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Slide 3-1
Slide 3-2
Chapter 3
Adjusting the Adjusting the AccountsAccounts
Financial Accounting, IFRS EditionWeygandt Kimmel Kieso
Slide 3-3
1. Explain the time period assumption.
2. Explain the accrual basis of accounting.
3. Explain the reasons for adjusting entries.
4. Identify the major types of adjusting entries.
5. Prepare adjusting entries for deferrals.
6. Prepare adjusting entries for accruals.
7. Describe the nature and purpose of an adjusted trial
balance.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Slide 3-4
Types of adjusting Types of adjusting entriesentries
Adjusting entries for Adjusting entries for deferralsdeferrals
Adjusting entries for Adjusting entries for accrualsaccruals
Summary of Summary of journalizing and journalizing and postingposting
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Fiscal and calendar Fiscal and calendar yearsyears
Accrual- vs. cash-Accrual- vs. cash-basis accountingbasis accounting
Recognizing Recognizing revenues and revenues and expensesexpenses
Preparing the Preparing the adjusted trial balanceadjusted trial balance
Preparing financial Preparing financial statementsstatements
The Basics of The Basics of Adjusting EntriesAdjusting Entries
The Basics of The Basics of Adjusting EntriesAdjusting Entries
The Adjusted Trial The Adjusted Trial Balance and Balance and
Financial StatementsFinancial Statements
The Adjusted Trial The Adjusted Trial Balance and Balance and
Financial StatementsFinancial Statements
Adjusting the AccountsAdjusting the AccountsAdjusting the AccountsAdjusting the Accounts
Slide 3-5
Generally a month, a quarter, or a year
Fiscal year vs. calendar year
Also known as the “Periodicity Assumption”
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accountants divide the economic life of a business into artificial time periods (Time Period Assumption).
SO 1 Explain the time period assumption.SO 1 Explain the time period assumption.
Jan. Feb. Mar. Apr. Dec.. . . . .
Slide 3-6
The time period assumption states that:
a. revenue should be recognized in the accounting period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided into artificial time periods.
d. the fiscal year should correspond with the calendar year.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
SO 1 Explain the time period assumption.SO 1 Explain the time period assumption.
a. revenue should be recognized in the accounting period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided into artificial time periods.
d. the fiscal year should correspond with the calendar year.
Solution on notes page
Slide 3-7
Accrual-Basis Accounting
Transactions recorded in the periods in which the
events occur.
Revenues are recognized when earned, rather than
when cash is received.
Expenses are recognized when incurred, rather than
when paid.
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accrual- vs. Cash-Basis Accounting
SO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.
Slide 3-8
Cash-Basis Accounting
Revenues are recognized when cash is received.
Expenses are recognized when cash is paid.
Cash-basis accounting is not in accordance with
International Financial Reporting Standards (IFRS).
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accrual- vs. Cash-Basis Accounting
SO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.
Slide 3-9
Revenue Recognition Principle
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Recognizing Revenues and Expenses
SO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.
Companies recognize
revenue in the accounting
period in which it is earned.
In a service enterprise,
revenue is considered to be
earned at the time the service
is performed.
Slide 3-10
Expense Recognition Principle – (Matching Principle)
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Recognizing Revenues and Expenses
SO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.
Match expenses with
revenues in the period when
the company makes efforts to
generate those revenues.
“Let the expenses follow
the revenues.”
Slide 3-11
Timing IssuesTiming IssuesTiming IssuesTiming Issues
SO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.
IFRS relationships in revenue and expense recognition
Illustration 3-1
Slide 3-12 SO 2SO 2
Answer on notes page
Slide 3-13
Match the description of the concept to the concept.
Solution on notes page
Timing IssuesTiming IssuesTiming IssuesTiming Issues
SO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.
gfcb
Slide 3-14
One of the following statements about the accrual basis of
accounting is false. That statement is:
a. Events that change a company’s financial statements
are recorded in the periods in which the events occur.
b. Revenue is recognized in the period in which it is
earned.
c. The accrual basis of accounting is in accord with
generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and
expenses are recorded only when cash is paid.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
SO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.Solution on notes page
One of the following statements about the accrual basis of
accounting is false. That statement is:
a. Events that change a company’s financial statements
are recorded in the periods in which the events occur.
b. Revenue is recognized in the period in which it is
earned.
c. The accrual basis of accounting is in accord with
generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and
expenses are recorded only when cash is paid.
