Professional Documents
Culture Documents
CH 03
CH 03
3-1
Chapter 3
Adjusting the
Accounts
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
3-2
Study
Study Objectives
Objectives
Slide
3-3
Adjusting
Adjusting the
the Accounts
Accounts
Slide
3-4
Timing
Timing Issues
Issues
.....
Jan. Feb. Mar. Apr. Dec.
Slide
3-5 SO 1 Explain the time period assumption.
Timing
Timing Issues
Issues
Review
The time period assumption states that:
a. revenue should be recognized in the accounting
period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided into
artificial time periods.
d. the fiscal year should correspond with the calendar
year.
Slide Solution on
3-6 notes page SO 1 Explain the time period assumption.
Timing
Timing Issues
Issues
Slide
3-7
SO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
Slide
3-8 SO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
Companies recognize
revenue in the accounting
period in which it is earned.
In a service enterprise,
revenue is considered to be
earned at the time the service
is performed.
Slide
3-9 SO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
Slide
3-10 SO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
Slide
3-11 SO 2 Explain the accrual basis of accounting.
Answer on
Slide
notes page SO 2
3-12
Timing
Timing Issues
Issues
Slide Solution on
3-13 notes page SO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
Review
One of the following statements about the accrual basis of
accounting is false. That statement is:
a. Events that change a company’s financial statements
are recorded in the periods in which the events occur.
b. Revenue is recognized in the period in which it is
earned.
c. The accrual basis of accounting is in accord with
generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and
expenses are recorded only when cash is paid.
Slide Solution on
3-14 notes page SO 2 Explain the accrual basis of accounting.
The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Slide
3-15 SO 3 Explain the reasons for adjusting entries.
The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Slide
3-16 SO 3 Explain the reasons for adjusting entries.
The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Review
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in
which they are incurred.
b. revenues are recorded in the period in which
they are earned.
c. statement of financial position and income
statement accounts have correct balances at
the end of an accounting period.
d. all of the above.
Slide Solution on
3-17 notes page SO 3 Explain the reasons for adjusting entries.
Types
Types of
of Adjusting
Adjusting Entries
Entries
Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not yet
recorded as assets before received in cash or
they are used or consumed. recorded.
Slide
3-18 SO 4 Identify the major types of adjusting entries.
Types
Types of
of Adjusting
Adjusting Entries
Entries
Illustration 3-3
Trial Balance –
Illustrations are
based on the
October 31, trial
balance of
Pioneer
Advertising
Agency Inc.
Slide
3-19 SO 4 Identify the major types of adjusting entries.
Types
Types of
of Adjusting
Adjusting Entries
Entries
Prepaid expenses
OR
Unearned revenues.
Slide
3-20 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Slide
3-21 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Prepaid Expenses
Costs that expire either with the passage of time or
through use.
Slide
3-22 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Slide
3-23 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration: Pioneer Advertising Agency purchased advertising
supplies costing $2,500 on October 5. Pioneer recorded the
payment by increasing (debiting) the asset Advertising Supplies.
This account shows a balance of $2,500 in the October 31 trial
balance. An inventory count at the close of business on October
31 reveals that $1,000 of supplies are still on hand.
Slide
3-24 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration: On October 4, Pioneer Advertising Agency paid
$600 for a one-year fire insurance policy. Coverage began on
October 1. Pioneer recorded the payment by increasing
(debiting) Prepaid Insurance. This account shows a balance of
$600 in the
October 31 trial balance. Insurance of $50 ($600 / 12) expires
each month.
Oct. 31 Insurance expense 50
Prepaid insurance 50
Illustration 3-6
Slide
3-25 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Depreciation
Buildings, equipment, and vehicles (long-lived assets)
are recorded as assets, rather than an expense, in the
year acquired.
Slide
3-26 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration: Pioneer Advertising estimates depreciation on the
office equipment to be $480 a year, or $40 per month.
Illustration 3-7
Slide
3-27 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-8
Slide
3-28 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Slide
3-29 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Slide
3-30 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Unearned Revenues
Company makes an adjusting entry to record the revenue
that has been earned and to show the liability that remains.
