ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENTS,Chapter 3,1,2,3,4,5,6,7,8,9,10,11,12,1,2,3,4,Annually,1,2,Monthly,Quarterly,Semiannually,The Accounting Period,Jan,Feb,Mar,Apr,May,Jun,Jul,Aug,Sep,Oct,Nov,Dec,C1,Accounting,ACCRUAL BASIS VS. CASH BASIS,Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred.,Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.,C2,Accrual Basis vs. Cash Basis,On the cash basis the entire $2,400 would be recognized as insurance expense in 2009. No insurance expense from this policy would be recognized in 2010 or 2011, periods covered by the policy.,C2,Accrual Basis vs. Cash Basis,On the accrual basis $100 of insurance expense is recognized in 2009, $1,200 in 2010, and $1,100 in 2011. The expense is matched with the periods benefited by the insurance coverage.,C2,We have delivered the product to our customer, so I think we should record the revenue earned.,Recognizing Revenues & Expenses,Revenue Recognition Principle,C2,Recognizing Revenues & Expenses,Revenue Recognition Principle Matching Principle,Now that we have recognized the revenue, lets see what expenses we incurred to generate that revenue.,C2,An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.,Adjusting Accounts,Framework for Adjustments,*including depreciation,Adjustments,C3,Here is the check for my 24-month insurance policy.,Prepaid (Deferred) Expenses,Resources paid for prior to receiving the actual benefits.,Asset,Expense,Unadjusted Balance,P1,Prepaid Insurance,On 12/1/09, FastForward paid $2,400 for insurance for 2-years (24-months, December 2009 through November 2011). FastForward recorded the expenditure as Prepaid Insurance on 12/31/09. What adjustment is required?,P1,Supplies,During 2009, FastForward purchased $9,720 of supplies. FastForward recorded the expenditures in the asset account, “Supplies.” On December 31, 2009, a count of the supplies indicated $8,670 on hand, so $1,050 of supplies were used during December. What adjustment is required?,P1,Other Prepaid Expenses,Other prepaid expenses, such as Prepaid Rent, are accounted for exactly as Insurance and Supplies. We should note that some prepaid expenses are both paid for and fully used up within a single period. 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. In these special cases, we can record the cash paid with a debit to the expense account instead of an asset account.,P1,Depreciation,Depreciation is the process of allocating the cost of a plant asset over its useful life in a systematic and rational manner.,P1,Depreciation,On December 1, 2009, 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. Lets record depreciation expense for the month ended December 31, 2009.,P1,Depreciation,On December 1, 2009, 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 $8,000 cash. Lets record depreciation expense for the month ended December 31, 2009.,P1,Equipment,Depreciation Expense,1/1 26,000,12/31 375,Accumulated Depreciation,12/31 375,Depreciation,P1,Equipment is shown net of accumulated depreciation.,$,Depreciation,P1,Unearned (Deferred) Revenues,We will apply this cash you gave us towards your total consulting fees.,Cash received in advance of providing products or services.,P1,Unearned (Deferred) Revenues,On December 26, 2009, 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:,P1,On December 31, earns some of the 5-days of consulting fees. Each day that passes results in consulting fees of $50 ($3,000 60).,Unearned (Deferred) Revenues,P1,Were about one-half done with this job and want to be paid for our work!,Costs incurred in a period that are both unpaid and unrecorded.,Accrued Expenses,Expense,Liability,P1,FastForwards employee earns $70 per day and is paid every two weeks on Friday. Year-end, 12/31/09, falls on a Wednesday. The last payday of 2009, is Friday, 12/26/09. 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.,ACCRUED SALARIES EXPENSES,P1,ACCRUED SALARIES EXPENSES,FastForwards employee earns $70 per day and is paid every two weeks on Friday. Year-end, 12/31/09, the employee has earned salaries of $210.,P1,Future Payment of Accrued Expenses,On January 9, 2010, FastForward w