Ch3 ADJUSTING Accounts AGMA) il gill alse] g “Ay geal) a gb Adare) Gly gucill To provide timely information, accounting systems prepare periodic reports at regular intervals. Hake hh A gt yA tT gk aly cag ge 3 THEACCOUNTING PERIOD — aul>all 8 iil The time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial time periods. Accounting time periods are generally a month, a quarter, or a year. The accounting time period of one year in length is usually known as a fiscal year. "Ai Lina’ 9! "Quarterly" 2) 295 9! "monthly" 4 A Send! 5 All O95 oO) Oy wot “Annually” ais ———————————————_—————— 1 2 Ll J annuallyAccrual- versus Cash-Basis Accounting Saal Gulu! 9 GlanwV! Gull Accrual-Basis Accounting Sti=.I wu! Transactions recorded in the periods in which the events occur. [p48 a> coull oui Gadi 59 Joeuw lal Ola>V! ‘@ Companies recognize revenues when they perform services (rather than when they receive cash). asa pisad aie slyl psi @ Revenue is recognized when earned Expenses are recognized when incurred (rather than when paid). dossll ata Loic Bgnaall Jonas ogi @ In accordance with generally accepted accounting principles (GAAP). or (IFRS) ico I gol! h-| jis At intin wsaaill Gulu Revenues recognized when cash is received. ayaa Juasd Ge slyNl Jase gai Expenses recognized when cash is paid. sal B99 Uo Bo nc0l! Judy poi Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). Bao we Saal Gull because the cash basis of accounting often leads to misleading financial statements. allac aJlo pilgd slacl sJl So, oY@ The matching principles: aisle! Lavo @ Revenues are matched with expenses incurred in association with generating these revenues CLusd op28l judi 58 Obigpaoll ola yo Cow Gull Obl WL olig,aall aéylae yo LV. ell @ Matching expenses with revenues without alignment (adjustment) Agi say lal yVly Oswell gay Aas Uo coos IB @ may cause shifting of expenses or revenues between different accounting periods. Up) cart caatg S51 uaslee 9 oll lalyUl gl OBypaoll Jury oll Sosa AUIS ula @ Thus, the results of operations may be overstated or understated Les aul! padi gl oob5 col Sodeus slldlg @ To avoid such misstatements, Ob Lucdl agai go LV lbsil Lia soled it becomes necessary to adjust the balances of the accounts MULTIPERIOD TRANSACTIONS Ales 0,9 oro iS! ale osioo/! Gla>Vl The matching principle of accounting requires recognition of revenues and expenses in the accounting period in which they have occurred. 8,g.20J! Lia gf alyMl Lia [psd a> all on28I! 59 Bon20l gl 31-VL BLic Vl yo 4 @ Going concern assumpti It assumes that the enterprise has neither the need nor the intention to liquidate or curtail materially the scale of its operations. 31 Sil asda ai SLD Guily Judtunall coll Jas! 58 oaruo ail Ul yall 9 Josll px> Julai Low LoRecog iq Revenues and Expenses Og no.0Il9 SlalyVl (Gaus) GIseI Lare REVENUE RECOGNITION PRINCIPLE = wisly:Vb (Jews) Glue VI Lue Recognize revenue in the accounting period in which the performance obligation is satisfied ly8 doasel p28 p35 sll op2a/l 98 Olly Jae aus pga states that revenue should be recognized in the accounting period in which it is earned. EXPENSE RECOGNITION PRINCIPLE = clig,all (Jens) lic VI Lue Match expenses with revenues in the period when the company makes efforts that generate those revenues. lg 20Jl 648 lira! sl Obl yVL Glo a0ll alec GayAguil 998 ol Lb] 5 Framework for Adjustments Adjustments pall ay Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Prepaid (Deferred) Unearned (Deferred) ‘Accrued Accrued Expenses Revenues Expenses Revenues sia fe gh ly pe fase isl) aa Hin ly pe af Hine yh Assets Liabilities Liabilities Assets Expenses