Introduction to Accounting Preparing for a User’s Perspective Identify accounts needing adjustments Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store

The Full Accounting Cycle Original Transaction Entries Identify Analyze Record Post Prepare Pre-adjusted TB Adjusting Entries Identify Analyze Record Post Prepare Adjusted TB Financial Statements Closing Entries Identify Analyze Record Post Prepare Post-Closing TB

Steps in the Accounting Cycle 1) Identify 2) Analyze Steps in the Accounting Cycle a) What accounts? Round 2 b) Increase or decrease? Adjusting Entries c) Amount $? d) Debit or credit? 3) Record 5) Prepare* Date Account Debit Credit 4/8 Utilities Expense 75 Accrued Liabilities Adj. Trial Balance DR (CR) 20 50 80 Etc. (105) $0 Cash Accounts Receivable Inventory Etc. Accrued Liabilities Etc. Total Util. Expense Accrued Liab. 4) Post 10 30 75 75 * This round includes preparation of financial statements

How do companies identify what needs to be adjusted? They create a checklist of common adjusting entries. Remember to: Accrue interest on Note Payable Adjust prepaid expenses for the portion used up Count inventory and make appropriate adjustments Estimate realizable value of accounts receivable Etc . They program the adjusting entries into their computer system. Example: When a prepayment for 6 months of insurance is made, they program the computer to expense 1/6th of the prepaid insurance to insurance expense every month. They review the pre-adjusted trial balance in detail looking for additional accounts requiring adjustment. Pre-Adjusted Trial Balance

#3 Identify: What accounts need to be adjusted to comply with accrual accounting (i.e. revenue recognition and matching principle)? Some accounts may be OVERstated and need to be DECREASED Some accounts may be UNDERstated and need to be INCREASED Note: Some adjustments may result in accounts being added to the list because their pre-adjusted balance was zero $

Identify: Perform a bank reconciliation to identify: Unrecorded interest income Unrecorded deposits Bank errors: increases decreases Company errors: increases decreases Unrecorded interest expense Unrecorded bank service charges Unrecorded NSF checks & fees Unrecorded check printing fees

Identify: Obtain current market values of marketable equity securities to identify: Unrealized gains Unrealized losses

Identify: Estimate collectability of accounts receivable to identify necessary adjustments: related to uncollectible accounts

Identify: Evaluate and count the company’s inventory to identify: Unrecorded sales Unrecorded theft Unrecorded damage Errors Obsolescence, drop in value Lower of cost or market Misapplication of manufacturing costs Unrecorded purchases on account

Identify: Compute the amount of prepaid insurance that has been used up and expense it accordingly. Review amounts expensed and verify that we didn’t expense TOO much thus requiring an adjusting entry to increase prepaid expenses.

Identify: Determine the amount of depreciation that should be recognized on the equipment and on the building. Determine whether the equipment or building has been permanently impaired.

Identify: Determine whether: any accrued expenses need to be recognized any unrecorded inventory purchases need to be recorded

Identify: Determine whether any sales have been recognized for which the commission has not yet been recognized.

Identify: Determine whether any utilities have been received and not yet been recognized.

Identify: Determine the amount of interest that should have been accrued and adjust accordingly.

Identify: Ensure all issued and outstanding stock has been properly accounted for.

Identify: Ensure all dividend declarations have been accounted for.

Identify: Review long-term contracts, agreements, shipping documents to ensure all revenues that should have been recognized are recognized.

Identify: Update COGS for what was learned during review of Inventory as well as during review of Sales Revenue.

Identify: Verify that all commission expense has been recorded based on adjusted Sales Revenues.

Identify: Verify that all utilities expense has been recorded up to period end.

Identify: Accrue all dividend income declared by investee(s)

Summary The pre-adjusted trial balance is almost ALWAYS wrong because the proper adjusting entries have not been recorded yet Adjusting entries are needed to ensure revenues and expenses are recorded in the correct accounting period at the correct amounts Some adjustments are needed because NOTHING has been recorded yet Other adjustments are needed because something was recorded BUT the related revenues or expenses were not recorded in the correct accounting period Adjusting entries related to accruals and deferrals will affect a balance sheet account and an income statement account Some adjusting entries, such as a purchase of inventory on account, may only affect the balance sheet Wise management uses an organized “adjusting entry process” to ensure they IDENTIFY all accounts needing adjustment

Introduction to Accounting Preparing for a User’s Perspective Identify accounts needing adjustments Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store