Chapter 8! The Accounting Cycle Work Sheet and Adjusting Process Unit 3 Test (cover chapter 6, 7 and 8, but we will cover only some portion of chapter 8) will be Tue Nov 18

 Adjusting Entry:  is a journal entry, which assigns an amount of revenue or expense to the appropriate accounting period.  It brings a balance sheet account to its true value.

Reasons why we have to make adjusting entry:  Revenue Recognition: You recognize the revenue when it is earned not when you get paid.  Matching Principle: Accountants have to match the expense with revenue (that it helped to generate) in the same fiscal period.

 Cost Principle: Assets must be shown in balance sheet at their original cost. (not current price)  Principles of Conservatism: Assets should be neither overstated nor understated.  For example, if my business paid $ for land 30 years ago, and the land is now worth $ How should my balance sheet show the value of the land?  Balance sheet should show $ because of cost principle. Reasons for making Adjusting Entries

 There are many different types of adjusting entries accountants make at the end of the fiscal period :  Prepaid Expense  Prepaid Insurance  Supplies adjustment  Unearned Revenue  Late-Arriving Purchase Invoice Adjusting Entry

 My office supplies account has a beginning balance of 200.  On June 1, we purchased 350 worth of office supplies. (paper, ink cartridge, pens and pencils)  On October 1, we purchased 250 worth of office supplies. (similar to above)  As a result, my ending balance for supplies account is 800.  Even though supplies were used everyday, accountant did not make journal entries to record these usages everyday. (Doing so would have taken too much time and effort. ) Adjusting Entry for Supplies account

 If noone makes any adjusting entry, the balance sheet would show $800 for supplies account in balance sheet. Is this fair to the reader?  No it is not fair. Since we used up a lot of office supplies everyday, we are violating principles of conservatism, if supplies account shows $800.  Therefore we have to make an adjusting entry.  The first step: someone counts how much worth of supplies are left. This procedure is called, “taking inventory” Adjusting Entry for Supplies account

 Suppose an accounting clerk counted the supplies left in the office and discovered that there was actually $200 worth of supplies left.  Accountant must make an adjusting entry, which would reduce the ending balance of supplies account from $800 to $200, so he or she would credit $600 to supplies account.  We need a debit entry. Which account should we debit for $600?  We would debit Supplies Expense account. Adjusting Entry for Supplies account

 The adjusting entry would be: Dr.Cr. Dec 31 Supplies Expense600 Supplies600 Adjusting entry for supplies account Adjusting Entry for Supplies account

 After the adjustment, the supplies ledger (asset) account reflects the true value. MAKE SENSE? Summary:

 The financial statements are usually prepared two to three weeks after the fiscal year end. For example, if the fiscal year is from Jan 1 to December 31, then the company would make financial statement in the second week of January.  Let’s say we receive Utility (Electricity) Bill on January 17, but the bill is for the utility usage in December. (Amount is 450$)  If we do not make any adjusting entry, then the income statement contain lower total expense  Net income is too overstated. Adjusting Entry for Late-Arriving Purchase Invoices

 As an accountant, you must apply matching principle, so you will enter adjusting entry: Dr.Cr. Dec 31Utilities Expense450 Accounts Payable450 Adjusting Entry, Utilities Bill Invoice #1234 Jan 17 Accounts Payable450 Bank450 Paying for Utilities Bill Check #5678 Adjusting Entry for Late-Arriving Purchase Invoices

T-account for the entries

1) Answer Review Questions – pg 276 #6, #7 2) P277 and P278 Ex#1, 2 (Only supplies and late-arriving invoice questions) Classwork / Homework