Ch03

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  • p. 98 How Long Will “The Force” Be with Us? Q: What accounting principle does this example illustrate? A: This situation demonstrates the expense recognition principle. Q: How will financial results be affected if the expenses are recognized over a period that is less than that used for revenues? A: If expenses are recognized over a period that is less than that used for revenues, earnings will be understated during the early years and overstated during the later years. Q: What if the expenses are recognized over a period that is longer than that used for revenues? A: If the expenses are recognized over a period that is longer than that used for revenues, earnings will be overstated during the early years and understated in later years. In either case, management and shareholders could be misled.
  • p. 106 Turning Gift Cards into Revenue Q: Suppose that Robert Jones purchases a €100 gift voucher at Carrefour (FRA) on December 24, 2011, and gives it to his wife, Devon, on December 25, 2011. On January 3, 2012, Devon uses the voucher to purchase €100 worth of CDs. When do you think Carrefour should recognize revenue, and why? A: According to the revenue recognition principle, companies should recognize revenue when earned. In this case, revenue is not earned until Carrefour provides the goods. Thus, when Carrefour receives cash in exchange for the gift voucher on December 24, 2011, it should recognize a liability, Unearned Revenue, for €100. On January 3, 2012, when Devon Jones exchanges the voucher for merchandise, Carrefour should recognize revenue and eliminate €100 from the balance in the Unearned Revenue account.
  • Ch03

    1. 1. Slide3-1
    2. 2. Slide3-2Chapter 3Adjusting theAdjusting theAccountsAccountsFinancial Accounting, IFRS EditionWeygandt Kimmel Kieso
    3. 3. Slide3-31. Explain the time period assumption.2. Explain the accrual basis of accounting.3. Explain the reasons for adjusting entries.4. Identify the major types of adjusting entries.5. Prepare adjusting entries for deferrals.6. Prepare adjusting entries for accruals.7. Describe the nature and purpose of an adjusted trialbalance.Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
    4. 4. Slide3-4Types of adjustingTypes of adjustingentriesentriesAdjusting entries forAdjusting entries fordeferralsdeferralsAdjusting entries forAdjusting entries foraccrualsaccrualsSummary ofSummary ofjournalizing andjournalizing andpostingpostingTiming IssuesTiming IssuesTiming IssuesTiming IssuesFiscal and calendarFiscal and calendaryearsyearsAccrual- vs. cash-Accrual- vs. cash-basis accountingbasis accountingRecognizingRecognizingrevenues andrevenues andexpensesexpensesPreparing thePreparing theadjusted trial balanceadjusted trial balancePreparing financialPreparing financialstatementsstatementsThe Basics ofThe Basics ofAdjusting EntriesAdjusting EntriesThe Basics ofThe Basics ofAdjusting EntriesAdjusting EntriesThe Adjusted TrialThe Adjusted TrialBalance andBalance andFinancial StatementsFinancial StatementsThe Adjusted TrialThe Adjusted TrialBalance andBalance andFinancial StatementsFinancial StatementsAdjusting the AccountsAdjusting the AccountsAdjusting the AccountsAdjusting the Accounts
    5. 5. Slide3-5Generally a month, a quarter, or a yearFiscal year vs. calendar yearAlso known as the “Periodicity Assumption”Timing IssuesTiming IssuesTiming IssuesTiming IssuesAccountants divide the economic life of a business intoartificial time periods (Time Period Assumption).SO 1 Explain the time period assumption.SO 1 Explain the time period assumption.Jan. Feb. Mar. Apr. Dec.. . . . .
