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Adjusting Entries - Adjusting Entries Measuring Business...

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Unformatted text preview: Adjusting Entries Measuring Business Income s Accounting period assumption s Cash accounting versus accrual accounting s Matching principle s Materiality concept Adjusting Entries s Journal entries that update the general ledger accounts to state revenues, expenses, assets, and liabilities more accurately s Involve One balance sheet account One income statement account Never cash Adjusting Process s Identify the accounts requiring adjustment s Determine unadjusted balances s Determine correct (adjusted) balances for each account s Prepare adjusting entry to bring accounts in agreement with adjusted balances Deferrals sA cash payment or receipt occurred in current period s Must defer a portion of expense or revenue until a future period Deferrals s Two situations Pay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit Deferrals s Two situations Pay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit Receive a cash revenue in advance and allocate amounts as revenues to periods in which revenues earned Prepaid Insurance s Dec. 1, paid $600 for 12 month insurance premium recording as asset, Prepaid Insurance s At Dec. 31 Prepaid Insurance balance $600 Insurance Expense balance $0 Prepaid Insurance s As of Dec. 31, one month's insurance has expired and become expense s Correct Dec. 31 balance Prepaid Insurance $550 Insurance Expense $50 Prepaid Insurance s Adjusting entry Debit Insurance Expense $50 Increases Insurance Expense to correct balance $50 Credit Prepaid Insurance $50 Decreases Prepaid Insurance to correct balance $550 Depreciation Expense s Similar to prepaid insurance but for long-term asset s Decrease in asset not recorded in asset account s Recorded as increase in contra asset - Accumulated Depreciation Depreciation Expense Before Balance Sheet $26,000 Trucks 400 Accum Deprec Income Statement Depreciation expense $0 $400 After $26,000 800 Unearned Revenues s Dec. 1, received $600 for 6 month rent recording as liability, Unearned Rent s At Dec. 31 Unearned Rent balance $600 Rent Revenue balance $0 Unearned Revenues s As of Dec. 31, one month's rent has been earned and become revenue s Correct Dec. 31 balance Unearned Revenue $500 Rent Revenue $100 Unearned Revenues s Adjusting entry Debit Unearned Rent $100 Decreases Unearned Rent to correct balance $500 Credit Rent Revenue $100 Increases Rent Revenue to correct balance $100 Accruals s Recognize revenues and expenses that have accumulated (accrued) during the accounting period but have not been recorded Accrued Revenues s Dec.11, received 30-day, 15% note from customer. s At Dec. 31 Interest Revenue balance $0 Interest Receivable balance $0 Accrued Revenues s As of Dec. 31, 20 days interest has been earned and become revenue s $1,200 x 0.15 x 20/360 = $10 s Correct Dec. 31 balance Interest Revenue $10 Interest Receivable $10 Accrued Revenues s Adjusting entry Debit Interest Receivable $10 Increases Interest Receivable to correct balance $10 Credit Interest Revenue $10 Increases Interest Revenue to correct balance $10 Accrued Expenses s Employees paid Friday for 5-day work week at $1,000 per week s At Dec. 31, a Tuesday Wages Expense balance $50,000 represents past weeks wages Wages Payable balance $0 Accrued Expenses s As of Dec. 31, 2 days wages have been incurred and become expense s Correct Dec. 31 balance Wages Expense $50,200 Wages Payable $200 Accrued Expenses s Adjusting entry Debit Wages Expense $200 Increases Wages Expense to correct balance $50,200 Credit Wages Payable $200 Increases Wages Payable to correct balance $200 Summarize Adjustments Analyzing Information s Use questions to compare companies Income Statement s Which company has the higher revenues? s Which company has the higher percentage change in revenues? s Which company has the lower percentage of expenses to revenues? Balance Sheet s Which company has the higher assets? s What is the percentage change in assets for each company? s Is the percent of total liabilities to total liabilities plus owners' equity increasing or decreasing? Which company is more risky? Integrative Analysis s Are companies operating efficiently by using least amount of assets to generate a given level of revenues? Calculate total asset turnover s Are companies operating efficiently by using least amount of assets to generate a given net income? Calculate return on assets ...
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