1. Adjusting Accounts & Preparing Financial Statements
Chapter 3

2. Accounting period Time principle period
Specific time periods for accounting activities
Fiscal year
Consisting of any 12 months period other than ending on December 31
Natural year
Ends December 31

3. Accounting basis Accrual basis Cash Basis
Uses the adjusting process to recognize revenues when earned and to match expenses with revenues
Cash Basis
Recognized revenues when cash is received and records expenses when cash is paid

4. Revenue Recognition Matching principle
Aims to record expenses in the same accounting period as the revenues that are earned as a result of these expenses

5. Adjustments Adjusting entries
To correct for transactions and events that extend over more than one period
Deferred – wait till cash is paid
Accrual –
Rule
Debit the expense
Credit the asset or liabilities
For the amount used up

6. Prepaid insurance
Suppose that we purchase $2,400 for insurance for one year on May 1. Record the adjustments on December 31.
$2,400/12 = $200 x 8months = $1,600
Insurance expense 1600
Prepaid insurance 1600

7. Supplies
Suppose that supplies account has a balance of $4,000 and inventory shows $1,000. Record the supplies used up.
Balance 4,000
Inventory1,000
Used up 3,000

8. Supplies
Supplies expense 3,000
Supplies ,000

9. Depreciation Plant assets/Fixed Assets Depreciation
Assets which are tanigble and long lived
Building and machinery
Depreciation
The reduction in value of an asset due to its use

10. Depreciation Depreciation expense Accumulated depreciation
Annual reduction in value of asset
Accumulated depreciation
Contra asset
Increases with a credit
Total reduction in value of an asset

11. Unearned revenues
Refers to cash received in advance of services provided
Suppose that unearned revneue has a balance of $7,000 but records shows only $3,000 is unearned
Balance $7,000
Should be 3,000
Earned ,000

12. Unearned Revenues Unearned revenues Unearned revenues 4,000
A liability
If we do not complete the work then we are liable to refund the monies.
Once the work is completed then the liability does not exist
Unearned revenues 4,000
Fees earned

13. Accrued expenses
Refers to costs that are incurred in a period that are unpaid and unrecorded
Accrued salaries
Salaries owed at the end of the period to be made next period
Suppose year ends on Wed, do we pay on Wed or wait until Friday

14. Salaries Suppose salaries at year end is $400 Salaries expense 400
Salaries payable

15. Accrued revenues
Refers to revenues earned in a period that are both unrecorded and not yet received in cash
Unrecorded accounts receivable

16. Trial Balance Unadjusted trial balance Adjusted trial balance
is a list of account balances before adjustments
Used to make adjusting entries
Adjusted trial balance
Used to prepare financial statements

17. Financial Statements Four basic financial statements Income statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash flows

18. Income Statement Results of operations for a business
Shows revenues minus expenses
Rob Co
Income Statement
For period ending 12/31/04
Revenues
Sales
$75,000
Expense
Salaries exp
$25,000
Rent exp
$10,000
Total exp
35,000
Net income
$40,000

19. Statement of Retained Earnings
Changes in net worth and equity
Rob Co
Statement of Retained Earnings
For period ending 12/31/04
Beginning Retained Earnings $60,000
+Net income ,000
100,000
-Dividends ,000
Ending Retained Earnings $80,000

20. Balance sheet Rob Co Balance Sheet December 3, 2004 Assets Cash
$45,000
Truck
75,000
Total Assets
$120,000
Liabilities
Accts pay
$10,000
Total liab.
Stockholder’s Equity
Common Stock
$30,000
Retained Earnings
$80,000
Total S.E.
$110,000
Total S.E. & Liabilities

21. Statement of Cash Flows
Inflows and outflow of cash from
Operations
Investments
Financing

22. Accounting Cycle Record and post closing entries
Record entries in the journal
Post to ledger
Prepare unadjusted Trial Balance
Record and post adjusting entries
Prepare adjusted trial balance
Prepare financial statements
Record and post closing entries

23. Closing Entries Temporary accounts
Accumulate data related to one accounting period
Revenue
Expense
Dividends
Income summary

24. Close revenues Revenues DR
Income summary Cr
Debit whatever revenue accounts you have on the trial balance for their ending balance and the total is credited to income summary

25. Close Expenses Income summary DR Expenses CR
Credit each expense account separately for the amount of the balance in the account and debit income summary for the total

26. Close Income Summary Income Summary DR Retained earnings CR
For the balance in the income summary account
Income Summary
Debit
Credit
Total expenses
Total revenues
Net income

27. Close Dividends
Dividends reduce the equity of the business and the amount retained in the business
Retained earnings DR
Dividends CR
For the amount of the balance in the dividend account

28. Transactions Fees earned $50,000 Rent expense 10,000
Supplies expense ,000
Dividends ,000
Retained earnings $30,000
Record the closing entries

29. Close revenues
Fees earned 50,000
Income summary ,000

30. Close Expenses Income Summary $15,000 Rent expense $10,000
Supplies expense ,000

31. Close Income Summary Income Summary $35,000 Retained earnings $35,000DR CR
Expenses
$50,000
$15,000
Revenues
$35,000 net income

32. Close Dividends Retained earnings $2,000 Dividends $2,000CR
$30,000 Balance
$35,000 net income DR
$2,000
Dividends
$63,000 ending balance

33. Classification of Accounts
Current assets
Expected to be collected in less than one year
Cash
Accounts receivable
Supplies
Inventory
Plant Asset
Long lived tangible assets
Factory building
Machinery and equipment