CH 4. exam 1 - Click to edit Master subtitle style Chapter...

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Unformatted text preview: Click to edit Master subtitle style Chapter 4 Adjustments, Financial Statements, and the Quality of Financial Reporting Learning Objective 1 Explain why adjustments are needed. Why Adjustments Are Needed Accounting systems are designed to record most recurring daily transactions, particularly any involving cash. The problem is that cash is not always received or paid in the period when the revenue is earned or when the expense is incurred. Why Adjustments Are Needed Adjusting entries are recorded at the end of the period to update revenues and expenses. Why Adjustments Are Needed Lets look at the Unadjusted Trial Balance for the Hokie Printshop. At the end of September, does the Hokie Printshop still have $9,600 of Prepaid Rent to use in the future? Why Adjustments Are Needed No, because 1/3 of the Prepaid Rent was used in September. During September, the Hokie Printshop incurred Rent Expense of $3,200. The balances in the Prepaid Rent account and the Rent Expense account need to be adjusted. Types of Adjusting Entries n Deferrals n Accruals Deferral Adjustments n Recorded when some or all of an assets future benefits have expired or been used up in the current period q Usually relate to transactions where cash is paid or the asset is acquired before the expense is incurred. q Examples: n When supplies are used, the supplies account must be reduced and supplies expense must be recorded. n When all or part of a prepaid expense expires, prepaid expense must be reduced and an expense must be recorded. Deferral Adjustments n Recorded when the company provides goods or services in the current period to satisfy an existing liability. q Usually relate to transactions where cash is received before the revenue is earned. q Examples: n Unearned revenue must be reduced and revenue must be recorded when the revenue is earned n Subscriptions paid in advance (a liability) must be reduced and subscriptions revenue must be recorded when the subscription is delivered Accrual Adjustments n To recognize assets and revenues that are generated in the current period but havent been recorded as of the end of the period. q Usually relate to transactions where the revenue is earned before the cash is received. q A receivable and revenue are recorded. Accrual Adjustments n To recognize liabilities and expenses that are incurred in the current period but havent been recorded as of the end of the period. q Usually relate to transactions where the expense is incurred before the cash is paid. q An expense and a payable are recorded. The accounts in any adjustment always include one balance sheet account (an asset or liability) and one income statement account (revenue or expense)....
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This note was uploaded on 08/15/2011 for the course ACIS 2115 taught by Professor Jayardley during the Spring '07 term at Virginia Tech.

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CH 4. exam 1 - Click to edit Master subtitle style Chapter...

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