Slide 3-15
Adjusting entries make it possible to report correct
amounts on the statement of financial position
and on the income statement.
A company must make adjusting entries every time
it prepares financial statements.
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
SO 3 Explain the reasons for adjusting entries.SO 3 Explain the reasons for adjusting entries.
Slide 3-16
RevenuesRevenues - recorded in the period in which they are - recorded in the period in which they are
earnedearned.
Expenses Expenses - recognized in the period in which they - recognized in the period in which they
are incurredare incurred.
Adjusting entriesAdjusting entries - needed to ensure that the - needed to ensure that the
revenue recognitionrevenue recognition and and expense recognitionexpense recognition are are
followed.followed.
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
SO 3 Explain the reasons for adjusting entries.SO 3 Explain the reasons for adjusting entries.
Slide 3-17
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which they are earned.
c. statement of financial position and income statement accounts have correct balances at the end of an accounting period.
d. all of the above.
ReviewReview
SO 3 Explain the reasons for adjusting entries.SO 3 Explain the reasons for adjusting entries.
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which they are earned.
c. statement of financial position and income statement accounts have correct balances at the end of an accounting period.
d. all of the above.
Solution on notes page
Slide 3-18
Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.
Deferrals
3. Accrued Revenues. Revenues earned but not yet received in cash or recorded.
4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.
2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned.
Accruals
SO 4 Identify the major types of adjusting entries.SO 4 Identify the major types of adjusting entries.
Illustration 3-2Categories of adjusting entries
Types of Adjusting Entries
Slide 3-19
Trial BalanceTrial Balance – Illustrations are based on the October 31, trial balance of Pioneer Advertising Agency Inc.
Illustration 3-3
Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
SO 4 Identify the major types of adjusting entries.SO 4 Identify the major types of adjusting entries.
Slide 3-20
Deferrals are either:
Prepaid expenses
OR
Unearned revenues.
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
Adjusting Entries for Deferrals
Slide 3-21
Payment of cash that is recorded as an asset because Payment of cash that is recorded as an asset because service or benefit will be received in the future.service or benefit will be received in the future.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
insuranceinsurance
suppliessupplies
advertisingadvertising
Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
rentrent
maintenance on equipmentmaintenance on equipment
fixed assets (depreciation)fixed assets (depreciation)
Prepayments often occur in regard to:Prepayments often occur in regard to:
Slide 3-22
Prepaid Expenses
Costs that expire either with the passage of time or through use.
Adjusting entries (1) to record the expenses that apply to the current accounting period, and (2) to show the unexpired costs in the asset accounts.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-23
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Adjusting entries for prepaid expenses
Increases (debits) an expense account and
Decreases (credits) an asset account.
Illustration 3-4
Slide 3-24
Illustration: Pioneer Advertising Agency purchased advertising supplies costing $2,500 on October 5. Pioneer recorded the payment by increasing (debiting) the asset Advertising Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand.
Advertising supplies 1,500
Advertising supplies expense 1,500Oct. 31
Illustration 3-5
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-25
Illustration: On October 4, Pioneer Advertising Agency paid $600 for a one-year fire insurance policy. Coverage began on October 1. Pioneer recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in theOctober 31 trial balance. Insurance of $50 ($600 / 12) expires each month.
Prepaid insurance 50
Insurance expense 50Oct. 31
Illustration 3-6
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-26
Depreciation
Buildings, equipment, and vehicles (long-lived assets)
are recorded as assets, rather than an expense, in the
year acquired.
Companies report a portion of the cost of a long-lived
asset as an expense (depreciation) during each period
of the asset’s useful life.
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-27
Illustration: Pioneer Advertising estimates depreciation on the office equipment to be $480 a year, or $40 per month.
Accumulated depreciation 40
Depreciation expense 40Oct. 31
Illustration 3-7
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-28
Depreciation (Statement Presentation)
Accumulated Depreciation is a contra asset account.
Appears just after the account it offsets (Equipment) on the statement of financial position.
Illustration 3-8
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-29
SummaryIllustration 3-9
Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-30
Receipt of cash that is recorded as a liability because the Receipt of cash that is recorded as a liability because the revenue has not been earned.revenue has not been earned.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
rentrent
airline ticketsairline tickets
school tuitionschool tuition
Cash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFORE
magazine subscriptionsmagazine subscriptions
customer depositscustomer deposits
Unearned revenues often occur in regard to:Unearned revenues often occur in regard to:
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-31
Unearned Revenues
Company makes an adjusting entry to record the revenue
that has been earned and to show the liability that remains.
