Adjustments for Financial AccountingNot considered GAAP.
Mandated by GAAP.
Matching Principle
Expenses should be recognized in the same accounting period as are the revenues they generated. (i.e., match revenues and expenses.)
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Matching Principle
Expenses should be recognized in the same accounting period as are the revenues they generated. (i.e., match revenues and expenses.)
1998 1999 2000
Matching Principle
Expenses should be recognized in the same accounting period as are the revenues they generated. (i.e., match revenues and expenses.)
The Matching Principle is the reason for using the accrual basis of accounting.
1998 1999 2000
The Need for Adjusting Entries
Journal entries are made at the end of each accounting period to bring about a proper matching of revenues and expenses
Economic events (i.e., transactions) have been ongoing but never recorded.
Why not?
The Need for Adjusting Entries
Journal entries are made at the end of each accounting period to bring about a proper matching of revenues and expenses
Economic events (i.e., transactions) have been ongoing but never recorded.
Why not?
Revenue Example
Revenue Example
12-Month Magazine Subscription
When the time necessary to earn a revenue extends into the next period . . .
1/1/99
12/31/99
1/1/98
12/31/98
6/30/98
6/30/99
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Revenue Example
. . . the adjusting process allows us to separate 1998 subscription revenue from from 1999 subscription revenue ...
When the time necessary to earn a revenue extends into the next period . . .
12-Month Magazine Subscription
Revenue Example
. . . the adjusting process allows us to separate 1998 subscription revenue from from 1999 subscription revenue as shown.
When the time necessary to earn a revenue extends into the next period . . .
12-Month Magazine Subscription
Expense Example
12-Month Real Estate Tax
Remember, we can also use adjustments to help us match expenses with revenues by making adjusting entries to put expenses in the same period as the related revenues.
1/1/99
12/31/99
1/1/98
12/31/98
6/30/98
6/30/99
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AJEs use the same recording format as regular journal entries.
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Deferrals
Entries involving transfer of amounts previously recorded in asset and liability accounts to expense and revenue accounts, respectively
Accruals
Entries involving the initial, or first, recording of assets and liabilities and their related revenues and expenses
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Cash (credit)
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The prepaid expense is consumed during the period.
Cash (credit)
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Expense (debit)
Cash (credit)
AJE at end of period
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Example
On September 1, 1998, Bob’s Bait Shop prepaid its rent for the next twelve months. Rent is $200 per month.
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Example
On September 1, 1998, Bob’s Bait Shop prepaid its rent for the next twelve months. Rent is $200 per month.
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Example
Bob’s fiscal year-end is December 31. Record the adjustment necessary on December 31 for the prepaid rent.
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Example
Bob’s fiscal year-end is December 31. Record the adjustment necessary on December 31 for the prepaid rent.
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months of rent expense
Prepaid Subscriptions
Supplies on Hand
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Supplies on Hand
Blank paper used in a copier is a great example of how supplies on hand transform from being an asset to becoming an expenses.
Asset
Expense
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Accounting Estimates
Some assets are not fully used up in a single fiscal period.
A truck may last five years, but its value as a resource declines with time and usage.
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Accounting Estimates
Some assets are not fully used up in a single fiscal period.
A truck may last five years, but its value as a resource declines with time and usage.
Assets that benefit more than one year are called long-term or “fixed” assets.
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Accounting Estimates
The portion of an asset’s utility that is used up must be expensed in the period used.
Cash (credit)
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Accounting Estimates
The portion of an asset’s utility that is used up must be expensed in the period used.
The asset’s usefulness is partially consumed during the period.
Cash (credit)
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Accounting Estimates
The portion of an asset’s utility that is used up must be expensed in the period used.
The asset’s usefulness is partially consumed during the period.
Accumulated Depreciation (credit)
Depreciation Expense (debit)
AJE at end of period
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Accounting Estimates
The portion of an asset’s utility that is used up must be expensed in the period used.
This is called a contra-asset account and has a credit balance.
Accumulated Depreciation (credit)
Depreciation Expense (debit)
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Accounting Estimates
The portion of an asset’s utility that is used up must be expensed in the period used.
