Professional Documents
Culture Documents
ACCOUNTING
Learning Objectives
[3] Explain how accounting adjustments affect the balance sheets and income statements
and prepare financial statements from adjusted trial balance.
3-2
THE ACCOUNTING
C1
PERIOD
3-3
C2
Accounting
3-4
CALENDAR YEAR
FISCAL YEAR
NATURAL FISCAL YEAR ends when business
Activities at low point
INTERIM STATEMENTS
3-5
C2
C2
$ - $ - $ - $ -
May Jun Jul Aug
$ - $ - $ - $ -
Sep Oct Nov Dec
$ - $ - $ - $ 2,400
C2
$ - $ - $ - $ -
May Jun Jul Aug
$ - $ - $ - $ -
On the accrual basis,
Sep Oct Nov Dec
$100 of insurance
$ - $ - $ - $ 100
EXPENSES
Revenue Recognition Principle
C2
RECOGNIZING REVENUES &
EXPENSES
Revenue Recognition Principle
Matching Principle
Now that we
Summary have
recognized the revenue,
of Expenses let’s see what
Rent $1,000 expenses we incurred
Gasoline 500
Advertising 2,000
to
Salaries 3,000 generate that revenue.
Utilities 450
and . . . . ....
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C3
ADJUSTING
ACCOUNTS
• An adjusting entry is recorded to bring an asset or liability account
balance to its proper amount.
• Framework for Adjustments
Adjustments
Paid (or recei ved) cash before Paid (or received) cash after
expense (or revenue) recognized expense (or revenue) recognized
PREPAID (DEFERRED)
P1
receiving the
actual benefits.
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PREPAID
P1
INSURANCE
(a) On 12/1/11, FastForward paid $2,400 for insurance for
2-years (24-months, December 2011 through November
2013). FastForward recorded the expenditure as Prepaid
Insurance on 12/31/11.
What adjustment is required?
SUPPLIE
P1
S
(b) During 2011, FastForward purchased $9,720 of supplies.
FastForward recorded the expenditures in the asset
account, “Supplies.” On December 31, 2011, a count of the
supplies indicated $8,670 on hand, so $1,050 of supplies
were used
during December.
What adjustment is required?
Dec. 31 Supplies Expense 1,050
Supplies 1,050
To record supplies used during 2011
OTHER PREPAID
P1
EXPENSES
1. Other prepaid expenses, such as Prepaid Rent, are
accounted for exactly as Insurance and Supplies.
2. We should note that some prepaid expenses are both
paid for and fully used up within a single period.
3. For example, a company may pay monthly rent on the
first day of each month. This payment creates a prepaid
expense on the first day of the month that fully expires
by the end of the month.
4. In these special cases, we can record the cash paid with
a debit to the expense account instead of an asset
account.
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DEPRECIATI
P1
ON
Depreciation is the process of allocating the
cost of a plant asset over its useful life in a
systematic and rational manner.
DEPRECIATI
P1
ON
On December 1, 2011, FastForward purchased
equipment for $26,000 cash. The equipment has
an estimated useful life of four years (48 months)
and FastForward expects to sell the equipment
at
the end of its life for $8,000 cash.
(c) Let’s record depreciation expense for the
month ended December 31, 2011.
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DEPRECIATI
P1
ON
Dec. 31 Depreciation Expense 375
Accumulated Depreciation - Equipment 375
To record monthly equipment depreciation
Accumulated Depreciation
12/31 375
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DEPRECIATI
P1
ON
$
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P1
UNEARNED (DEFERRED)
REVENUESWe will apply this cash
Cash received in you gave us towards
advance of providing your total consulting fees.
products or
services.
UNEARNED (DEFERRED)
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P1
REVENUES
On December 26, 2011, FastForward agrees to provide
consulting services to a client for a fixed fee of
$3,000 for 60 days. On this date, the client pays the
entire consulting fee in advance. FastForward makes
the following entry:
3,000
Consulting
Unearnedfees received in advance
Revenue
Dec. 26
3,000
3 - 21
P1
UNEARNED (DEFERRED)
REVENUES
(d) On December 31, FastForward earns 5-days of
consulting fees. Each day that passes results in
consulting fees of $50 ($3,000 ÷ 60), so
FastForward earned ($50 × 5 days)
$250.
Dec. 31 Unearned Revenue 250
Consulting Revenue 250
To recognize 5-days of consulting fees
P1
ACCRUED EXPENSES
We’re about one-half
Costs incurred in done with this job
a period that and want to be paid
for our work!
are both unpaid
and
unrecorded.
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ACCRUED SALARIES
P1
EXPENSES
FastForward’s employee earns $70 per day and is paid
every two weeks on Friday. Year-end, 12/31/11, falls on a
Wednesday. The last payday of 2011, is Friday, 12/26/11.
From 12/26 until year-end is three working days. The
employee has earned salaries of $210 for Monday through
Wednesday. They will not be paid until the next Friday.
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ACCRUED SALARIES
P1
EXPENSES
(e) FastForward’s employee has earned but not been paid
on December 31, 2011, $210.
P1
FUTURE PAYMENT OF ACCRUED
EXPENSES
On January 9, 2012, FastForward will pay the payroll
for the two weeks from December 26, 2011 through
January 9, 2012. Here is the journal entry for the payroll:
ACCRUED INTEREST
P1
EXPENSES
FastForward borrowed $6,000 from First National Bank on
December 1, 2011. The note bears interest at the annual
rate of 6% and is due to be repaid in one year. Let’s accrue
interest for the month ended 12/31/11.
P1
ACCRUED REVENUES
Revenues Yes, I’ve completed your
earned in a consulting job, but have not
had time to bill you yet.
period that are
both
unrecorded and not
yet received.
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P1 ACCRUED SERVICE
REVENUE
(f) On December 12, 2011, FastForward agrees to render
consulting services under a 30-day fixed fee contract for
$2,700 ($90 per day). All services are to be completed by
January 10, 2012, when the client will pay in full.
P1
FUTURE RECEIPT OF SERVICE
REVENUES
On January 10, 2012, FastForward completed its
obligation under the consulting contract. The client was
billed $2,700 and FastForward received $2,700 in cash.
1,800
Consulting Revenue
Revenue in January
900
10 days @ $90 = $900
To record completion of contract and cash collection
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LINKS TO FINANCIAL
A1
STATEMENTS
3 - 31
First, the
initial
unadjusted
amounts are
added to
the
worksheet.
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Next,
FastForward’s
adjustments
are added.
3 - 33
Finally, the
totals are
determined.
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P3
1. PREPARETHE INCOME
P3
STATEMENT
3 - 36
SHEET
GLOBAL
3 - 38
VIEW
Both U.S. GAAP and IFRS include broad and similar
guidance for adjusting accounts. Although some
variations exist in revenue and expense recognition.
Both U.S. GAAP and IFRS include similar guidance for adjusting
accounts. Although some variations exist in revenue and expense
recognition.
3 - 39
A2 PROFIT
MARGIN
The profit margin ratio measures the company’s
net income to net sales.
Profit =
Net
Income Margin
Net Sales
Limited Brands, Inc.