Slide 1Learning Objective 1Why Adjustments Are NeededAdjustments Are Needed to ensure…1. Deferral Adjustments1. Deferral Adjustments2. Accrual Adjustments2. Accrual AdjustmentsLearning Objective 2Adjustment Analysis, Recording and SummarizingSlide 11Deferral AdjustmentsFinancial Statement EffectsDeferral AdjustmentsDeferral AdjustmentsDeferral AdjustmentsDeferral AdjustmentsDepreciationDeferral AdjustmentsDeferral AdjustmentsAccrual AdjustmentsAccrual AdjustmentsAccrual AdjustmentsAccrual AdjustmentsAccrual AdjustmentsAdjusting Journal Entry HintsLearning Objective 3Slide 28Learning Objective 4Slide 30Slide 31Learning Objective 5Closing Temporary AccountsClosing Temporary AccountsClosing Temporary AccountsSlide 36Closing Temporary AccountsPost-Closing Trial BalanceLearning Objective 6Adjusted Financial ResultsSlide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48End of Chapter 4Copyright © 2016 by McGraw-Hill Education .Chapter 4Adjustments, Financial Statements, and Financial ResultsPowerPoint Author:Brandy Mackintosh, CAEdited by:Muriel Anderson, MBA, CPA4-2Learning Objective 1Explain why adjustments are needed.4-3Solution: Adjustments are made to the accounting records at the end of the period to state assets, liabilities, revenues, and expenses at appropriate amounts. Why Adjustments Are NeededHowever, cash is not always received or paid in the period in which the company earns the related revenue or incurs the related expense.Accounting systems are designed to record most recurring daily transactions, particularly any involving cash.4-4Adjustments Are Needed to ensure…Income StatementRevenues are recorded when earned.Expenses are recorded in the same period as the revenues to which they relate.Balance SheetAssets are reported at amounts representing the economic benefits that remain at the end of the period. Liabilities are reported at amounts owed at the end of the period.4-51. Deferral AdjustmentsAn expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period.Sept. 1 Sept. 30Use-up rent benefitsCash paid for rent in advanceAdjustment neededSept. 1 Sept. 30Deliver game downloadsCash received for game downloads in advanceAdjustment needed4-61. Deferral AdjustmentsDeferral adjustments are used to decrease balance sheet accounts and increase corresponding income statement accounts. Each deferral adjustment involves one asset and one expense account, or one liability and one revenue account.4-72. Accrual AdjustmentsAccrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period.Sept. 1 Sept. 30Incur income taxesAdjustment neededSept. 1 Sept. 30Earn revenue from promotional servicesAdjustment neededDec. 31Cash paid for income taxesDec. 31Cash received for promotional services4-82. Accrual AdjustmentsAccrual adjustments are used to record revenue or expenses when they occur prior to receiving or paying cash, and to adjust corresponding balance sheet accounts. Each accrual adjustment involves one asset and one revenue account, or one liability and one expense account.4-9Learning Objective 2Prepare adjustments needed at the end of the period.4-10Adjustment Analysis, Recording and Summarizing1AnalyzeDetermine the necessary adjustments to make to the accounting records.Without adjustments, the financial statements present an incomplete and misleading picture of the company’s financial performance.4-11Adjustment Analysis, Recording and Summarizing4-12Deferral Adjustments(a) Supplies Used during the Period.Of the $600 in supplies previously received, $250 remain on hand at September 30.2Record(a) Supplies Expense (+E, -SE) Supplies (-A) 3503503SummarizeUnadj. Bal.Adj. Bal.AJE (a)Supplies (A)dr +cr -600250350Unadj. Bal.AJE (a)Adj. Bal.Supplies Expense (E, SE)dr +cr -03503501AnalyzeLiabilitiesAssets=Stockholders’ Equity+(a) Supplies -$350 Supplies Expense (+E) -$3504-13Financial Statement Effects4-14Deferral Adjustments(b) Rent Benefits Expired during the Period.Three months of rent were prepaid on September 1 for $7,200, but one month has now expired, leaving only two months prepaid at September 30.4-15Deferral AdjustmentsThree months of rent were prepaid on September 1 for $7,200, but one month has now expired, leaving only two months prepaid at September 30.(b) Rent Benefits Expired during the Period.2Record(b) Rent Expense (+E, -SE) Prepaid Rent (-A) 2,4002,4003SummarizeUnadj. Bal.Adj. Bal.AJE (b)Prepaid Rent (A)dr +cr -7,2004,8002,400Unadj. Bal.AJE (b)Adj. Bal.Rent Expense (E, SE)dr +cr -02,4002,4001AnalyzeLiabilitiesAssets=Stockholders’ Equity+(b) Prepaid Rent -$2,400Rent Expense (+E) -$2,4004-16Deferral Adjustments(c) Depreciation Is Recorded for Use of Equipment.The computer equipment, which was estimated to last two years, has now been used for one month, representing an estimated expense of $400.Depreciation is the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used.A contra-account is an account that is an offset to, or reduction of, another account.4-17Deferral AdjustmentsThe computer equipment, which was estimated to last two years, has now been used for one month, representing an estimated expense of $400.(c) Depreciation Is Recorded for Use of Equipment.1AnalyzeLiabilitiesAssets=Stockholders’ Equity+(c) Accumulated Depr.(+xA) -$400DepreciationExpense (+E) -$4002Record(c) Depreciation Expense (+E, -SE) Accumulated Depreciation (+xA, -A) 400400Equipment (A)dr +cr -Unadj. Bal.Adj. Bal.9,6009,6003SummarizeUnadj. Bal.AJE (c)Adj. Bal.Accum. Depr. (xA)dr -cr +0400400Depr. Expense (E, SE)dr +cr -Unadj. Bal.AJE (c)Adj. Bal.04004004-18DepreciationAccumulated Depreciation*Balance SheetDepreciation ExpenseIncome StatementNote 3Accumulated Depreciation*Total Amount DepreciatedEquipmentOriginal costNote 1*Contra-AccountOpposes account it offsets (e.g., Equipment)Note 2Depreciation AmountDepends on method usedNote 44-184-19Deferral AdjustmentsThe app software developed for SonicGateway, estimated to have three years of usefulness, has now been used for one month at an estimated expense of $250.(d) Amortization Is Recorded for Use of Software.2Record(d) Amortization Expense (+E, -SE) Accumulated Amortization (+xA, -A) 250250Software (A)dr +cr -Unadj. Bal.Adj.