Chapter 3-1. Chapter 3-2 CHAPTER 3 ADJUSTING THE ACCOUNTS Financial Accounting, Sixth Edition.
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Transcript of Chapter 3-1. Chapter 3-2 CHAPTER 3 ADJUSTING THE ACCOUNTS Financial Accounting, Sixth Edition.
Chapter 3-1
Chapter 3-2
CHAPTER CHAPTER 33
ADJUSTING THE ADJUSTING THE ACCOUNTSACCOUNTS
Financial Accounting, Sixth Edition
Chapter 3-3
1. Explain the time period assumption.
2. Explain the accrual basis of accounting.
3. Explain the reasons for adjusting entries.
4. Identify the major types of adjusting entries.
5. Prepare adjusting entries for deferrals.
6. Prepare adjusting entries for accruals.
7. Describe the nature and purpose of an adjusted trial balance.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 3-4
Adjusting the AccountsAdjusting the AccountsAdjusting the AccountsAdjusting the Accounts
Timing IssuesTiming IssuesTiming IssuesTiming IssuesThe Basics of The Basics of
Adjusting Adjusting
EntriesEntries
The Basics of The Basics of
Adjusting Adjusting
EntriesEntries
The Adjusted Trial The Adjusted Trial
Balance and Balance and
Financial Financial
StatementsStatements
The Adjusted Trial The Adjusted Trial
Balance and Balance and
Financial Financial
StatementsStatements
Time period Time period assumptionassumption
Fiscal and Fiscal and calendar yearscalendar years
Accrual- vs. cash-Accrual- vs. cash-basis accountingbasis accounting
Recognizing Recognizing revenues and revenues and expensesexpenses
Types of Types of adjusting entriesadjusting entries
Adjusting entries Adjusting entries for deferralsfor deferrals
Adjusting entries Adjusting entries for accrualsfor accruals
Summary of Summary of journalizing and journalizing and postingposting
Preparing the Preparing the adjusted trial adjusted trial balancebalance
Preparing Preparing financial financial statementsstatements
Chapter 3-5
Generally a month, a quarter, or a year.Fiscal year vs. calendar yearAlso known as the “Periodicity Assumption”
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accountants divide the economic life of a business into artificial time periods (Time Period Assumption).
LO 1 Explain the time period assumption.LO 1 Explain the time period assumption.
Jan. Feb. Mar. Apr. Dec.. . . . .
Chapter 3-6
The time period assumption states that:The time period assumption states that:
a.a. revenue should be recognized in the accounting period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided into artificial time periods.
d. the fiscal year should correspond with the calendar year.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 1 Explain the time period assumption.LO 1 Explain the time period assumption.
Chapter 3-7
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.
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accrual- vs. Cash-Basis Accounting
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Chapter 3-8
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).
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accrual- vs. Cash-Basis Accounting
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Chapter 3-9
Revenue Recognition Principle
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Recognizing Revenues and Expenses
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
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.
Chapter 3-10
Matching Principle
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Recognizing Revenues and Expenses
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Match expenses with revenues in the period when the company makes efforts to generate those revenues.
“Let the expenses follow the revenues.”
Chapter 3-11
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
GAAP relationships in revenue and expense recognition
GAAP relationships in revenue and expense recognition
Illustration 3-1Illustration 3-1
Chapter 3-12
One of the following statements about the accrual basis of accounting is false. That statement is:
a. Events that change a company’s financial statements are recorded in the periods in which the events occur.
b. Revenue is recognized in the period in which it is earned.
c. The accrual basis is in accord with generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and expense is recorded only when cash is paid.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 2 Explain the accrual basis of accounting.LO 2 Explain the accrual basis of accounting.
Chapter 3-13
Adjusting entries make it possible to report correct amounts on the balance sheet and on the income statement.
A company must make adjusting entries every time it prepares financial statements.
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
LO 3 Explain the reasons for adjusting entries.LO 3 Explain the reasons for adjusting entries.
Chapter 3-14
RevenuesRevenues - recorded in the period in - recorded in the period in which they are earnedwhich they are earned.
Expenses Expenses - recognized in the period in - recognized in the period in which they are incurredwhich they are incurred.
Adjusting entriesAdjusting entries - needed to ensure - needed to ensure that the that the revenue recognitionrevenue recognition and and matching principlesmatching principles are followed. are followed.
The Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting EntriesThe Basics of Adjusting Entries
LO 3 Explain the reasons for adjusting entries.LO 3 Explain the reasons for adjusting entries.
