1. 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
Free Jan. 2014
Available on the Google Play Store

2. 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

3. 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

4. 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

5. #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 $

6. 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

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

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

9. 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

10. 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.

11. 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.

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

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

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

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

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

17. Identify: Ensure all dividend declarations have been accounted for.

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

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

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

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

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

23. 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

24. 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
Free Jan. 2014
Available on the Google Play Store