Recording Transactions in the Financial Statement: the adjustments Prof.ssa Barbara Sveva Magnanelli Financial Accounting

Operating Profit On an ACCRUAL BASIS Profit for the period on an accrual basis Loss for the period on an accrual basis Need for ADJUSTMENTS

Adjustments of expenses Standing expenses integration, to charge the balance sheet with: Standing expenses adjustments, to write off the balance sheet: depreciation allowances concerning fixed assets certain, uncertain and deferred costs devaluations of specific investments costs of left-over commmodities cost of left-over services cost of remainders cost of products done on the cheap

Adjustments of revenues Current revenue integration, to charge the balance sheet with: Current revenue adjustments, to write off the balance sheet: certain, fixed or deferred revenues advance revenues generated by future performance

Depreciation and Amortization The physiological and predictable decrease in the value of assets having a limited useful life. “Depreciation” refers to tangible fixed assets, “amortization” refers to intangible fixed assets Hence, it represents the portion of utility assigned by an asset to long-term utilityin the balance sheet It’s necessary to record at the end of the year: THE DECREASE IN VALUE OF THE FIXED ASSETS THE INCREASE OF THE COSTS

Depreciation and Amortization On 1/01/0X a plant having a value of 200.000 € and with a useful life of 10 years is purchased. B.S. I.S. 1/01/0X BANK ACCOUNT - 200.000 PLANT +200.000 B.S. I.S. 31/12/0X PLANT +200.000 180.000 DEPRECIATION 20.000

END-OF-YEAR OPERATIONS Accruals and Payables END-OF-YEAR OPERATIONS ADVANCE PAYMENT DELAYED PAYMENT ADVANCE PAYMENT DEFERRED LIABILITIES DEFERRED PAYMENT ACCOUNT PAYABLES ADVANCE REVENUE DEFERRED ASSETS DEFERRED REVENUE ACCOUNT RECEIVABLES

NOT COMPETENCE OF THIS YEAR Pre-paid Expenses On 1/10/0X the equivalent of € 120,000 is paid for an annual insurance contract DURATION OF SERVICE 1/10/0X 31/12/0X 1/10/0X+1 PAYMENT FISCAL YEAR OX NOT COMPETENCE OF THIS YEAR (PREPAID EXPENSE)

Pre-paid Expenses On 1/10/0X the equivalent of € 120,000 is paid for an annual insurance contract B.S. I.S. 1/10/0X BANK ACCOUNT - 120.000 INSURANCE 120.000 B.S. I.S. 31/12/0X INSURANCE - 90.000 PRE-PAID EXPENSES 90.000

NOT COMPETENCE OF THIS YEAR Unearned Revenues On 1/11/0X the equivalent of € 240,000 is collected for a six-month consultancy DURATION OF SERVICE 1/10/0X 31/12/0X 1/10/0X+1 REVENUE FISCAL YEAR OX NOT COMPETENCE OF THIS YEAR (UNEARNED REVENUE)

Unearned Revenues On 1/11/0X the equivalent of € 240,000 is collected for a six-month consultancy B.S. I.S. 1/10/0X BANK ACCOUNT + 240.000 REVENUES FROM SERVICES + 240.000 B.S. I.S. 31/12/0X REVENUES FROM SERVICES - 160.000 UNEARNED REVENUES 160.000

COMPETENCE OF THIS YEAR Accrued Revenues On 1/10/0X an annual consultancy contract is drawn up for a total amount of € 240,000, deferred payment by the client. DURATION OF SERVICE 1/10/0X 31/12/0X 1/10/0X+1 REVENUE and PAYMENT COMPETENCE OF THIS YEAR (ACCRUED REVENUE)

Accrued Revenues On 1/10/0X an annual consultancy contract is drawn up for a total amount of € 240,000, deferred payment by the client. B.S. I.S. 1/10/0X B.S. I.S. 31/12/0X REVENUES FROM SERVICES 60.000 ACCRUED REVENUES 60.000

COMPETENCE OF THIS YEAR Accrued Payables On 1/9/0X a six-month lease contract is drawn up for a total amount of € 60,000, delayed payment. DURATION OF CONTRACT 1/09/0X 31/12/0X 1/09/0X+1 SERVICE and PAYMENT COMPETENCE OF THIS YEAR (ACCRUED PAYABLES)

Accrued Payables On 1/9/0X a six-month lease contract is drawn up for a total amount of € 60,000, delayed payment. B.S. I.S. 1/10/0X B.S. I.S. 31/12/0X ACCRUED PAYABLES 40.000 LEASE SERVISES 40.000

Left-Overs of Raw Materials INCREASE IN INVENTORY VALUE Anglo-saxon solution PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES FROM SALES’

Left-Overs of Raw Materials During the fiscal year, goods for a total value of 1,000 are purchased (payment through bank deposits) As at 31/12 the goods warehouse is valued at 100. B.S. B.S. Bank deposits - 1,000 Raw Materials inventory 100 I.S. I.S. Raw materials + 1,000 Raw Materials + 1,000 purchases consumption 900

Left-Overs of Finished Products and WIP products INCREASE IN PRODUCT STORE VALUE Anglo-saxon solution PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES FROM SALES’

Left-Overs of Finished Products and WIP products During the fiscal year, total production costs and revenues are equivalent to 10,000 and € 20,000 respectively As at 31/12, 40 cars valued at 400 are still in stock B.S. B.S. Finish Products Inventory 400 I.S. I.S. … Tot. Production costs + 10,000 … Tot. Production costs+ 10,000 Revenues + 20,000 Changes in leftover of finish product -400