    6. 6. Slide3-6The time period assumption states that:a. revenue should be recognized in the accountingperiod in which it is earned.b. expenses should be matched with revenues.c. the economic life of a business can be divided intoartificial time periods.d. the fiscal year should correspond with the calendaryear.ReviewReviewTiming IssuesTiming IssuesTiming IssuesTiming IssuesSO 1 Explain the time period assumption.SO 1 Explain the time period assumption.a. revenue should be recognized in the accountingperiod in which it is earned.b. expenses should be matched with revenues.c. the economic life of a business can be divided intoartificial time periods.d. the fiscal year should correspond with the calendaryear.Solution onnotes page
    7. 7. Slide3-7Accrual-Basis AccountingTransactions recorded in the periods in which theevents occur.Revenues are recognized when earned, rather thanwhen cash is received.Expenses are recognized when incurred, rather thanwhen paid.Timing IssuesTiming IssuesTiming IssuesTiming IssuesAccrual- vs. Cash-Basis AccountingSO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.
    8. 8. Slide3-8Cash-Basis AccountingRevenues are recognized when cash is received.Expenses are recognized when cash is paid.Cash-basis accounting is not in accordance withInternational Financial Reporting Standards (IFRS).Timing IssuesTiming IssuesTiming IssuesTiming IssuesAccrual- vs. Cash-Basis AccountingSO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.
    9. 9. Slide3-9Revenue Recognition PrincipleTiming IssuesTiming IssuesTiming IssuesTiming IssuesRecognizing Revenues and ExpensesSO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.Companies recognizerevenue in the accountingperiod in which it is earned.In a service enterprise,revenue is considered to beearned at the time the serviceis performed.
    10. 10. Slide3-10Expense Recognition Principle – (Matching Principle)Timing IssuesTiming IssuesTiming IssuesTiming IssuesRecognizing Revenues and ExpensesSO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.Match expenses withrevenues in the period whenthe company makes efforts togenerate those revenues.“Let the expenses followthe revenues.”
    11. 11. Slide3-11Timing IssuesTiming IssuesTiming IssuesTiming IssuesSO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.IFRS relationships inrevenue and expenserecognitionIllustration 3-1
    12. 12. Slide3-12 SO 2SO 2Answer onnotes page
    13. 13. Slide3-13Match the description of the concept to theconcept.Solution onnotes pageTiming IssuesTiming IssuesTiming IssuesTiming IssuesSO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.gfcb
    14. 14. Slide3-14One of the following statements about the accrual basis ofaccounting is false. That statement is:a. Events that change a company’s financial statementsare recorded in the periods in which the events occur.b. Revenue is recognized in the period in which it isearned.c. The accrual basis of accounting is in accord withgenerally accepted accounting principles.d. Revenue is recorded only when cash is received, andexpenses are recorded only when cash is paid.ReviewReviewTiming IssuesTiming IssuesTiming IssuesTiming IssuesSO 2 Explain the accrual basis of accounting.SO 2 Explain the accrual basis of accounting.Solution onnotes pageOne of the following statements about the accrual basis ofaccounting is false. That statement is:a. Events that change a company’s financial statementsare recorded in the periods in which the events occur.b. Revenue is recognized in the period in which it isearned.c. The accrual basis of accounting is in accord withgenerally accepted accounting principles.d. Revenue is recorded only when cash is received, andexpenses are recorded only when cash is paid.
    15. 15. Slide3-15Adjusting entries make it possible to report correctamounts on the statement of financial positionand on the income statement.A company must make adjusting entries every timeit prepares financial statements.The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesSO 3 Explain the reasons for adjusting entries.SO 3 Explain the reasons for adjusting entries.
    16. 16. Slide3-16RevenuesRevenues - recorded in the period in which they are- recorded in the period in which they areearnedearned.ExpensesExpenses - recognized in the period in which they- recognized in the period in which theyare incurredare incurred.Adjusting entriesAdjusting entries - needed to ensure that the- needed to ensure that therevenue recognitionrevenue recognition andand expense recognitionexpense recognition arearefollowed.followed.The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesSO 3 Explain the reasons for adjusting entries.SO 3 Explain the reasons for adjusting entries.
