1. 3
Adjusting Accounts for Financial Statements
CHAPTER

2. Time period concept
Start up
Definition: The life of a business is divisible into time periods of equal length
Annual financial reports  once a year
Interim financial reports –monthly, quarterly or semi-annually
Annual accounting periods are the norm
Fiscal year – any 12 consecutive months
Calendar year – 12 months ending December 31
Natural business year – ends when inventories and business activities are at their lowest point

3. Need for adjustment at the end of the period
Purpose
makes the information on the accounting statements comparable from period to period
The revenue recognition principle
requires that revenue be assigned to the accounting period in which it is earned, rather than the period in which it is collected in cash
The matching principle
requires that expenses be matched to the period the revenue was earned
Period 1
Period 2
Period 3
Revenue
Order
Taken
Services Performed
- recognize revenue
Match Expenses
Cash Collected

4. Accrual Basis Vs. Cash Basis
Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.
Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred.
Accounting

5. Accrual Basis Vs. Cash Basis
Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred.
Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.
Not GAAP
Accounting

6. Need for adjustment at the end of the period
Unadjusted trial balance
some balances are incorrect for financial statement purposes, not through error but due to the passage of time
accountants must record internal economic events such as the use of an asset
these internal transactions are not evidenced by business papers as were the transactions presented in previous chapters.
Time Passes
Assets are used up, consumed or expire

7. Exhibit 4.5
Adjusting Accounts
An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.
Framework for Adjustments
Prepaid
Expenses
Amortization
Unearned
Revenues
Accrued
Adjustments
Transactions where cash is paid or
received before a related expense
or revenue is recognized.
Transactions where cash is paid or
received after a related expense
or revenue is recognized.

8. BAT Entertainment
The Gr. 12 BAT class has decided to enter into an employment venture and we started our own entertainment business. We offer many services: catering, DJ, consulting, photography, etc.
We rented office space downtown and have started to incur expenses and earn revenue since our opening on October 1st, Since we are accounting experts from Ms. Delorme’s accounting class we have decided to keep our own records. We are doing our month end recording and there are some transactions that we need to make adjustments for using the appropriate GAAPs. They are as follows:

9. Paid for in advance of receiving benefits.
Prepaid Expenses
Paid for in advance of receiving benefits.
Here is the cheque
for my first
6 months’ rent.

10. Adjusting Prepaid Expenses
Prepaid asset
Expense
Unadjusted
Balance
Credit
Adjustment
Debit
Adjustment
As time goes by, a prepaid asset will be consumed or will expire and its cost will become an expense. This adjusting entry records the amount of the prepaid asset that has been consumed or that has expired as an expense and reduces the prepaid asset account accordingly.

11. E.g. Prepaid Rent
On Oct. 1st, we prepaid for 6 months of our office space downtown. The monthly rent is $ Therefore we prepaid $12,000 and the entry was:
Prepaid Rent
Cash
By Oct. 31st, one month’s rent is used and must be recorded:
Rent Expense
Prepaid Rent

12. Asset Cost - Salvage Value
Amortization
Amortization is the process of computing expense from allocating the cost of capital assets over their expected useful lives.
Straight-Line
Amortization
Expense =
Asset Cost - Salvage Value
Useful Life

13. Adjusting for Amortization
Accumulated Amortization
Amortization Expense
Credit
Adjustment
Debit
Adjustment
As a capital asset wears out over time, an expense is recorded to match the cost of the asset over the periods benefited. This adjusting entry uses a contra account called Accumulated Amortization. This account would be subtracted from the capital asset account to which it related on the balance sheet.

14. e.g. Amortization of our DJ equipment
On Oct. 1st BAT Entertainment purchased $18,000 of DJ equipment:
Equipment
Cash
The cost of the equipment needs to be amortized (we are going to use straight-line) – estimated life is 3 years and salvage value is $5,000 – the adjustment for one month on Oct. 31st is:
Amortization exp, equip. 361
Accumulated amortiz., equip. 361
Calculation: 18,000 – 5000/36 = 361

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Unearned Revenue
Cash received in advance of providing products or services.
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16. Adjusting Unearned Revenue
Consulting Revenue
Debit
Adjustment
Unadjusted
Balance
Credit
Adjustment
Unearned revenue is a liability account because the company has an obligation to supply future services. As these services are provided, an unearned revenue will become an earned revenue. This adjusting entry records the amount of unearned revenue that later becomes earned.

17. e.g. Unearned photography consulting revenue
On Oct. 16th, BAT Entertainment agreed to do some consulting for an upcoming wedding. On the same day we were paid $4,200 to provide these services:
Cash
Unearned consulting rev
On Oct. 31st, we had provided one day of the two days of service so we recorded the adjustment as follows:
Unearned consulting Rev
Consulting Rev