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AccountingAccounting
PrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition
Prepared by:
Carole Bowman, Sheridan College
Weygandt · Kieso · Kimmel ·Trenholm
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1. Analyze
transactions 2. Journalize the
transactions
3. Post to ledgeraccounts
4. Prepare a
trial balance
5. Journalize
and post
adjusting
entries6. Prepare
adjusted trial
balance
7. Prepare
inancial
state!ents
". #o!ing
ne$t chapter
%. #o!ing
ne$t chapter
STEPS IN THE ACCOUNTING CYCLESTEPS IN THE ACCOUNTING CYCLE
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ADJUSTING THE ACCOUNTSADJUSTING THE ACCOUNTS
CHAPTERCHAPTER
33
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TIME PERIOD ASSUMPTION
The time period (or periodicity) assumption assumesthat the economic life of a business can be divided into
artificial time periods — generally a month, a quarter,or a year.
Periods of less than one year are calledinterim periods.
The accounting time period of one year inlength is usually known as a fiscal year.
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REVENUE RECOGNITIONPRINCIPLE
The revenue recognition principle states thatrevenue should be recognied in the accountingperiod in which it is earned.
!n a service business, revenue is usually consideredto be earned at the time the service is performed.
!n a merchandising business, revenue is usuallyearned at the time the goods are delivered.
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THE MATCHING PRINCIPLE
The practice of e"pense recognition is
referred to as the matching principle.
The matching principle dictates that efforts
(e"penses) be matched with
accomplishments (revenues).
Revenuesearned
ths !"nth
are "##seta$anst%%%%
e&'ensesn(urred nearnn$ the
revenue
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ACCRUAL )ASIS O*ACCOUNTING
#dheres to the$evenue recognition principle
%atching principle
$evenue recorded when earned, not onlywhen cash received.
&"pense recorded when services or goodsare used or consumed in the generationof revenue, not only when cash paid.
G A
A P
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$evenue recorded
only when cash
received.
&"pense recorded
only when cash
paid.
' ( T
)
# # P
CASH )ASIS O*ACCOUNTING
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#d*usting entries make the revenue
recognition and matching principles
HAPPEN!
ADJUSTING ENTRIES
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ILLUSTRATIONILLUSTRATION 3+33+3
TRIAL )ALANCETRIAL )ALANCE
&ebit #redit
#ash 15'2(()
Ad*ertising +upplies 2'5(( Prepaid ,nsurance 6((
-ice /uip!ent 5'(((
0otes Payable 5'((()
Accounts Payable 2'5((
nearned e*enue 1'2((
#.. yrd' #apital 1('(((
#.. yrd' &raings 5((
+er*ice e*enue 1('(((
+alaries $pense 4'(((
ent $pense %((
2"'7(() 2"'7(()
Pioneer Ad*ertising Agency
rial alance
-ctober 31' 2((2
The Trial +alance
is analysed to
determine the
need for ad*ustingentries.
The Trial +alance
is analysed to
determine the
need for ad*ustingentries.
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#d*usting entries are required each time financialstatements are prepared.
#d*usting entries can be classified as
. prepayments ( prepaid expenses or unearnedrevenues),
-. accruals (accrued revenues or accruedexpenses), or
. estimates (amortization).
ADJUSTING ENTRIES
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TYPES O* ADJUSTING ENTRIES
Prepayments
. Prepaid &"penses — &"penses paid in cash
and recorded as assets before they are used or
consumed.
-. /nearned $evenues — $evenues received in
cash and recorded as liabilities before they areearned.
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TYPES O* ADJUSTING ENTRIES
#ccruals
. #ccrued $evenues — $evenues earned but not
yet received in cash or recorded.
-. #ccrued &"penses — &"penses incurred but
not yet paid in cash or recorded.
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TYPES O* ADJUSTING ENTRIESTYPES O* ADJUSTING ENTRIES
&stimates
. #mortiation — #llocation of the cost of
capital assets to e"pense over their useful
lives.
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PREPAYMENTS
Prepayments are either prepaid e"penses orunearned revenues.
