Chapter 3

Adjusting the Accounts

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Chapter Outline (p.2)

應計基礎與調整分錄

遞延項目的調整分錄

應計項目的調整分錄

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Learning Objective 1
Explain the accrual basis of accounting
and the reasons for adjusting entries.

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Accrual-Basis Accounting and Adjusting Entries
(p.3)
Time period (or periodicity) assumption: 會計期間假設

Accountants divide the economic life of a business into time periods.

▪ Ex. The airplanes purchased by Cathay Pacific five years ago are still in use today.

Comic episode

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Time period (or periodicity) assumption
▪ Example: Cathay Pacific purchased an airplane on 1/1/2015. This
airplane can be used for five years.

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Fiscal and Calendar Years (p.3)
• Accounting time periods are generally a month, a quarter, or a year.
• Monthly and quarterly time periods are called . 期中期間

• Most large companies must prepare both and financial

statements.
• Fiscal Year = Accounting time period that is one year in length.
• Calendar Year = January 1 to December 31.
• Sometimes a company’s year-end will vary from year to year, resulting in accounting
periods of either 52 or 53 weeks.

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Example- Fiscal and Calendar Years
1. Retail Businesses:
Example: A major retailer might choose a fiscal year that ends on
rather than December 31st.

Reason: This allows them to include the entire holiday sales season,
including potential product returns in January, within a single fiscal year.
It helps in getting a complete picture of holiday sales without splitting it
over two fiscal years.

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Example- Fiscal and Calendar Years
2. Agriculture:
Example: A farm business that harvests crops in the fall might have a
fiscal year that ends after the harvest season, say, .

Reason: This ensures that all activities related to planting, growing, and
harvesting the crops, as well as sales, are captured within one fiscal year.

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Example- Fiscal and Calendar Years
3. Educational Institutions:
Example: Many colleges and universities have a fiscal year that runs
from .

Reason: This aligns closely with the academic year, allowing institutions
to plan budgets around student enrollments, semesters, and breaks.

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(partial)

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Accrual- versus Cash-Basis Accounting (p.3)

Accrual-Basis Accounting 應計基礎會計

• Transactions are recorded in the periods in which the events .

• Companies recognize revenues when they services (rather
than when they receive cash). 提供服務時才能認列收入

• Expenses are recognized when (rather than when paid).

費用已發生時認列

• Accrual-basis accounting is in accordance with IFRS.

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Accrual- versus Cash-Basis Accounting p.3

Cash-Basis Accounting 現金基礎會計

• Revenues are recorded when cash is received.

• Expenses are recorded when cash is paid.
• Cash-basis accounting is not in accordance with IFRS.

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Accrual- versus Cash-Basis Accounting
Example
➢ During 2017, Karas Brothers billed clients $50,500 for consulting
services performed in 2017.
➢ By Dec. 31, Karas had received $22,000 in cash from customers, with
the $28,500 balance expected in 2018.
➢ During 2017, Karas paid $21,900 for various expenses that had been
incurred.
➢ At Dec. 31, 2017, Karas still owed $11,200 for salary expenses incurred.
These expenses will be paid during January 2018.

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Accrual- versus Cash-Basis Accounting
Example
Determine net income under both methods.

Accrual-basis accounting
is required by GAAP.

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Recognizing Revenues and Expenses (p.3)
收入認列原則

滿足履約義務可認列收入

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Example-Performance Obligation
iPhone with a 2-Year Cellular Contract
Scenario: You walk into a phone store and decide to buy an iPhone for
$600. Additionally, you sign up for a 2-year cellular service contract, which
includes both a call plan and data, for $50 per month.
Performance Obligations:
1.iPhone Delivery: The store has the immediate obligation to provide you
with an iPhone.
2.Cellular Service: The store (or cellular provider) has an ongoing
obligation to provide you with cellular service (calls and data) for the next
24 months.
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Example-Performance Obligation

Revenue Recognition:
1.iPhone: The entire revenue for the iPhone ($600) is recognized
immediately once the phone is to you.
2.Cellular Service: The store (or cellular provider) recognizes revenue
gradually, as the service is . This means $50 will be
recognized as revenue each for the cellular service. By the
end of the 24-month period, the total revenue recognized for the
service will be $1,200 (24 months x $50/month).

