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AdjustingAccountsandPreparingFinancialStatementsChapter3PowerPointEditor:BethKane,MBA,CPACopyright©2015McGraw-HillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGraw-HillEducation03-C1:TheAccountingPeriod2TheAccountingPeriodC1303-C2:AccrualBasisversusCashBasis4AccrualBasisversusCashBasisAccrualBasisRevenuesarerecognizedwhenearnedandexpensesarerecognizedwhenincurred.CashBasisRevenuesarerecognizedwhencashisreceivedandexpensesarerecordedwhencashispaid.C25CashBasisRevenuesarerecognizedwhencashisreceivedandexpensesarerecordedwhencashispaid.AccrualBasisversusCashBasisNon-GAAPC2AccrualBasisRevenuesarerecognizedwhenearnedandexpensesarerecognizedwhenincurred.6AccrualBasisversusCashBasisOnDecember1,2015,FastForwardpaid$2,400cashforatwenty-fourmonthbusinessinsurancepolicy.Usingthecashbasis,theentire$2,400wouldberecognizedasinsuranceexpensein2015.Noinsuranceexpensefromthispolicywouldberecognizedin2016or2017,periodscoveredbythepolicy.C27AccrualBasisversusCashBasisOntheaccrualbasis,$100ofinsuranceexpenseisrecognizedin2015,$1,200in2016,and$1,100in2017.Theexpenseismatchedwiththeperiodsbenefitedbytheinsurancecoverage.C28RecognizingRevenuesC2Therevenuerecognitionprinciplestatesthatwerecognizerevenuewhentheproductorserviceisdeliveredtoourcustomer.9RecognizingExpensesTheexpenserecognition(ormatching)principleaimstorecordexpensesinthesameaccountingperiodastherevenuesthatareearnedasaresultofthoseexpenses.Thismatchingofexpenseswiththerevenuebenefitsisamajorpartoftheadjustingprocess.C21003-C3:FrameworkforAdjustments11FrameworkforAdjustmentsC312Anadjustingentryismadeattheendofanaccountingperiodtoreflectatransactionoreventthatisnotyetrecorded.03-P1:Prepaid(Deferred)Expenses13Prepaid(Deferred)ExpensesResourcespaidforpriortoreceivingtheactualbenefits.P114NEED-TO-KNOWForeachseparatecasebelow,followthethree-stepprocessforadjustingtheprepaidassetaccount.Step1:Determinewhatthecurrentaccountbalanceequals.Step2:Determinewhatthecurrentaccountbalanceshouldequal.Step3:Recordanadjustingentrytogetfromstep1tostep2.Assumenootheradjustingentriesaremadeduringtheyear.PrepaidInsurance.ThePrepaidInsuranceaccounthasa$5,000debitbalancetostarttheyear.Areviewofinsurancepoliciesandpaymentsshowsthat$1,000ofunexpiredinsuranceremainsatyear-end.PrepaidRent.OnOctober1ofthecurrentyear,thecompanyprepaid$12,000foroneyearofrentforfacilitiesbeingoccupiedfromthatdayforward.ThecompanydebitedPrepaidRentandcreditedCashfor$12,000.December31year-endstatementsmustbeprepared.Supplies.TheSuppliesaccounthasan$1,000debitbalancetostarttheyear.Suppliesof$2,000werepurchasedduringthecurrentyearanddebitedtotheSuppliesaccount.ADecember31physicalcountshows$500ofsuppliesremaining.AccumulatedDepreciation.Thecompanyhasonlyonefixedasset(equipment)thatitpurchasedatthestartofthisyear.Thatassethadcost$38,000,hadanestimatedlifeof10years,andisexpectedtobevaluedat$8,000attheendofthe10-yearlife.P115NEED-TO-KNOWStep1:Determinewhatthecurrentaccountbalanceequals.$5,000Step2:Determinewhatthecurrentaccountbalanceshouldequal.$1,000Unadj.5,000Adjustment4,000Adj.1,000Step3:Recordanadjustingentrytogetfromstep1tostep2.DateDebitCreditDec.31Insuranceexpense4,000PrepaidInsurance4,000PrepaidInsurance.ThePrepaidInsuranceaccounthasa$5,000debitbalancetostarttheyear.Areviewofinsurancepoliciesandpaymentsshowsthat$1,000ofunexpiredinsuranceremainsatyear-end.PrepaidInsuranceGeneralJournalP116IncomeStatementRevenueDebitExpenseBalanceSheetCreditAssetLiabilityNEED-TO-KNOWStep1:Determinewhatthecurrentaccountbalanceequals.$12,000Step2:Determinewhatthecurrentaccountbalanceshouldequal.$9,000Oct.112,000Adjustment3,000Dec.319,000Step3:Recordanadjustingentrytogetfromstep1tostep2.DateDebitCreditDec.31RentExpense3,000PrepaidRent3,000PrepaidRentGeneralJournalPrepaidRent.OnOctober1ofthecurrentyear,thecompanyprepaid$12,000foroneyearofrentforfacilitiesbeingoccupiedfromthatdayforward.ThecompanydebitedPrepaidRentandcreditedCashfor$12,000.December31year-endstatementsmustbeprepared.P117IncomeStatementRevenueDebitExpenseBalanceSheetCreditAssetLiabilityNEED-TO-KNOWStep1:Determinewhatthecurrentaccountbalanceequals.$3,000Step2:Determinewhatthecurrentaccountbalanceshouldequal.$500Unadj.3,000Adjustment2,500Dec.31500Step3:Recordanadjustingentrytogetfromstep1tostep2.DateDebitCreditDec.31SuppliesExpense2,500Supplies2,500Supplies.TheSuppliesaccounthasa$1,000debitbalancetostarttheyear.Suppliesof$2,000werepurchasedduringthecurrentyearanddebitedtotheSuppliesaccount.ADecember31physicalcountshows$500ofsuppliesremaining.SuppliesGeneralJournalP118IncomeStatementRevenueDebitExpenseBalanceSheetCreditAssetLiabilityNEED-TO-KNOWStep1:Determinewhatthecurrentaccountbalanceequals.$0Step2:Determinewhatthecurrentaccountbalanceshouldequal.$3,000Unadj.0Adjustment3,000Dec.313,000($38,000-$8,000)10yearsStep3:Recordanadjustingentrytogetfromstep1tostep2.DateDebitCreditDec.31DepreciationExpense3,000AccumulatedDepreciation3,000AccumulatedDepreciationGeneralJournalAccumulatedDepreciation.Thecompanyhasonlyonefixedasset(equipment)th