chapter 3 adjusting the accounts ( 帳戶之調整 ) prepared by chih-liang julian liu department of...

Chapter 3 Adjusting the Accounts (帳戶之調整 )

Prepared by Chih-Liang Julian Liu

Department of Industrial and Business Management

Chang Gung University

Learning Objectives

1. Explain the time period assumption (會計期間假設 ).

2. Explain the accrual basis of accounting (會計之應計基礎 ).

3. Explain the reasons for adjusting entries (調整分錄 ).

4. Identify the major types of adjusting entries.

Learning Objectives

5. Prepare adjusting entries for deferrals (遞延項目 ).

6. Prepare adjusting entries for accruals (應計項目 ).

7. Describe the nature and purpose of an adjusted

trial balance (調整後試算表 ).

Preview of Chapter 3

Generally a month, a quarter, or a year.

Also known as the “Periodicity Assumption”

Timing IssuesAccountants divide the economic life of a business into

artificial time periods (Time Period Assumption ; 會計期間假設 ).

Jan. Feb. Mar. Apr. Dec.. . . . .

Monthly and quarterly time periods are called

interim periods.

Most large companies must prepare both quarterly

and annual financial statements.

Fiscal Year = Accounting time period that is one

year in length.

Calendar Year = January 1 to December 31.

Timing IssuesFiscal (會計年 ) and Calendar (曆年制 ) Years

The time period assumption states that:

a. revenue should be recognized in the accounting

period in which a performance obligation is satisfied.

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.

Timing Issues

Question

Accrual-Basis Accounting (應計基礎會計 )

Transactions recorded in the periods in which the

events occur (期間內所發生事件必須記錄 ).

Revenues are recognized when the services are

performed (已賺得 ), rather than when cash is received

(已收現 ).

Expenses are recognized when incurred (發生 ), rather

than when paid (付現 ).

Accrual- vs. Cash-Basis Accounting

Timing Issues

Cash-Basis Accounting (現金基礎會計 )

Revenues recognized when cash is received.

Expenses recognized when cash is paid.

Cash-basis accounting is not in accordance with

International Financial Reporting Standards (IFRS).

Accrual- vs. Cash-Basis Accounting

Timing Issues

Revenue Recognition Principle (收入認列原則 )

Recognizing Revenues and Expenses

Recognize revenue in the

accounting period in which the

performance obligation is

satisfied.

In a service enterprise, revenue is

considered to be earned (已賺得 )

at the time the service is

performed (完成服務的時間點 ).

Timing Issues

Expense Recognition Principle (費用認列原則 )

Recognizing Revenues and Expenses

Match expenses with revenues

(費用配合收入 ) in the period

when the company makes efforts

to generate those revenues.

“Let the expenses follow the

revenues.”

Timing Issues

Timing Issues

Illustration 3-1 IFRS relationships in revenue and expense recognition

Which of the following statements about the accrual basis of accounting is false.

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 services are performed.

c. The accrual basis is in accord with IFRS.

d. Revenue is recorded only when cash is received, and expenses are recorded only when cash is paid.

Timing Issues

Question

A list of concepts is provided in the left column below, with a

description of the concept in the right column below. There are more

descriptions provided than concepts. Match the description of the

concept to the concept.

fecb

Adjusting Entries (調整分錄 )

Ensure that the revenue recognition and expense

recognition principles are followed.

Necessary because the trial balance may not

contain up-to-date and complete data.

Required every time a company prepares financial

statements (編製財務報表都需進行調整 ).

Will include one income statement account and

one statement of financial position account.

The Basics of Adjusting Entries

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 services

are provided.

c. statement of financial position and income statement

accounts have correct balances at the end of an

accounting period.

d. all of the above.


Question

1. Prepaid Expenses (預付費用 ). Expenses paid in cash before they are used or consumed.

Deferrals (遞延項目 )

3. Accrued Revenues (應計收入 ). Revenues for services performed but not yet received in cash or recorded.

4. Accrued Expenses (應計費用 ). Expenses incurred but not yet paid in cash or recorded.

2. Unearned Revenues (預收收入 ). Cash received before services are performed.

Accruals (應計項目 )

Illustration 3-2Categories of adjusting entries


Types of Adjusting Entries

Trial Balance –

Each account is

analyzed to

determine whether

it is complete and

up-to-date.

Illustration 3-3


Types of Adjusting Entries

Deferrals are either:

Prepaid expenses (預付費用 )

OR

Unearned revenues (預收收入 ).

Adjusting Entries for Deferrals


Payment of cash, that is recorded as an asset because service or

benefit will be received in the future (( 未來可以獲得服務或效益 ).).

Insurance (保險 )

Supplies (辦公用品 )

Advertising (廣告 )

Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE

Rent (租金 )

Equipment (設備 )

Buildings

Prepayments often occur in regard to:


Prepaid Expenses

Expire either with the passage of time or through use

(隨時間的經過或使用而調整費用 ).

Adjusting entry:

► Increase (debit) to an expense account and

► Decrease (credit) to an asset account.


Prepaid Expenses

Illustration 3-4

Illustration: Pioneer Advertising Agency

purchased supplies costing $2,500 on

October 5. Pioneer recorded the payment

by increasing (debiting) the asset

Supplies. This account shows a balance

of $2,500 in the October 31 trial balance.

An inventory count at the close of

business on October 31 reveals that

$1,000 of supplies are still on hand.

