chapter 3

H. Adjusted Trial Balance

A list of accounts and balances prepared after adjusting entries are recorded and posted to the ledger.

E. Adjusting Accrued Expenses

1. Accrued expenses are costs or expenses incurred in a period but are both unpaid and unrecorded. 2. Common accrued expenses are salaries, interest, rent, and taxes. 3. Adjusting entries for recording accrued expenses involve increasing (debiting) expenses and increasing (crediting) liabilities. (The liability is a "payable.")

F. Adjusting Accrued Revenues

1. Accrued revenues are revenues earned in a period that are both unrecorded and not yet received in cash. 2. Accrued revenues commonly result from partially completed jobs or interest earned. 3. Adjusting entries for recording accrued revenues involve increasing (debit) assets and increasing (credit) revenues. (The asset is a "receivable.")

C. Adjusting for Depreciation

1. Depreciation is the process of allocating the cost of plant assets over their expected useful lives. 2. Adjusting entries for depreciation expense involve increasing (debiting) expenses and increasing (crediting) a special account called Accumulated Depreciation. This account is classified as a contra-asset. It is linked to the asset as a subtraction and thus used to record the declining asset balance. 3. Book value is a term used to describe the asset less its contra-asset (accumulated-depreciation)

B. Adjusting Prepaid (Deferred) Expenses

1. Prepaid expenses (including depreciation) are items paid for in advance of receiving their benefits. Prepaid expenses, also called deferred expenses are assets. As the assets are used, their costs become expenses. 2. Common prepaid items are supplies, prepaid insurance, prepaid rent and depreciation. 3. Adjusting entries for prepaid involve increasing (debiting) expenses and decreasing (crediting) assets (with the exception of depreciation on plant and equipment).

D. Adjusting Unearned (Deferred) Revenues

1. Unearned revenues (also called deferred revenues) are liabilities created by cash received in advance of providing products or services. The obligation is to provide the service or product. As they are provided, unearned revenues (liabilities) become earned revenues (revenues). 2. Adjusting entries for unearned revenues involve increasing (crediting) revenues and decreasing (debiting) unearned revenues.

Adjusting Accounts

An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. This entry also updates the related expense or revenue account.

G. Links to Financial Statements

Each adjusting entry affects one or more income statement accounts and one or more balance sheet accounts. Failure to make a necessary adjustment will result in misstatements of amounts on each of these statements

A. Framework for adjustments

adjustments are necessary for transactions that extend over more than one period.

Cash Basis

revenues are recognized when cash is received and expenses are recognized when cash is paid. Cash basis is not consistent with GAAP.

Accrual Basis

uses the adjusting process to recognize revenues when earned and expenses when incurred with revenues (match the expense with the revenue). this means the economic effects of revenues and expenses are recorded when earned or incurred, not when cash is received or paid. - consisted with GAAP. Improves comparability of statements.