Assets! || Liabilities | revenues? | | Expenses? uabilitiest || Assets? revenues 1 (Or) (cr) (Dr) (cr) (Or) (cr) (Or) (cr) Rent Expense dr Unearned Revenue dr Rent Expense dr Rent Receivable dr Prepaied Rent Revenue or Rent Payable cr Rent Revenue cr Supplies used Supplies expense dr supplies er Depreciation Depreciation expense dr ‘Accumulated Depreciation cr alsill gl eal Wg sl ul gl dp pao laass! ulus 98 57 Aguall 98 aol facld Each adjusting entry affects one balance sheet account and one income statement accountAccrued Expenses: Aare] a laoJl Expenses take place as a function of time. That is, they occur as time expire Geil 99.0) Grin ,Lacll Accrued expenses are expenses incurred but not yet paid in cash or recorded at the statement date. a. Accrued expenses include interest, rent, taxes, and salaries. b. A liability-expense account relationship exists with accrued expenses. ies and expenses are understated. c. Prior to adjustment, both liabi d. The adjusting entry results in an increase (a debit) to an expense account and an increase (a credit) to a liability account.aaziwoll slgall ACCRUED INTEREST Example: Assume that the Sunrise Corporation obtained L/E. 10,000 loan from the National Bank of Egypt for two years starting October 1, 2015 with 12% interest payable at end of each year. The Sunrise Fiscal year ends December 31 each year. Required: 1) Prepare the adjusting entry at Dec.31 ,2015 ? 2) Prepare the Journal entry to record the payment of interest in 2016 ? Year end Dec.31,2015 Oct.1 | Sept.30 2015 | | 2016 2017 3 months 9 monthsSolution 1) Adjusting entry: Dec.31, 2015: ' Annual Time in ere ene x Interest x Terms of = Interest ees Rate One Year 10,000 x 12% x 3/12 - 300 Date | Explanation Debit Credit Dec.31 | Interest Expense 300 2015 Interest Payable ~~ 2) Journal entry: Sept.30, 2016 Date [Explanation Debit | Credit Sept.30 | Interest Expense (10,000 x 12% x 9/12) 900 2016 | Interest Payable (10,000 x 12% x 3/12) 300 Cash (10,000 x 12% x 12/12) 1,200D 2021 yi sroll JLo & Q. 30-36: use the following data to answer questions No 30 to 36: \f the firm obtained L.E. 100,000 loan from the bank on July 1, 2020, with 10% interest rate payable at Jun 30 each year. The firm’s accounting period ends on December 31, each year. Agauill 295 alacl (ogy) laslacl pi Jol aoild ul L248! Assuming that income statement prepared without adjusting entries, 30. interest expenses charged for the year ended December 31. 2020 is: a)Zero b) 10,000. c} 5,000 31. interest expenses charged for the year ended December 31, 2021 is: a)Zero b) 10,000 c) 5,000 32. balance of interest expense account in December 31. 2020 is a)Zero b)10,000 c) 5,000 euguaill 9948 slacl (am) laslacl pi Jou! anil ol Lo,sl if the income statement prepared after preparing adjusting entries, 33. the interest expense charged for the year ended December 31. 2020 is: a)Zero 6) 10,000) 5,000 34. the interest expense charged for the year ended December 31. 2021 is a)Zero 6) 10,000 ¢) 5,000 35. balance of interest expense payable account in December 31. 2020 is a)Zero b)10,000 ¢) 5,000 36. balance of interest expense payable account in December 31. 2021 is: a)Zero b) 10,000 c) 5,000of Ug! 49 slacl U9.u Without (30) Interest Expense for Year Ended Dec.31, 2020 = Zero Bon,20)] Jeu pl Lil lalze IS! aguuill 9.5 slacl Ug, OY (31) Interest Expense for Year Ended Dec.31, 2021 = 100,000 x 10% = $ 10,000 Cash Basis JI aa b plixiwh liod Lil alco IS! yguuill 9948 slacl vga, oY Usiw 2289 05 SUI Bo,a0)1 Jeans ind Why (32) Balance of Interest Expense for Year Ended Dec.31, 2020 = Zero Bo20)] Jaw pl Lil lobeo [51 aguill 99.5 slacl vga oYVow! 