Professional Documents
Culture Documents
Accounting
John J. Wild
Third Edition
McGraw-Hill/Irwin
Chapter 3
Adjusting Accounts and
Preparing Financial
Statements
3-6
C1
Semiannually
1
Quarterly
1
Jan
Feb
Mar
Apr
10
Monthly
11
12
Nov Dec
3-7
C1
Cash Basis
Revenues are
recognized when
earned and expenses
are recognized when
incurred.
Revenues are
recognized when
cash is received and
expenses recorded
when cash is paid.
Accounting
Not GAAP
3-8
C1
3-9
C2
3-10
C2, P1
Adjusting Accounts
An adjusting entry is recorded to bring an asset or
liability account balance to its proper amount.
Prepaid
Unearned
Prepaid
Unearned
(Deferred)
(Deferred)
(Deferred)
(Deferred)
expenses*
revenues
expenses*
revenues
*including depreciation
Paid
Paid (or
(or received)
received) cash
cash after
after
expense
expense (or
(or revenue)
revenue) recognized
recognized
Accrued
Accrued
expenses
expenses
Accrued
Accrued
revenues
revenues
3-11
P1
Credit
Adjustment
Expense
Debit
Adjustment
3-12
P1
Supplies
During 2009, Scott Company purchased $15,500 of
supplies. Scott recorded the expenditures as
Supplies. On December 31, a count of the supplies
indicated $2,655 on hand.
What adjustment is required?
126
652
3-13
P1
Depreciation
Depreciation is the process of computing
expense from allocating the cost of plant
and equipment over their expected useful
lives.
Straight-Line
Asset Cost - Salvage Value
Depreciation =
Useful Life
Expense
3-14
P1
Depreciation
On January 1, 2009, Barton, Inc. purchased
equipment for $62,000 cash. The equipment
has an estimated useful life of 5 years and
Barton expects to sell the equipment at the end
of its life for $2,000 cash.
Lets record depreciation expense for the year
ended December 31, 2009.
2009
$62,000 - $2,000
Depreciation =
=
Expense
5
$12,000
3-15
P1
Depreciation
On January 1, 2009, Barton, Inc. purchased
equipment for $62,000 cash. The equipment
has an estimated useful life of 5 years and
Barton expects to sell the equipment at the end
of its life for $2,000 cash.
Lets record depreciation expense for the year
ended December 31, 2009.
Accumulated
Accumulated depreciation
depreciation is
is
aa contra
contra asset
asset account.
account.
3-16
P1
Depreciation
Equipment is
shown net of
accumulated
depreciation.
This amount is
referred to as the
assets book
value
3-17
P1
Liability
Debit
Adjustment
Unadjusted
Balance
Go Big Blue
Revenue
Credit
Adjustment
3-18
P1
3-19
P1
3-20
Accrued Expenses
P1
Costs
Costs incurred
incurred in
in aa
period
period that
that are
are
both
both unpaid
unpaid and
and
unrecorded.
unrecorded.
Expense
Debit
Adjustment
Liability
Credit
Adjustment
3-21
Accrued Expenses
P1
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
Last pay
date
12/26/09
12/1/09
Next pay
date
12/31/09
Year end
Record
Record adjusting
adjusting
journal
journal entry.
entry.
3-22
P1
Accrued Expenses
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
3-23
P1
Accrued Revenues
Smith
Smith &
& Jones,
Jones, CPAs,
CPAs, had
had $31,200
$31,200 of
of work
work
completed
completed but
but not
not yet
yet billed
billed to
to clients.
clients. Lets
Lets make
make
the
the adjusting
adjusting entry
entry necessary
necessary on
on December
December 31,
31, 2009,
2009,
the
the end
end of
of the
the companys
companys fiscal
fiscal year.
year.
3-24
A1
3-25
P2
First, the
initial
unadjusted
amounts are
added to the
work sheet.
3-26
P2
Next,
FastForwards
adjustments
are added.
3-27
P2
Finally, the
totals are
determined.
3-28
P3
3-29
P3
3-30
P3
3-31
C3
P4
3-33
P4
Consulting Revenues
Examine the
accounts
presented.
Income Summary
$ 25,000
Retained Earnings
$ 7,000
3-34
P4
Consulting Revenues
$ 25,000
$ 18,100
Income Summary
$ 25,000
$ 25,000
Close revenues
with a debit to the
revenue account
and a credit to
Income Summary.
3-35
P4
$ 18,100
Income Summary
$ 18,100
$ 25,000
Consulting Revenues
$ 25,000
$ 25,000
Close expense
accounts with a
credit to expenses
and a debit to
Income Summary.
3-36
P4
$ 18,100
Income Summary
$ 18,100
$ 25,000
$ 6,900
Consulting Revenues
$ 25,000
$ 25,000
Determine the
balance in the
Income Summary
account.
3-37
P4
$ 18,100
Income Summary
$ 18,100
$ 6,900
$ 25,000
$ 6,900
3-38
P4
$ 2,000
Retained Earnings
$ 2,000
$ 7,000
6,900
3-39
P4
$ 2,000
Retained Earnings
$ 2,000
$ 7,000
6,900
$ 11,900
3-40
P5
C3
Start
Reverse
(optional)
Analyze
transactions
Prepare
post-closing
trial balance
Close
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjust
3-42
C4
3-43
C4
Intangible Assets
Long-term resources that benefit business
operations. They usually lack physical form and
have uncertain benefits. Examples include patents,
trademarks, copyrights, franchises, and goodwill.
3-44
C4
Current Liabilities
Obligations due to be paid or settled within one year
or the operating cycle, whichever is longer.
3-45
3-46
A2
Profit Margin
The profit margin ratio measures the
companys net income to net sales.
Profit
Margin
Net Income
Net Sales
3-47
A3
Current Ratio
3-48
End of Chapter 3
3-49