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UnitFourAccountingCycle(3)AdjustmentsObjectives:►1Explainhowthematchingconceptrelatestotheaccrualbasisofaccounting.►2Explainwhyadjustmentsarenecessaryandlistthecharacteristicofadjustingentries.►3Journalizeentriesforaccountsrequiringadjustment.►4Summarizetheadjustmentprocessandprepareanadjustmenttrialbalance.►一accountingperiod►→cashbasis(receivedorpaid)►accrualbasis(earnedorrelate):►revenuerecognitionconcept►→matchingprinciple►GAAPrequiretheuseoftheaccrualbasis,smallservicebusinessesmayusethecashbasisbecausetheyhavefewreceivablesandpayables.►Thematchingprinciplesupportsrecordingrevenuesandrelateexpensesinthesameperiod.►二Attheendofanaccountingperiod,someaccountsintheledgerrequireupdating.►Thejournalentriesthatbringtheaccountsuptogateattheendoftheaccountingperiodarecalledadjustingentries.三Fourtypicaladjustingentries:►Deferrals---------arecreatedbyrecordingatransactioninawaythatdelaysordeferstherecognitionofanexpenseorarevenue.►㈠Deferredexpenses(prepaidexpenses)→becomeexpenseovertime►(1)supplies►(2)prepaidinsurance►(3)prepaidadvertising►(4)prepaidinterest►㈡Deferredrevenues(unearnedrevenue)→becomerevenuesovertime►(1)unearnedrent►(2)tuition►(3)annualretailerfee►(4)premium►(5)magazinesubscriptions►Accruals---------arecreatedbyanunrecordedexpensethathasbeenincurredoranunrecordedrevenuethathasbeenearned.►㈢Accruedexpenses(accruedliabilities)→►expensehavebeenincurredbutnotrecorded►(1)accruedwages►(2)accruedinterestonnotespayable►(3)accruedtaxes►㈣Accruedrevenues(accruedassets)→revenuesearnedbutnotrecorded►(1)feesforservices►(2)unbilledcommissions►(3)accruedinterestonnotesreceivable►(4)accruedrentSummarize:►1Howdoyoutellthedifferencebetweendeferralsandaccruals?►Ifcashisreceivedorpaidinthecurrentperiod,buttherevenueorexpenserelatestoafutureperiod,therevenueorexpenseisadeferreditem.Ifcashwillnotbereceivedorpaiduntilafutureperiod,buttherevenueorexpenserelatestothecurrentperiod,therevenueorexpenseisanaccrueditem.►Currentaccountingperiod→►(cashreceivedorpaid)(revenueorexpenseincurred)►→futureaccountingperiod►(revenueorexpenseincurred)(cashreceivedorpaid)►2Alladjustingentriesaffectatleastoneincomestatementaccountandonebalancesheetaccount.四Examples:►1AssumingthatonDecember31theamountofsuppliesonhandis$760,theamounttobetransferredfromtheassetaccounttotheexpenseaccountis$1240.(suppliesusedistheamountofadjustment)►Dr.SuppliesExpense$1240►Cr.Supplies$1240►2Thedebitbalanceof$2400inAprepaidinsuranceaccountrepresentsaDecember1prepaymentofinsurancefor24months.AttheendofDecembertheinsuranceforonemonthturnintoreality.►Dr.InsuranceExpense$100►Cr.PrepaidInsurance$100Attention:►(1)thebalanceofaprepaid(deferred)expenseisanassetthatwillbecomeanexpenseinafutureperiod.►(2)Whatistheeffectofomittingadjustingentries?►Ontheincomestatement,SuppliesExpenseandInsuranceExpensewillbeunderstatedbyatotalof$1340.►Onthebalancesheet,SuppliesandPrepaidInsurancewillbeoverstatedbyatotalof$1340.►(3)Prepaymentsofexpensesaresometimesmadeatthebeginningoftheperiodinwhichtheywillbeentirelyconsumed.►3AccordingtoA’strialbalanceonDecember31,thebalanceintheunearnedrentaccountis$360.Thisrepresentsthereceiptofthreemonths’rentonDecember1forDec.Jan.Feb,AttheendofDecember$120rentshouldbeturnintoreality.►Dr.UnearnedRent$120►Cr.RentRevenue$120►Inthecaseofwagesexpense,ifthelastdayofapaidperiodisnotthelastdayoftheaccountingperiod,theaccruedwagesexpenseandtherelatedliabilitymustberecordedintheaccountsbyanadjustingentry.►4AttheendofDecember,accruedwagesforAwere$250.►Dr.WagesExpense$250►Cr.WagesPayable$250►(1)wagesarepaidonthesecondandfourthFridaysforthetwo-weekperiodendingonthoseFridays.Thepaymentswere$950onDecember13and$1200onDecember27.►(2)ThewagesaccruedforMondayandTuesday,December30and31,are$250.►(3)WagespaidonFriday,January10,totals$1275.SundayMondayTuesdayWednesdayFourthdayFridaySaturday12345678910111213141516171819202122232425262728293031►13-------wagesexpense(paid)$950►27-------wagesexpense(paid)$1200►30,31--wagesexpense(accrued)$250►Jan,10:►Dr.WagesPayable$250►Cr.Cash$250►5AssumethatAsignedanagreementwithBonDecember15.TheagreementprovidesthatAwillbeoncalltoanswercomputerquestionsandrenderassistancetoB’semployees.TheservicesprovidedwillbebilledtoBonthefifteenthofeachmonthatarateof$20perhour.AsofDecember31,Ahadprovided25hoursofassistancetoB.►Dr.AccountsReceivable$500►Cr.FeesEarned$500►6Fixedassetsareatypeoflong-termdeferredexpense.Thedecreasesinusefulnessiscalleddepreciation.Allfixedasset,expectland,losetheirusefulness.►Theestimatedamountofdepreciationforthemonthisassumedtobe$50inDec.ofA.►Dr.DepreciationExpense$50►Cr.AccumulatedDepreciation►__officeequipment$50►(contraaccountorcontraassetaccount)►Theremindervalueofofficeequipment$1750iscalledthebookvalueoftheassetornetbookvalue.►Result:depreciationallocatesthecostofafixedassettoexpenseoveritsestimatedlife.Question:►1IfA’sadjustmentforunearnedrenthadincorrectlybeenmadefor$180insteadof$120,whatwouldhavebeentheeffectonthefinancialstatements?►Revenuewouldhavebeenoverstatedby$60;netincomewouldhavebeenoverstatedby$60;liabilitywou