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Chapter 4

ACCT 1201 Chapter Notes - Chapter 4: Historical Cost, Net Income, Trial Balance


Department
Accounting
Course Code
ACCT 1201
Professor
Ganesh Krishnamoorthy
Chapter
4

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Accounting Chapter 4: Adjustments, Financial
Statements, and the Quality of Earnings
01/26/2014
High Quality Information is information is that is relevant( that is
material and able to influence user’s decisions) and a faithful representation
of what is being reported (complete unbiased free from error)
Because it is costly most companies wait to the end of the year to
make adjustments to record related revenues and expenses in the correct
period.
Adjusting Revenues And Expenses
Accounting Cycle
End-of-period steps focus on adjustments to record revenues and
expenses in the proper period and to update the balance sheet
accounts for reporting purposes
Purpose of Adjustments
To deal with the problem of expenses being incurred in one period
but not paid until another accounts adjust entries so that
oRevenues are recorded when they are earned
oExpenses are recorded when they are incurred to generate
revenue
oAssets are reported at amounts that represent the probable
future benefits remaining at the end of the period
oLiabilities are reported at amounts that represent probable
future sacrifices of assets or services owed at the end of the
period.
Accountants wait to the end of the accounting period to adjust the
accounts because it would be costly to do so on a daily basis.
Types of Adjustments
Four types of adjustments
oAdjusting Entries that increase Revenues
Deferred Revenues (Unearned Revenue)
Previously recorded liabilities that were created
when cash was received in advance, and that
must be reduced for the amount of revenue
actually earned during the period
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Accrued Revenues
Revenues that have been earned but not yet
recorded because cash will be received after the
services are performed or goods delivered
oAdjusting Entries that increase Expenses
Deferred Expenses
Previously recorded assets such as Prepaid rent,
Supplies and Equipment that were created when
cash was paid in advance and that must be
reduced for the amount of expense actually
incurred during the period through use of the
asset
Accrued Expenses
Expenses that have been incurred but not yet
recorded because cash will be paid after the
goods or services are used.
Adjustment Process
Step 1 Ask: Was revenue earned or an expense incurred that is not
yet recorded
oif the answer is yes credit the revenue account or debit the
expense account in the adjusting entry
Step 2 Ask: Was the related cash received or paid in the past or
will it be received or paid in the future
oIf cash was received in the past a deferred revenue(liability)
usually unearned revenue was recorded in the past
Reduce that liability account in the adjusting entry.
oIf cash will be received in the future
Increase receivables account
if cash was paid in the past a deferred expense
account(asset) was created in the past
Now reduce that asset account
oIf cash will be paid in the future
Increase the payable account
Step 3 Compute the amount of revenue earned or expense
incurred
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