Chapter 4

Purpose of adjusting entries

1) Revenues are recorded when they are earned

2) Expenses are recorded when they are incurred to generate revenu

3) Assets are reported at amounts that represent the probable future benefits remaining at the end of the period

4) Liabilities are reported at amounts that represent the probable future sacrifices of assets or services owed at the end of the period

5) almost every account EXCEPT CASH can require an adjustment

Deferred (unearned) revenues

When customer pays for goods/services before company delivers them, Adjusting entry will be unearned rev (-L) and then XX revenue (+SE)

Accrued revenues

When companies perform service/goods before customer pays

Revenues would not be recorded, so called accrued revenues

Deferred Expenses

Assets being used over time

Ex. Supplies expense (-SE), Supplies (-A)

Accrued Expenses

When expenses are incurred in the current period but not paid until the next

ex. Wages expense (-SE), wages payable (+L)

How to prepare statements at the end of the period?

1) income statement first because net income is a component of retained earnings, 2) SE because total from income statement of net income is carried into RE 3) BS ending balances of CS, APIC, treasury stock, and RE carried over 4) Cash flows (no adjustments)

How does accumulated depreciation affect BC?

subtracted from the total of land, buildings, and equipment accounts to reflect net book value at period-end for balance sheet purposes

How efficient is management in using assets to generate sales

total asset turnover ratio = Net sales / avg total assets