Accounting and Financial

Reporting
Master of Business Administration
(MBA)

1
Lecture Week 7
Adjusted Trial Balance, Financial Statements Preparation, Qualities of Useful
Information, Correcting Entries, and Reversing Entries

2
 Learning Objectives
1. Describe the nature and purpose of an adjusted trial balance.
2. Explain how financial statements are prepared from the adjusted trial
balance and from the work sheet.
3. Identify the sections of a classified statement of financial position.
4. Explain some financial reporting concepts related to the quality of
useful information.
5. Discuss some similarities and differences between GAAP and IFRS.
6. Explain the need to prepare correcting entries and reversing entries.
3
Adjusted Trial Balance
• Prepared after adjusting entries are journalized and posted
• Proves equality of debit and credit balances
• Basis for the preparation of financial statements

Trial Adjusting
Analyze Journalize Post
Balance Entries

Adjusted Prepare Journalize and Post-Closing

Trial Financial Post Closing Trial Balance
Balance Statements Entries

4
 Yazici Advertising
Adjusted Trial Balance
October 31, 2020
Debit Credit
Cash ₺15,200
Accounts Receivable 200
Supplies 1,000
Prepaid Insurance 550
Equipment 5,000
Accumulated Depreciation ₺ 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Revenue 800
Salaries and Wages Payable 1,200
Interest Payable 50
Owner’s Capital 10,000
Owner’s Drawings 500
Service Revenue 10,600
Salaries and Wages Expense 5,200
Supplies Expense 1,500
Rent Expense 900
Insurance Expense 50
Interest Expense 50
Depreciation Expense 40
₺30,190 ₺30,190

5
Quick Test; Adjusted Trial Balance
Which of the following statements is incorrect concerning
the adjusted trial balance?
a. An adjusted trial balance proves the equality of the
total debit balances and the total credit balances in
the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary
basis for the preparation of financial statements.
c. The adjusted trial balance lists the account
balances segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the
adjusting entries have been journalized and posted. 6
 Quick Test; Trial Balance
Skolnick Co. was organized on April 1, 2020. The company prepares quarterly financial
statements. The adjusted trial balance at June 30 are shown below.

a. Determine the Debit Credit

Cash $ 6,700 Accumulated Depreciation $ 850
net income for Accounts Receivable 600 Notes Payable 5,000
the quarter April Prepaid Rent 900 Accounts Payable 1,510
1 to June 30. Supplies 1,000 Salaries and Wages Payable 400
Equipment 15,000 Interest Payable 50
b. Determine the Owner’s Drawings 600 Unearned Rent Revenue 500
total assets and Salaries and Wages Expense 9,400 Owner’s Capital 14,000
total liabilities at Rent Expense 1,500 Service Revenue 14,200
June 30, 2020. Depreciation Expense 850 Rent Revenue 800
Supplies Expense 200
c. Determine the Utilities Expense 510
amount of Interest Expense 50
owner’s capital at $37,310 $37,310
June 30, 2020.

7
Quick Test; Trial Balance
a. Determine the net income for the quarter April 1 to June 30.
Revenues
Service revenue $14,200
Rent revenue 800
Total revenues $15,000
Expenses
Salaries and wages expense 9,400
Rent expense 1,500
Depreciation expense 850
Utilities expense 510
Supplies expense 200
Interest expense 50
Total expenses 12,510
Net income $ 2,490

8
Quick Test; Trial Balance
b. Determine the total assets and total liabilities at June 30, 2020.
Assets Liabilities
Cash 6,700 Notes Payable $5,000
Accounts Receivable 600 Accounts Payable 1,510
Prepaid Rent 900 Salaries and Wages Payable 400
Supplies 1,000 Interest Payable 50
Equipment 15,000 Unearned Rent Revenue 500
Accumulated Depreciation (850)
Total assets $23,350 Total liabilities $7,460

9
Quick Test; Trial Balance
c. Determine the amount of owner’s capital at June 30, 2020.

Owner’s capital, April 1 $ 0

Add: Investments 14,000
Net income 2,490
Less: Owner’s drawings 600
Total equity $15,890

10
Preparing Financial Statements
Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
fromthe
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.