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Recognizing Revenues and Expenses (p.4)
Matching Principle
費用認列原則 或 配合原則

費用在產生收入時認列

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Example-Matching Principle
Scenario: You own a small shoe store. At the beginning of March,
you purchase 100 pairs of sneakers for $50 each, totaling $5,000.
Throughout March, you sell 60 pairs of these sneakers for $100
each.
Inventory Purchase: When you purchase the sneakers at the
beginning of March for $5,000, you record this as an increase in
your inventory asset, but as an expense yet.

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Example-Matching Principle
Selling the Sneakers:
Revenue in March: .
Expense in March : .

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 The Need for Adjusting Entries (p.5)

• Adjusting entries ensure that the revenue recognition and expense

recognition principles are followed.
• Required / Optional every time a company prepares financial statements.
• Will include one account and
one account.

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 The Need for Adjusting Entries (p.5)
Reasons:
1. Some events are not recorded daily because it is not to do so.
(ex. The use of supplies and earning of wages by employees)
2. Some costs are not recorded during the accounting period because these
costs expire with the passage of rather than as a result of
recurring daily transactions.
(ex. Charges related to the use of buildings and equipment, rent, and
insurance)
3. Some items may be .
(ex. a utility service bill that will not be received until the next
accounting period)

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Types of Adjusting Entries p.5

遞延事項:先收付現金，後認列收入費用

應計事項:先認列收入費用，後收付現金

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Types of Adjusting Entries p.5
Revenue Earned Unearned
Not Received
Received

Expense Incurred Not Incurred

Not Paid
Paid
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Analyze each account to determine whether it is complete and up-
to-date for financial statement purposes. P.5

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Learning Objective 2
Prepare adjusting entries for deferrals.

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 Adjusting Entries for Deferrals p.6
調整分錄 財務報表 結帳後試算表
分析 過帳

Chapter 2 將交易做分錄 試算表 調整後試算表 結帳

Chapter 3 Chapter 4

Deferrals are expenses or revenues that are recognized at a date than the
point when cash was originally exchanged.

There are two types:

• Prepaid expenses, and
• Unearned revenues.
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Prepaid Expenses p.6
Prepaid expenses are costs that expire either with the passage of
time (e.g., rent and insurance) or through use (e.g., supplies).

Prior to adjustment, assets are overstated and expenses are

understated.

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Supplies p.7

Rather than record supplies expense as the supplies are used,

companies recognize supplies expense at the end of the
accounting period.
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 Supplies p.7
Assume: Yazici Advertising purchased supplies costing 2,500 on
October 5. Yazici recorded the purchase 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.

Demonstrate: How do you record the adjustment for supplies?

LO 2 31
Supplies p.7

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Insurance p.8

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Insurance p.8
Assume: On October 4, Yazici Advertising paid 600 for a one-
year fire insurance policy. Coverage began on October 1.
Yazici recorded the payment by increasing (debiting) Prepaid
Insurance.

Demonstrate: How do you record the adjustment for

insurance?

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Insurance p.8

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Depreciation p.9 折舊

➢ Depreciation is the process of the cost of

an asset to expense over its useful life.

➢ Depreciation is an concept, not a

valuation concept.

➢ That is, depreciation allocates an asset’s cost to

the periods in which it is used.

➢ Depreciation does attempt to report the

actual change in the value of the asset.

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Depreciation p.9
Assume: For Yazici Advertising, depreciation on the equipment is
480 a year, or 40 per month.

Demonstrate: How do you record the adjustment for

depreciation?

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Depreciation p.9

HELPFUL HINT
All contra accounts have increases, decreases, and
normal balances opposite to the account to which they
relate.
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Prepaid Expenses p.9
Statement Presentation.

1 Book value or carrying value: between the cost of

any depreciable asset and its related accumulated depreciation.