#d*usting entries for prepayments arerequired to record the portion of theprepayment that represents
. the e"pense incurred or,
-. the revenue earned in the currentaccounting period.
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Prepaid e"penses are e"penses paid in cash
and recorded as assets before they are used
or consumed.Prepaid e"penses e"pire with the passage of
time or through use and consumption.
#n asset-expense account relationship e"istswith prepaid e"penses.
PREPAID E,PENSES
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Prior to ad*ustment, assets are overstated and
e"penses are understated.
The ad*usting entry results in a debit to an
e"pense account and a credit to an asset
account.
&"amples of prepaid e"penses includesupplies, rent, insurance, and property ta".
PREPAID E,PENSES
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Prior to ad*ustment, liabilities are
overstated and revenues are understated.
The ad*usting entry results in a debit to aliability account and a credit to a revenue
account.
&"amples of unearned revenues includerent, magaine subscriptions, airplane
tickets, and tuition.
UNEARNED REVENUES
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ILLUSTRATIONILLUSTRATION 3+-3+-
ADJUSTING ENTRIES *OR PREPAYMENTSADJUSTING ENTRIES *OR PREPAYMENTS
#d*usting &ntries
#sset
/nad*usted
+alance
0redit
#d*usting
&ntry (1)
&"pense
2ebit
#d*usting
&ntry (3)
Prepaid &"penses
4iability
/nad*usted
+alance
2ebit
#d*usting
&ntry (1)
$evenue
0redit
#d*usting
&ntry (3)
/nearned $evenues
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ACCRUALS
# different type of ad*usting entry is
accruals.
#d*usting entries for accruals are requiredto record revenues earned and e"penses
incurred in the current period.
The ad*usting entry for accruals willincrease both a balance sheet and an
income statement account.
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#ccrued revenues may accumulate with thepassing of time or through services performed butnot billed or collected.
#n asset-revenue account relationship e"ists withaccrued revenues.
Prior to ad*ustment, assets and revenues areunderstated.
The ad*usting entry requires a debit to an assetaccount and a credit to a revenue account.
&"amples of accrued revenues include accountsreceivable, rent receivable, and interest
receivable.
ACCRUED REVENUES
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#ccrued e"penses are e"penses incurred but notyet paid.
# liability-expense account relationship e"ists.
Prior to ad*ustment, liabilities and e"penses areunderstated.
The ad*usting entry results in a debit to ane"pense account and a credit to a liability
account. &"amples of accrued e"penses include accounts
payable, rent payable, salaries payable, andinterest payable.
ACCRUED E,PENSES
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ILLUSTRATIONILLUSTRATION 3+.3+.
*ORMULA TO CALCULATE*ORMULA TO CALCULATE
INTERESTINTEREST
*a(e
Va/ue "#N"te
Annua/
InterestRate
T!e
0n Ter!s "#One Year1 & & Interest
24555 & .6 & 7879 : 29
:
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#d*usting &ntries
#sset2ebit
#d*usting
&ntry (3)
#ccrued $evenues
$evenue0redit
#d*usting
&ntry (3)
#ccrued &"penses
&"pense
2ebit
#d*usting
&ntry (3)
4iability
0redit
#d*usting
&ntry (3)
ILLUSTRATIONILLUSTRATION 3+3+
ADJUSTING ENTRIES *OR ACCRUALSADJUSTING ENTRIES *OR ACCRUALS
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#mortiation is the process of allocating
the cost of certain capital assets to e"pense
over their useful life in a rational and
systematic manner.
#mortiation attempts to match the cost of
a long1term, capital asset to the revenue it
generates each period.
AMORTI;ATION
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AMORTI;ATION
#mortiation is an estimate rather
than a factual measurement of the cost
that has e"pired.
Were not attempting to reect the
actual change in "alue o# an asset!