The adjusting entry for unearned revenues results in a
decrease (a debit) to a liability account and an
increase (a credit) to a revenue account.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-32
Adjusting entries for unearned revenues
Decrease (a debit) to a liability account and
Increase (a credit) to a revenue account.
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
Illustration 3-10
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-33
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
Illustration: Pioneer Advertising Agency received $1,200 on October 2 from R. Knox for advertising services expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. Analysis reveals that the company earned $400 of those fees in October.
Service revenue 400
Unearned service revenue 400Oct. 31
Illustration 3-11
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-34
Summary
Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”
Illustration 3-12
SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
Slide 3-35 SO 5SO 5
Answer on notes page
Slide 3-36
Made to record:
Revenues earned and
OR
Expenses incurred
in the current accounting period that have not been recognized through daily entries.
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
Adjusting Entries for Accruals
Slide 3-37
Revenues earned but not yet received in cash or Revenues earned but not yet received in cash or recorded.recorded.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
rentrent
interestinterest
services performedservices performed
BEFORE
Accrued revenues often occur in regard to:Accrued revenues often occur in regard to:
Cash ReceiptCash ReceiptRevenue RecordedRevenue Recorded
Adjusting entry results in:Adjusting entry results in:
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Slide 3-38
Accrued Revenues
An adjusting entry serves two purposes:
(1) It shows the receivable that exists, and
(2) It records the revenues earned.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Slide 3-39
Adjusting entries for accrued revenues
Increases (debits) an asset account and
Increases (credits) a revenue account.
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
Illustration 3-13
Slide 3-40
Illustration: In October Pioneer Advertising Agency earned $200 for advertising services that had not been recorded.
Service Revenue 200
Accounts Receivable 200Oct. 31
Illustration 3-14
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
Slide 3-41
SummaryIllustration 3-15
Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Slide 3-42
Expenses incurred but not yet paid in cash or recorded.Expenses incurred but not yet paid in cash or recorded.
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
rentrent
interestinterest
BEFORE
Accrued expenses often occur in regard to:Accrued expenses often occur in regard to:
Cash PaymentCash PaymentExpense RecordedExpense Recorded
taxestaxes
salariessalaries
Adjusting entry results in:Adjusting entry results in:
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Slide 3-43
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) It recognizes the expenses.
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Slide 3-44
Adjusting entries for accrued expenses
Increases (debits) an expense account and
Increases (credits) a liability account.
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Illustration 3-16
Slide 3-45 SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Illustration: Pioneer Advertising Agency signed a three-month note payable in the amount of $5,000 on October 1. The note requires Pioneer to pay interest at an annual rate of 12%.
Interest payable 50
Interest expense 50Oct. 31
Illustration 3-18
Illustration 3-17
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Slide 3-46 SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Illustration: Pioneer Advertising Agency last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 x 3 days).
Illustration 3-19
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Slide 3-47 SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Illustration: Pioneer Advertising Agency last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 x 3 days).
Salaries payable 1,200
Salaries expense 1,200Oct. 31
Illustration 3-20
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Slide 3-48
SummaryIllustration 3-21
SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
Slide 3-49
After all adjusting entries are journalized and posted the
company prepares another trial balance from the ledger
accounts (Adjusted Trial Balance).
Its purpose is to prove the equality of debit balances and
credit balances in the ledger.
The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance
SO 7 Describe the nature and purpose of an adjusted trial balance.SO 7 Describe the nature and purpose of an adjusted trial balance.
Slide 3-50
The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance
SO 7SO 7
Illustration 3-24Adjusted trial balance
Slide 3-51
Which of the following statements is incorrect concerning the adjusted trial balance?
a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the preparation of financial statements.
c. The adjusted trial balance lists the account balances segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
Review QuestionReview Question
SO 7 Describe the nature and purpose of an adjusted trial balance.SO 7 Describe the nature and purpose of an adjusted trial balance.
The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance
Which of the following statements is incorrect concerning the adjusted trial balance?
a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the preparation of financial statements.
c. The adjusted trial balance lists the account balances segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
Slide 3-52
Financial Statements are prepared directly from the Adjusted Trial Balance.