    17. 17. Slide3-17Adjusting entries are made to ensure that:a. expenses are recognized in the period inwhich they are incurred.b. revenues are recorded in the period in whichthey are earned.c. statement of financial position and incomestatement accounts have correct balances atthe end of an accounting period.d. all of the above.ReviewReviewSO 3 Explain the reasons for adjusting entries.SO 3 Explain the reasons for adjusting entries.The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesAdjusting entries are made to ensure that:a. expenses are recognized in the period inwhich they are incurred.b. revenues are recorded in the period in whichthey are earned.c. statement of financial position and incomestatement accounts have correct balances atthe end of an accounting period.d. all of the above.Solution onnotes page
    18. 18. Slide3-18Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries1. Prepaid Expenses.Expenses paid in cash andrecorded as assets beforethey are used or consumed.Deferrals3. Accrued Revenues.Revenues earned but not yetreceived in cash orrecorded.4. Accrued Expenses.Expenses incurred but notyet paid in cash or recorded.2. Unearned Revenues.Revenues received in cashand recorded as liabilitiesbefore they are earned.AccrualsSO 4 Identify the major types of adjusting entries.SO 4 Identify the major types of adjusting entries.Illustration 3-2Categories of adjusting entriesTypes of Adjusting Entries
    19. 19. Slide3-19Trial BalanceTrial Balance –Illustrations arebased on theOctober 31, trialbalance ofPioneerAdvertisingAgency Inc.Illustration 3-3Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesSO 4 Identify the major types of adjusting entries.SO 4 Identify the major types of adjusting entries.
    20. 20. Slide3-20Deferrals are either:Prepaid expensesORUnearned revenues.SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesAdjusting Entries for Deferrals
    21. 21. Slide3-21Payment of cash that is recorded as an asset becausePayment of cash that is recorded as an asset becauseservice or benefit will be received in the future.service or benefit will be received in the future.Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”insuranceinsurancesuppliessuppliesadvertisingadvertisingCash PaymentCash Payment Expense RecordedExpense RecordedBEFORESO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.rentrentmaintenance on equipmentmaintenance on equipmentfixed assets (depreciation)fixed assets (depreciation)Prepayments often occur in regard to:Prepayments often occur in regard to:
    22. 22. Slide3-22Prepaid ExpensesCosts that expire either with the passage of time orthrough use.Adjusting entries (1) to record the expenses that applyto the current accounting period, and (2) to show theunexpired costs in the asset accounts.Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    23. 23. Slide3-23Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.Adjusting entries for prepaid expensesIncreases (debits) an expense account andDecreases (credits) an asset account.Illustration 3-4
    24. 24. Slide3-24Illustration: Pioneer Advertising Agency purchased advertisingsupplies costing $2,500 on October 5. Pioneer recorded thepayment by increasing (debiting) the asset Advertising Supplies.This account shows a balance of $2,500 in the October 31 trialbalance. An inventory count at the close of business on October31 reveals that $1,000 of supplies are still on hand.Advertising supplies 1,500Advertising supplies expense 1,500Oct. 31Illustration 3-5Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    25. 25. Slide3-25Illustration: On October 4, Pioneer Advertising Agency paid $600for a one-year fire insurance policy. Coverage began on October1. Pioneer recorded the payment by increasing (debiting) PrepaidInsurance. This account shows a balance of $600 in theOctober 31 trial balance. Insurance of $50 ($600 / 12) expireseach month.Prepaid insurance 50Insurance expense 50Oct. 31Illustration 3-6Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    26. 26. Slide3-26DepreciationBuildings, equipment, and vehicles (long-lived assets)are recorded as assets, rather than an expense, in theyear acquired.Companies report a portion of the cost of a long-livedasset as an expense (depreciation) during each periodof the asset’s useful life.Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    27. 27. Slide3-27Illustration: Pioneer Advertising estimates depreciation on theoffice equipment to be $480 a year, or $40 per month.Accumulated depreciation 40Depreciation expense 40Oct. 31Illustration 3-7Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    28. 