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♦An adjusting entryfor prepayments (prepaid expenses or unearned revenues)will decrease a balance sheet account and increase an income statement account.Examples of adjusting entries for the following prepayments include insurance, supplies, depreciation, and unearned revenue. Review the concepts of depreciation, depreciation expense and accumulated depreciation.Review the effects on the income statement and balance sheet if adjustments are not made.4-4
Study Objective 5 - Prepare Adjusting Entries for Accruals♦Accruals fall into two categories--accrued revenuesand accrued expenses.Accrued revenues - revenuesearned but not yet received in cash or recorded at the statement date.•an adjusting entryfor accrued revenueswill result in an increase (a debit) in an asset account and an increase (a credit) to a revenue account.Accrued expenses- expensesincurred but not yet paid in cash or recorded at the statement date.•an adjusting entry foraccrued expenses results in an increase (a debit) to an expense account and an increase (a credit) to a liability account.•an adjusting entry for accruals (accrued revenues or accrued expenses) increases both a balance sheet and an income statement account.Review examples of adjusting entries foraccrued interest, accrued salaries and accrued revenues.Review the effects on the income statement and balance sheet if adjustments are not made.Summary of basic relationships:Type of AdjustmentAccounts Before AdjustmentAdjusting EntryPrepaid expensesAssets overstatedExpenses understatedDr. ExpensesCr. AssetsUnearned RevenuesLiabilities overstatedRevenues understatedDr. LiabilitiesCr. RevenuesAccrued revenuesAssets understatedRevenues understatedDr. AssetsCr. RevenuesAccrued expensesExpenses understatedLiabilities understatedDr. ExpensesCr. Liabilities4-5
Study Objective 6 - Describe the Nature and Purpose of the Adjusted Trial Balance♦The adjusted trial balance is prepared after all adjusting entries have been journalized and posted.♦The adjusted trial balance shows the balances of all accounts, including those that have been adjusted and those not needing adjustment, at the end of the accounting period.♦The purpose of the adjusted trial balance is to prove the equality of the total debit balances and total credit balances in the ledger after all adjustments.♦Financial statements are prepared from the adjusted trial balance.Notice how easy it is to prepare financial statements from the information contained in the adjusted trial balance.Study Objective 7 -Explainthe Purpose of Closing Entries♦Closing entries transfer net income (or net loss) and dividends to Retained Earnings.This causes the ending balance of Retained Earnings (amount shown on the Balance Sheet) to agree with the balance shown on the Retained Earnings Statement.