Supplies 1,500

Supplies expense 1,500Oct. 31


The Basics of Adjusting EntriesIllustration 3-5

Illustration: On October 4, Pioneer

Advertising paid $600 for a one-year fire

insurance policy. Coverage began on

October 1. Pioneer recorded the payment

by increasing (debiting) Prepaid

Insurance. This account shows a balance

of $600 in the October 31 trial balance.

Insurance of $50 ($600 ÷ 12) expires

each month.

Prepaid insurance 50

Insurance expense 50Oct. 31


Prepaid insurance 50

Insurance expense 50600

Oct. 4 Oct. 31

Recorded assets Adjusting expense

Prepaid insurance

Cash 600


Illustration 3-6

Depreciation (折舊 )

Buildings, equipment, and vehicles

(assets with long lives) are recorded as

assets, rather than an expense, in the year

acquired (購買 ).

Depreciation allocates a portion of the

asset’s cost as an expense (depreciation)

during each period of the asset’s useful life.


40

Illustration: For Pioneer Advertising,

assume that depreciation on the equipment

is $480 a year, or $40 per month.

Accumulated depreciation 40

Depreciation expense

Oct. 31


Accumulated Depreciation (累計折舊 )

is called a contra asset account (資產的抵銷科目；資產減項 ).

Statement Presentation

Accumulated Depreciation is a contra asset account (credit balance).

Appears just after the account it offsets (Equipment) on the statement of financial position.

Book value is the difference between the cost of any depreciable asset and its accumulated depreciation.


Illustration 3-8

The Basics of Adjusting EntriesIllustration 3-7

Illustration 3-9


Receipt of cash that is recorded as a liability

because service has not be performed (收入未完成而收取現金 ).

Rent

Airline tickets

Cash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFORE

Magazine subscriptions

Customer deposits

Unearned revenues often occur in regard to:


Unearned Revenues

Adjusting entry is made to record the revenue for

services performed and to show the liability that

remains.

Results in a decrease (debit) to a liability account

and an increase (credit) to a revenue account.


Unearned Revenues

Illustration 3-10

Illustration: Pioneer Advertising received $1,200 on

October 2 from R. Knox for advertising services expected

to be completed by December 31. Unearned Service

Revenue shows a balance of $1,200 in the October 31 trial

balance. Analysis reveals that the company earned $ 400

of those fees in October.

Service revenue 400

Unearned service revenue 400Oct. 31


Service revenue 400

Unearned service revenue 400

Oct. 2 Oct. 31

Unearned service

revenue

Cash 1,200

1,200


Illustration 3-11

Illustration 3-12


Accruals are made to record

Revenues for services performed (已完成 )

OR

Expenses incurred (已發生費用 )

in the current accounting period that have not been recognized through daily entries (當期未記錄的分錄 ).

Adjusting Entries for Accruals (調整應計項目分錄 )


Revenues for services performed but not yet received in cash or recorded (已完成收入但還未收現 ).

Interest

Services performed

Rent

Accrued revenues often occur in regard to:


Accrued Revenues (應計收入 )

BEFORE Cash ReceiptCash ReceiptRevenue RecordedRevenue Recorded

Adjusting entry shows the receivable that exists (已存在應收款項 ) and records the revenues for

services performed (已提供服務收入 ).

Adjusting entry:

► Increases (debits) an asset account and

► Increases (credits) a revenue account.


Illustration 3-13

Accrued Revenues

Illustration: In October Pioneer Advertising

Agency recognized $200 for advertising

services performed but not recorded.

Accounts receivable 200

Cash 200Nov. 10


200

Service revenue 200

Accounts receivable

Oct. 31

On November 10, Pioneer receives cash of

$ 200 for the services performed.


Illustration 3-14

Illustration 3-15


Expenses incurred but not yet paid in cash or recorded ((已發生費用但還未記錄 )).

Rent

Interest

Taxes

Salaries

Accrued expenses often occur in regard to:


Accrued Expenses (應計費用 )

BEFORE Cash PaymentCash PaymentExpense RecordedExpense Recorded

Adjusting entry records the obligation (負債 ) and

recognizes the expense.

Adjusting entry:

► Increase (debit) an expense account and

► Increase (credit) a liability account.


Accrued Expenses

Illustration 3-16

Illustration: Pioneer Advertising signed a three-month

note payable in the amount of $5,000 on October 1. The

note requires Pioneer to pay interest at an annual rate of

12%.

Interest payable 50

Interest expense 50Oct. 31


Illustration 3-17


Illustration 3-18

Illustration: Pioneer Advertising last paid salaries on

October 26; the next payment of salaries will not occur

until November 9. The employees receive total salaries of

$2,000 for a five-day work week, or $400 per day. Thus,

accrued salaries at October 31 are $1,200 ($ 400 x 3

days).


Illustration 3-19


Illustration 3-20

Illustration 3-21



Summary of Basic RelationshipsIllustration 3-22

Prepared after all adjusting entries are journalized

and posted.

Purpose is to prove the equality of debit balances

and credit balances in the ledger.

Is the primary basis for the preparation of financial

statements.

The Adjusted Trial Balance

Adjusted Trial Balance (調整後試算表 )

Illustration 3-25

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.

The Adjusted Trial Balance

Question

Financial Statements are prepared directly from the Adjusted Trial Balance.

Financial Statements are prepared directly from the Adjusted Trial Balance.

Statement of Financial

Position

Income Statement

Retained Earnings

Statement

Preparing Financial Statements

Illustration 3-26

Illustration 3-27

chapter 3 adjusting the accounts ( 帳戶之調整 ) prepared by chih-liang julian liu department of...

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