28. Slide3-28Depreciation (Statement Presentation)Accumulated Depreciation is a contra asset account.Appears just after the account it offsets (Equipment) onthe statement of financial position.Illustration 3-8Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    29. 29. Slide3-29Summary Illustration 3-9Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”Adjusting Entries for “Prepaid Expenses”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    30. 30. Slide3-30Receipt of cash that is recorded as a liability because theReceipt of cash that is recorded as a liability because therevenue has not been earned.revenue has not been earned.Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”rentrentairline ticketsairline ticketsschool tuitionschool tuitionCash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFOREmagazine subscriptionsmagazine subscriptionscustomer depositscustomer depositsUnearned revenues often occur in regard to:Unearned revenues often occur in regard to:SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    31. 31. Slide3-31Unearned RevenuesCompany makes an adjusting entry to record the revenuethat has been earned and to show the liability that remains.The adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    32. 32. Slide3-32Adjusting entries for unearned revenuesDecrease (a debit) to a liability account andIncrease (a credit) to a revenue account.Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Illustration 3-10SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    33. 33. Slide3-33Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Illustration: Pioneer Advertising Agency received $1,200 onOctober 2 from R. Knox for advertising services expected to becompleted by December 31. Unearned Service Revenue shows abalance of $1,200 in the October 31 trial balance. Analysisreveals that the company earned $400 of those fees in October.Service revenue 400Unearned service revenue 400Oct. 31Illustration 3-11SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    34. 34. Slide3-34SummaryAdjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Adjusting Entries for “Unearned Revenues”Illustration 3-12SO 5 Prepare adjusting entries for deferrals.SO 5 Prepare adjusting entries for deferrals.
    35. 35. Slide3-35 SO 5SO 5Answer onnotes page
    36. 36. Slide3-36Made to record:Revenues earned andORExpenses incurredin the current accounting period that have not beenrecognized through daily entries.SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesAdjusting Entries for Accruals
    37. 37. Slide3-37Revenues earned but not yet received in cash orRevenues earned but not yet received in cash orrecorded.recorded.Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”rentrentinterestinterestservices performedservices performedBEFOREAccrued revenues often occur in regard to:Accrued revenues often occur in regard to:Cash ReceiptCash ReceiptRevenue RecordedRevenue RecordedAdjusting entry results in:Adjusting entry results in:SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
    38. 38. Slide3-38Accrued RevenuesAn adjusting entry serves two purposes:(1) It shows the receivable that exists, and(2) It records the revenues earned.Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
    39. 39. Slide3-39Adjusting entries for accrued revenuesIncreases (debits) an asset account andIncreases (credits) a revenue account.SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Illustration 3-13
    40. 40. Slide3-40Illustration: In October Pioneer Advertising Agency earned$200 for advertising services that had not been recorded.Service Revenue 200Accounts Receivable 200Oct. 31Illustration 3-14SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”
    41. 41. Slide3-41SummaryIllustration 3-15Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”Adjusting Entries for “Accrued Revenues”SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
    42. 42. Slide3-42Expenses incurred but not yet paid in cash or recorded.Expenses incurred but not yet paid in cash or recorded.Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”rentrentinterestinterestBEFOREAccrued expenses often occur in regard to:Accrued expenses often occur in regard to:Cash PaymentCash PaymentExpense RecordedExpense RecordedtaxestaxessalariessalariesAdjusting entry results in:Adjusting entry results in:SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
    43. 43. Slide3-43Accrued ExpensesAn adjusting entry serves two purposes:(1) It records the obligations, and(2) It recognizes the expenses.Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.