Statement
Owner’s
Income of
Equity
Statement Financial
Statement
Position

11
 ILLUSTRATION
Preparation of the income statement and owner’s equity
statement from the adjusted trial balance
LO 4 12
 ILLUSTRATION
Preparation of the statement of financial position
from the adjusted trial balance

LO 4 13
The Worksheet
• Multiple-column form used in preparing financial statements
• Not a permanent accounting record
• May be a computerized worksheet
• Prepared using a five step process
• Use of worksheet is optional

14
 Yazici Advertising
Worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense
Insurance Expense
Step 1 Step 2
(a) 1,500
(b) 50
Step
1,500
50
3 1,500
50
Step 4
Accumulated Depreciation Prepare a Enter
(c) 40 Enter 40 Extend adjusted 40
Depreciation Expense (c)
trial balance (e)adjustment 40 40
adjusted 40
balances to appropriate
Accounts Receivable 200 200 200
Interest Expense on the (f) data.
50 balances.
50 statement columns.
50
Interest Payable (f) 50 50 50
Salaries and Wages Payable worksheet. (g) 1,200 1,200 Step 5 1,200
Totals 3,440 3,440 30,190 30,190 7,740Total the statement
10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 columns,
10,600 22,450 22,450
compute net income
(or net loss), and
complete worksheet.

15
 Yazici Advertising
Step 1 Worksheet
For the Month Ended October 31, 2020
Statement of
Adjusted Income Financial
Trial Balance Adjustments Trial Balance Statement Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 Trial balance amounts
50 50 come
Interest Payable (f) 50 50 50
Salaries and Wages Payable directly from 1,200
(g) 1,200 ledger accounts. 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Include all accounts
Net Income
Totals
2,860
10,600 10,600 22,450
2,860
22,450
with balances.

16
 Yazici Advertising
Step 2 Worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable
Accounts Payable
5,000
2,500
Adjustments
5,000
2,500
Key: 5,000
2,500
Unearned Service Revenue
Owner's Capital
1,200 (d) 400
10,000
(a) Supplies Used
800
10,000
800
10,000
Owner's Drawings 500 500 (b) Insurance Expired 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200 (c) Depreciation Expensed
Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 (d) Service900 Revenue Recognized
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 (e) Service 1,500Revenue Accrued
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 (f) 40 Interest Accrued 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 (g) Salaries Accrued 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 Enter
1,200 adjustment amounts, total
1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income adjustments2,860 columns, and check 2,860
Totals for equality.
10,600 10,600 22,450 22,450

Add additional accounts as needed.

17
 Yazici Advertising
Step 3 Worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450

Check equality of adjusted trial balance columns.

18
 Yazici Advertising
Step 4 Worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450

Extend adjusted trial balance amounts to appropriate financial statement columns.

19
 Yazici Advertising
Step 5 Worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450

Compute net income or net loss.

20
Preparing Adjusting Entries from a
Worksheet
• Adjusting entries are prepared from the adjustments
columns of the worksheet
• Journalizing and posting of adjusting entries follows the
preparation of financial statements when a worksheet is
used

21
Preparing Financial Statements from a
Worksheet
• Income statement is prepared from the income statement
columns
• Statement of financial position and owner’s equity statement
are prepared from the statement of financial position columns
• Companies can prepare financial statements before they
journalize and post adjusting entries

22
Classified Statement of Financial Position
• Presents a snapshot at a point in time
• Assets are grouped as current or noncurrent
• A current asset is one that is expected to be converted into cash in one year or
the company’s normal operating cycle, whichever is longer
• The operating cycle of a company is the time it takes to acquire inventory, sell
the inventory, and collect cash. For many companies the operating is less than
one year. These companies would classify an asset as current as long as that
asset is expected to be converted into cash within one year
• On the other side liabilities are divided between current and noncurrent
• A current liability is one expected to be paid out of the company’s current assets
within the longer of one year or the normal operating cycle.

