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Lect 3 Adjusting Accounts
Lect 3 Adjusting Accounts
Lect 3 Adjusting Accounts
PREPARING FINANCIAL
STATEMENTS
Dr Winston Kwok
LEARNING OBJECTIVES
1. Prepare and explain the use of a trial balance
2. Explain accrual accounting and how it improves financial statements
3. Prepare and explain adjusting entries
LEARNING OBJECTIVE 1
Statement of
Financial
Position
Statement of
Changes in Equity
Income Statement
TRIAL BALANCE
Revenues $6,000
Expenses 9,000
Net Loss $3,000
ACCRUAL BASIS NET INCOME
Non-GAAP
CASH BASIS ACCOUNTING
$ - $ - $ - $ -
May Jun Jul Aug
$ - $ - $ - $ -
Sep Oct Nov Dec
$ - $ - $ - $ 2,400
$ - $ - $ - $ -
May Jun Jul Aug
On the accrual basis,
$ - $ - $ - $ -
Sep Oct Nov Dec $100 of insurance
$ - $ - $ - $ 100
expense is recognized in
Insurance Expense 2012
Jan Feb Mar Apr 2011, $1,200 in 2012,
$ 100
May
$ 100
Jun
$ 100
Jul
$ 100
Aug and $1,100 in 2013. The
$ 100
Sep
$ 100
Oct
$ 100
Nov
$ 100
Dec expense is matched with
$ 100 $ 100 $ 100 $ 100
the periods benefited by
Insurance Expense 2013
Jan Feb Mar Apr the insurance coverage.
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ 100 $ 100 $ 100 $ -
LEARNING OBJECTIVE 3
Paid (or received) cash before Paid (or received) cash after
expense (or revenue) recognized expense (or revenue) recognized
*including depreciation
PREPAID (DEFERRED) EXPENSES
Assets become
expenses over time
This contra account allows readers to know both the full cost of the
equipment and the total depreciation since the equipment was bought.
CONTRA ACCOUNT
Equipment
An account linked with
another account.
Balance is opposite to
- +
Normal
PRESENTATION ON
STATEMENT OF FINANCIAL POSITION
FastForward
Statement of Financial Position
December 31, 2011
Assets
Cash $
.
Equipment $ 26,000
Less: accumulated deprec. 375 25,625 $25,625 is the carrying
. amount (traditionally
. called net book value or
Total Assets book value.)
Unearned Revenue
Dec. 26 3,000
UNEARNED (DEFERRED)
REVENUES
(d) On December 31, FastForward earns 5 days of
consulting fees. Each day that passes results in
consulting fee of $50 ($3,000 60), so FastForward
earned ($50 5 days) $250.
Expenses recorded
due to matching
principle
Revenue in January
10 days @ $90 = $900