Financial+chapter 4

Financial+chapter 4 - Chapter 4 End-of-the-Period...

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Chapter 4 – End-of-the-Period Adjustments Learning Objectives: After studying Chapter 4, you should Understand the purpose of end-of-period adjustments Know how to adjust the supplies account at the end of the period Understand prepaid amounts and how they are adjusted at the end of the period Understand the concept of depreciation and how it applies to buildings and equipment Understand the impact of depreciation on the Balance Sheet and the Income Statement Understand the concepts of principal and interest on a loan Understand how to accrue interest and the impact on the Balance Sheet and Income Statement To ensure the financial statements are accurate, it is usually necessary to make some adjustments to the accounts before preparing the statements. Adjustments are prepared after all of the transactions for the period have been recorded. To determine which accounts need to be adjusted, go through the Balance Sheet accounts to see if their ending balances are correct. If the ending balance is wrong, an adjustment needs to be made. Below are some accounts that typically need end-of-the-period adjustments. Supplies: When supplies are held by a business, a count must be taken or estimation made of the supplies still on hand at the end of the period. The asset account, called simply “supplies”, must be adjusted to reflect the dollar amount of supplies remaining. The other side of this entry goes to the Income Statement account, “supplies expense” to reflect the amount of supplies used during the period. The amount of the adjustment is the amount needed to bring the asset account to its correct balance. For example, assume a company started the period with no supplies and purchased $800 worth during the period. At the time of purchase, cash was decreased by $800 and the asset account “supplies” was increased by $800. At the time of purchase, the transaction was an exchange of one asset for another. Some of these supplies were used during the period and, at the end of the period when an inventory is taken, the count shows that only $240 worth is still on hand. An adjustment must be made in the amount of $560 to reduce the amount shown on the Balance Sheet from $800 to the actual balance of $240. The adjustment reduces the account balance of supplies on the Balance Sheet, but the Income Statement must also reflect that the company had supplies expense for the period of $560. So, the other side of the adjusting entry goes to the Income Statement account, “supplies expense”. This entry, reducing the asset account by $560 and increasing the expense account by $560, correctly shows the expense during this period and also correctly shows the balance of supplies still on hand as $240. Prepaid Amounts:
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Financial+chapter 4 - Chapter 4 End-of-the-Period...

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