ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENTS

1. Chapter 3 ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENTS

2. The Accounting Period C 1

3. Accrual Basis versus Cash Basis C 2 Cash Basis Revenues are recognized when cash is received and expenses are recorded when cash is paid. Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Accounting

4. Non-GAAP Accrual Basis versus Cash Basis C 2 Cash Basis Revenues are recognized when cash is received and expenses are recorded when cash is paid. Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Accounting

5. Accrual Basis versus Cash Basis C 2 On the cash basis, the entire $2,400 would be recognized as insurance expense in 2011. No insurance expense from this policy would be recognized in 2012 or 2013, periods covered by the policy.

6. Accrual Basis versus Cash Basis C 2 On the accrual basis, $100 of insurance expense is recognized in 2011, $1,200 in 2012, and $1,100 in 2013. The expense is matched with the periods benefited by the insurance coverage.

7. Revenue Recognition Principle Recognizing Revenues & Expenses C 2 We have delivered the product to our customer, so I think we should record the revenue earned.

8. Revenue Recognition Principle Matching Principle Summary of Expenses Rent Gasoline Advertising Salaries Utilities and . . . . $1,000 500 2,000 3,000 450 . . . . Recognizing Revenues & Expenses C 2 Now that we have recognized the revenue, let’s see what expenses we incurred to generate that revenue.

9. Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Prepaid (Deferred) expenses* Unearned (Deferred) revenues Accruedexpense Accruedrevenues Adjusting Accounts C 3 An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. Framework for Adjustments Adjustments *including depreciation

10. Prepaid (Deferred) Expenses P 1 Here is the check for my 24-monthinsurance policy. Resources paid for prior to receiving the actual benefits.

11. (a) On 12/1/11, FastForward paid $2,400 for insurance for 2-years (24-months, December 2011 through November 2013). FastForward recorded the expenditure as Prepaid Insurance on 12/31/11. What adjustment is required? 128 637 Prepaid Insurance P 1

12. (b) During 2011, FastForward purchased $9,720 of supplies. FastForward recorded the expenditures in the asset account, “Supplies.” On December 31, 2011, a count of the supplies indicated $8,670 on hand, so $1,050 of supplies were used during December. What adjustment is required? 652 126 Supplies P 1

13. Other Prepaid Expenses P 1 Other prepaid expenses, such as Prepaid Rent, are accounted for exactly as Insurance and Supplies. We should note that some prepaid expenses are both paid for and fully used up within a single period. For example, a company may pay monthly rent on the first day of each month. This payment creates a prepaid expense on the first day of the month that fully expires by the end of the month. In these special cases, we can record the cash paid with a debit to the expense account instead of an asset account.

14. Depreciation is the process of allocating the cost of a plant asset over its useful life in a systematic and rational manner. Straight-Line Depreciation Expense Asset Cost - Salvage Value Useful Life = Depreciation P 1

15. End of Chapter 3