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Chapter3 - ADJUSTING ACCOUNTS AND PREPARING FINANCIAL...

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McGraw-Hill/Irwin Slide 1 ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENTS Chapter 3
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McGraw-Hill/Irwin Slide 2 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 Annually 1 2 Monthly Quarterly Semiannually The Accounting Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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McGraw-Hill/Irwin Slide 3 Accrual Basis vs. Cash Basis Example: FastForward paid $2,400 for a 24-month insurance policy beginning December 1, 2009. On the  cash basis  the entire $2,400 would be  recognized as insurance expense in 2009. No  insurance expense from this policy would be  recognized in 2010 or 2011, periods covered by the  policy. Jan Feb Mar Apr - $ - $ - $ - $ May Jun Jul Aug - $ - $ - $ - $ Sep Oct Nov Dec - $ - $ - $ 2,400 $ Insurance Expense 2009
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McGraw-Hill/Irwin Slide 4 Accrual Basis vs. Cash Basis Jan Feb Mar Apr - $ - $ - $ - $ May Jun Jul Aug - $ - $ - $ - $ Sep Oct Nov Dec - $ - $ - $ 100 $ Jan Feb Mar Apr 100 $ 100 $ 100 $ 100 $ May Jun Jul Aug 100 $ 100 $ 100 $ 100 $ Sep Oct Nov Dec 100 $ 100 $ 100 $ 100 $ Jan Feb Mar Apr 100 $ 100 $ 100 $ 100 $ May Jun Jul Aug 100 $ 100 $ 100 $ 100 $ Sep Oct Nov Dec 100 $ 100 $ 100 $ - $ Insurance Expense 2009 Insurance Expense 2010 Insurance Expense 2011 On the  accrual basis  $100  of insurance  expense is recognized  in  2009 $1,200  in  2010 and  $1,100  in  2011 . The  expense is matched  with the periods  benefited by the  insurance coverage.
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McGraw-Hill/Irwin Slide 5 Accounting ACCRUAL BASIS VS. CASH BASIS Accrual Basis Recognize  revenues when  they are  earned   and records  expenses when   they are  incurred  (match with  revenues).  Cash Basis Recognize revenue  when cash is  received  and  records expenses  when cash is  paid . Not GAAP
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McGraw-Hill/Irwin Slide 6 The Need for Adjusting Entries Ø The need for adjusting entries does not mean that transactions are being recorded improperly. Ø The purpose of adjusting entries is to ensure that revenue and expenses are recognized in the right accounting period under the accrual concept. Ø We rely on two principles in the adjusting process: revenue recognition and matching.
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McGraw-Hill/Irwin Slide 7 Adjusting Accounts Prepaid (Deferred) expenses * Unearned (Deferred) revenues Accrued expense Accrued revenues Framework for Adjustments * including depreciation Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Adjustment s
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McGraw-Hill/Irwin Slide 8 Here is the check for my 24-month insurance policy. Prepaid (Deferred) Expenses Resources paid  for prior to  receiving the  actual benefits. Asset Expense Unadjusted Balance Credit Adjustment Debit Adjustment
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McGraw-Hill/Irwin Slide 9 Prepaid Insurance On 12/1/09, FastForward paid $2,400 for insurance for 2- years (24-months, December 2009 through November 2011). FastForward recorded the expenditure as Prepaid Insurance on 12/1/09 . What adjustment is required?
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