Financial Statements are prepared directly from the Adjusted Trial Balance.
Statement of Financial
Position
Income Statement
Retained Earnings
Statement
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
SO 7 Describe the nature and purpose of an adjusted trial balance.SO 7 Describe the nature and purpose of an adjusted trial balance.
Slide 3-53
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
Illustration 3-25 Preparation of the incomestatement and retained earnings statement from the adjusted trial balance
SO 7SO 7
Slide 3-54
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsIllustration 3-26
SO 7SO 7
Slide 3-55
Like IFRS, companies applying GAAP use accrual-basis
accounting to ensure that they record transactions that change a
company’s financial statements in the period in which events
occur.
Similar to IFRS, cash-basis accounting is not in accordance with
GAAP.
GAAP also divides the economic life of companies into artificial
time periods. Under both GAAP and IFRS, this is referred to as the
time period assumption. GAAP requires that companies present a
complete set of financial statements, including comparative
information annually.
Adjusting the Accounts
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences
Slide 3-56
GAAP has more than 100 rules dealing with revenue recognition.
Many of these rules are industry-specific. Revenue recognition
under IFRS is determined primarily by a single standard, IAS 18.
Despite this large disparity in the detailed guidance devoted to
revenue recognition, the general revenue recognition principles
required by IFRS that are used in this textbook are similar to those
under GAAP.
GAAP uses concepts such as realized, realizable, and earned as a
basis for revenue recognition.
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences Adjusting the Accounts
Slide 3-57
Internal controls are a system of checks and balances designed to
detect and prevent fraud and errors. The Sarbanes-Oxley Act
requires U.S. companies to enhance their systems of internal
control. However, many foreign companies do not have this
requirement.
Under IFRS, revaluation to fair value of items such as land and
buildings is permitted. This is not permitted under GAAP.
The form and content of financial statements are very similar under
GAAP and IFRS. Any significant differences will be discussed in
those chapters that address specific financial statements.
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences Adjusting the Accounts
Slide 3-58
Looking to the FutureLooking to the Future
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
The IASB and FASB are now involved in a joint project on revenue
recognition. Presently, the Boards are considering an approach
that focuses on changes in assets and liabilities (rather than on
“when earned”) as the basis for revenue recognition. It is hoped
that this approach will lead to more consistent accounting in this
area. The IASB and the FASB also face a difficult task in attempting
to update, modify, and complete a converged conceptual
framework. For example, how do companies choose between
information that is highly relevant but difficult to verify versus
information that is less relevant but easy to verify? Should a single
measurement method, such as historical cost or fair value, be
used, or does it depend on whether it is an asset or liability that is
being measured?
Adjusting the Accounts
Slide 3-59
Some companies use an alternative treatment for
prepaid expenses and unearned revenues.
When a company prepays an expense, it debits that
amount to an expense account.
When a company receives payment for future services,
it credits the amount to a revenue account.
Alternative Treatment of Prepaid Expenses Alternative Treatment of Prepaid Expenses and Unearned Revenuesand Unearned RevenuesAlternative Treatment of Prepaid Expenses Alternative Treatment of Prepaid Expenses and Unearned Revenuesand Unearned Revenues
SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
APPENDIX
Slide 3-60
Illustration: Pioneer Advertising purchased supplies on October 5 for $2,500 and debited AdvertisingSupplies Expense for the full amount. What if an inventoryof $1,000 of advertising supplies remains on October 31?
Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”
SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Advertising supplies expense 1,000
Advertising supplies 1,000Oct. 31
Illustration 3A-1
Slide 3-61
Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”
SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Adjustment approaches—a comparisonIllustration 3A-2
Slide 3-62
Illustration: Assume that Pioneer Advertising received $1,200 for future services on October 2 and credited the entire amount to Service Revenue. If at the statement date Pioneer has not performed $800 of the services, it would make an adjusting entry.
Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”
SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Unearned service revenue 800
Service revenue 800Oct. 31
Illustration 3A-4
Slide 3-63 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Adjustment approaches—a comparisonIllustration 3A-5
Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”
Slide 3-64 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Summary of Additional Adjustment RelationshipsSummary of Additional Adjustment RelationshipsSummary of Additional Adjustment RelationshipsSummary of Additional Adjustment Relationships
Illustration 3A-7
Slide 3-65
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