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ADJUSTING THE ACCOUNTS

CHAPTER. 9. ADJUSTING THE ACCOUNTS. What are Adjustments?. Adjustments are exactly what the name suggests: they are adjustments made to the books of a company at the end of the accounting cycle. Adjustments are made to ensure that financial information adheres to GAAPs.

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ADJUSTING THE ACCOUNTS

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  1. CHAPTER 9 ADJUSTING THE ACCOUNTS

  2. What are Adjustments? • Adjustments are exactly what the name suggests: • they are adjustments made to the books of a company at the end of the accounting cycle. • Adjustments are made to ensure that financial information adheres to GAAPs.

  3. Why are they a concern? • Without adjustments, accounting for many companies would not adhere to GAAPs, and therefore wouldn’t reflect the actual performance of a business. • The revenue recognition and matching principles state that revenues and expenses that are earned in one period should be recorded in that period, regardless of whether payment is made or invoices are received! • transactions that take place in one accounting period sometimes are not invoiced until the next period, or an invoice may arrive late. • As well, some things “build up” (or accrue) over time but are never billed in the current period. • It is because of these kinds of events that adjustments must occur.

  4. TIME PERIOD ASSUMPTION GAAP’S Involved with the Adjustment Process • Thetime period(or periodicity) assumptionassumes that the economic life of a business can be divided into artificial time periods — generally a month, a quarter, or a year. • Periods of less than one year are called interim periods. • The accounting time period of one year in length is usually known as afiscal year.

  5. REVENUE RECOGNITION PRINCIPLE GAAP’S Involved with the Adjustment Process • The revenue recognition principlestates that revenue should be recognized in the accounting period in which it is earned. • In a service business, revenue is usually considered to be earned at the time the service is performed. • In a merchandising business, revenue is usually earned at the time the goods are delivered.

  6. Revenues earned this month expenses incurred in earning the revenue are offset against.... THE MATCHING PRINCIPLE GAAP’S Involved with the Adjustment Process • The practice of expense recognition is referred to as thematching principle. • Thematching principledictates that efforts (expenses) be matched with accomplishments (revenues).

  7. GAAP ACCRUAL BASIS OF ACCOUNTING • Adheres to the • Revenue recognition principle • Matching principle • Revenue recorded when earned, not only when cash received. • Expense recorded when services or goods are used or consumed in the generation of revenue, not only when cash paid.

  8. NOT GAAP CASH BASIS OF ACCOUNTING Remember • Revenue recorded only when cash received. • Expense recorded only when cash paid.

  9. Adjustments Worksheet with Adjustments Download and save the file called Adjustments from the Homework section of my website. Extract the contents Open the file and click on overview.html Read and follow the informational text. • Download and save the file called Worksheet with Adjustments from the Homework section of my website. • Extract the contents • Open the file and click on overview.html • Read and follow the informational text.

  10. SUMMARY OF ADJUSTING ENTRIES Account Accounts before Adjusting Type of Relationship Adjustment Entry Adjustment 1.Prepaid Assets and Assets overstated Dr. Expenses expenses expenses Expenses understated Cr.Assets . 2.Unearned Liabilities and Liabilities overstated Dr. Liabilities revenues revenues Revenues understated Cr.Revenues 3.Accrued Assets and Assets understated Dr. Assets revenues revenues Revenues understated Cr.Revenues 4.Accrued Expenses and Expenses understated Dr. Expenses expenses liabilities Liabilities understated Cr. Liabilities 5.Amortization Expense and Expenses understated Dr.Amort. Exp contra asset Assets overstated Cr. Acc. Amort.

  11. ADJUSTED TRIAL BALANCE • An Adjusted Trial Balanceis prepared after all adjusting entries have been journalized and posted. • It shows the balances of all accounts at the end of the accounting period and the effects of all financial events that have occurred during the period. • It proves the equality of the total debit and credit balances in the ledger after all adjustments have been made. • Financial statements can be prepared directly from the adjusted trial balance.

  12. TRIAL BALANCE AND ADJUSTED TRIAL BALANCE COMPARED

  13. PREPARING FINANCIAL STATEMENTS Financial statementscan be prepared directly from an adjusted trial balance. • The income statement is prepared from the revenue and expense accounts. • The statement of owner’s equity is derived from the owner’s capital and drawings accounts and the net income (or net loss) shown in the income statement. • The balance sheet is then prepared from the asset and liability accounts and the ending owner’s capital balance as reported in the statement of owner’s equity.

  14. PREPARATION OF THE INCOME STATEMENT AND THE STATEMENT OF OWNER’S EQUITY FROM THE ADJUSTED TRIAL BALANCE

  15. From Statement of Owner’s Equity PREPARATION OF THE BALANCE SHEET FROM THE ADJUSTED TRIAL BALANCE Note: this example is not a Classified Statement

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