Slide

3-1

Chapter

Adjusting the
Accounts
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
3-2

Study
Study Objectives
Objectives
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.

Slide
3-3

Adjusting
Adjusting the
the Accounts
Accounts

Timing Issues

Fiscal and calendar

years
Accrual- vs. cashbasis accounting
Recognizing
revenues and
expenses

Slide
3-4

The Basics of
Adjusting Entries

Types of adjusting
entries
Adjusting entries for
deferrals
Adjusting entries for
accruals
Summary of
journalizing and
posting

The Adjusted Trial

Balance and
Financial Statements
Preparing the
adjusted trial balance
Preparing financial
statements

Timing
Timing Issues
Issues
Accountants divide the economic life of a business into
artificial time periods (Time Period Assumption).
Jan.

Feb.

Mar.

Apr.

.....

Dec.

Generally a month, a quarter, or a year

Fiscal year vs. calendar year
Also known as the Periodicity Assumption
Slide
3-5

SO 1 Explain the time period assumption.

Timing
Timing Issues
Issues

Review
The time period assumption states that:
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.

Slide
3-6

Solution on
notes page

SO 1 Explain the time period assumption.

Timing
Timing Issues
Issues
Accrual- vs. Cash-Basis Accounting
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.

Slide
3-7

SO 2 Explain the accrual basis of accounting.

Timing
Timing Issues
Issues
Accrual- vs. Cash-Basis Accounting
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
International Financial Reporting Standards (IFRS).

Slide
3-8

SO 2 Explain the accrual basis of accounting.

Timing
Timing Issues
Issues
Recognizing Revenues and Expenses
Revenue Recognition Principle
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.
Slide
3-9

SO 2 Explain the accrual basis of accounting.

Timing
Timing Issues
Issues
Recognizing Revenues and Expenses
Expense Recognition Principle (Matching Principle)
Match expenses with
revenues in the period when
the company makes efforts to
generate those revenues.
Let the expenses follow
the revenues.

Slide
3-10

SO 2 Explain the accrual basis of accounting.

Timing
Timing Issues
Issues
IFRS relationships in
revenue and expense
recognition

Slide
3-11

Illustration 3-1

SO 2 Explain the accrual basis of accounting.

Timing
Timing Issues
Issues
Match the description of the concept to the
concept.
g
f
c
b

Slide
3-13

Solution on
notes page

SO 2 Explain the accrual basis of accounting.

E3-19. Presented below are the assumptions and principles discussed in this
chapter.
1.Full disclosure principle
4. Time period assumption
2.Going concern assumption
5. Historical cost principle
3.Monetary unit assumption
6. Economic entity assumption
Identify by number the accounting assumption or principle that is described
below. Do not use a number more than once.
(a)Is the rationale for why plant assets are not reported at liquidation value. (Do
not use the historical cost principle.)2
(b)Indicates that personal and business record-keeping should be separately
maintained. 6
(c)Assumes that the monetary unit is the measuring stick used to report on
financial performance. 3
(d)Separates financial information into time periods for reporting purposes. 4
(e)Measurement basis used when a reliable estimate of fair value is not
available. 5
(f)Dictates that companies should disclose all circumstances and events that
make a difference to financial statement users. 1
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3-14

E3-21. The following characteristics, assumptions, principles, or constraint guide the IASB when
it creates accounting standards.
1Relevance
2Faithful representation
3Comparability
4Consistency
5Monetary unit assumption
6Economic entity assumption

7Expense recognition principle

8Time period assumption
9Going concern assumption
10Historical cost principle
11Full disclosure principle
12Materiality

Match each item above with a description below.

1.Ability to easily evaluate one companys results relative to anothers. 3
2.Belief that a company will continue to operate for the foreseeable future. 9
3.The judgment concerning whether an items size is large enough to matter to decisionmakers. 12
4.The reporting of all information that would make a difference to financial statement users. 11
5.The practice of preparing financial statements at regular intervals. 8
6.The quality of information that indicates the information makes a difference in a decision. 1
7.A belief that items should be reported on the statement of financial position at the price that
was paid to acquire the item. 10
8.A companys use of the same accounting principles and methods from year to year. 4
9.Tracing accounting events to particular companies. 6
10.The desire to minimize bias in financial statements. 2
11.Reporting only those things that can be measured in monetary units. 5
12.Dictates that efforts (expenses) be matched with results (revenues). 7
Slide
3-15

Timing
Timing Issues
Issues

Review
One of the following statements about the accrual basis of
accounting is false. That statement is:
a. Events that change a companys 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 of accounting is in accord with
generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and
expenses are recorded only when cash is paid.
Slide
3-16

Solution on
notes page

SO 2 Explain the accrual basis of accounting.

