CHAPTER

1. 3 Adjusting Accounts for Financial Statements CHAPTER

2. Time period concept Definition: The life of a business is divisible into time periods of equal length Annual financial reports  once a year Interim financial reports –monthly, quarterly or semi-annually Annual accounting periods are the norm Fiscal year – any 12 consecutive months Calendar year – 12 months ending December 31 Natural business year – ends when inventories and business activities are at their lowest point Start up

3. Need for adjustment at the end of the period Purpose makes the information on the accounting statements comparable from period to period The revenue recognition principle requires that revenue be assigned to the accounting period in which it is earned, rather than the period in which it is collected in cash The matching principle requires that expenses be matched to the period the revenue was earned Revenue Period 1 Period 2 Period 3 Order Taken Services Performed - recognize revenue Match Expenses Cash Collected

4. Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash BasisRevenues are recognized when cash is received and expenses recorded when cash is paid. Accrual Basis Vs. Cash Basis Accounting

5. Accrual BasisRevenues are recognized when earned and expenses are recognized when incurred. Cash BasisRevenues are recognized when cash is received and expenses recorded when cash is paid. Accrual Basis Vs. Cash Basis Accounting Not GAAP

6. Need for adjustment at the end of the period Unadjusted trial balance some balances are incorrect for financial statement purposes, not through error but due to the passage of time accountants must record internal economic events such as the use of an asset these internal transactions are not evidenced by business papers as were the transactions presented in previous chapters. Time Passes Assets are used up, consumed or expire

7. Adjusting Accounts Framework for Adjustments Adjustments Prepaid Amortization Unearned Accrued Accrued Expenses Revenues Expenses Revenues Transactionswhere cash is paid or received before a related expense or revenue is recognized. Transactions where cash is paid or received after a related expense or revenue is recognized. Exhibit 4.5 An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.

8. BAT Entertainment The Gr. 12 BAT class has decided to enter into an employment venture and we started our own entertainment business. We offer many services: catering, DJ, consulting, photography, etc. We rented office space downtown and have started to incur expenses and earn revenue since our opening on October 1st, 2011. Since we are accounting experts from Ms. Delorme’s accounting class we have decided to keep our own records. We are doing our month end recording and there are some transactions that we need to make adjustments for using the appropriate GAAPs. They are as follows:

9. Paid for in advance of receiving benefits. Prepaid Expenses Here is the cheque for my first 6 months’ rent.

10. Adjusting Prepaid Expenses Prepaidasset Expense Unadjusted Balance Credit Adjustment Debit Adjustment As time goes by, a prepaid asset will be consumed or will expire and its cost will become an expense. This adjusting entry records the amount of the prepaid asset that has been consumed or that has expired as an expense and reduces the prepaid asset account accordingly.

11. E.g. Prepaid Rent On Oct. 1st, we prepaid for 6 months of our office space downtown. The monthly rent is $2000. Therefore we prepaid $12,000 and the entry was: Prepaid Rent 12000 Cash 12000 By Oct. 31st, one month’s rent is used and must be recorded: Rent Expense 2000 Prepaid Rent 2000

12. Amortization is the process of computing expense from allocating the cost of capital assets over their expected useful lives. Amortization Straight-Line Amortization Expense Asset Cost - Salvage Value Useful Life =

13. Adjusting for Amortization Accumulated Amortization Amortization Expense Credit Adjustment Debit Adjustment As a capital asset wears out over time, an expense is recorded to match the cost of the asset over the periods benefited. This adjusting entry uses a contra account called Accumulated Amortization. This account would be subtracted from the capital asset account to which it related on the balance sheet.

14. e.g. Amortization of our DJ equipment On Oct. 1st BAT Entertainment purchased $18,000 of DJ equipment: Equipment 18000 Cash 18000 The cost of the equipment needs to be amortized (we are going to use straight-line) – estimated life is 3 years and salvage value is $5,000 – the adjustment for one month on Oct. 31st is: Amortization exp, equip. 361 Accumulated amortiz., equip. 361 Calculation: 18,000 – 5000/36 = 361

15. Cash received in advance of providing products or services. Unearned Revenue Buy your season tickets for all home basketball games NOW!

16. Adjusting Unearned Revenue Unearned Revenue Consulting Revenue Debit Adjustment Unadjusted Balance Credit Adjustment Unearned revenue is a liability account because the company has an obligation to supply future services. As these services are provided, an unearned revenue will become an earned revenue. This adjusting entry records the amount of unearned revenue that later becomes earned.

17. e.g. Unearned photography consulting revenue On Oct. 16th, BAT Entertainment agreed to do some consulting for an upcoming wedding. On the same day we were paid $4,200 to provide these services: Cash 4200 Unearned consulting rev. 4200 On Oct. 31st, we had provided one day of the two days of service so we recorded the adjustment as follows: Unearned consulting Rev. 2100 Consulting Rev. 2100