23
Classified Statement of Financial Position

24
 Cheng Ltd.
Statement of Financial Position
October 31, 2020
Assets
Current assets
Cash NT$ 6,600
Debt investments 2,000
Accounts receivable 7,000
Notes receivable 1,000
Inventory 3,000
Supplies 2,100
Prepaid insurance 400
Total current assets NT$22,100
Long-term investments
Stock investments 5,200
Investment in real estate 2,000 7,200
Property, plant, and equipment
Land 10,000
Equipment NT$24,000
Less: Accumulated depreciation– equipment 5,000 19,000 29,000
Intangible assets
Patents 3,100
Total assets NT$61,400
25
 Cheng Ltd.
Statement of Financial Position
October 31, 2020
Liabilities and Owner’s Equity
Current liabilities
Notes payable NT$ 11,000
Accounts payable 2,100
Unearned service revenue 900
Salaries and wages payable 1,600
Interest payable 450
Total current liabilities NT$16,050
Long-term liabilities
Mortgage payable 10,000
Notes payable 1,300
Total long-term liabilities 11,300
Total liabilities 27,350
Owner’s equity
Owner’s capital 34,050
Total liabilities and owner’s equity NT$61,400
26
Current Assets
• Assets that a company expects to convert to cash or use up within one year or the
operating cycle, whichever is longer
• Accounts usually listed in order of liquidity.
Tesco
Statement of Financial Position (partial)
(£ in millions)
Current assets
Inventories £2,430
Trade and other receivables 1,311
Derivative financial instruments 97
Current tax assets 6
Short-term investments 360
Cash and cash equivalents 1,788
Total current assets £5,992 27
Long-Term Investments
• Expected to be held for more than one year or the operating cycle
• Investments in stocks and bonds of other companies (purchased in
order to control or own the other company)
• Investments in non-current assets such as land or buildings that are not
currently being used in operating activities
• Long-term notes receivable
Alphabet Inc.
Statement of Financial Position (partial)
(in thousands)
Long-term investments
Non-marketable equity investments $1,469

28
Property, Plant, and Equipment
• Long useful lives
• Currently used in operations (produce or sell products or services)
• Include productive assets of the company along with any land
containing structures such as buildings
• They are all depreciable, except land (Depreciation - allocating the
cost of assets to a number of years, Accumulated depreciation -
total amount of depreciation expensed thus far in the asset’s life)
• Book value is the cost of the asset less any accumulated
depreciation
• Sometimes called fixed assets or plant assets
29
Property, Plant, and Equipment
Laclede Group
Statement of Financial Position (partial)
(₩ in billions )
Property, plant, and equipment
Land ₩2,604
Buildings ₩9,487
Structures 1,568
Machinery 36,956
Vehicles 226
Other 10,600 58,837
Less: Accumulated depreciation 32,617
₩28,824

30
Intangible Assets
• Long-lived assets that do not have physical substance, used to
produce and sell products and services
• Patents, copyrights, trademarks, and goodwill
• In general, it is very difficult to properly value intangible assets.

Nokia
Statement of Financial Position (partial)
(in millions)
Intangible assets
Capitalized development costs € 244
Goodwill 6,257
Other intangible assets 3,913
€10,414

31
Current Liabilities
• Obligations company is to pay within coming year or its operating
cycle, whichever is longer
• Usually list notes payable first, followed by accounts payable. Other
items follow in order of magnitude
• Common examples are accounts payable, salaries and wages
payable, notes payable, interest payable, income taxes payable,
current maturities of long-term obligations
• Liquidity - ability to pay obligations expected to be due within the
next year

32
Current Liabilities

Siemens
Statement of Financial Position (partial)
(in millions)
Current liabilities
Trade payables € 8,860
Current provisions 5,165
Other current financial liabilities 2,427
Income taxes payable 1,970
Current maturities for long-term debt 1,819
Other current liabilities 22,210
€42,451

33
Non-Current Liabilities
• Obligations a company expects to pay after one year, or the
company’s operating cycle whichever is longer.
Siemens
Statement of Financial Position (partial)
(in millions)
Non-current liabilities
Long-term debt € 14,260
Pension plans and similar commitments 4,361
Provisions 2,533
Deferred tax liabilities 726
Other non-current liabilities 2,752
€24,632
34
Owner’s Equity
• Proprietorship - one capital account
• Partnership - capital account for each partner
• Corporation - Common Stock and Retained Earnings

Halie Capital Ltd.

