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1、Lesson 4Adjusting Accounts for Financial Statement,Task Team ofFUNDAMENTAL ACCOUNTINGSchool of Business,Sun Yat-sen University,2,Outline,Describe the purpose of adjusting accounts at the end of the period.Prepare and explain adjusting entries for prepaid expenses,amortization,unearned revenues,accru
2、ed expenses,and accrued revenues.Explain how accounting adjustments link to financial statements.Explain and prepare an adjusted trial balance.,3,Definition:the continued life of a business is divided into time periods of equal length.,Review:Time period concept,4,Review:Revenue Recognition Principl
3、e,Revenue is recorded at the time it is earned regardless of whether cash or another asset has been exchanged.,5,Review:Matching Principle,Expenses are to be matched in the same accounting period as the revenues they helped to earn.,6,Accrual and cash basis,The accrual basis of accounting matches re
4、venues earned with expenses incurred.The cash basis matches revenues received with expenses paid.It is not satisfactory for most businesses because it results in financial statements that are not comparable from period to period,except when the amounts of prepaid,unearned,and accrued items are not m
5、aterial.,7,Adjust:A Step in Accounting cycle,Now that we havecovered the trialbalance,letsdiscuss adjustingentries.,8,Why Need to Adjust,Some events are not evidenced by the obvious documents.the effects of these events are recorded at the end of the accounting period by means of adjusting entries.T
6、he purpose of adjusting the accounts at the end of period is to make the accounting information comparable from period to period.,9,Why Need to Adjust,Adjustments are based on three generally accepted accounting principles:Time period principle.Revenue recognition principle.Matching principle.,10,Ty
7、pe of Adjusting Entries,11,Adjusting Entries Accruals,Accruals occur when revenues have been earned or expenses incurred but no cash has been exchanged.,Example:interest revenue earned during the period but not received until the next period.,12,Adjusting Entries Accruals,Example:On Jun 1,2004,Smith
8、 Inc.invests$100,000 for a bonds which pays 5%interest per year.Smith Inc.will not receive the interest until March 31,2005.On December 31,2004,Smith,Inc.need to make the following entry for the interest earned so far.,13,Adjusting Entries Accrued,Unrecorded expenses incurred,14,Adjusting Entries Ac
9、crued,Example:On the year-end,Dec.31,2004,Smith Inc.s employees have earned total wages of$35,000 for the Monday,but Smith Inc.will not pay the wages until 5th of next month.So at the end of the accounting period,Smith need to make the following entries to accrued the wage expenses.,15,Adjusting Ent
10、ries Deferrals,Prepaid expense is used up,16,Adjusting Entries Deferrals,Example:On July 1,2004,Smith Inc.paid$20000 for whole years rent covered from 1stof July to 30th of June.At the end of 2004,$10000 of rent expenses have occurred so Smith Inc.need to make the following entries to transfer the d
11、eferrals to expenses.,17,Adjusting Entries Deferrals,Example:service revenue received in advance.,Converting liabilities to revenues:,18,Adjusting Entries Deferrals,Example:On Oct.1,2004,Smith Inc.signed a contract for providing a special service to Cone.Smith received$50000 for the service to be pr
12、ovided.At the end of 2004 half of the services have been proved to Cone.Smith should make the following entries to record earned revenue.,19,Adjust:Allocating the Costs oflong-term assets,Certain circumstances require adjusting entries to record accounting estimates.Amortization is an example.Amorti
13、zation is the process of allocating the costs of assets over their useful lives.,20,Amortization,Companies acquire capital assets such as equipment,buildings,vehicles,and patents to generate revenues.These assets are expected to provide benefits for more than one period.The accounting concept of amo
14、rtization involves the systematic and rational allocation of cost of a long-lived asset to the periods during which it is used to generate revenue.,21,Amortization,On January 1,2004,a company purchased a piece of equipment for$100,000.The equipment is expected to have a useful life of five years and
15、 have a salvage value of$5000.Asume the company use the straight-line method.,22,Amortization,The required journal entry includes a debit to Amortization expense and a credit to an account called accumulated amortization.,23,Adjusted Trial Balance,The adjusted trial balance is used to check if there
16、 are any mistakes in the adjusted accounts and it is used for the financial statement.Assume that Smith Inc.has the following unadjusted trial balance:,24,Adjusted Trial Balance,25,Adjusted trial balance,26,Adjustments&Financial Statements,Adjusting entries bring the accounts up-to-date.Adjustments are only made when financial statements are prepared.Adjust entries will affect both the income statement and the balance sheet.Will not affect the cash flow of the company.,The End of Lesson 4,
