting
6 Need for adjustment at the end of the period Unadjusted trial balancesome balances are incorrect for financial statement purposes, not through error but due to the passage of timeaccountants must record internal economic events such as the use of an assetthese internal transactions are not evidenced by business papers as were the transactions presented in previous chapters.Time PassesAssets are used up, consumed or expire
7 Exhibit 4.5Adjusting AccountsAn adjusting entry is recorded to bring an asset or liability account balance to its proper amount.Framework for AdjustmentsPrepaidExpensesAmortizationUnearnedRevenuesAccruedAdjustmentsTransactions where cash is paid orreceived before a related expenseor revenue is recognized.Transactions where cash is paid orreceived after a related expenseor revenue is recognized.
8 BAT EntertainmentThe Gr. 12 BAT class has decided to enter into an employment venture and we started our own entertainment business. We offer many services: catering, DJ, consulting, photography, etc.We rented office space downtown and have started to incur expenses and earn revenue since our opening on October 1st, Since we are accounting experts from Ms. Delorme’s accounting class we have decided to keep our own records. We are doing our month end recording and there are some transactions that we need to make adjustments for using the appropriate GAAPs. They are as follows:
9 Paid for in advance of receiving benefits. Prepaid ExpensesPaid for in advance of receiving benefits.Here is the chequefor my first6 months’ rent.
10 Adjusting Prepaid Expenses Prepaid assetExpenseUnadjustedBalanceCreditAdjustmentDebitAdjustmentAs time goes by, a prepaid asset will be consumed or will expire and its cost will become an expense. This adjusting entry records the amount of the prepaid asset that has been consumed or that has expired as an expense and reduces the prepaid asset account accordingly.
11 E.g. Prepaid RentOn Oct. 1st, we prepaid for 6 months of our office space downtown. The monthly rent is $ Therefore we prepaid $12,000 and the entry was:Prepaid RentCashBy Oct. 31st, one month’s rent is used and must be recorded:Rent ExpensePrepaid Rent
12 Asset Cost - Salvage Value AmortizationAmortization is the process of computing expense from allocating the cost of capital assets over their expected useful lives.Straight-LineAmortizationExpense=Asset Cost - Salvage ValueUseful Life
13 Adjusting for Amortization Accumulated AmortizationAmortization ExpenseCreditAdjustmentDebitAdjustmentAs a capital asset wears out over time, an expense is recorded to match the cost of the asset over the periods benefited. This adjusting entry uses a contra account called Accumulated Amortization. This account would be subtracted from the capital asset account to which it related on the balance sheet.
14 e.g. Amortization of our DJ equipment On Oct. 1st BAT Entertainment purchased $18,000 of DJ equipment:EquipmentCashThe cost of the equipment needs to be amortized (we are going to use straight-line) – estimated life is 3 years and salvage value is $5,000 – the adjustment for one month on Oct. 31st is:Amortization exp, equip. 361Accumulated amortiz., equip. 361Calculation: 18,000 – 5000/36 = 361
15 Buy your season tickets for all home basketball games NOW! Unearned RevenueCash received in advance of providing products or services.Buy your season tickets forall home basketball games NOW!
16 Adjusting Unearned Revenue Consulting RevenueDebitAdjustmentUnadjustedBalanceCreditAdjustmentUnearned revenue is a liability account because the company has an obligation to supply future services. As these services are provided, an unearned revenue will become an earned revenue. This adjusting entry records the amount of unearned revenue that later becomes earned.
17 e.g. Unearned photography consulting revenue On Oct. 16th, BAT Entertainment agreed to do some consulting for an upcoming wedding. On the same day we were paid $4,200 to provide these services:CashUnearned consulting revOn Oct. 31st, we had provided one day of the two days of service so we recorded the adjustment as follows:Unearned consulting RevConsulting Rev