Chapter 4 - Why are Adjustments Needed PERIODIC REPORTING...

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Unformatted text preview: Why are Adjustments Needed? PERIODIC REPORTING: Time-Period Concept – Divides the life of a business into distinct and relatively short accounting periods (usually 12 months or less) Fiscal Year – 12-month accounting period ending on a day other than December 31. Calendar Year – 12-month accounting period ending on December 31. ADJUSTMENTS are needed to ensure: ⇒ Revenues are recorded when earned (the _____________ principle), ⇒ Expenses are recorded when incurred to generate revenues (the _____________ principle), ⇒ Assets are reported at amounts representing the economic benefits that remain at the end of the current period, and Chapter 4 Class Notes Adjustments, Financial Statements, and the Quality of Financial Reporting Compiled by: Janice H. Fergusson, CPA Certain Materials used with permission of The McGraw-Hill Companies, Inc. ACCT 225 – Fall 2008 Page 2 of 14 Chapter 4 ⇒ Liabilities are reported at amounts owed at the end of the current period that will require a future sacrifice of resources. Deferral Adjustments – involve either a pair of asset and expenses accounts, or a pair of liability and revenue accounts. Accrual Adjustments – involve either a pair of asset and revenue accounts, or a pair of liability and expense accounts. See Exhibit 4.2 (page 140) Adjusting Entries Adjusting entries are a requirement of the _______________. They are recorded on the _________ of the accounting period. IMPORTANT TIPS REGARDING ADJUSTING ENTRIES ⇒ Each adjusting entry will always include at least one ___________________ ACCT 225 – Fall 2008 Page 3 of 14 Chapter 4 and one _____________________ . ⇒ Adjusting entries NEVER involve _____. There are four types of Adjusting Entries: 1. Prepaid Expenses (deferral adjustment) Payments made in advance for items normally charged to expense. PREPAID EXPENSES are ASSETS until they are used up. 2. Unearned Revenues (deferral adjustment) Cash amounts received before they have been earned. UNEARNED REVENUES are LIABILITIES until we have earned them. 3. Unrecorded Receivables (accrual adjustment) Revenues earned during a period that have not been recorded by the end of the period. 4. Unrecorded Liabilities (accrual adjustment) Expenses incurred during a period that have not been recorded by the end of the period. Let’s take a closer look at each type of adjusting entry. Meet Smith – he likes to play “accountant” so we will assume that he owns an accounting firm called ACCT 225 – Fall 2008 Page 4 of 14 Chapter 4 Prepaid Expenses Example 1-Supplies Used: On 1/1/08, Smith has $400 of supplies on hand. On 8/15/08, he purchased $250 of supplies on...
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Chapter 4 - Why are Adjustments Needed PERIODIC REPORTING...

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