Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !

sen Uni"e#si $

Lesson Notes Lesson 4 Adjusting Accounts for Financial Statement Learning objectives

%& Desc#i'e he (u#(ose of a)*us in+ accoun s a he en) of he (e#io)& ,& -#e(a#e an) e.(lain a)*us in+ en #ies fo# (#e(ai) e.(enses, amo# i/a ion, unea#ne) #e"enues, acc#ue) e.(enses, an) acc#ue) #e"enues& 0& E.(lain ho1 accoun in+ a)*us men s link o financial s a emen s& 2& E.(lain an) (#e(a#e an a)*us e) #ial 'alance&
Teaching hours S u)en s ma*o# in accoun in+3 0 hou#s O he#s3 Teaching contents: 0 hou#s

Need for adjustments at the end of an accounting period Some e"en s a#e no e"i)ence) '$ he o'"ious )ocumen s& The$ ma$ no #eco#)e) an) #ela e) accoun s 1ill no 'e u(! o!)a e an) he#efo#e )o no (#o"i)e a fai# (#esen a ion of he accoun s on he financial s a emen s& A)*us men a#e necessa#$ o #eco#) in e#nal economic e"en s such as he e.(i#a ion of cos & Befo#e financial s a emen s a#e (#e(a#e) a he en) of an accoun in+ (e#io), i is necessa#$ o a)*us he accoun 'alances ha a#e no u(! o!)a e& The (u#(ose of makin+ a)*us men s is o ensu#e ha he info#ma ion on he accoun in+ s a emen is com(a#a'le f#om (e#io) o (e#io)& Related GAA A)*us men s a#e 'ase) on h#ee +ene#all$ acce( e) accoun in+ (#inci(les3 Time (e#io) (#inci(le3 The con inue) life of a 'usiness is )i"i)e) in o ime (e#io)s of e4ual len+ h& Annual Financial #e(o# s a#e (#e(a#e) a he en) of each fiscal (e#io)& 5e"enue #eco+ni ion (#inci(le3 The #e"enue is #eco+ni/e) in he (e#io) in 1hich i is ea#ne) #e+a#)less he cash is #ecei"e) o# no & Ma chin+ (#inci(le3 Ma chin+ (#inci(le #e4ui#es ha #e"enues an) e.(enses 'e ma che)& All e.(enses incu##e) in ea#nin+ #e"enues mus 'e )e)uc e) f#om he #e"enues in )e e#minin+ ne income& So, A)*us men s a#e #e4ui#e) o ma ch3 Associa e) #e"enues 1i h hei# #ela e) cos s 5e"enues an) e.(enses o hei# a((#o(#ia e ime (e#io)s

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

Accrual and cash basis of accounting The acc#ual 'asis of accoun in+ ma ches #e"enues ea#ne) 1i h e.(enses incu##e)& The cash 'asis ma ches #e"enues #ecei"e) 1i h e.(enses (ai)& I is no sa isfac o#$ fo# mos 'usinesses 'ecause i #esul s in financial s a emen s ha a#e no com(a#a'le f#om (e#io) o (e#io), e.ce( 1hen he amoun s of (#e(ai), unea#ne), an) acc#ue) i ems a#e no ma e#ial& Cash 'asis accoun in+ )oes no make a)*us men s fo# (#e(ai) e.(enses, acc#ue) e.(enses, unea#ne) #e"enues, an) acc#ue) #e"enues& Onl$ acc#ual accoun in+, 1i h i s em(hasis on ma chin+, an) hence he nee) fo# a)*us men s, is acce( a'le un)e# GAA-& T!pe of Adjusting "ntries The#e a#e fou# $(es of a)*us men 3 Acc#uin+ un#eco#)e) #e"enues Con"e# in+ lia'ili ies o #e"enues Acc#uin+ un#eco#)e) e.(enses Con"e# in+ asse s o e.(enses Acc#uin+ un#eco#)e) #e"enues is o acc#ue #e"enues an) #eco#) he #ela e) asse s& Since he #e"enues a#e ea#ne) in one (e#io) an) cash #ecei"e) in he o he# (e#io) so a)*us men is necessa#$& "#ample: On 6un %, ,772, Smi h Inc& in"es s 8%77,777 fo# a 'on)s 1hich (a$s 9: in e#es per year& Smi h Inc& 1ill no #ecei"e he in e#es un il Ma#ch 0%, ,779& On Decem'e# 0%, ,772, Smi h, Inc& nee) o make he follo1in+ en #$ fo# he in e#es ea#ne) al#ea)$ The a)*us in+ #$ fo# he a)*us men 1ill 'e3 D#& In e#es 5ecei"a'le ,;%<&<= C#& In e#es 5e"enue ,;%<&<= Acc#uin+ un#eco#)e) e.(enses is o acc#ue incu##e) e.(enses an) #eco#) he #ela e) lia'ili ies& "#ample: On he $ea#!en), Dec& 0%, ,772, Smi h Inc&>s em(lo$ees ha"e ea#ne) o al 1a+es of 809,777 fo# he Mon)a$, 'u Smi h Inc& 1ill no (a$ he 1a+es un il 9 h of ne. mon h& So a he en) of he accoun in+ (e#io), Smi h nee) o make he follo1in+ en #ies o acc#ue) he 1a+e e.(enses& The a)*us in+ en #$ 1ill 'e 3 D#& ?a+es E.(ense 09777 C#& ?a+es -a$a'le 09777 Con"e# in+ lia'ili ies o #e"enues is o #eco+ni/e as #e"enues he ea#ne) (o# ion of unea#ne) #e"enue lia'ili ies& "#ample: On Oc & %, ,772, Smi h Inc& si+ne) a con #ac fo# (#o"i)in+ a s(ecial

