Chapter04 - Chapter 4: Adjustments, Trial Balance, and...

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Unformatted text preview: Chapter 4: Adjustments, Trial Balance, and Financial Statements Acct 2301 Fall 2009 Cox School of Business, SMU Professor Zining Li What do We Hope to Learn? Accounting Cycle Adjusting entries What, why, when, and how to adjust? Unadjusted and adjusted trial balance Preparing financial statements Closing process 2 Accounting Cycle 1. Identify recordable financial transactions 2. Record the journal entries 3. Post journal entry amounts to T-accounts 4. Prepare the unadjusted trial balance 5. Record adjusting journal entries 6. Prepare the adjusted trial balance 7. Prepare the financial statements 8. Record the closing entries 3 Adjusting Entries Under accounting, revenues (expenses) are recorded when they are earned (incurred) Some revenues (expenses) are earned (incurred) without any external transaction Adjusting entries are needed to record such revenues and expenses in the correct period Adjustments are made at the end of a reporting period 4 Timetable of the Adjustment Process 5 1/1/04 12/31/04 Adjustments are made at the end of the period, but before the financial statements are prepared Adjustments are made at the end of the period, but before the financial statements are prepared Transactions are recorded all during the period Transactions are recorded all during the period What need to be adjusted Accruals Accrued revenues Accrued expenses Deferrals Deferred revenues Deferred expenses 6 What need to be adjusted (1) Accrued revenues Those are revenues that are already earned, although cash havent been collected Revenues need to be recorded, at the same time, assets are increased Example: interest revenue 7 On October 1, 2006, Webb, Inc. invests $10,000 for 6 months in a certificate of deposit that pays 6% interest per year . Webb will not receive the interest until the CD matures on March 31, 2007. On December 31, 2006, Webb, Inc. must make an entry for the interest earned so far. Interest Receivable 12/31 150 Bal. 150 Interest Revenue 12/31 150 Bal. 150 What need to be adjusted (2) Accrued expenses Those are expenses that are already incurred through out the accounting period, although cash havent been paid Expense need to be recorded, at the same time, liabilities are increased Examples: Salary expense Interest expense Tax expense 9...
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Chapter04 - Chapter 4: Adjustments, Trial Balance, and...

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