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Chapter 4

Chapter 4 BU227.docx

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Department
Business
Course
BU227
Professor
Carolyn Mac Tavish
Semester
Fall

Description
BU227 Chapter 4 – Adjustments, Financial Statements, and the Quality of Earnings Week 4 Adjusting Revenues and Expenses Accounting Cycle -Accounting cycle – the process used by entities to analyze and record transactions adjust the records at the end of the period, prepare financial statements, and prepare records for the next cycle -During the accounting period, transactions that result in exchanges between the company and other external parties are analyzed and recorded in the general journal in chronological order and the related accounts are updated in the general ledger (T-accounts) -End-of-period steps focus on adjustments to record revenues and expenses in the proper period and to update the statement of financial position accounts or reporting purposes Purpose and Types of Adjustments -Revenues are recorded when earned (revenue principle) -Expenses are recorded when they are incurred to generate revenue during the same period (matching process) -Assets are reported at amounts that represent the probable future benefits remaining at the end of the period -Liabilities are reported at amounts that represent the probable future sacrifices of assets or services owed at the end of the period -Companies wait until the end of the accounting period to adjust their accounts because adjusting the records daily would be very costly and time-consuming BU227 Chapter 4 – Adjustments, Financial Statements, and the Quality of Earnings Week 4 Types of Adjustments -There are four types of adjustments divided into two categories as displayed in the diagram above -Each of these adjustments involves two entries: 1. One for the cash receipt of payment 2. One for recording the revenue or expense in the proper period (through the adjusting entry) -When a customer pays for goods or services before the company delivers them, the company records the amount of cash received in a deferred revenue account -Recognition of recording the revenue is postponed until the company meets its obligation -Revenues that have been earned but have not yet been recorded at the end of the accounting period are called accrued revenues -Many assets are deferred expenses that are used over time to generate revenues, including supplies, repaid rent, prepaid insurance, buildings, equipment, and intangible assets – at the end of every period, an adjustment must be made to record the amount of the asset that was used during the period -Numerous expenses are incurred in the current period without being paid for until the net period – Ex wages -Deferred revenues – previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenues earned -Accrued revenues – previously unrecorded revenues that need to be recorded at the end of the accounting period to reflect the amount earned and its related receivable account -Deferred expenses – previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expense incurred in using the assets to generate revenue -Accrued expenses – previously unrecorded expenses that need to be recorded t the end of the accounting period to reflect te amount incurred and its related payable account Adjustment Process -Nearly every account, except cash on a company’s statement of financial position will need to be adjusted STEP 1: Identify the type of adjustment STEP 2: Determine the amount of revenue that has been earned or expense that has been incurred during the period STEP 3: Record the adjusting journal entry and post I to the appropriate accounts Unadjusted Trial Balance -Trial balance – a list of all accounts with their balances, to provide a check on the equality of the debits and credits -A trial balance is a list o individual accounts in one column with their ending debit or credit balances in the next two columns – debit balances are indicated in the left column and credit in the right -To keep track of the asset’s historical cost, the amount that has been said is not subtracted directly from the asset account – it is accumulated in a new kind of account called a contra account -Contra account – an account that is an offset to, or reduction of, the primary asset -Carrying amount (Book value, net book value) – of an asset is the difference between its acquisition cost and accumulate depreciation, its related contra account -Adjustments are required to r
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