adjusting entries. measuring business income n accounting period assumption n cash accounting versus...

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  • Adjusting Entries

    Copyright 1999

  • Measuring Business IncomeAccounting period assumptionCash accounting versus accrual accountingMatching principleMateriality concept

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  • Adjusting EntriesJournal entries that update the general ledger accounts to state revenues, expenses, assets, and liabilities more accuratelyInvolveOne balance sheet accountOne income statement accountNever cash

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  • Adjusting ProcessIdentify the accounts requiring adjustmentDetermine unadjusted balancesDetermine correct (adjusted) balances for each accountPrepare adjusting entry to bring accounts in agreement with adjusted balances

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  • DeferralsA cash payment or receipt occurred in current periodMust defer a portion of expense or revenue until a future period

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  • DeferralsTwo situationsPay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit

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  • DeferralsTwo situationsPay a cost of benefit in advance and allocate cost as expenses to periods that receive benefitReceive a cash revenue in advance and allocate amounts as revenues to periods in which revenues earned

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  • Prepaid InsuranceDec. 1, paid $600 for 12 month insurance premium recording as asset, Prepaid InsuranceAt Dec. 31Prepaid Insurance balance $600Insurance Expense balance $0

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  • Prepaid InsuranceAs of Dec. 31, one months insurance has expired and become expenseCorrect Dec. 31 balancePrepaid Insurance $550Insurance Expense $50

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  • Prepaid InsuranceAdjusting entryDebit Insurance Expense $50Increases Insurance Expense to correct balance $50Credit Prepaid Insurance $50Decreases Prepaid Insurance to correct balance $550

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  • Depreciation ExpenseSimilar to prepaid insurance but for long-term assetDecrease in asset not recorded in asset accountRecorded as increase in contra asset - Accumulated Depreciation

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  • Depreciation ExpenseBeforeAfterBalance SheetTrucksAccum Deprec$26,000400$26,000800Income StatementDepreciation expense$0$400

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  • Unearned RevenuesDec. 1, received $600 for 6 month rent recording as liability, Unearned RentAt Dec. 31Unearned Rent balance $600Rent Revenue balance $0

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  • Unearned RevenuesAs of Dec. 31, one months rent has been earned and become revenueCorrect Dec. 31 balanceUnearned Revenue $500Rent Revenue $100

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  • Unearned RevenuesAdjusting entryDebit Unearned Rent $100Decreases Unearned Rent to correct balance $500Credit Rent Revenue $100Increases Rent Revenue to correct balance $100

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  • AccrualsRecognize revenues and expenses that have accumulated (accrued) during the accounting period but have not been recorded

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  • Accrued RevenuesDec.11, received 30-day, 15% note from customer.At Dec. 31Interest Revenue balance $0Interest Receivable balance $0

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  • Accrued RevenuesAs of Dec. 31, 20 days interest has been earned and become revenue$1,200 x 0.15 x 20/360 = $10Correct Dec. 31 balanceInterest Revenue $10Interest Receivable $10

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  • Accrued RevenuesAdjusting entryDebit Interest Receivable $10Increases Interest Receivable to correct balance $10Credit Interest Revenue $10Increases Interest Revenue to correct balance $10

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  • Accrued ExpensesEmployees paid Friday for 5-day work week at $1,000 per weekAt Dec. 31, a TuesdayWages Expense balance $50,000 - represents past weeks wagesWages Payable balance $0

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  • Accrued ExpensesAs of Dec. 31, 2 days wages have been incurred and become expenseCorrect Dec. 31 balanceWages Expense $50,200Wages Payable $200

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  • Accrued ExpensesAdjusting entryDebit Wages Expense $200Increases Wages Expense to correct balance $50,200Credit Wages Payable $200Increases Wages Payable to correct balance $200

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  • Summarize Adjustments

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  • Analyzing InformationUse questions to compare companies

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  • Income StatementWhich company has the higher revenues?Which company has the higher percentage change in revenues?Which company has the lower percentage of expenses to revenues?

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  • Balance SheetWhich company has the higher assets?What is the percentage change in assets for each company?Is the percent of total liabilities to total liabilities plus owners equity increasing or decreasing? Which company is more risky?

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  • Integrative AnalysisAre companies operating efficiently by using least amount of assets to generate a given level of revenues?Calculate total asset turnoverAre companies operating efficiently by using least amount of assets to generate a given net income?Calculate return on assets

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  • Copyright 1999

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