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Unformatted text preview: Ch. 4: Adjusting Entries 1 Chapter 4 Adjusting Process In this chapter you will see how accounting systems assure the data reported in financial statements reflect outcomes of actual business operations. The process resulting in reasonable dollar amounts reported in financial statements is the adjusting process. The Accounting Process (so far) In the first three chapters, we saw that the goal of a company's financial accounting system is to provide information about the company's resources and where they came from. The information is provided in the form of financial statements. To generate information for financial statements, accounting systems are organized around the accounting equation: Assets = Liabilities + Stockholders' Equity The equality of the accounting equation is constantly maintained through the debits equal credits process. In brief, in order to generate information for financial statements, accounting systems: 1. organize data to be reported by using a chart of accounts and a general ledger. 2. analyze business events, or transactions, and convert them into debits and credits through the preparation of journal entries. The journal entries are recorded in the general journal. 3. post journal entries to the general ledger. 4. verify data in the general ledger accounts will result in a balanced accounting equation through preparation of a trial balance. Once a trial balance is prepared, it is possible to prepare financial statements from the trial balance data. Based on the work in Chapter 3, the Parks Computer Service Corporation prepared the September financial statements presented again in Exhibit 4-1, 4-2, and 4-3. Exhibit 4-1 Parks Computer Service Corporation Income Statement for the Month Ended September 30 Revenues Fees Revenue $3,000 Expenses Utilities Expense $60 Telephone Expense $45 Wages Expense $450 Total Expenses $555 Net Income $2,445 From the Parks Computer Service Corporation's income statement we saw management used the company's resources in September to generate $2,445 of 2 Ch. 4: Adjusting Entries additional resources (net income). The income statement showed management brought in resources of $3,000 (revenues) and used $555 of resources (expenses). Exhibit 4-2 Parks Computer Service Corporation Statement of Retained Earnings for the Month Ended September 30 Retained Earnings, Sept. 1 $900 Net Income for September $2,445 Subtotal $3,345 Dividends $75 Retained Earnings, Sept. 30 $3,270 From the Parks Computer Service Corporation's statement of retained earnings we saw that of the $2,445 resources generated through management operations in September (net income), $75 were distributed to the owner (dividends). By the end of September, the company retained $3,270 of resources generated through management operations....
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