adjustments. remember financial statements should always be … accurate timely understandable to...
TRANSCRIPT
ADJUSTMENTS
Remember Financial statements should always be …
ACCURATE
TIMELY
UNDERSTANDABLE
To make Decisions
Reason for Adjustments
An example of the inefficiency of recording transactions: Each time a waiter used a napkin from the supplies closet, a
journal entry debiting Supplies Expense and crediting Supplies for $0.35 (estimated cost of napkin) should be recorded. However, it would be very costly and inefficient to try to keep up with each little transaction like this. So instead, we wait until the end of the accounting period and determine the total amount of supplies used. Then we make an adjusting entry to account for all the supplies used during the period.
Adjusting EntriesWhy adjust?
Can be inefficient and costly to account for certain types of transactions on a daily basis, so we prepare…
Adjusting Entries to bring certain account balances up to date at the end of the accounting period
How to Analyze an Adjusting Entry
When analyzing an adjusting entry, look for the item that has not been recorded but should have been. This information is often not explicit and must be inferred from the data given.For expenses, look for the amount usedFor revenue, look for the amount earned
Let’s think back to our restaurant example…(Supplies Adjustments)
•The beginning balance in the restaurants supplies account was $300. The restaurant purchased $500 worth of supplies during the January, an additional $200 in October. A year-end count of supplies revealed $400 worth of supplies was on hand at year-end. Account for the necessary adjustments.
Adjusting Supplies
RULE OF THUMB: Adjusting results in debiting (increase) an expense account and a credit(decrease) to an asset
DATE ACCOUNTPOS
TREF
DEBIT CREDIT
Dec 31 Supplies Expense 600 00
Supplies 600 00
Class Example - Supplies
•The Office Supplies on Hand account showed a balance of $3,500 at the beginning of 2010. Supplies costing $12,000 were purchased during 2010. Supplies of $2,200 were on hand at December 31, 2010. Prepare the adjustment.
The Adjustment
DATE ACCOUNTPOSTREF
DEBIT CREDIT
Dec 31 Supplies Expense 13,300 00
Supplies 13,300 00
RULE OF THUMB: Adjusting results in debiting (increase) an expense account and a credit(decrease) to an asset
Adjusting Prepaid Expenses
Prepaid expenses are future expenses that have been paid in advance
Adjusting Prepaid Expenses
You bought insurance on the restaurant building on August 1, 2013 for a 2 year insurance policy at a cost of $ 4800.
Analyzing the Entry
Each month, a portion of the prepaid insurance expires. At the end of the fiscal period, the Prepaid account must be updated for the insurance that has expired (been used)
Analyzing the Entry
What accounts are involved? When something is “used up” it indicates an expense account. In
this case, we need to debit an account called Insurance Expense for the expired insurance. Furthermore, the asset, Prepaid Insurance, has decreased so we will credit this asset.
The Adjustment
DATE ACCOUNTPOSTREF
DEBIT CREDIT
Dec 31 Insurance Expense 1000 00
Prepaid Insurance 1000 00
Class Example - Prepaid
•Now let’s assume that a business with a fiscal year-end of December 31 purchases a full prepaid 12-month property insurance policy for $36,000 on September 1, 2010. Prepare the adjusting entry on December 31, 2010
The Adjustment
DATE ACCOUNTPOSTREF
DEBIT CREDIT
Dec 31 Insurance Expense 12000 00
Prepaid Insurance 12000 00
RULE OF THUMB: Adjusting results in debiting (increase) an expense account and a credit(decrease) to an asset account
Adjusting Late-Arriving Purchase InvoicesThe journal entry to record is the same as it would be if the invoice arrived on time;
•however, the date must be recorded as if we received the invoice at the end of the year even though we received it in January
•Business may act as if the late-arriving invoice arrived just prior to the close of the period and record that invoice as if it had arrived on the final day of the previous period.
The Adjustment
DATE ACCOUNTPOSTREF
DEBIT CREDIT
Dec 31 Advertising Expense 400 00
Hydro Expense 200 00
Accounts Payable 600 00
RULE OF THUMB : Adjusting entry results in a decrease (a debit) to a liability
account and an increase (a credit) to an asset account.
Adjusting Unearned Revenue
•Receipt of cash recorded as a liability before the service is preformedRent, airline tickets, magazine subscriptionsAdjusting entry to record the revenue that has been earned and to show the liability that remains
Class Example - Adjusting Unearned Revenue
•You received $12,000 advance cash on November 1 for a painting job you are to complete over the next three months.
The Initial Entry
Initial EntryDATE ACCOUNT
POSTREF
DEBIT CREDIT
Nov 1 Cash 12000 00
Unearned Paint Revenue 12000 00
On November 1, Cash would be debited and a liability account called Unearned Paint Revenue would be credited. The liability account is credited because you owe the customer. You owe the customer painting services.
The AdjustmentDATE ACCOUNT
POSTREF
DEBIT CREDIT
Dec 31 Unearned Paint Revenue 8000 00
Paint Revenue 8000 00
RULE OF THUMB : Adjusting entry results in a decrease (a debit) to a liability
account and an increase (a credit) to a revenue account.
Each month as you perform catering services, you are earning a portion of the unearned revenue. At the end of the fiscal period, the Unearned Paint Revenue and Paint Revenue accounts must be updated for the revenue that has now been earned.
Remember
•Adjusting entries are non-cash transactions—the Cash account will never be used in an adjusting entry
•You are simply updating the accounts
•When analyzing an adjusting entry, look for the item that has not been recorded but should have been:• For expenses, look for the amount used• For revenue, look for the amount earned
•The rule of thumb*•*Always involves at least one income statement account and one balance sheet account
Practice
Page 276-277
• Exercise 1
• Exercise 2
• Exercise 6: a-d