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Ch4slides - Chapter4 Adjustments,Financial...

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Chapter 4 Adjustments, Financial  Statements, and Financial  Results
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Learning Objectives 1. Explain why adjustments are needed. 2. Prepare adjustments needed at the end  of the period. 3. Prepare an adjusted trial balance. 4. Prepare financial statements. 5. Explain the closing process. 6. Explain how adjustments affect financial  results.
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Solution:  Adjustments are made to the accounting records at the end  of the period to state assets, liabilities, revenues, and expenses at  appropriate amounts.  Why Adjustments Are Needed However, cash is not always received in the period in which  the company earns the related revenue; likewise, cash is not  always paid in the period in which the company incurs the  related expense. Accounting systems are designed to record most recurring  daily transactions, particularly any involving cash.
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Why Adjustments Are Needed Income Statement Revenues are recorded  when earned. Expenses are recorded  in the same period as  the revenues to which  they relate. Balance Sheet Assets are reported at  amounts representing  the economic benefits  that remain at the end  of the period.  Liabilities are reported  at amounts owed at the  end of the period. 
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1. Deferral Adjustments An expense or revenue has been  deferred  if we have postponed  reporting it on the income statement until a later period. Sept. 1 Sept. 30 Use-up rent  benefits Cash paid  for rent  in advance Adjustment  needed Jan. 1 Jan. 31 Deliver  subscription  service Cash received  for  subscription in  advance Adjustment  needed
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1. Deferral Adjustments Deferral adjustments are  used to decrease balance  sheet accounts and  increase corresponding  income statement accounts.  Each deferral adjustment  involves one asset and one  expense account, or one  liability and one revenue  account.
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2. Accrual Adjustments Accrual adjustments are needed when a company has earned revenue or  incurred an expense in the current period but  has not yet recorded  it because  the related cash will not be received or paid until a later period. Sept. 1 Sept. 30 Incur income taxes Adjustment needed Jan. 1 Jan. 31 Earn interest Adjustment needed Dec. 31 Cash paid  for  income taxes Mar. 31 Cash received  for  interest
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2. Accrual Adjustments Accrual adjustments are  used to record revenue or  expenses when they  occur prior to receiving or  paying cash, and to  adjust corresponding  balance sheet accounts.   Each accrual adjustment  involves one asset and  one revenue account, or  one liability and one  expense account.
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Making Required Adjustments Adjustments are not made on a daily basis because  it’s more efficient to do them all at once at the end of  each period.
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