Professional Documents
Culture Documents
Adjusting
Accounts and Preparing
Financial Statements
McGraw-Hill/Irwin
LO1
Learning Objective 1
Explain
accounting
and
how
it
Accrual
basisaccrual
accounting
Cash
basis
accounting
improves
financial
uses
the adjusting
processstatements.
to
recognizes revenue when
recognize revenues when
cash is received and
earned and expenses when
records expenses when
incurred.
cash is paid.
It is commonly held that accrual accounting better
reflects business performance than cash basis
accounting.
As an example, consider FastForwards Prepaid Insurance account.
FastForward paid $2,400 for 24 months of insurance coverage beginning
December 1, 2010. Accrual accounting requires that $100 of insurance
expense be reported on December 2010s income statement keeping the
accounts more accurate.
5-2
5-2
LO2
Learning Objective 2
Identify
the types of accounting adjustments and
their
purpose.
Reflects unearned
Reflects
transactions
revenues and prepaid
expenses.
Adjustments
Unearned
(Deferred)
revenues
Prepaid
(deferred)
expenses
Accrued
revenues
Accrued
expenses
5-3
5-3
LO3
Learning Objective 3
Prepare and explain adjusting entries.
An adjusting entry is recorded to bring an asset or
liability account balance to its proper amount. This
entry also updates a related expense or revenue
account.
Three-step Process
1. Determine the current account
balance.
2. Determine what the current account
balance should be.
3. Record the adjusting journal entry to
get from step 1 to step 2.
5-4
5-4
LO3
Prepaid Expenses
Resources paid
for prior to
receiving the
actual benefits.
Asset
Unadjusted
Balance
Credit
Adjustment
Remember that a
prepaid expense is an
asset that results from
the payment of cash
before the expense is
recognized.
Expense
Debit
Adjustment
5-5
5-5
LO3
Prepaid Insurance
On December 1, 2010, FastForward paid $4,800 for
insurance for 24 months. FastForward recorded the
expenditure as Prepaid Insurance on December 1.
What adjustment is required?
637
128
5-6
5-6
LO3
Supplies
During December, FastForward purchased $9,720 of
supplies. FastForward recorded the expenditures with
a debit to Supplies. On December 31, a count of the
supplies indicated $8,670 on hand.
1,050
1,050
Bought
Bal.
Supplies
9,720 Dec. 31
8,670
126
1,050
Supplies Expense
Dec. 31
1,050
652
5-7
5-7
LO3
Depreciation
Depreciation is the process of spreading the
costs of plant and equipment over their
expected useful lives.
Straight-Line
Asset Cost - Salvage Value
Depreciation =
Useful Life
Expense
5-8
5-8
LO3
Depreciation
FastForward purchased equipment for $20,000
in early December. The equipment is expected
to have a useful life of four years and a salvage
value of $8,000.
Monthly
$20,000 - $8,000
Depreciation =
=
Expense
48 months
$250
Accumulated
Accumulated depreciation
depreciation is
is
aa contra
contra asset
asset account.
account.
5-9
5-9
LO3
Depreciation
Notice the contraaccount, accumulated
depreciation, will be
shown as a reduction
in the cost of the
asset
LO3
Next pay
date
1/9/11
12/31/10
Year end
Dec. 31 Salaries Expense
Salaries Payable
Record
Record adjusting
adjusting
journal
journal entry
entry..
210
210
5-11
5-11
Learning Objective 4
Explain and prepare an adjusted trial balance.
LO4
An adjusted trial balance is a list of accounts and balances prepared after adjusting
entries have been recorded and posted to the ledger.
5-12
5-12
LO5
LearningNotice
Objective
5
how we took the information directly from the
Prepare financial
statements
from
an statement.
adjusted trial
worksheet
and prepared the
income
balance.
5-13
5-13
LO5
5-14
5-14
LO5
5-15
5-15
End of Chapter 5
5-16
5-16