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A((u!u/ated A!"rt
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AMORTI;ATIONAMORTI;ATION
+alance 5heet Presentation
ffice equipment 67,888
4ess9 #ccumulated
amortiation :
'et book value 6;,
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ILLUSTRATIONILLUSTRATION 3+=3+=
SUMMARY O* ADJUSTING ENTRIESSUMMARY O* ADJUSTING ENTRIES
.Prepaid #ssets and #ssets overstated 2r. &"pensese"penses e"penses &"penses understated 0r. #ssets
-./nearned 4iabilities and 4iabilities overstated 2r. 4iabilitiesrevenues revenues $evenues understated 0r. $evenues
.#ccrued #ssets and #ssets understated2r. #ssets revenuesrevenues $evenues understated 0r. $evenues
;.#ccrued &"penses and &"penses understated 2r. &"pensese"penses liabilities 4iabilities understated 0r. 4iabilities
7.#mortiation&"pense and &"penses understated 2r. #mort. &"pcontra asset #ssets overstated 0r. #ccum. #mortiation
.Prepaid #ssets and #ssets overstated 2r. &"pensese"penses e"penses &"penses understated 0r. #ssets
-./nearned 4iabilities and 4iabilities overstated 2r. 4iabilitiesrevenues revenues $evenues understated 0r. $evenues
.#ccrued #ssets and #ssets understated2r. #ssets revenuesrevenues $evenues understated 0r. $evenues
;.#ccrued &"penses and &"penses understated 2r. &"pensese"penses liabilities 4iabilities understated 0r. 4iabilities
7.#mortiation&"pense and &"penses understated 2r. #mort. &"pcontra asset #ssets overstated 0r. #ccum. #mortiation
Type of #ccount #ccounts before #d*usting
#d*ustment $elationship #d*ustment &ntry
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ADJUSTED TRIAL )ALANCE
#n #d*usted Trial +alance is prepared after allad*usting entries have been *ournalied and posted.
!t shows the balances of all accounts at the end of
the accounting period and the effects of all financial
events that have occurred during the period. !t proves the equality of the total debit and credit
balances in the ledger after all ad*ustments have
been made.
>inancial statements can be prepared directly from
the ad*usted trial balance.
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&ebit #redit &ebit #redit
#ash 15'2(() 15'2(()
Accounts ecei*able 955
Ad*ertising +upplies 2'5(( 74555
Prepaid ,nsurance 6(( 5
-ice /uip!ent 5'((( 5'(((
Accu!ulated A!ortn. =32
0otes Payable 5'((() 5'(((
Accounts Payable 2'5(( 2'5((
nearned e*enue 1'2(( =55
+alaries Payable 74955
,nterest Payable 9
#.. yrd' #apital 1('((( 1('(((
#.. yrd' &raings 5(( 5(( +er*ice e*enue 1('((( 754.55
Ad*. +upplies $pense 7455
A!ortization $pense =3
,nsurance $pense 5
+alaries $pense 4'((( 4955
ent $pense %(( >55
,nterest $pense 9
2"'7(() 2"'7(() 3('2(") 3('2(")
Pioneer Ad*ertising Agency
rial alance
-ctober 31' 2((2eore Adjust!ent Ater Adjust!ent
ILLUSTRATIONILLUSTRATION 3+773+77TRIAL )ALANCE AND ADJUSTED TRIAL )ALANCE COMPAREDTRIAL )ALANCE AND ADJUSTED TRIAL )ALANCE COMPARED
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PREPARING *INANCIAL STATEMENTSPREPARING *INANCIAL STATEMENTS
>inancial statements can be prepared directly froman ad*usted trial balance.
. The income statement is prepared from the revenueand e"pense accounts.
-. The statement of owner’s equity is derived from theowner?s capital and drawings accounts and the netincome (or net loss) shown in the income statement .
. The balance sheet is then prepared from the asset
and liability accounts and the ending owner?s capitalbalance as reported in the statement of owner’s equity.