Chapter 3-15
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which they are earned.
c. balance sheet and income statement accounts have correct balances at the end of an accounting period.
d. all of the above.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 3 Explain the reasons for adjusting entries.LO 3 Explain the reasons for adjusting entries.
Chapter 3-16
Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries
Deferrals
1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.
2. Unearned Revenues. Cash received and recorded as liabilities before revenue is earned.
Accruals
1. Accrued Revenues. Revenues earned but not yet received in cash or recorded.
2. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.
LO 4 Identify the major types of adjusting entries.LO 4 Identify the major types of adjusting entries.
Chapter 3-17
Trial BalanceTrial Balance – Each account is analyzed to determine whether it is complete and up-to-date.
Trial BalanceTrial BalanceTrial BalanceTrial Balance
LO 4 Identify the major types of adjusting entries.LO 4 Identify the major types of adjusting entries.
PIONEER ADVERTISING AGENCY INC.Trial Balance
October 31, 2008Account Debit CreditCash $ 15,200Advertising Supplies 2,500Prepaid Insurance 600Office Equipment 5,000Notes Payable $ 5,000Accounts Payable 2,500Unearned Revenue 1,200Common Stock 10,000Retained Earnings 0Dividends 500Service Revenue 10,000Salaries Expense 4,000Rent Expense 900
$28,700 $ 28,700
Chapter 3-18
Deferrals are either:
Prepaid expenses or
Unearned revenues.
Adjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for Deferrals
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-19
Payment of cash, that is recorded as an asset because Payment of cash, that is recorded as an asset because service or benefit will be received in the future.service or benefit will be received in the future.
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
insuranceinsurance
suppliessupplies
AdvertisingAdvertising
rentrent
Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Prepayments often occur in regard to:Prepayments often occur in regard to:
building building purchasespurchases
equipment equipment purchasespurchases
Chapter 3-20
Prepaid Expenses
Costs that expire either with the passage of time or through use.
Adjusting entries
(1) to record the expenses that apply to the current accounting period, and
(2) to show the unexpired costs in the asset accounts.
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-21
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Illustration 3-4Adjusting entries for prepaid expenses
Increases (debits) an expense account and
Decreases (credits) an asset account.
Chapter 3-22
Example Example (Insurance)(Insurance):: On Oct. 4On Oct. 4thth, Pioneer , Pioneer Advertising paid $600 for a one-year fire insurance Advertising paid $600 for a one-year fire insurance policy. Show the journal entry to record the payment policy. Show the journal entry to record the payment on Oct 4on Oct 4thth. .
Cash 600
Prepaid insurance 600Oct. 4
Debit Credit
Prepaid Insurance
600600 600600
Debit Credit
Cash
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-23
Example Example (Insurance)(Insurance):: On Oct. 4th, Pioneer Advertising On Oct. 4th, Pioneer Advertising paid $600 for a one-year fire insurance policy. paid $600 for a one-year fire insurance policy. Show the Show the adjusting journal entryadjusting journal entry required at Oct. 31 required at Oct. 31stst. .
Prepaid insurance 50
Insurance expense 50Oct. 31
Debit Credit
Prepaid Insurance
600600 5050
Debit Credit
Insurance Expense
5050
550550
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-24
Depreciation
Buildings, equipment, and vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired.
Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset’s useful life (Matching Principle).
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-25
Example Example (Depreciation)(Depreciation):: On Oct. 2On Oct. 2ndnd, Pioneer , Pioneer Advertising paid $5,000 for office equipment that has Advertising paid $5,000 for office equipment that has an expected useful life of 10 years. Show the journal an expected useful life of 10 years. Show the journal entry to record the purchase of the equipment on Oct. entry to record the purchase of the equipment on Oct. 22ndnd. .
Cash 5,000
Equipment 5,000Oct. 2
Debit Credit
Equipment
5,0005,000 5,0005,000
Debit Credit
Cash
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-26
Example Example (Depreciation)(Depreciation):: On Oct. 2On Oct. 2ndnd, Pioneer , Pioneer Advertising paid $5,000 for office equipment that has an Advertising paid $5,000 for office equipment that has an expected useful life of 10 years. Show the expected useful life of 10 years. Show the adjusting adjusting journal entryjournal entry required at Oct. 31 required at Oct. 31stst. The equipment has a . The equipment has a $200 salvage value.$200 salvage value.([$5,000- $200 salvage value] / 5 yrs / 12 months = $40)([$5,000- $200 salvage value] / 5 yrs / 12 months = $40)
Accumulated depreciation 40
Depreciation expense 40Jan. 31
Debit Credit
Depreciation Expense
4040 4040
Debit Credit
Accumulated Depreciation
4040
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-27
Depreciation (Statement Presentation)
Accumulated Depreciation—is a contra asset account.