Slide
3-31 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Slide
3-32 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Illustration: Pioneer Advertising Agency received $1,200 on
October 2 from R. Knox for advertising services expected to be
completed by December 31. Unearned Service Revenue shows a
balance of $1,200 in the October 31 trial balance. Analysis
reveals that the company earned $400 of those fees in October.
Illustration 3-11
Slide
3-33 SO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Summary
Illustration 3-12
Slide
3-34 SO 5 Prepare adjusting entries for deferrals.
Answer on
Slide
notes page SO 5
3-35
Types
Types of
of Adjusting
Adjusting Entries
Entries
OR
Expenses incurred
Slide
3-36 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Revenues earned but not yet received in cash or
recorded.
Slide
3-37 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Accrued Revenues
An adjusting entry serves two purposes:
Slide
3-38 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Slide
3-39 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Illustration 3-14
Slide
3-40 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Summary
Illustration 3-15
Slide
3-41 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Slide
3-42 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Expenses
An adjusting entry serves two purposes:
Slide
3-43 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Slide
3-44 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Illustration: Pioneer Advertising Agency signed a three-month
note payable in the amount of $5,000 on October 1. The note
requires Pioneer to pay interest at an annual rate of 12%.
Illustration 3-17
Slide
3-45 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Illustration: Pioneer Advertising Agency last paid salaries on
October 26; the next payment of salaries will not occur until
November 9. The employees receive total salaries of $2,000 for a
five-day work week, or $400 per day. Thus, accrued salaries at
October 31 are $1,200 ($400 x 3 days).
Illustration 3-19
Slide
3-46 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Illustration: Pioneer Advertising Agency last paid salaries on
October 26; the next payment of salaries will not occur until
November 9. The employees receive total salaries of $2,000 for a
five-day work week, or $400 per day. Thus, accrued salaries at
October 31 are $1,200 ($400 x 3 days).
Slide
3-47 SO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Summary
Illustration 3-21
Slide
3-48 SO 6 Prepare adjusting entries for accruals.
The
The Adjusted
Adjusted Trial
Trial Balance
Balance
Slide
3-49 SO 7 Describe the nature and purpose of an adjusted trial balance.
The
The Adjusted
Adjusted Trial
Trial Balance
Balance
Illustration 3-24
Adjusted trial balance
Slide
3-50 SO 7
The
The Adjusted
Adjusted Trial
Trial Balance
Balance
Review Question
Which of the following statements is incorrect concerning
the adjusted trial balance?
a. An adjusted trial balance proves the equality of the
total debit balances and the total credit balances in
the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis
for the preparation of financial statements.
c. The adjusted trial balance lists the account balances
segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the
adjusting entries have been journalized and posted.
Slide
3-51 SO 7 Describe the nature and purpose of an adjusted trial balance.
Preparing
Preparing Financial
Financial Statements
Statements
Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
from the
the
Adjusted
AdjustedTrial
Trial Balance.
Balance.
Statement Retained
Income
of Financial Earnings
Statement
Position Statement
Slide
3-52 SO 7 Describe the nature and purpose of an adjusted trial balance.
Preparing
Preparing Financial
Financial Statements
Statements
Illustration 3-25
Preparation of
the income
statement and
retained earnings
statement from
the adjusted trial
balance
Slide
3-53 SO 7
Preparing
Preparing Financial
Financial Statements
Statements
Illustration 3-26
Slide
3-54 SO 7
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Slide
3-55
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Slide
3-56
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Slide
3-57
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Slide
3-59 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Alternative
Alternative Treatment
Treatment for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3A-1
Slide
3-60 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Alternative
Alternative Treatment
Treatment for
for “Prepaid
“Prepaid Expenses”
Expenses”
Slide
3-61 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Alternative
Alternative Treatment
Treatment for
for “Unearned
“Unearned Revenues”
Revenues”
Slide
3-62 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Alternative
Alternative Treatment
Treatment for
for “Unearned
“Unearned Revenues”
Revenues”
Slide
3-63 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Summary
Summary of
of Additional
Additional Adjustment
Adjustment Relationships
Relationships
Illustration 3A-7
Slide
3-64 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Copyright
Copyright
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programs or from the use of the information contained herein.”
Slide
3-65