    44. 44. Slide3-44Adjusting entries for accrued expensesIncreases (debits) an expense account andIncreases (credits) a liability account.SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Illustration 3-16
    45. 45. Slide3-45 SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.Illustration: Pioneer Advertising Agency signed a three-monthnote payable in the amount of $5,000 on October 1. The noterequires Pioneer to pay interest at an annual rate of 12%.Interest payable 50Interest expense 50Oct. 31Illustration 3-18Illustration 3-17Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
    46. 46. Slide3-46 SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.Illustration: Pioneer Advertising Agency last paid salaries onOctober 26; the next payment of salaries will not occur untilNovember 9. The employees receive total salaries of $2,000 for afive-day work week, or $400 per day. Thus, accrued salaries atOctober 31 are $1,200 ($400 x 3 days).Illustration 3-19Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
    47. 47. Slide3-47 SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.Illustration: Pioneer Advertising Agency last paid salaries onOctober 26; the next payment of salaries will not occur untilNovember 9. The employees receive total salaries of $2,000 for afive-day work week, or $400 per day. Thus, accrued salaries atOctober 31 are $1,200 ($400 x 3 days).Salaries payable 1,200Salaries expense 1,200Oct. 31Illustration 3-20Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
    48. 48. Slide3-48SummaryIllustration 3-21SO 6 Prepare adjusting entries for accruals.SO 6 Prepare adjusting entries for accruals.Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”Adjusting Entries for “Accrued Expenses”
    49. 49. Slide3-49After all adjusting entries are journalized and posted thecompany prepares another trial balance from the ledgeraccounts (Adjusted Trial Balance).Its purpose is to prove the equality of debit balances andcredit balances in the ledger.The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceSO 7 Describe the nature and purpose of an adjusted trial balance.SO 7 Describe the nature and purpose of an adjusted trial balance.
    50. 50. Slide3-50The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceSO 7SO 7Illustration 3-24Adjusted trial balance
    51. 51. Slide3-51Which of the following statements is incorrect concerningthe adjusted trial balance?a. An adjusted trial balance proves the equality of thetotal debit balances and the total credit balances inthe ledger after all adjustments are made.b. The adjusted trial balance provides the primary basisfor the preparation of financial statements.c. The adjusted trial balance lists the account balancessegregated by assets and liabilities.d. The adjusted trial balance is prepared after theadjusting entries have been journalized and posted.Review QuestionReview QuestionSO 7 Describe the nature and purpose of an adjusted trial balance.SO 7 Describe the nature and purpose of an adjusted trial balance.The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceWhich of the following statements is incorrect concerningthe adjusted trial balance?a. An adjusted trial balance proves the equality of thetotal debit balances and the total credit balances inthe ledger after all adjustments are made.b. The adjusted trial balance provides the primary basisfor the preparation of financial statements.c. The adjusted trial balance lists the account balancessegregated by assets and liabilities.d. The adjusted trial balance is prepared after theadjusting entries have been journalized and posted.
    52. 52. Slide3-52Financial Statements are prepared directly from theAdjusted Trial Balance.Financial Statements are prepared directly from theAdjusted Trial Balance.Statementof FinancialPositionIncomeStatementRetainedEarningsStatementPreparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsSO 7 Describe the nature and purpose of an adjusted trial balance.SO 7 Describe the nature and purpose of an adjusted trial balance.