The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Adjusting entries make it possible to report correct
amounts on the statement of financial position
and on the income statement.
A company must make adjusting entries every time
it prepares financial statements.

Slide
3-17

SO 3 Explain the reasons for adjusting entries.

The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Revenues - recorded in the period in which they are
earned.
earned
Expenses - recognized in the period in which they
are incurred.
incurred
Adjusting entries - needed to ensure that the
revenue recognition and expense recognition are
followed.

Slide
3-18

SO 3 Explain the reasons for adjusting entries.

The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries

Review
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. statement of financial position and income
statement accounts have correct balances at
the end of an accounting period.
d. all of the above.
Slide
3-19

Solution on
notes page

SO 3 Explain the reasons for adjusting entries.

Types
Types of
of Adjusting
Adjusting Entries
Entries
Types of Adjusting Entries

Slide
3-20

Illustration 3-2
Categories of adjusting entries

Deferrals

Accruals

1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.

3. Accrued Revenues.
Revenues earned but not yet
received in cash or
recorded.

2. Unearned Revenues.
Revenues received in cash
and recorded as liabilities
before they are earned.

4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or recorded.

SO 4 Identify the major types of adjusting entries.

Types
Types of
of Adjusting
Adjusting Entries
Entries
Illustration 3-3

Trial Balance
Illustrations are
based on the
October 31, trial
balance of
Pioneer
Advertising
Agency Inc.

Slide
3-21

SO 4 Identify the major types of adjusting entries.

Types
Types of
of Adjusting
Adjusting Entries
Entries
Adjusting Entries for Deferrals
Deferrals are either:
Prepaid expenses
OR
Unearned revenues.

Slide
3-22

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Payment of cash that is recorded as an asset because
service or benefit will be received in the future.
Cash Payment

BEFORE

Expense Recorded

Prepayments often occur in regard to:

insurance
supplies
advertising

Slide
3-23

rent
maintenance on equipment
fixed assets (depreciation)

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
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.

Slide
3-24

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Adjusting entries for prepaid expenses
Illustration 3-4

Increases (debits) an expense account and

Decreases (credits) an asset account.

Slide
3-25

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Illustration: Pioneer Advertising Agency purchased advertising
supplies costing $2,500 on October 5. Pioneer recorded the
payment by increasing (debiting) the asset Advertising 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.
Oct. 31

Advertising supplies expense

Advertising supplies

1,500
1,500
Illustration 3-5

Slide
3-26

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Illustration: On October 4, Pioneer Advertising Agency 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.
Oct. 31

Insurance expense

50

Prepaid insurance

50
Illustration 3-6

Slide
3-27

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
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 assets useful life.

Slide
3-28

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Illustration: Pioneer Advertising estimates depreciation on the
office equipment to be $480 a year, or $40 per month.
Oct. 31

Depreciation expense
Accumulated depreciation

40
40

Illustration 3-7

Slide
3-29

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Depreciation (Statement Presentation)
Accumulated Depreciation is a contra asset account.
Appears just after the account it offsets (Equipment) on
the statement of financial position.
Illustration 3-8

Slide
3-30

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Summary

Slide
3-31

Illustration 3-9

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Receipt of cash that is recorded as a liability because the
revenue has not been earned.
Cash Receipt

BEFORE

Revenue Recorded

Unearned revenues often occur in regard to:

rent
airline tickets
school tuition

Slide
3-32

magazine subscriptions
customer deposits

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
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.

Slide
3-33

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Adjusting entries for unearned revenues
Illustration 3-10

Decrease (a debit) to a liability account and

Increase (a credit) to a revenue account.
Slide
3-34

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Illustration: Pioneer Advertising Agency 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.
Oct. 31

Unearned service revenue

Service revenue

400
400
Illustration 3-11

Slide
3-35

SO 5 Prepare adjusting entries for deferrals.

Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Summary
Illustration 3-12

Slide
3-36

SO 5 Prepare adjusting entries for deferrals.

Types
Types of
of Adjusting
Adjusting Entries
Entries
Adjusting Entries for Accruals
Made to record:
Revenues earned and
OR
Expenses incurred
in the current accounting period that have not been
recognized through daily entries.

Slide
3-38

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Revenues
Revenues
Revenues earned but not yet received in cash or recorded.

Adjusting entry results in:

Revenue Recorded

BEFORE

Cash Receipt

Accrued revenues often occur in regard to:

rent
interest
services performed
Slide
3-39

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Revenues
Revenues
Accrued Revenues
An adjusting entry serves two purposes:
(1) It shows the receivable that exists, and
(2) It records the revenues earned.