Appears just after the account it offsets (Equipment) on the balance sheet.
Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Office equipment $5,000
Less: Accumulated depreciation-Office Equipment 40 $4,960
Chapter 3-28
Receipt of cash that is recorded as a liability Receipt of cash that is recorded as a liability because the revenue has not been earned.because the revenue has not been earned.
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
rentrent
magazine subscriptionsmagazine subscriptions
customer deposits for customer deposits for future servicefuture service
Cash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFORE
sale of airline ticketssale of airline tickets
school tuitionschool tuition
Unearned revenues often occur in regard to:Unearned revenues often occur in regard to:
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-29
Unearned Revenues
Company makes an adjusting entry to record the revenue that has been earned and to show the liability that remains.
The adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
Chapter 3-30 LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Illustration 3-10Adjusting entries for unearned revenues
Decrease (a debit) to a liability account and
Increase (a credit) to a revenue account.
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
Chapter 3-31
Example:Example: On Oct. 2On Oct. 2ndnd, Pioneer Advertising received , Pioneer Advertising received $1,200 from R. Knox for services to be completed by $1,200 from R. Knox for services to be completed by December 31. Show the journal entry to record the December 31. Show the journal entry to record the receipt on Oct 2receipt on Oct 2ndnd. .
Unearned Revenue 1,200
Cash 1,200Oct. 2
Debit Credit
Cash
1,2001,200 1,2001,200
Debit Credit
Unearned Rent Revenue
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-32
Example:Example: On Oct. 2nd, Pioneer Advertising received $1,200 On Oct. 2nd, Pioneer Advertising received $1,200 from R. Knox for services to be completed by December 31.from R. Knox for services to be completed by December 31. Show the Show the adjusting journal entryadjusting journal entry required on Oct. 31 required on Oct. 31stst. .
Service Revenue 400
Unearned Revenue 400Oct. 31
Debit Credit
Service Revenue
400400 1,2001,200
Debit Credit
Unearned Revenue
400400
800800
Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”
LO 5 LO 5 Prepare adjusting entries for deferrals.Prepare adjusting entries for deferrals.
Chapter 3-33
Made to record:
Revenues earned and
Expenses incurred
in the current accounting period that have not been recognized through daily entries.
Adjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for Accruals
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-34
Revenues earned but not yet received in cash or Revenues earned but not yet received in cash or recorded.recorded.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”
interestinterest
rentrent
services performedservices performed
BEFORE
Accrued revenues often occur in regard to:Accrued revenues often occur in regard to:
Cash ReceiptCash ReceiptRevenue RecordedRevenue Recorded
Adjusting entry results in:Adjusting entry results in:
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-35
Accrued Revenues
An adjusting entry serves two purposes:
(1) It shows the receivable that exists, and
(2) It records the revenues earned.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-36
Illustration 3-13Adjusting entries for accrued revenues
Increases (debits) an asset account and
Increases (credits) a revenue account.
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”
Chapter 3-37
Example:Example: In October Pioneer Advertising earned $200 October Pioneer Advertising earned $200 for advertising services that have not been recorded. for advertising services that have not been recorded. Show the journal entry to record the accrued revenues Show the journal entry to record the accrued revenues in October. in October.
Service Revenue 200
Accounts Receivable 200Oct. 31
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Debit Credit
Accounts Receivable
200200 200200
Debit Credit
Service Revenue
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”
Chapter 3-38
Expenses incurred but not yet paid in cash or Expenses incurred but not yet paid in cash or recorded.recorded.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
interestinterest
rentrent
BEFORE
Accrued expenses often occur in regard to:Accrued expenses often occur in regard to:
Cash PaymentCash PaymentExpense RecordedExpense Recorded
taxestaxes
salariessalaries
Adjusting entry results in:Adjusting entry results in:
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-39
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) It recognizes the expenses.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-40
Illustration 3-16Adjusting entries for accrued expenses
Increases (debits) an expense account and
Increases (credits) a liability account.
