Ch. 4- Adjustments, Financial Statements, and Financial Results

Accumulated Amortization

*Credit Balance sheet

Amortization Expense

*Debit Income statement

Adjustments are needed to ensure...

- Revenue recognition principle (revenues recorded when earned) - Expense recognition "matching" principle (expenses recorded in the same period as the revenues to which they relate) - Assets are reported at amounts representing economic benefits that remain at the end of the current period - Liabilities are reported at amounts owed at the end of the current period that will require a future sacrifice of resources

Deferral Adjustments

- Used to decrease balance sheet accounts and increase corresponding income statement accounts - Previously deferred amounts are adjusted and transferred to the income statement using a deferral adjustment - Each deferral adjustment involves one asset and one expense account, or one liability and on revenue account Ex. Supplies --> Supplies Expense Ex. Prepaid rent --> Rent Expense Ex. Unearned Revenue --> Sales/Service Revenue

Adjustment Steps:

1. Analyze necessary adjustments 2. Record using adjusting journal entries 3. Summarize in accounts

2 Categories of Adjustments

1. Deferrals 2. Accruals

Order of statement preparation....

1. Income 2. Retained Earnings 3. Balance 4. Cash flows and notes

Dividends

1. have a normal debit balance 2. are closed into retained earnings by crediting Dividends 3. are closed into retained earnings by debiting retained earnings

2 Effects of Deferral Adjustments:

1. reduce the carrying value of assets on the balance sheet 2. transfer the amount of the reductions to related expense accounts on the income statement

After posting the adjusting entry to record revenues earned but not yet collected, which account will be increased?

Accounts Receivable

How do accrual adjustments affect liabilities and expenses?

Accrual adjustments can increase liabilities and increase expenses OR increase assets and increase revenues

Carrying value

Amount at which an asset or liability is reported ("carried") in the financial statements Also known as... - Net book value - Book value

Amortization

Applies to using up long-term assets that lack physical substance and have a limited period of usefulness - Deferral adjustment to report amortization as an expense on the income statement and accumulate it in a contra-asset account on the balance sheet

Accumulated Depreciation

Balance sheet account - increase over time, as it accumulates the depreciation of each period *Credit

Interest

Cost of interest relates to the current period only thus, when a Note Payable and Interest is due next year, the Interest Expense should be increased

The adjusting entry for supplies used during the period requires a _____________ (debit/credit) to Supplies and a _______________ (debit/credit) to Supplies Expense

Credit to Supplies Debit to Supplies Expense

The adjusting entry to record salaries and wages owed to employees at the end of the accounting period includes a debit to "Salaries and Wages __________" and a credit to "Salaries and Wages ________"

Debit to "salaries and wages expense" Credit to "Salaries and Wages Payable"

Adjustments

Entries made at the end of every accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts - involve both income statement and balance sheet acounts

Depreciation Expense

Income statement account - will include only the depreciation of the current accounting year *Debit

Gift cards are an example of a transaction in which a company receives payment in advance of fulfilling a sale or performing a service. This type of transaction will result in an increase to an asset account (cash) and a _____________ to a ____________ account

Increase to a liability account

___________ expense accumulates or accrues throughout the accounting period on Notes Payable.

Interest accumulates throughout the accounting period on Notes Payable

Why aren't adjustments made on a daily basis?

It is more efficient to do them all at once at the end of each period

Closing process

Last step of the accounting cycle, performed only at the end of the year, after the financial statements have been prepared

Contra-account

Like a negative asset account... An account that is an offset to, or reduction of, another account while maintaining a record of the original cost for long-lived asset accounts The normal balance in a contra-account is always the opposite of the account it offsets

Accrual Adjustments

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 *unlike "deferral" adjustments, accrual adjustments pair one asset and one revenue or one liability and one expense

Will adjusting entires reduce cash?

No, adjusting entries adjust balances based on internal events and the passage of time. They do not involve the exchange of cash.

Where is account Dividends reported?

Only on the statement of retained earnings

Adjusted Trial Balance

Prepared to check that the accounting records are still in balance, after having posted all adjusting entries to the t-accounts

Depreciation

Process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used - "Depreciation expense" NOT taken directly out of the asset's account (ex. Equipment) Rather, a contra-account is created to keep track of all the depreciation recorded against the equipment

Adjusting journal entries (AJEs)

Record the effects of each period's adjustments in a debits-equal-credits format

The amount coming from the adjusted trial balance is the beginning-of-year balance for ____________________

Retained Earnings *Doesn't yet include revenues, expenses and dividends for the current period because they've been recorded in their own separate accounts

True or False: Supplies is an asset account because it contains the value of supplies that have NOT been used, but still remain an economic resource for the co.

True *Supplies Expense reports the amount of supplies that have been used during that period

Key starting point for adjustments...

Unadjusted trial balance, because it presents the unadjusted balances for every account

Income Tax

always calculate income tax expense after taking into account all revenue and expense adjustments Company's adjusted income (before income tax expense) [X] Company's tax rate

Adjusting entires always include one ________ sheet and one ______________ statement account.

balance sheet, income statement account

Adjusting journal entries never involve ________________.

cash

The adjusting entry to record services earned but not yet billed requires ______________

debit to Accounts Receivable and credit to Service Revenue

Post-closing trial balance

final check on credits-equals-debits and all temp. accounts have been closed