1. Chapter 3! The Adjusting Entry Unit 1 Test (cover chapter 1 to 4) will occur on Friday September 26!

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

3. The Nature of Depreciation  There are two categories for assets: 1. Short Term Assets: These assets last only short term: E.g. Cash and AR 2. Long Term Assets : These assets last long term: E.g. Land, Building, Equipment, Computer, Car, Truck etc  Long Term assets are also called “Fixed Assets” or “Capital Assets” Adjusting for Depreciation

4.  The long term assets (like car, truck, computer and equipment) help the business’ producing income over many assets.  Therefore, the cost of purchasing these assets must be spread out over the length of time that they help produce revenue.  By doing depreciation adjusting entry, we are honoring matching principle. Depreciation

5.  Accountants must estimate the useful life of the long term assets.  The two most common methods of calculating depreciation are the straight line method and declining balance method. Depreciation

6.  SLMD for one year = Cost – Salvage Value Periods  Cost = original cost of the long term asset  Salvage value = how much you will receive when you sell it at the end of the useful life or selling price after you used it for many years.  Periods = How long you will use it before selling it or throwing away Straight Line Method

7.  Let’s say I own Pizza restaurant and I use my car to deliever pizza.  How long does my car last? In other words, how many years will my car help my business to generate income?  It lasts 15 years. After 15 years, my car will die. Its useful life is 15 years.  We recorded $15000, the original cost in Balance Sheet. (I paid $15000 2 year old, used Honda Civic on January 1 2013) Adjusting for Depreciation

8.  The car example we used:  SLMD = 15000 - 0 = 1000 per year 15 years  This means that my car’s value will decrease by $1000 every year.  (Assuming that we bought the car on January 1, 2013) Adjusting Entry we should make on December 31 is: Amortization Expense$1000 Accumulated Amortization – Auto$1000 To record annual depreciation Amortization

9.  What if Mr. Park purchased this car on November 1, 2013? How much should he depreciate on December 31, 2013?  1000 /12 months * 2 months = 166 December 31 Amortization Expense$166 Accumulated Amortization – Auto$166 To record amortization of auto Amortization

10.  The balance in the Accumulated Amortization account will increase by $83 every month or $1000 every year.  Statement Presentation on Dec 31 2013: Auto$15000 Less: Accumulated amort – auto($166) Net Book Value$14834  The difference between the cost and its accumulated amortization is called the net book value of that asset. Amortization

11.  Sometimes salaries and commissions are paid after the work has been performed.  For example Pioneer Adverstising employees began work on December 13. They were last paid on December 24. Their next payment will occur on January 7.  At December 31, the salaries for the last 5 working days in December represent an accrued expense and a liability to Pioneer Advertising. Accrued Salaries (Accrued Expense category)

12.  At December 31, they must make an adjusting entry: (4 employees * 5 days *$100 per day = 2000) Dec 31 Salaries Expense2000 Salaries Payable 2000 To record accrued salaries Accrued Salaries (Accrued Expense category)

13.  Pioneer Advertising pays salaries every two weeks.  On January 7, 2014 as they pay their salaries, they will make the following journal entry: Jan 7 Salaries Payable $2000 Salaries Expense$2000 Cash$4000 To record January 7 payroll Accrued Salaries (Accrued Expense category)

14.  Some Revenues are earned but not yet received in cash or recorded at the statement date.  Accrued revenues may accumulate (or accrue) with the passage of time, as happens with interest revenue and rent revenue.  An adjusting entry is required for two purposes: to record the accurate revenue and to record increase in AR or NR. Accrued Revenue

15.  BMO’s perspective : Park Accounting borrowed $50,000 at 5% interest on September 1, 2014 which is due August 31, 2015. What kind of JE is made on September 1, 2014? Sept 1 Loan Receivable $50,000 Bank $50,000 Accrued Revenue

16.  Adjusting Entry that BMO has to make on December 31, 2014?  (5% * 50000 * 4 months / 12 months = 833) Dec 31, 2014 Interest Receivable $833 Interest Revenue$833 Adjusting Entry for accrued interest Revenue : Loan #5987 Accrued Revenue

17.  JE on August 31 2015? Aug 31 Cash$52500 Loan Receivable $50000 Interest Receivable $833 Interest Revenue$1667 Accrued Revenue

18.  Adjusted Trial Balance : After all adjusting entries are posted, another (or updated) trial balance is prepared from the general ledger accounts.  Basic procedure of making ATB is same as Trial Balance.  An adjusted trial balance proves that total debit balances and the total credit balances in the ledger are equal after all adjustments have been made.  Show Page 125 : We can make BS, IS, SOE from Adjusted Trial Balance. The Adjusted Trial Balance and FS

19. P138 E3-5, E3-8 P142 P3-6A Classwork / Homework