Adjusting the Books Unit 11

Adjustments Adjustments are Accounting changes recorded to ensure that account balances are correct. The “books” are adjusted to make sure that the financial statements are accurate.

Prepaid Expenses Any prepaid expense such as prepaid rent, prepaid insurance, office supplies are considered to be ASSETS. They would be recorded on the BALANCE SHEET. When they are used up the expenses are recorded on the INCOME STATEMENT. Refer to pages 209-210 for examples of this.

Depreciation Depreciation is allocation of the cost of a fixed asset to the fiscal periods in which it is used. It is an expense and appears on the income statement. Sometimes called amortization. There is also a corresponding account called the Accumulated Depreciation account which will be recorded on the Balance Sheet.

Contra Accounts A contra account offsets the value of another account. Sometimes called valuation accounts. They include accounts such as the Accumulated Depreciation account.

What types of accounts do we know?? Asset Liability Owner’s Equity Expense Revenue Contra←This one is NEW!!

Methods of Calculation Depreciation Straight-Line Method: Allocates the same amount of depreciation to each fiscal period. See p. 214 for an example. Declining-Balance Method: Allocates a greater amount of depreciation to the first years of an assets life. This is the method that must be used for the purposed of calculating Income Tax in Canada.

New GAAPs! The Principle of Materiality: Requires that information that could affect the decisions of the users of financial statements be included when the financial statements are prepared. The Principle of Conservationism: Requires that, where acceptable alternative accounting treatments for an item, accounts choose the one that will result in lower net income and net assets.

What now? Let’s do questions 1 and 2 on page 218 as an example! When we’re done, you can work on your worksheet. Don’t forget there will be a quiz on Friday!!