Journal balance with IVA

Cash (A) 70,000 Capital Stock (OE) 50,000

Premium on stock (OE) 20,000

Copy material (a) 10,000 Suppliers (l) 11,600

Iva receivable (A) 1,600

Advertisement [e] 20,000 Cash (A) 23,200

Iva receivable (a) 3,200

Cash (A) 27144 unearned fees (l) 23,400

Iva payable (l) 3744

Suppliers(l) 8,000 cash (A= 8000

Salaries [e] 9300 cash (a) 7000

account payable (l) 2,300

Cash (a) 14616 earned fees [r] 12600

Iva payable (l) 2016
OBJECTIVE 1: Describe the nature of the adjusting process.
Nature of the Adjusting Process
Financial statementsà economic life of the business is divided into time periods.

Accounting period conceptà requires à revenues and expenses be reported in the proper period. à (GAAP)àrequir
basis of accounting.

Accrual basisà revenues àreported: income statement period earned. àwhen services provided à“revenue recognition

Accrual basis, expenses à reported in the same period as revenues to which they relate. àSupporting reporting
expenses in same period à “matching concept, or matching principle” (matching r&e net income or loss for perio
income statement.

GAAP àrequires accrual basis of accounting,

Cash basis of accountingà revenues and expensesà reported on income statement in period in which cash is received

Small businessà cash basis, because they have few receivables and payables. For them, cash basis provides financi
similar to accrual basis. For most large businesses, however, the cash basis will not provide accurate financial statem
needs. For this reason, the accrual basis is used
The Adjusting Process

At the end of the accounting period, many of the account balances in the ledger are reported in the financial statem
change.
-          Some accounts, require updatingàreasons:

1. Some expenses are not recorded daily: daily use of supplies

2. Some revenues and expenses are incurred as time passes rather than as separate transactions: rent received in adv
and becomes revenue

3. Some revenues and expenses may be unrecorded: provided services not billed or recorded at the end of the accoun

Adjusting processà analysis and updating of accounts at the end of the period before the financial statements are pre

Adjusting entries àThe journal entries that bring the accounts up to date at the end of the accounting period

·         All adjusting entries affect at least one income statement account and one balance sheet account.

·         Adjusting entry will always involve revenue or expense account and an asset or a liability account.

Types of Accounts Requiring Adjustmentà

1. Prepaid expenses

2. Unearned revenues
Prepaid expensesà Advance payment of future expenses.

·         Recorded as assets when cash is paid.

·         Become expenses over time or during normal operations.

Unearned revenuesà Advance receipt of future revenues

·         Recorded as liabilities when cash is received.
·         Unearned revenues become earned revenues over time or during normal operations
Accrued revenues àUnrecorded revenues that have been earned and for which cash has yet to be received
·         Fees for services that an attorney or a doctor has provided but not yet billed are accrued re

Accrued expenses à Unrecorded expenses that have been incurred and for which cash has yet to be paid.
·         Wages owed to employees at the end of a period but not yet paid are an accrued expense.

Deferrals àPrepaid expenses and unearned revenues

·         recording of the related expense or revenue is deferred to a future period.
Accruals àAccrued revenues and accrued expenses
·         related revenue or expense should be recorded or accrued in the current period.
Adjusting Entries
Depreciation Expenseà Fixed assets, or plant assets, are physical resources that are owned and used by a business an
·         This decrease in usefulness is called depreciation.
·         All fixed assets, except land,
Accumulated depreciation accounts à contra accounts, or contra asset accounts.
·         Deducted from their related fixed asset accounts on the balance sheet. The normal balance
Fixed Asset Account à
Land
Buildings
Store Equipment
Office Equipment

The difference between these two balances is the cost of the office equipment that has not yet been depreciated. This
Book Value of Office Equipment = Cost of Offi ce Equipment – Accumulated Depr. of Offi ce Equipment
Book Value of Office Equipment = $1,800 – $50
Book Value of Office Equipment = $1,750
The office equipment and its related accumulated depreciation are reported on
the December 31, 2011, balance sheet as follows:
Offi ce equipment $1,800
Less accumulated depreciation 50 $1,750
The market value of a fixed asset usually differs from its book value. This is because depreciation is an allocation me

TOTAL SUMMARY

Obj 1 àDescribe the nature of the adjusting process.

Key Points The accrual basis of accounting requires that revenues are reported in the period in which they ar
expenses are matched with the revenues they generate. The updating of accounts at the end of the accounting period
adjusting process. Each adjusting entry affects an income statement and balance sheet account. The four types
requiring adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.

Obj 2 à Journalize entries for accounts requiring adjustment.

Key Points At the end of the period, adjusting entries are needed for prepaid expenses, unearned revenues, accrued
accrued expenses. In addition, an adjusting entry is necessary to record depreciation on fixed assets.
Obj 3 à Summarize the adjustment process.

Key Points A summary of adjustments, including the type of adjustment, reason for the adjustment, the adjusting e
effect of omitting an adjustment on the financial statements

Obj 4 à Prepare an adjusted trial balance.

Key Points After all the adjusting entries have been posted, the equality of the total debit balances and total cred
verified by an adjusted trial balance.

Obj 5 à Describe and illustrate the use of vertical analysis in evaluating a company’s performance and financia

Key Points Comparing each item on a financial statement with a total amount from the same statement is called ver
On the balance sheet, each asset is expressed as a percent of total assets and each liability and stockholders’ equity is
a percent of total liabilities and stockholders’ equity. On the income statement, each revenue and expense is expresse
of total revenues or fees earned.
3. Accrued revenues

4. Accrued expenses
are permanent or have a long life.

a contra account is opposite to the account from which it is deducted.

Contra Asset Account
 Accumulated Depreciation—Store Equipment
Accumulated Depreciation—Office Equipment

ount, called the book value of the asset (or net book value), is computed as shown below. Book Value of Asset = Cost of the As

d, not a valuation method. That is, depreciation allocates the cost of a fixed asset to expense over its estimated life. Depreciation
None—Land is not depreciated.
 Accumulated Depreciation—Buildings

d as shown below. Book Value of Asset = Cost of the Asset – Accumulated Depreciation of Asset

xed asset to expense over its estimated life. Depreciation does not measure changes in market values, which vary from year to ye