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
Chapter 3-41
Notes payable 5,000
Cash 5,000Oct. 1
Debit Credit
Cash
5,0005,000 5,0005,000
Debit Credit
Notes Payable
Example:Example: On Oct 1On Oct 1stst, Pioneer Advertising signed a , Pioneer Advertising signed a $,5000, 3-month note payable at a rate of 12% per year. $,5000, 3-month note payable at a rate of 12% per year. The total interest due on the note at its due date is $150 The total interest due on the note at its due date is $150 ($5,000 X 12% X 3/12). Show the journal entry to record ($5,000 X 12% X 3/12). Show the journal entry to record the borrowing on Oct. 1the borrowing on Oct. 1stst..
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-42
Example:Example: On Oct 1st, Pioneer Advertising signed a $,5000, 3-On Oct 1st, Pioneer Advertising signed a $,5000, 3-month note payable at a rate of 12% per year. The total interest month note payable at a rate of 12% per year. The total interest due on the note at its due date is due on the note at its due date is $150 ([$5,000 x 12%] / 12 $150 ([$5,000 x 12%] / 12
months)months). . Show the Show the adjusting journal entryadjusting journal entry required on required on Oct. 31Oct. 31stst. .
Interest payable 50
Interest expense 50Oct. 31
Debit Credit
Interest Expense
5050 5050
Debit Credit
Interest Payable
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-43
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) it recognizes the expenses.
Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”
LO 6 LO 6 Prepare adjusting entries for accruals.Prepare adjusting entries for accruals.
Chapter 3-44
After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance).
Its purpose is to prove the equality of debit balances and credit balances in the ledger.
The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Chapter 3-45
Which of the following statements is incorrect concerning the adjusted trial balance?
a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the preparation of financial statements.
c. The adjusted trial balance lists the account balances segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
ReviewReview
Timing IssuesTiming IssuesTiming IssuesTiming Issues
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Chapter 3-46
Financial Statements are prepared directly from the Adjusted Trial Balance. Financial Statements are prepared directly from the Adjusted Trial Balance.
Balance Sheet
Income Statemen
t
Statement of Cash
Flows
Retained Earnings Statemen
t
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Chapter 3-47
Income Statement
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Account Debit CreditCash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550Office Equipment 5,000Accumulated Depreciation-Off Equip $40Notes Payable 5,000Accounts Payable 2,500Unearned Revenue 800Salaries Payable 1,200Interest Payable 50Common Stock 10,000Retained Earnings 0Dividends 500Service Revenue 10,600Salaries Expense 5,200Advertising Supplies Expense 1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 30,190 $ 30,190
PIONEER ADVERTISING AGENCY INC.Income Statement
For the Month Ended October 31, 2008RevenuesService Revenue 10,600
ExpensesSalaries Expense 5,200Advertising Supplies Expense1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40Total expenses 7,740
Net income $ 2,860
Chapter 3-48
Retained Earnings
Statement
Preparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Account Debit CreditCash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550Office Equipment 5,000Accumulated Depreciation-Off Equip $40Notes Payable 5,000Accounts Payable 2,500Unearned Revenue 800Salaries Payable 1,200Interest Payable 50Common Stock 10,000Retained Earnings 0Dividends 500Service Revenue 10,600Salaries Expense 5,200Advertising Supplies Expense 1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 30,190 $ 30,190
PIONEER ADVERTISING AGENCY INC.Retained Earnings Statement
For the Month Ended October 31, 2008Retained earnings, October 1 $ 0Add: Net income 2,860
2,860Less: Dividends 500Retained Earnings, October 31 2,360
Chapter 3-49
Balance SheetPreparing Financial StatementsPreparing Financial StatementsPreparing Financial StatementsPreparing Financial Statements
LO 7 LO 7 Describe the nature and purpose of an adjusted trial Describe the nature and purpose of an adjusted trial balance.balance.
Account Debit CreditCash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550Office Equipment 5,000Accumulated Depreciation-Off Equip $40Notes Payable 5,000Accounts Payable 2,500Unearned Revenue 800Salaries Payable 1,200Interest Payable 50Common Stock 10,000Retained Earnings 0Dividends 500Service Revenue 10,600Salaries Expense 5,200Advertising Supplies Expense 1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 30,190 $ 30,190
PIONEER ADVERTISING AGENCY INC.Balance Sheet
October 31, 2008Assets
Cash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550Office Equipment $5,000Accumulated Depreciation-Off Equip 40 4,960
Total Assets $ 21,910Liabilities and Stockholders’ Equity
LiabilitiesNotes Payable $ 5,000Accounts Payable 2,500Unearned Revenue 800Salaries Payable 1,200Interest Payable 50
Total liabilities 9,550Stockholders’ EquityCommon Stock 10,000Retained Earnings 2,360Total liabilities and stockholders’ equity $ 21,910
Chapter 3-50
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