149 sacl assy After Preparing Adjusting entries (33) Interest Expense for Year Ended Dec.31, 2020 = 100,000 x 10% x 6/12 = $ 5,000 (34) Interest Expense for Year Ended Dec.31, 2021 = 100,000 x 10% x 12/12 = $ 10,000 (35) Interest Payable for Year Ended Dec.31, 2020 = 100,000 x 10% x 6/12 = $ 5,000 (36) Interest Payable for Year Ended Dec.31, 2020 = 100,000 x 10% x 6/12 = $ 5,000 ~Salaries & Wages Accrued Exampl Assume that the Sunrise corporation has a weekly salary of L.E. 6000. The firm has recognized salaries and wages for the whole year except for the last week. The accounting period ends December 31, 2018, which happened this year to be Tuesday. Here, we see that the ledger shows a Salaries and Wages Expense account that has accumulated a balance of L.E. 306000 for the past 51 weeks of the year. Salary of the last week of the year of L.E. 6000 not yet Paid. And will be paid in January 2019. Required: 1) Prepare the adjusting entry at year end Dec.31, 2018 ? 2) Prepare the journal entry to record the payment of salaries on 2019? Solution De 4. ,2¢ Year End 4 days ‘ 2 days ——_—_—2.aevs_, [Saturday [Sunday [Monday | Tuesday [Wednesday | Thursday Salary per day = $ 6,000 / 6 days = 1,000 per day 1) Adjusting Entry: Dec.31 | Salaries Expense (1000 x 4 days) 4,000 2018 Salaries Payable 4,000 2)_Journal entry: Jan.2. | Salaries Expense (1000 x 2 days) 2,000 2019 | Salaries Payable (1000 x 4 days) 4,000 Cash (1000 x 6 days) 6,00010 Accrued revenues = qaxiwoll ls! Vl Revenues for services performed but not yet received in cash or recorded. phew pis pla lplaars pty 0) USIs Yovaiti pi oles Accrued revenues » - 9 a are revenues earned but not yet recorded at the statement date. . Accrued revenues may accumulate with the passing of time as in the case of interest and rent, or through services performed but for which payment has not been collected. An asset-revenue account relationship exists with accrued revenues. . Prior to adjustment, both assets and revenues are understated. . The adjusting entry results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account.11 Rent Revenue: = .slc Jlio Example: Assume that the Full Moon corporation has a vacant floor in its building in Cairo. On August 1, 2016, the firm leased the floor to XYZ Company for L.E. 24000 per year. Rents are payable on semiannual basis, at end of each 6-month period. The fiscal year-end of the Full-Moon is December 31,2016. Required: 1) Prepare adjusting entry at year end Dec.31, 2016 ? 2) Prepare Journal entry to record the receiving of Rent at Jan.31, 2017 ? Year end Dec.31,2016 Aug.1 Jan.1 2016 2017 5 months 1 monthSolution 1) Adjusting Entry: Dec.31 | Rent Receivable (24,000 x 5/6) 20,000 2016 Rent Revenue 20,000 2)_Journal entry: Jan.1 | Cash 24,000 2017 Rent Receivable 20,000 Rent Revenue (24,000 x 1/6 ) 4,00013 Interest Revenue ule Jlio Example: ABC Corporation deposited L.E. 100,000 in Bank Misr for two years starting October 1, 2019. The certificate earns 10% interest per year, which is payable in two semiannual payments (April 1 and October 1 of each year). The fiscal year-end of ABC is December 31, 2019 ? Require 1) Prepare adjusting entry at the year end Dec.31, 2019 ? 2) Prepare journal entry to record the receiving interest at April.1, 2020 ? Year end Dec.31,2016 Oct.1 April. 2019 2020 3 months 3 months14 1) Adjusting Entry: Face Value x Interest Rate x time of year = Interest 100,000 x 10% x 3/12 = 2,500 Dec.31 | Interest Receivable 2,500 2019 Interest Revenue 2,500 2)_Journal entry: April.1 | Cash 5,000 2020 Interest Receivable (100,000 x 10% x 3/12) 2,500 Interest Revenue (100,000 x 10% x 3/12) 2,500