MBA SOP 2021 - Sessions 2 & 3
MBA SOP 2021 - Sessions 2 & 3
MBA SOP 2021 - Sessions 2 & 3
Adjusting the
Accounts
3-1
The Accounting Cycle
Start Prepare
Reverse
post-closing
(optional)
Analyze trial balance
transactions
Close
Journalize
Prepare
Post statements
Prepare Prepare
unadjusted Adjust adjusted
trial balance trial balance
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Timing Issues
Generally a
Alternative Terminology
month, The time period assumption
is also called the
quarter, or
periodicity assumption.
year.
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Timing Issues
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Timing Issues
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Timing Issues
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Timing Issues
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Timing Issues
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Timing Issues
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The Basics of Adjusting Entries
Adjusting Entries
Ensure that the revenue recognition and expense
recognition principles are followed.
Necessary because the trial balance may not contain
up-to-date and complete data.
Required every time a company prepares financial
statements.
Will include one income statement account and one
balance sheet account.
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The Basics of Adjusting Entries
Deferrals Accruals
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
Unearned revenues.
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The Basics of Adjusting Entries
PREPAID EXPENSES
Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.
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The Basics of Adjusting Entries
PREPAID EXPENSES
Expire either with the passage of time or through use.
Adjusting entry:
► Increase (debit) to an expense account and
► Decrease (credit) to an asset account.
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The Basics of Adjusting Entries
Illustration: Pioneer Advertising Agency purchased supplies
costing $2,500 on October 5. Pioneer recorded the payment by
increasing (debiting) the asset Supplies. This account shows a
balance of $2,500 in the October 31 trial balance. An inventory
count at the close of business on October 31 reveals that $1,000
of supplies are still on hand.
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
Illustration: On October 4, Pioneer Advertising Agency paid $600
for a one-year fire insurance policy. Coverage began on October 1.
Pioneer recorded the payment by increasing (debiting) Prepaid
Insurance. This account shows a balance of $600 in the October 31
trial balance. Insurance of $50 ($600 ÷ 12) expires each month.
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
Depreciation
Buildings, equipment, and motor vehicles (assets that
provide service for many years) are recorded as assets,
rather than an expense, in the year acquired.
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The Basics of Adjusting Entries
Oct. 31
Depreciation expense 40
Accumulated depreciation 40
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
Statement Presentation
Accumulated Depreciation is a contra asset account
(credit).
Appears just after the account it offsets (Equipment) on
the balance sheet.
Book value is the difference between the cost of any
depreciable asset and its accumulated depreciation.
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
UNEARNED REVENUES
Receipt of cash that is recorded as a liability because the
service has not been performed.
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The Basics of Adjusting Entries
UNEARNED REVENUES
Adjusting entry is made to record the revenue for
services performed during the period and to show the
liability that remains at the end of the period.
Results in a decrease (debit) to a liability account and
an increase (credit) to a revenue account.
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
ACCRUED REVENUES
Revenues for services performed but not yet received in cash
or recorded.
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The Basics of Adjusting Entries
ACCRUED REVENUES
Adjusting entry shows the receivable that exists and records
the revenues for services performed.
Adjusting entry:
► Increases (debits) an asset account and
► Increases (credits) a revenue account.
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The Basics of Adjusting Entries
Oct. 31
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
ACCRUED EXPENSES
Expenses incurred but not yet paid in cash or recorded.
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The Basics of Adjusting Entries
ACCRUED EXPENSES
Adjusting entry records the obligation and recognizes the
expense.
Adjusting entry:
► Increase (debit) an expense account and
► Increase (credit) a liability account.
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
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The Basics of Adjusting Entries
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The Adjusted Trial Balance
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The Financial Statements
Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
fromthe
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.
Owner’s
Income Balance
Equity
Statement Sheet
Statement
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Concepts in Action
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Concepts in Action
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Concepts in Action
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Concepts in Action
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Concepts in Action
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Concepts in Action
Cost Constraint
Cost Constraint
Accounting standard-setters weigh
the cost that companies will incur to
provide the information against the
benefit that financial statement
users will gain from having the
information available.
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Double-Entry Accounting
Assets
Assets = Liabilities
Liabilities + Equity
Equity
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Double-Entry Accounting
Equity
Common
Common _ _
Stock
Stock
Dividends
Dividends
+ Revenues
Revenues Expenses
Expenses
Assets
Assets = Liabilities
Liabilities + Equity
Equity
Common
Common _ Dividends _
Stock
Stock
Dividends
+ Revenues
Revenues Expenses
Expenses
Retained Earnings
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Closing the Books
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Closing the Books
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Closing the Books
Note:
Dividends are closed directly
to retained earnings and not
to Income Summary because
Retained earnings is a
dividends are not an permanent account; all
expense. other accounts are
temporary accounts.
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Closing the Books
Closing
Entries
Illustrated
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Closing the Books
Posting
Closing
Entries
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Summary of the Accounting Cycle
1.
1. Analyze
Analyze business
business transactions
transactions
9.
9. Prepare
Prepare aa post-closing
post-closing 2.
2. Journalize
Journalize the
the
trial
trial balance
balance transactions
transactions
8.
8. Journalize
Journalize and
and post
post 3.
3. Post
Post to
to ledger
ledger accounts
accounts
closing
closing entries
entries
7.
7. Prepare
Prepare financial
financial 4.
4. Prepare
Prepare aa trial
trial balance
balance
statements
statements
6.
6. Prepare
Prepare an
an adjusted
adjusted trial
trial 5.
5. Journalize
Journalize and
and post
post
balance
balance adjusting
adjusting entries
entries
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The Classified Statement of Financial Position
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The Classified Statement of Financial Position
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The Classified Statement of Financial Position
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The Classified Statement of Financial Position
Intangible Assets
Assets that do not have physical substance.
Illustration 4-19
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The Classified Statement of Financial Position
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The Classified Statement of Financial Position
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The Classified Statement of Financial Position
Long-Term Investments
Investments in ordinary shares and bonds of other
companies.
Investments in non-current assets such as land or
buildings that a company is not using in its operating
activities.
Illustration 4-21
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The Classified Statement of Financial Position
Current Assets
Assets that a company expects to convert to cash or
use up within one year or the operating cycle,
whichever is longer.
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The Classified Statement of Financial Position
Usually listed in the reverse order they expect to convert them into
cash.
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The Classified Statement of Financial Position
Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation – Share Capital and Retained Earnings.
Illustration 4-23
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The Classified Statement of Financial Position
Non-Current Liabilities
Obligations a company expects to pay after one year.
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The Classified Statement of Financial Position
Current Liabilities
Obligations company is to pay within the coming
year or its operating cycle, whichever is longer.
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The Classified Statement of Financial Position
Current Liabilities
Illustration 4-25
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