    53. 53. Slide3-53Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsIllustration 3-25Preparation ofthe incomestatement andretained earningsstatement fromthe adjusted trialbalanceSO 7SO 7
    54. 54. Slide3-54Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsIllustration 3-26SO 7SO 7
    55. 55. Slide3-55Like IFRS, companies applying GAAP use accrual-basis accountingto ensure that they record transactions that change a company’sfinancial statements in the period in which events occur.Similar to IFRS, cash-basis accounting is not in accordance withGAAP.GAAP also divides the economic life of companies into artificialtime periods. Under both GAAP and IFRS, this is referred to as thetime period assumption. GAAP requires that companies present acomplete set of financial statements, including comparativeinformation annually.Adjusting the AccountsUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPKey DifferencesKey Differences
    56. 56. Slide3-56GAAP has more than 100 rules dealing with revenue recognition.Many of these rules are industry-specific. Revenue recognitionunder IFRS is determined primarily by a single standard, IAS 18.Despite this large disparity in the detailed guidance devoted torevenue recognition, the general revenue recognition principlesrequired by IFRS that are used in this textbook are similar to thoseunder GAAP.GAAP uses concepts such as realized, realizable, and earned as abasis for revenue recognition.Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPKey DifferencesKey Differences Adjusting the Accounts
    57. 57. Slide3-57Internal controls are a system of checks and balances designed todetect and prevent fraud and errors. The Sarbanes-Oxley Actrequires U.S. companies to enhance their systems of internalcontrol. However, many foreign companies do not have thisrequirement.Under IFRS, revaluation to fair value of items such as land andbuildings is permitted. This is not permitted under GAAP.The form and content of financial statements are very similar underGAAP and IFRS. Any significant differences will be discussed inthose chapters that address specific financial statements.Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPKey DifferencesKey Differences Adjusting the Accounts
    58. 58. Slide3-58Looking to the FutureLooking to the FutureUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPThe IASB and FASB are now involved in a joint project on revenuerecognition. Presently, the Boards are considering an approachthat focuses on changes in assets and liabilities (rather than on“when earned”) as the basis for revenue recognition. It is hopedthat this approach will lead to more consistent accounting in thisarea. The IASB and the FASB also face a difficult task in attemptingto update, modify, and complete a converged conceptualframework. For example, how do companies choose betweeninformation that is highly relevant but difficult to verify versusinformation that is less relevant but easy to verify? Should a singlemeasurement method, such as historical cost or fair value, beused, or does it depend on whether it is an asset or liability that isbeing measured?Adjusting the Accounts
    59. 59. Slide3-59Some companies use an alternative treatment forprepaid expenses and unearned revenues.When a company prepays an expense, it debits thatamount to an expense account.When a company receives payment for future services,it credits the amount to a revenue account.Alternative Treatment of Prepaid ExpensesAlternative Treatment of Prepaid Expensesand Unearned Revenuesand Unearned RevenuesAlternative Treatment of Prepaid ExpensesAlternative Treatment of Prepaid Expensesand Unearned Revenuesand Unearned RevenuesSO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.APPENDIX
    60. 60. Slide3-60Illustration: Pioneer Advertising purchased supplies onOctober 5 for $2,500 and debited AdvertisingSupplies Expense for the full amount. What if an inventoryof $1,000 of advertising supplies remains on October 31?Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.Advertising supplies expense 1,000Advertising supplies 1,000Oct. 31Illustration 3A-1
    61. 61. Slide3-61Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”Alternative Treatment for “Prepaid Expenses”SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.Adjustment approaches—a comparisonIllustration 3A-2
    62. 62. Slide3-62Illustration: Assume that Pioneer Advertising received $1,200for future services on October 2 and credited the entire amountto Service Revenue. If at the statement date Pioneer has notperformed $800 of the services, it would make an adjustingentry.Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.Unearned service revenue 800Service revenue 800Oct. 31Illustration 3A-4
    63. 63. Slide3-63 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.Adjustment approaches—a comparisonIllustration 3A-5Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”Alternative Treatment for “Unearned Revenues”
    64. 64. Slide3-64 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.SO 8 Prepare adjusting entries for the alternative treatment of deferrals.Summary of Additional Adjustment RelationshipsSummary of Additional Adjustment RelationshipsSummary of Additional Adjustment RelationshipsSummary of Additional Adjustment RelationshipsIllustration 3A-7
    65. 65. Slide3-65“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted inSection 117 of the 1976 United States Copyright Act without theexpress written permission of the copyright owner is unlawful.Request for further information should be addressed to thePermissions Department, John Wiley & Sons, Inc. The purchasermay make back-up copies for his/her own use only and not fordistribution or resale. The Publisher assumes no responsibility forerrors, omissions, or damages, caused by the use of theseprograms or from the use of the information contained herein.”CopyrightCopyrightCopyrightCopyright

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