Statement of Financial Position (partial)
(in thousands)
Equity
Share capital £ 685,934
Retained earnings 1,406,747
Total equity £2,092,681

35
Quick Test; Classified Statement of Financial Position
Patents and copyrights are
a. Current assets
b. Intangible assets
c. Long-term investments
d. Property, plant, and equipment

36
Quick Test; Classified Statement of Financial Position
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable

37
Quick Test; Statement of Financial Position Classifications
Match each of the following to its proper statement of financial position classification. If
the item would not appear on a statement of financial position, use “NA.”
CL Salaries and wages payable LTI Stock investments (long-term)
NA Service revenue PPE Equipment
CL Interest payable PPE Accumulated depreciation
IA Goodwill NA Depreciation expense
CA Debt investments (short-term) OE Owner’s capital
NCL Mortgage payable (due in 3 years) CL Unearned service revenue
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Non-current liabilities (NCL)
Property, plant, and equipment (PPE) Owner’s equity (OE)
Intangible assets (IA)

38
Financial Reporting Concepts; Qualities of Useful Information
Fundamental Qualities
1. Relevance
Make a difference in a business decision
Provides information that has predictive value (helps users in predicting or anticipating future
outcomes) and confirmatory value (enables users to check and confirm earlier predictions or
evaluations)
Materiality is a company-specific aspect of relevance
 An item is material when its size makes it likely to influence the decision of an investor or
creditor
2. Faithful Representation
Information accurately depicts what really happened.
Information must be
 complete (nothing important has been omitted)
 neutral (is not biased toward one position or another)
39
 free from error
Financial Reporting Concepts; Qualities of Useful Information
Enhancing Qualities

Comparability Information is Information has the

results when verifiable if quality of
different companies independent understandability
use the same observers, using the if it is presented in a
accounting same methods, clear and concise
principles. obtain similar results. fashion.

Consistency means that a For accounting

company uses the same information to have
accounting relevance, it must be
principles and methods timely.
from year to year.

40
Financial Reporting Concepts; Cost Constraint

Cost Constraint
Accounting standard-setters
weigh the cost that companies
will incur to provide the
information against the benefit
that financial statements users
will gain from having the
information available.

41
GAAP and IFRS
Similarities
Like IFRS, companies applying GAAP also use accrual-basis accounting to ensure that
they record transactions that change a company’s financial statements in the
period in which events occur.
Similar to IFRS, cash-basis accounting is not in accordance with GAAP.
GAAP also divides the economic life of companies into artificial time periods. Under
both GAAP and IFRS, this is referred to as the time period assumption.
The form and content of financial statements are very similar under GAAP and IFRS.
IFRS generally requires a classified statement of financial position similar to the
classified balance sheet under GAAP.
IFRS follows the same guidelines as GAAP for distinguishing between current and
non-current assets and liabilities.

42
GAAP and IFRS
Differences
Under IFRS, revaluation (using fair value) of items such as land and buildings is permitted. IFRS
allows depreciation based on revaluation of assets, which is not permitted under GAAP.
IFRS companies often report non-current assets before current assets in their statements of
financial position, this is never seen under GAAP.
Under IFRS, current assets are usually listed in the reverse order of liquidity. For example, under
GAAP cash is listed first, but under IFRS it is listed last.
The terminology used for revenues and gains, and expenses and losses, differs somewhat
between IFRS and GAAP. For example, under IFRS, income includes both revenues, which arise
during the normal course of operating activities, and gains, which arise from activities outside
of the normal sales of goods and services. The term income is not used this way under GAAP.
Instead, under GAAP income refers to the net difference between revenues and expenses.
Under IFRS, expenses include both those costs incurred in the normal course of operations as
well as losses that are not part of normal operations. This is in contrast to GAAP, which defines
each separately.
43
Correcting Entries—An Avoidable Step
• Unnecessary if accounting records are free of errors
• Made whenever an error is discovered
• Must be posted before closing the books
• Instead of preparing a correcting entry, it is possible to reverse the
incorrect entry and then prepare the correct entry.