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

se#"ice o Cone& Smi h #ecei"e) 897777 fo# he se#"ice o 'e (#o"i)e)& A he en) of ,772 half of he se#"ices ha"e 'een (#o"e) o Cone& Smi h shoul) make he follo1in+ en #ies o #eco#) ea#ne) #e"enue & The a)*us in+ en #$ 1ill 'e3 D#& Unea#ne) 5e"enue ,9777 C#& Se#"ice 5e"enue ,9777 Con"e# in+ asse s o e.(enses is o cha#+e he e.(i#e) (o# ion of (#e(ai) e.(enses o e.(ense& "#ample3 On 6ul$ %, ,772, Smi h Inc& (ai) 8,7777 fo# 1hole $ea#>s #en co"e#e) f#om %s of 6ul$ o 07 h of 6une& A he en) of ,772, 8%7777 of #en e.(enses ha"e occu##e) so Smi h Inc& nee) o make he follo1in+ en #ies o #ansfe# he )efe##als o e.(enses& The a)*us in+ en #$ 1ill 'e3 D#& 5en E.(ense %7777 C#& -#e(ai) 5en %7777 Amo# i/a ion is also 'elon+s o his $(e of a)*us men , 'ecause Amo# i/a ion is o con"e# he cos of fi. asse o amo# i/a ion e.(ense& "#ample3 On 6anua#$ %,,772, a com(an$ (u#chase) a (iece of e4ui(men fo# 8%77,777& The e4ui(men is e.(ec e) o ha"e a useful life of fi"e $ea#s an) ha"e a sal"a+e "alue of 89777&Asume he com(an$ use he s #ai+h !line me ho)& ?e can calcula e) ha he annual amo# i/a ion "alue is %;777& @A%77777!9777BC9D, he a)*us in+ en #$ 1ill 'e 3 D#& Amo# i/a ion E.(ense %;777 C#& Accumula e) Amo# i/a ion %;777 Adjusted Trial $alance The a)*us e) #ial 'alance is use) o check if he#e a#e an$ mis akes in (#e(a#in+ an) (os in+ he a)*us e) accoun s an) i is use) fo# he financial s a emen & Adjustments % Financial Statements A)*us in+ en #ies '#in+ he accoun s u(! o!)a e& A)*us men s a#e onl$ ma)e 1hen financial s a emen s a#e (#e(a#e)& A)*us en #ies 1ill affec 'o h he income s a emen an) he 'alance shee & A)*us men 1ill no affec he cash flo1 of he com(an$&
&e! points %& I)en if$ an) anal$/e he e"en s nee)e) o a)*us E ,& The (#e(a#a ion of a)*us in+ en #ies& Reference

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

%& -hili( E& Fess an) Ca#l S& ?a##en, Accounting Principles, Sou h!?es e#n -u'lishin+ Co&, %;F=&

,& Bu##o1es, Ashle$ ?& Co#e Conce( s of Accoun in+ Info#ma ion S$s ems& Issues in
Accounting E)uca ion, Ma$,779, Gol& ,7 Issue ,&

0& Su on, S e"e G&, The #ole of AIS #esea#ch in +ui)in+ (#ac ice&,International Journal of
Accounting Information Systems, Ma#,779, Gol& < Issue %&

2& Hu chison, -aul D&, ?hi e, C#ai+ G&, an) Dai+le, 5onal) 6&, A)"ances in Accoun in+
Info#ma ion S$s ems an) In e#na ional 6ou#nal of Accoun in+ Info#ma ion S$s ems3 fi#s en "olumes A%;;,I,770B&, International Journal of Accounting Information Systems, Oc ,772,
Gol& 9 Issue 0&

9& Lin, Fen+$i, A Unified Accounting Information Framework To Modeling Bank

Accounting Systems, Journal of Applied Business Research, Fall2004, ol! 20 Issue