Class 6 Chapter 4 The adjustment processAnnouncementThe Accounting CycleThe Adjustment Process and Financial StatementsTrial BalancePowerPoint PresentationAdjusting EntriesSlide 8DeferralsDeferrals (1) Prepaid expensesSlide 11Slide 12Slide 13Deferrals (2) Unearned revenueSlide 15Slide 16Slide 17Slide 18AccrualsSlide 20Accruals (1) InterestSlide 22Slide 23Accruals (2) WagesSlide 25Slide 26Slide 27Slide 28Accounting EstimatesDepreciation ExpenseDepreciationSlide 32Slide 33Slide 34Practice problem 1Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43What did we do?Next class1Class 6Chapter 4 The adjustment processAccounting 2610Xiumin Martin1/31/20132AnnouncementSummarize results of Quiz 13The Accounting CycleEnd of the Accounting PeriodStart of the Accounting Period Perform transaction analysis. Record journal entries. Post amounts to general ledger. Perform transaction analysis. Record journal entries. Post amounts to general ledger.Phase 1:During theAccountingPeriod. Prepare a trial balance. Record and post adjusting entries. Prepare financial statements. Record and post closing entries. Prepare a trial balance. Record and post adjusting entries. Prepare financial statements. Record and post closing entries.Phase 2:End of theAccountingPeriod.4The Adjustment Process and Financial StatementsTodayTrial BalanceAdjusting EntriesDeferralsAccrualsExampleNext classPrepare a full set of financial statementsClosing entries5Trial BalanceA listing of all accounts showing their ending balancesPrimary purpose is to check debits equal creditsIf total debits do not equal total credits then one of the following errors has occurredJournal entries do not balanceError in posting the journal entriesError copying ending balances from ledger to trial balanceNote that total debits = total creditsNote that total debits = total credits7Adjusting Entries“Internal events”TimingEnd of the accounting cycle prior to preparing the financial statementsPurpose Update books of firm prior to preparing financial statementsEnsure revenues and expenses recorded in appropriate periodApply the revenue and matching principles8Adjusting EntriesThere are two types of adjusting entries.ACCRUALSACCRUALSRevenues earned or expenses incurred that have not been previously recorded.Revenues earned or expenses incurred that have not been previously recorded.DEFERRALSDEFERRALSReceipts of assets or payments of cash in advance of revenue or expense recognition. Receipts of assets or payments of cash in advance of revenue or expense recognition.9End of accounting periodCash receivedor paid.Revenues earnedor expenses incurredExamples include subscriptions received in advance or insurance premiums paid in advance.Examples include subscriptions received in advance or insurance premiums paid in advance.DeferralsDeferrals (1) Prepaid expensesOn January 1, 2000, Tipton, Inc. paid $3,600 for a 3-year fire insurance policy. The entry on January 1, 2000, to record the policy on Tipton’s books would appear as followsOn January 1, 2000, Tipton, Inc. paid $3,600 for a 3-year fire insurance policy. The entry on January 1, 2000, to record the policy on Tipton’s books would appear as follows11Deferrals (1) Prepaid expensesAt the end of 2000, we record the amountof insurance used up during 2000.Since the policy is for 3 years, 1/3 of the policy will expire each year. At the end of 2000, we record the amountof insurance used up during 2000.Since the policy is for 3 years, 1/3 of the policy will expire each year. 1/1/00 12/31/00Year end12/31/01Year end12/31/02Year endPaid cash forinsurance< 3-year insurance policy >12Deferrals (1) Prepaid expensesOn December 31, 2000, Tipton must adjust the Prepaid Insurance Expense account to reflect that 1 year of the policy has expired.$3,600 × 1/3 = $1,200 per year.On December 31, 2000, Tipton must adjust the Prepaid Insurance Expense account to reflect that 1 year of the policy has expired.$3,600 × 1/3 = $1,200 per year.Deferrals (1) Prepaid expensesAfter we post the entry to the T-accounts, the account balances look like this:After we post the entry to the T-accounts, the account balances look like this:1/1 3,600Prepaid Insurance12/31 1,200Bal. 2,400Insurance Expense12/31 1,200Bal. 1,200Adjusting entryDeferrals (2) Unearned revenueOn December 1, 2001, JP Property Management received a check for $3,000, for the first four months’ rent of a new tenant. The entry on December 1, 2001, to record the receipt of the prepaid rent payment would beOn December 1, 2001, JP Property Management received a check for $3,000, for the first four months’ rent of a new tenant. The entry on December 1, 2001, to record the receipt of the prepaid rent payment would be15Deferrals (2) Unearned revenueAt the end of 2001, we record the amountof rent EARNED during December.Since the prepayment is for 4 months, 1/4 of the rent is earned each month. At the end of 2001, we record the amountof rent EARNED during December.Since the prepayment is for 4 months, 1/4 of the rent is earned each month. Received cash for rent< 4-month prepayment of rent >12/1/01 12/31/01Year end2/28/021/31/02 3/31/0216Deferrals (2) Unearned revenueOn December 31, 2001, Tom’s Rentals must adjust the Unearned Rent Revenue account to reflect that 1 month of rent revenue has been earned.$3,000 × 1/4 = $750 per month.On December 31, 2001, Tom’s Rentals must adjust the Unearned Rent Revenue account to reflect that 1 month of rent revenue has been earned.$3,000 × 1/4 = $750 per month.17Deferrals (2) Unearned revenueAfter we post the entry to the T-accounts, the account balances look like this:After we post the entry to the T-accounts, the account balances look like this:Unearned Rent Revenue12/31 750 12/1 3000Bal. 2,250Rent Revenue12/31 750Bal. 750Adjusting entry18The Adjustment Process and Financial StatementsTrial BalanceAdjusting EntriesDeferrals: Adjustments to past transactions that involved cash payments or receiptsA past journal entry was entered. AccrualsPrepare a full set of financial statementsClosing entries19AccrualsAccruals occur when revenues have been earned or expenses incurred but no cash no cash has been exchanged.No past journal entry was posted.Accruals occur when revenues have been earned or expenses incurred but no cash no cash has been
View Full Document