44
Correcting Entries—An Avoidable Step
Case 1: On May 10, Mercato Co. journalized and posted a NT$500 cash collection on
account from a customer as a debit to Cash NT$500 and a credit to Service Revenue
NT$500. The company discovered the error on May 20, when the customer paid the
remaining balance in full.

Incorrect Cash 500

entry Service Revenue 500

Correct Cash 500

entry Accounts Receivable 500
Correcting Service Revenue 500
entry Accounts Receivable 500

45
Correcting Entries—An Avoidable Step
Case 2: On May 18, Mercato purchased on account equipment costing
NT$4,500. The transaction was journalized and posted as a debit to
Equipment NT$450 and a credit to Accounts Payable NT$450. The error was
discovered on June 3,
Incorrect Equipment450
entry Accounts Payable 450
Correct Equipment4,500
entry Accounts Payable 4,500
Correcting Equipment4,050
entry Accounts Payable 4,050
46
Quick Test; Correcting Entries
Sanchez Company discovered the following errors made in January 2020 (amounts
in thousands).
1. A payment of Salaries and Wages Expense of INR600 was debited to Supplies
and credited to Cash, both for INR600.
2. A collection of INR3,000 from a client on account was debited to Cash INR200
and credited to Service Revenue INR200.
3. The purchase of supplies on account for INR860 was debited to Supplies
INR680 and credited to Accounts Payable INR680.
Correct the errors without reversing the incorrect entry.

47
Quick Test; Correcting Entries
1. A payment of Salaries and Wages Expense of INR600 was debited to
Supplies and credited to Cash, both for INR600.
Salaries and Wages Expense 600
Supplies 600
2. A collection of INR3,000 from a client on account was debited to Cash
INR200 and credited to Service Revenue INR200.
Service Revenue 200
Cash 2,800
Accounts Receivable 3,000

48
Quick Test; Correcting Entries
3. The purchase of supplies on account for INR860 was debited to Supplies
INR680 and credited to Accounts Payable INR680.
Supplies (INR860 - INR680) 180
Accounts Payable 180

49
Reversing Entries
Reversing entries are optional
Companies make a reversing entry at beginning of next accounting period
The purpose of reversing entries is to simplify a company’s recordkeeping
They are recorded in response to accrued assets and accrued liabilities
that were created by adjusting entries at the end of a reporting period
Each reversing entry is exact opposite of adjusting entry made in previous
period
Use of reversing entries does not change amounts reported in the
financial statements

50
Reversing Entries
Consider the following example of salaries expense transactions for Yazici Advertising.
1. October 26 (initial salary entry): Yazici pays ₺4,000 of salaries and wages earned
between October 15 and October 26.
2. October 31 (adjusting entry): Salaries and wages earned between October 29 and
October 31 are ₺1,200. The company will pay these in the November 9 payroll.
3. November 9 (subsequent salary entry): Salaries and wages paid are ₺4,000. Of this
amount, ₺1,200 applied to accrued salaries and wages payable and ₺2,800 was
earned between November 1 and November 9.

51
 Reversing Entries
Without Reversing Entries With Reversing Entries
Initial Salary Entry

Will be Oct. 26 Same entry

exalained Adjusting Entry
later
Oct. 31 Same entry

Closing Entry

Oct. 31 Same entry

Reversing Entry

Nov. 1 Salaries and Wages Payable 1,200

Salaries and Wages Expense
1,200
Subsequent Salary Entry

Nov. 9 Salaries and Wages Expense 4,000

Cash 4,000

52
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References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

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