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Unearned Revenues p.10

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Unearned Revenues p.10
➢ When companies receive cash before/after services are performed, they record a
liability by increasing (crediting) a liability account called unearned revenues.

➢ Prior to adjustment, liabilities are and revenues are .

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Service Revenue p.11
Assume: Yazici Advertising received 1,200 on October 2 from R.
Knox for advertising services expected to be completed by
December 31. Yazici credited the payment to Unearned Service
Revenue. This liability account shows a balance of 1,200 in the
October 31 trial balance.

Demonstrate: How do you record the adjustment for advertising

revenue?

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Service Revenue p.11

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 Learning Objective 3
Prepare adjusting entries for accruals.

LO3 44
Adjusting Entries for Accruals
調整分錄 財務報表 結帳後試算表
分析 過帳

Chapter 2 將交易做分錄 試算表 調整後試算表 結帳

Chapter 3 Chapter 4
Accruals are made to record the following:
• Revenues for services performed but not yet recorded at the statement
date – accrued revenues
or
• Expenses incurred but not yet paid or recorded at the statement date –
accrued expenses

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Accrued Revenues p.13

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Accrued Revenues p.13

Prior to adjustment, both assets and revenues are

An adjusting entry for accrued revenues results in an increase (a debit/credit)

to an asset account and an increase (a debit/credit) to a revenue account.

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Accrued Revenues
Assume: In October, Yazici Advertising performed
services worth 200 that were not billed to clients on or
before October 31. Because these services were not
billed, they were not recorded.

Demonstrate: How do you adjust for accrued revenue?

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Accrued Revenues p.14

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 Accrued Revenues p.14
Assume: On November 10, Yazici receives cash of 200
for the services performed in October and makes the
following entry.

Demonstrate: How do you record the collection of the

receivables?

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 Accrued Expenses p.14

Prior to adjustment, both liabilities and expenses are .

An adjusting entry for accrued expenses results in an increase (a debit/credit) to an

expense account and an increase (a debit/credit) to a liability account.
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Accrued Interest p.15
Assume: Yazici Advertising signed a three-month note
payable in the amount of 5,000 on October 1. The note
requires Yazici to pay interest at an annual rate of 12%.

Demonstrate:
(1) How do you determine the interest to be recorded?
(2) How do you create the adjustment for accrued
interest?

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Accrued Interest p.15

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Accrued Interest p.15

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Accrued Salaries and Wages p.16

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Accrued Salaries and Wages p.16
Assume: At October 31, the salaries and wages for these
three days represent an accrued expense and a related
liability to Yazici. The employees receive total salaries
and wages of 2,000 for a five-day work week, or 400 per
day. Thus, accrued salaries and wages at October 31 are
1,200 ( 400 × 3).

Demonstrate: How do you create the adjustment for

accrued salaries and wages?

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Accrued Salaries and Wages p.16

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Accrued Salaries and Wages p.17
Assume: Yazici pays salaries and wages every two weeks.
Consequently, the next payday is November 9, when the company
will again pay total salaries and wages of 4,000. The payment
consists of 1,200 of salaries and wages payable at October 31 plus
2,800 of salaries and wages expense for November (7 working
days, as shown in the November calendar × 400).

Demonstrate: Which entry does Yazici make on November 9?

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Accrued Expenses – Summary p.17

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Summary of Basic Relationships p.17

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Summary of Basic Relationships p.18

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Learning Objective 4
Describe the nature and purpose of an
adjusted trial balance.
調整後試算表

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Adjusted Trial Balance and
Financial Statements 調整分錄 財務報表 結帳後試算表
分析 過帳

Chapter 2 將交易做分錄 試算表 調整後試算表 結帳

Chapter 3 Chapter 4
Adjusted trial balance:

• Proves the of the total debit balances and the total credit
balances in the ledger after all adjustments.
• Primary basis for the preparation of financial statements.

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Preparing the Adjusted Trial Balance p.21

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Preparing Financial Statements (1/2) p.22

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Preparing Financial Statements (2/2) p.23

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