This is called a contra-asset account and has a credit balance.
Balance Sheet Presentation
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Example
On 12/31/97, Putnam Plumbing, recorded $2,000 of Depreciation Expense on a $10,000 truck.
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Example
On 12/31/97, Putnam Plumbing, recorded $2,000 of Depreciation Expense on a $10,000 truck.
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Unearned Revenues
Assets that have been received, but have not yet been earned.
Cash (debit)
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Unearned Revenues
Assets that have been received, but have not yet been earned.
Cash (debit)
Journal entry when payment is received.
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Unearned Revenues
Assets that have been received, but have not yet been earned.
Revenue (credit)
Journal entry when payment is received.
AJE at end of period
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Example
On 10/1/98, the Cookeville Gazette received $240 for a one-year subscription. The monthly subscription rate is $20.
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Example
On 10/1/98, the Cookeville Gazette received $240 for a one-year subscription. The monthly subscription rate is $20.
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subscription payment
Example
The Cookeville Gazette’s fiscal year-end is on 12/31/98 (three months later). Record the adjustment necessary at 12/31/98.
Prepare the proper adjusting journal entry.
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Example
The Cookeville Gazette’s fiscal year-end is on 12/31/98 (three months later). Record the adjustment necessary at 12/31/98.
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months of subscription earned
Accrued Assets/Revenues
Assets and revenues that remain unrecorded at the end of the period.
During the period, revenues are earned, but are not recorded at that time.
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Accrued Assets/Revenues
Assets and revenues that remain unrecorded at the end of the period.
Revenue (credit)
Asset (debit)
During the period, revenues are earned, but are not recorded at that time.
AJE at end of period
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Example
On 12/31/97, First Bank owes your company $100 of interest on your account. You will receive the interest on 1/10/98.
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Example
On 12/31/97, First Bank owes your company $100 of interest on your account. You will receive the interest on 1/10/98.
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not yet received
Accrued Liabilities/Expenses
Liabilities and expenses that remain unrecorded at the end of the period.
During the period, expenses are incurred, but are not recorded at that time.
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Accrued Liabilities/Expenses
Liabilities and expenses that remain unrecorded at the end of the period.
Liability (credit)
Expense(debit)
During the period, expenses are incurred, but are not recorded at that time.
AJE at end of period
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Example
At 12/31/97, your company owes $235 of interest to Big Corp. You will not actually pay the interest until 1/10/98.
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Example
At 12/31/97, your company owes $235 of interest to Big Corp. You will not actually pay the interest until 1/10/98.
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Big Corporation
Question
On 10/1/98, BeeBee Inc. pays $3,600 for a 12-month insurance policy. What kind of transaction would this be called?
a. Accrued Liability
b. Prepaid Expense
c. Accounting Estimate
d. Unearned Revenue
Question
On 10/1/98, BeeBee Inc. pays $3,600 for a 12-month insurance policy. What kind of transaction would this be called?
a. Accrued Liability
b. Prepaid Expense
c. Accounting Estimate
d. Unearned Revenue
BeeBee has an asset that is awaiting assignment to an expense account.
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Question
The last day of 1998 is on a Thursday. CeeCee Inc. will pay its employees on Friday. What kind of adjusting entry is required?
a. Accrued Liability
b. Accrued Asset
c. Accounting Estimate
d. Unearned Revenue
Question
The last day of 1998 is on a Thursday. CeeCee Inc. will pay its employees on Friday. What kind of adjusting entry is required?
a. Accrued Liability
b. Accrued Asset
c. Accounting Estimate
d. Unearned Revenue
CeeCee has incurred an obligation to pay its workers after year-end.
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Affects both the Income Statement and the Balance Sheet.
Failure to Effect on Effect on
Recognize Net Income Balance Sheet
Consumption of a Overstates Overstate Assets
Prepaid Expense Net Income Overstates R/E
Earning of an Understates Overstates Liabs
Unearned Revenue Net Income Understates R/E
Accrual of Assets Understates Understates Assets
Net Income Understates R/E
Net Income Overstates R/E
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Estimated
Why would anyone want to make a CRUDE journal entry?
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