Chapter 4 Adjustments, Financial Statements and the Quality of Earnings.docx

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Department
Accounting & Financial Management
Course
AFM 101
Professor
Donna Psutka
Semester
Fall

Description
Chapter 4: Adjustments, Financial Statements and the Quality of Earnings 9/18/2013 11:27:00 AM Adjusting Revenues and Expenses Four types of adjustments 1. deferred revenues (previously recorded as liabilities  unearned revenue) 2. accrued revenues (revenues that were earned but not recorded because cash was received after the services were performed or goods were delivered) 3. deferred expenses (prepaid expenses also depreciation) 4. accrued expenses (expenses that were incurred but not recorded because cash was paid after the goods or services were used) Deferred Revenues Office services clients paid fees in cash for future service Cash Deferred/Unearned revenue ADJUSTING Deferred/Unearned revenue Revenue Accrued Revenues Sold merchandise on account but hasn’t recorded the sales invoice (Jan 31) Trades receivables Sales revenue Deferred Expenses 1. Paid in advance for rent for the month Prepaid rent Cash ADJUSTING Rent expense Prepaid rent 2. Accumulated depreciation for equipment Depreciation expense Accumulated Depreciation – equipment Accrued Expense 1. Received a utility bill at the end of the month Utility expense Accrued liabilities (trade payable) 2. Income Taxes if income tax rate is 25% and pretax profit is $1600, income tax expense is $400 Income tax expense Income Tax Payable Materiality An item is material to the financial statements if the omission or misstatement of this item would influence or change a decision Closing the Books Closing entries have two purposes: - to transfer profit or loss to retained earnings - establish a zero balance in each of the temporary (nominal) accounts to start accumulation in the next accounting period JOURNAL ENTRIES 1. Re
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