Slide
3-40

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Revenues
Revenues
Adjusting entries for accrued revenues
Illustration 3-13

Increases (debits) an asset account and

Increases (credits) a revenue account.
Slide
3-41

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Revenues
Revenues
Illustration: In October Pioneer Advertising Agency earned
$200 for advertising services that had not been recorded.
Oct. 31

Accounts Receivable
Service Revenue

200
200
Illustration 3-14

Slide
3-42

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Revenues
Revenues
Summary
Illustration 3-15

Slide
3-43

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Expenses incurred but not yet paid in cash or recorded.
Adjusting entry results in:
Expense Recorded

BEFORE

Cash Payment

Accrued expenses often occur in regard to:

rent
interest

Slide
3-44

taxes
salaries

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) It recognizes the expenses.

Slide
3-45

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Adjusting entries for accrued expenses
Illustration 3-16

Increases (debits) an expense account and

Increases (credits) a liability account.
Slide
3-46

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Illustration: Pioneer Advertising Agency 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%.
Illustration 3-17

Oct. 31

Interest expense
Interest payable

50
50
Illustration 3-18

Slide
3-47

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Illustration: Pioneer Advertising Agency 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

Slide
3-48

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Illustration: Pioneer Advertising Agency 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).
Oct. 31

Salaries expense

1,200

Salaries payable

1,200
Illustration 3-20

Slide
3-49

SO 6 Prepare adjusting entries for accruals.

Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Summary
Illustration 3-21

Slide
3-50

SO 6 Prepare adjusting entries for accruals.

E3-5. Dan Luther Company has the following balances in selected accounts on December 31, 2014.
Accounts Receivable
Accumulated Depreciation Equipment
Equipment
Interest Payable

$ -0-07,000
-0-

Notes Payable

8,000

Prepaid Insurance

2,100

Salaries and Wages Payable

Supplies
Unearned Service Revenue

-02,450
30,000

All the accounts have normal balances. The information below has been gathered at December 31, 2014.
1.Dan Luther Company borrowed $8,000 by signing a 10%, one-year note on October 1, 2014.
2.A count of supplies on December 31, 2014, indicates that supplies of $780 are on hand.
3.Depreciation on the equipment for 2014 is $1,000.
4.Dan Luther Company paid $2,100 for 12 months of insurance coverage on June 1, 2014.
5.On December 1, 2014, Dan Luther collected $30,000 for consulting services to be performed from
December 1, 2014, through March 31, 2015.
6.Dan Luther performed consulting services for a client in December 2014. The client will be billed $3,900.
7.Dan Luther Company pays its employees total salaries of $9,000 every Monday for the preceding 5-day
week (Monday through Friday). On Monday, December 29, employees were paid for the week ending
December 26. All employees worked the last 3 days of 2014.
Prepare annual adjusting entries for the seven items described above.
Slide
3-51

E3-12. Selected accounts of Welch Company are shown below.

Supplies Expense
7/31

800
Salaries and Wages Payable

Supplies
7/1 Bal.
7/10

1,100

7/31

7/31

800

200
Unearned Service Revenue

Accounts Receivable
7/31

1,200

620

7/31

900

7/1 Bal.
7/20

Salaries and Wages Expense

1,500
750

Service Revenue

7/15

1,200

7/14

2,000

7/31

1,200

7/31

900

7/31

620

After analyzing the accounts, journalize (a) the July transactions and (b) the adjusting entries that were
made on July 31. (Hint: July transactions were for cash.)

Slide
3-52

The
The Adjusted
Adjusted Trial
Trial Balance
Balance
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.

Slide
3-53

SO 7 Describe the nature and purpose of an adjusted trial balance.

The
The Adjusted
Adjusted Trial
Trial Balance
Balance
Illustration 3-24
Adjusted trial balance

Slide
3-54

SO 7

The
The Adjusted
Adjusted Trial
Trial Balance
Balance

Review Question
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.
Slide
3-55

SO 7 Describe the nature and purpose of an adjusted trial balance.

Preparing
Preparing Financial
Financial Statements
Statements
Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
from the
the
Adjusted
AdjustedTrial
Trial Balance.
Balance.

Statement
of Financial
Position

Slide
3-56

Income
Statement

Retained
Earnings
Statement

SO 7 Describe the nature and purpose of an adjusted trial balance.

