Ch4slides - Chapter 4 Adjustments, Financial Statements,...

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Unformatted text preview: Chapter 4 Adjustments, Financial Statements, and Financial Results 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. 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. 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. 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 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. 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 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. Making Required Adjustments Adjustments are not made on a daily basis because its more efficient to do them all at once at the end of each period. Adjustment Analysis, Recording...
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This note was uploaded on 09/21/2011 for the course ACCT 210 taught by Professor Li during the Fall '10 term at Ill. Chicago.

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Ch4slides - Chapter 4 Adjustments, Financial Statements,...

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