ILLUSTRATIONILLUSTRATION 3+793+79
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ILLUSTRATIONILLUSTRATION 3+793+79 PREPARATION O* THE INCOME STATEMENT AND THEPREPARATION O* THE INCOME STATEMENT AND THE
STATEMENT O* O?NER@S EUITY *ROM THESTATEMENT O* O?NER@S EUITY *ROM THE
ADJUSTED TRIAL )ALANCEADJUSTED TRIAL )ALANCE
e*enues
+er*ice e*enue 754.552
$penses
Ad*. +upplies $pense 74552
A!ortization $pense =3
,nsurance $pense 5 +alaries $pense 4955
ent $pense >55
,nterest $pense 9
otal $penses B4B=
0et ,nco!e 94=-92
Pioneer Ad*ertising Agency
,nco!e +tate!ent
7or the 8onth nded -ctober 31' 2((2
#.. yrd' #apital' -ctober 1 9)
Add: ,n*est!ents 754555
0et inco!e 94=-9
12'"42
;ess: &raings 55
#.. yrd' #apital' -ctober 31 12'342)
+tate!ent o -ners /uity
or the 8onth nded -ctober 31' 2((2
Pioneer Ad*ertising Agency
&ebit #redit
#ash 15'2(()
Accounts ecei*able 2((
Ad*ertising +upplies 1'(((
Prepaid ,nsurance 55(
-ice /uip!ent 5'(((
Accu!ulated A!ort6n. "3)
0otes Payable 5'(((
Accounts Payable 2'5((
nearned e*enue "((
+alaries Payable 1'2((
,nterest Payable 25
#.. yrd' #apital 754555
#.. yrd' &ra4ings 55
+er*ice e*enue 754.55
Ad*. +upplies $pense 7455
A!ortization $pense =3
,nsurance $pense 5
+alaries $pense 4955
ent $pense >55
,nterest $pense 9
3('2(") 3('2(")
Pioneer Ad*ertising Agency
Adjusted rial alance
-ctober 31' 2((2
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&ebit #redit
#ash 749552
Accounts ecei*able 955
Ad*ertising +upplies 74555
Prepaid ,nsurance 5
-ice /uip!ent 4555 Accu!ulated A!ortn. =32
0otes Payable 4555
Accounts Payable 9455
nearned e*enue =55
+alaries Payable 74955
,nterest Payable 9
#.. yrd' #apital 1('(((
#.. yrd' &raings 5(( +er*ice e*enue 1('6((
Ad*. +upplies $pense 1'5((
A!ortization $pense "3
,nsurance $pense 5(
+alaries $pense 5'2((
ent $pense %((
,nterest $pense 25
3('2(") 3('2(")
Pioneer Ad*ertising Agency
Adjusted rial alance
-ctober 31' 2((2
#ash 749552
Accounts ecei*able 955
Ad*ertising +upplies 74555
Prepaid ,nsurance 5
-ice /uip!ent 45552
;ess: Accu!ulated A!ortization =3 -4>7B
otal Assets 21'"67)
;iabilities and -4ners /uity
;iabilities
0otes Payable 45552
Accounts Payable 9455
nearned e*enue =55
+alaries Payable 74955
,nterest Payable 9
otal ;iabilities %'525)
-4ners /uity
#.. yrd' #apital 7943-9
otal ;iabilities and -4ners /uity 21'"67)
-ctober 31' 2((2
Assets
Pioneer Ad*ertising Agency
alance +heet
ILLUSTRATIONILLUSTRATION 3+733+73 PREPARATION O* THE )ALANCE SHEET *ROMPREPARATION O* THE )ALANCE SHEET *ROM
THE ADJUSTED TRIAL )ALANCETHE ADJUSTED TRIAL )ALANCE
*r"!State!ent"# Oner@s
Eut
*r"!State!ent"# Oner@s
Eut
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COPYRIGHTCOPYRIGHT
Copyright $ %&&% 'ohn Wiley ( Sons Canada) *td+ All rightsreser"ed+ ,eproduction or translation o# this -or. /eyond
that permitted /y CANC0P1 2Canadian ,eprographyCollecti"e3 is unla-#ul+ ,e4uest #or #urther in#ormation should/e addressed to the Permissions 5epartment) 'ohn Wiley (Sons Canada) *td+ The purchaser may ma.e /ac.6up copies#or his 7 her o-n use only and not #or distri/ution or resale+The author and the pu/lisher assume no responsi/ility #or
errors) omissions) or damages) caused /y the use o# these