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Lecture 6

MGAB01H3 Lecture Notes - Lecture 6: Profit Margin, Nenets People, Retained Earnings

Financial Accounting
Course Code
Liang Chen

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Chapter Four:
Adjustments, Financial Statements, & the Quality of Earnings
Acctg cycle: process used by entities to analyze & record transactions, adjust the records at
the end of the period, prepare financial statements, and prepare the records for the next cycle.
Focus on end-of-period adjustments to record rev & exp and to update stmt of financial
$ not always received which company earns rev/ incurs exp
Adjusting entries @ end of every period to:
o1.) Record rev when earned (rev principle)
oExp when incurred to generate rev during same period (matching process)
oAssets @ probable amts for future benefits
oLiabilities @ probable future sacrifices of assets/ services @ period end
Why at end? Costly and time-consuming
2 Entries:
1. Record $ receipt/ pymt during period
2. Record rev/exp in proper period through adjusting entry at period end
Deferred Rev Accrued Rev
Liab. of company’s promise to deliver
goods/ services in future- postponed till
company meets obligation
I.E.: Ticket, Subscription rev
Liability (DOWN)
Revenue (UP)
Rev earned but not recorded for
goods/services before customers pay
Asset UP
Rev UP
I.E.,: Interest, rent receivable
Deferred Exp Accrued Exp
Assets used to generate rev &
adjustment needed to record amt asset
I.E., supplies, ppymts, PPE
Exp (UP)
Asset (UP)
Exp incurred in current period until next
period- accrue overtime but recognized
@ period end in adjusting entry
I.E., interest, wages, property tax
Exp (UP)
Liab (DOWN)
$ never adjusted/affected
1.) Was rev earned or exp incurred not recorded? If YES rev/exp increased
2.) Cash…
a. Received in the past- reduce liability (def rev i.e.)
b. Received in the future…increase receivable acct
c. Paid in past- reduce asset acct (supplies, ppymts)
d. Paid in future- increase payable acct (interest, wages payable)
3.) Compute amt (unless given)
Trial balance (unadjusted)
List of all accts with balances to see equality of debits/credits
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