Beruflich Dokumente
Kultur Dokumente
Chapter Summary
In order for revenues and expenses to be reported in which they are earned or incurred,
adjusting entries must be made at the end of the accounting period. Adjusting entries are made so
the revenue recognition and matching principles are followed. Chapter 4 completes the treatment
of the accounting cycle for service type businesses. It focuses on the year-end activities
culminating in the annual report. These include the preparation of adjusting entries, preparing the
financial statements themselves, drafting the footnotes to the statements, closing the accounts, and
preparing for the audit. These topics form the content of Chapter 4.
The chapter begins with a thorough review of various adjusting entries. The adjustments
are classified into four categories: converting assets to expenses; converting liabilities to revenue;
accruing unpaid expenses and; accruing uncollected revenues. The categories are discussed and
illustrated in this order. We briefly explain that the adjusting entries are needed to satisfy the
realization and matching principles. The concept of materiality is introduced and its relevance to
the adjusting entries is explained next.
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
Explain how the principles of recognition and matching relate to adjusting entries.
8.
9.
4-1
Adjusting entries
1 The need for adjusting entries
2 Types of adjusting entries
3 Adjusting entries and timing differences
4
Characteristics of adjusting entries
5 Year-end at Overnight Auto Service
6 Converting assets to expenses
a Prepaid expenses
b Shop supplies
c Insurance policies - see Your Turn (page 147)
d Recording prepayments directly in the expense accounts
7 The concept of depreciation
a What is deprecation?
b Depreciation is only an estimate - see Case in Point (page 149)
c Depreciation of Overnight's building
d Depreciation of tools and equipment
e Depreciation - a noncash expense
8 Converting liabilities to revenue
a Recording advance collections directly in the revenue accounts
9
4-2
Topical
Outline
Coverage
A
A
B-C
Discussion
Questions
1, 2, 4
8, 9
10, 11
Brief
Exercises
1, 2
4, 5
9, 10
Exercises
2, 3, 6
7, 9
10, 11
Problems
1
3, 4
6
Critical
Thinking
Cases
1
2
Introduce the principle of materiality and discuss its relevance to adjusting entries.
General comments
The need for adjusting entries stems from the most basic concepts of accrual accounting,
the concepts that revenue is recognized when it is earned and that expenses are recognized when
the related goods and services are used. We find that students who do not fully understand the
nature and purpose of adjusting entries have difficulty with other accrual accounting concepts
throughout the course. We find Exercises 2, 3, 5, and 9 particularly useful. Exercise 2 illustrates
the effects of the four basic types of adjusting entries upon both the income statement and balance
sheet. Exercise 3 focuses upon those adjustments that apportion previously recorded amounts,
while Exercise 5 illustrates adjustments needed to accrue unrecorded amounts. Exercise 9
demonstrates that the need for adjusting entries arises from transactions spanning more than one
accounting period. We also like Exercise 6, which focuses upon unearned revenue in the
accounting records of Cathay Pacific.
4-3
4-4
CHAPTER 4
NAME
period.
b The entry to record revenue earned but not yet collected or
recorded.
c
The CPA firm auditing Indian Company found that profit had been
overstated. Which of the following errors could be the cause?
a Failure to record depreciation expense for the period.
b No entry made to record purchase of land for cash on the last day
of the year.
c
the year.
4-5
4-6
CHAPTER 4
NAME
Credit
$ 18,000
12,000
20,000
38,200
27,600
_________
$115,800
Refer to the above data. Employees are owed $1,200 for services
since the last payday in January to be paid the first week of February.
No adjustment was made for this item. As a result of this error:
a Assets at January 31 are overstated.
b January profit is overstated.
c Liabilities at January 31 are overstated.
d Equity at January 31 is understated.
4-7
4-8
CHAPTER 4 NAME
Credit
$9,000
6,000
7,500
21,600
13,800
________
$57,900
4-9
CHAPTER 4
NAME
4-10
1,260
4-11
1,260
QUIZ D
Adjusting Entries
Jan 31
A
Accounts Receivable
2,400
2,400
Insurance Expense
300
Unexpired Insurance
300
2,500
2,500
Depreciation Expense
300
Accumulated Depreciation
Learning Objective: 3, 5, 6
4-12
300
Brief
Exercis
es
1 10
< 10
E
1, 2, 3,
4
1, 2, 6
7, 8, 9
5
Exercises
1 15
< 15
E
1, 2, 3, 4, 5, 6,
7, 8, 9, 10, 11,
12, 13, 14, 15
1, 2, 3, 4, 5, 6,
7, 8, 9, 12, 13,
14, 15
1, 2, 3, 4, 5,
7, 9, 10, 12,
13, 14
1, 2, 3, 4, 5, 6,
7, 9, 10, 11,
12, 13, 14
1, 2, 3, 4, 5,
7, 8, 9, 10, 12,
13, 14
1, 2, 3, 4, 5,
7, 9, 12, 13,
14
1, 3, 4, 5, 7, 9,
10, 11, 12, 14
Problems
Cases
1
40
M
2
40
M
3
40
M
4
25
S
5
30
M
6
60
S
7
60
S
8
60
S
1
30
M
2
30
M
3
30
M
1, 14
4-13
10
Ne
t
4
30
M
9. Prepare an adjusted
trial balance and
describe its purpose.
1, 2, 9, 12
4-14