Adjusting entries – entries necessary at the end of the accounting period to identify and record all revenues and expenses
of that period. Companies wait till the end of the accounting period to adjust the accounts because adjusting them daily
would be costly and time consuming.
Three steps: Identify the type of adjustment; determine the amount; record the entry
Four types of adjustment entries:
Deferred Revenues – Cash was received before the good or service was produced to the customer (unearned revenue)
Accrued Revenues – Good or service was produced the customer but cash was not yet paid
Deferred Expenses – Cash was paid for before using the asset (prepaid expenses)
Accrued Expense – Cash is paid after the expense has incurred (wages payable)
A contra account – an account that is a reduction of the primary account. It has a balance on the opposite side of the T-
account. The contra account of Property, Land & Equipment is Accumulated Depreciation. PPE has debit balance whereas
accumulated depreciation will have a credit balance.
Net Book Value (carrying amount) = Cost of asset – Accumulated depreciation
Materiality – minor items that would not influence the decisions of financial statement users are to be treated in the easiest
and convenient manner. Materiality depends on the nature of the item as well as its value. It allows accountants to ignore
some accounting rules if the results do not have a material effect on the financial statements.
Earnings per share = Profit available for common shareholders