1. Adjusting the Accounts – Part 1
Accounting 201
Adjusting the Accounts – Part 1
Instructor: Judith Paquette

2. Where do the adjustments fall in the accounting cycle?
Journal Entries
T – Accounts
Trial Balance
Adjustments –done at end of period (month, quarter, year)
T-Accounts
Final Financial Statements
Closing Entries
Post Closing Trial Balance

3. Issues to consider with adjustments
Timing Issues
Types of Adjustments (2)
Prepaids (also called Deferrals, e.g., buy now, expense later)
Accruals (an unrecorded transaction occurred that must now be recorded)

4. TIMING ISSUES Fiscal and calendar years
Accrual- vs. cash-basis accounting
Recognizing revenues and expenses

5. FISCAL & CALENDAR YEARS
Financial Statements cover an arbitrary
period of time—a month, a quarter, a year.
A calendar year ends December 31st.
A fiscal year is the year the Company decide (for most retail stores, the fiscal year ends around January 31st)
Financial statements are reported using the Company’s chosen Fiscal year.

6. Accrual vs. CASH-BASIS ACCOUNTING
Accrual-Basis Accounting
Transactions recorded in the periods in which the events occur.
Revenues are recognized when earned, rather than when cash is received.
Expenses are recognized when incurred, rather than when paid.

7. Accrual vs. CASH-BASIS ACCOUNTING
Revenues are recognized when cash is received.
Expenses are recognized when cash is paid.
Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP).

8. Recognizing revenues and expenses
This is a BIG DEAL!
REVENUE
RECOGNITION
PRINCIPLE!
Often comes up in Fraud investigations!

9. Revenue recognition principle
Ask: Was the Service Completed?
Companies recognize revenue in the accounting period in which it is earned.
In a service enterprise, revenue is considered to be earned at the time the service is performed.
Customer requests Service--Service PerformedCustomer pays for Service

10. EXPENSE recognition principle
For example: The Company provided 20 hours of advertising services and earned $2,000 in Service Revenue.
During the SAME period, the company should also record its expenses, such as Supplies Expense (for supplies used) and Salaries Expense (for its labor costs)
(Matching Principle)
Expenses should be recognized in the SAME period as the revenues they helped to generate.
Expenses should be recognized when incurred, not necessarily when they are paid.

11. Here’s a story to show you why Accrual Accounting helps us.
A man, Jaewan, starts a company. The company paints buildings, called Sky High Painting
Jaewan invests $60,000 of his own money in Sky High Painting Painting.
The company is started on December 1, 2013.
He gets the job to paint a BIG Building in downtown Bellevue.
He hires employees and buys paint.
They paint the building.
He pays all his expenses of $50,000 in cash.
He bills the customer for $80,000 and goes home on December 31st, 2010.
He gets hit by a car on the way home and dies.

12. Purchased paint, painted building , Received payment for work
Year Year 2
Purchased paint, painted building ,
paid employees
Received payment for work
done in year one
Activity
Accrual
basis
Cash
Revenue $80,000
Expense ,000
Net Income $30,000
Revenue $
Net Loss ( $50,000)
Expense
Net Income $80,000
Net Income $

13. Accrual vs. Cash Accounting
Cash Accounting doesn’t give us the information we need to analyze our business
Plus….it is not in accordance with GAAP
Accrual accounting tells us “how we’re doing.”

14. Adjusting entries
Give us the CORRECT amounts on the Income Statement and Balance Sheet
Every single period, accountants must review the accounts, and determine whether adjusting entries must be made.
Every single adjusting entry:
Affects at least ONE Balance Sheet Account AND at least ONE Income Statement Account
Cash is NEVER, EVER one of the accounts used in an Adjusting Entry.

15. Here’s an example of why we need adjusting entries…
A company buys supplies for $900 on October 3rd.
JE? T Account?
But at the END of the month, October 31st a physical inventory shows that there are only $250 supplies on hand.
How do we adjust the Supplies Account? That is, how do we write DOWN the Supplies Account to its current actual amount of $250?
Answer: you will find out later!

16. Adjusting entries
Revenues - recorded in the period in which they are earned.
Expenses - recognized in the period in which they are incurred.
Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed.

17. Types of Adjusting entries
Prepaids (also called Deferrals)
Accruals
Prepaid Expenses (3 entries):
Expenses paid in cash and recorded as assets before they are used or consumed
Accrued Revenue
Revenues earned but not yet received in cash or recorded.
Unearned Revenue
Revenues received in cash and recorded as liabilities before they are earned.
Accrued Expenses (2 entries)
Expenses incurred but not yet paid in cash or recorded.
You need to know the basic seven (7) adjusting journal entries. There are slight variations on these, but they all follow the same pattern

18. End of Adjustments – Part 1
Next video: Adjustments – Part 2