Preparing
Preparing Financial
Financial Statements
Statements
Illustration 3-25
Preparation of
the income
statement and
retained earnings
statement from
the adjusted trial
balance

Slide
3-57

SO 7

Preparing
Preparing Financial
Financial Statements
Statements
Illustration 3-26

Slide
3-58

SO 7

P3-2A. Lazy River Resort opened for business on June 1 with eight air-conditioned units. Its trial balance before adjustment on August 31 is as follows.
Lazy River Resort, Inc.
Trial Balance
August 31, 2014
Account Number
Debit
Credit
101
Cash
$ 19,600
126
Supplies
3,300
130
Prepaid Insurance
6,000
140
Land
25,000
143
Buildings
125,000
157
Equipment
26,000
201
Accounts Payable
$ 6,500
208
Unearned Rent Revenue
7,400
275
Mortgage Payable
80,000
311
Share Capital Ordinary
100,000
332
Dividends
5,000
429
Rent Revenue
80,000
622
Maintenance and Repairs Expense
3,600
726
Salaries and Wages Expense
51,000
732
Utilities Expense
9,400
$273,900
$273,900
In addition to those accounts listed on the trial balance, the chart of accounts for Lazy River Resort also contains the following accounts and account number: No. 112
Accounts Receivable, No. 144 Accumulated Depreciation-Buildings, No. 158 Accumulated Depreciation-Equipment, No. 212 Salaries and Wages Payable, No. 230
Interest Payable, No. 631 Supplies Expense, No. 711 Depreciation Expense, No. 718 Interest Expense, and No. 722 Insurance Expense.
Other data:
1.Insurance expires at the rate of $400 per month.
2.A count on August 31 shows $900 of supplies on hand.
3.Annual depreciation is $4,500 on buildings and $2,400 on equipment.
4.Unearned rent revenue of $4,100 was recognized for services performed prior to August 31.
5.Salaries of $400 were unpaid at August 31.
6.Rentals of $3,700 were due from tenants at August 31. (Use Accounts Receivable.)
7.The mortgage interest rate is 9% per year. (The mortgage was taken out on August 1.)
Instructions
(a)Journalize the adjusting entries on August 31 for the 3-month period June 1 August 31.
(b)Prepare a ledger using the three-column form of account. Enter the trial balance amounts and post the adjusting entries. (Use J1 as the posting reference.)
(c)Prepare an adjusted trial balance on August 31.
(d)Prepare an income statement and a retained earnings statement for the 3 months ending August 31 and a statement of financial position as of August 31.

Slide
3-59

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Adjusting the Accounts

Like IFRS, companies applying GAAP use accrual-basis accounting

to ensure that they record transactions that change a companys
financial statements in the period in which events occur.
Similar to IFRS, cash-basis accounting is not in accordance with
GAAP.
GAAP also divides the economic life of companies into artificial
time periods. Under both GAAP and IFRS, this is referred to as the
time period assumption. GAAP requires that companies present a
complete set of financial statements, including comparative
information annually.

Slide
3-60

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Adjusting the Accounts

GAAP has more than 100 rules dealing with revenue recognition.
Many of these rules are industry-specific. Revenue recognition
under IFRS is determined primarily by a single standard, IAS 18.
Despite this large disparity in the detailed guidance devoted to
revenue recognition, the general revenue recognition principles
required by IFRS that are used in this textbook are similar to those
under GAAP.
GAAP uses concepts such as realized, realizable, and earned as a
basis for revenue recognition.

Slide
3-61

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Adjusting the Accounts

Internal controls are a system of checks and balances designed to

detect and prevent fraud and errors. The Sarbanes-Oxley Act
requires U.S. companies to enhance their systems of internal
control. However, many foreign companies do not have this
requirement.
Under IFRS, revaluation to fair value of items such as land and
buildings is permitted. This is not permitted under GAAP.
The form and content of financial statements are very similar under
GAAP and IFRS. Any significant differences will be discussed in
those chapters that address specific financial statements.

Slide
3-62

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future

Slide
3-63

Adjusting the Accounts

The IASB and FASB are now involved in a joint project on revenue
recognition. Presently, the Boards are considering an approach
that focuses on changes in assets and liabilities (rather than on
when earned) as the basis for revenue recognition. It is hoped
that this approach will lead to more consistent accounting in this
area. The IASB and the FASB also face a difficult task in attempting
to update, modify, and complete a converged conceptual
framework. For example, how do companies choose between
information that is highly relevant but difficult to verify versus
information that is less relevant but easy to verify? Should a single
measurement method, such as historical cost or fair value, be
used, or does it depend on whether it is an asset or liability that is
being measured?

Alternative
Alternative Treatment
Treatment of
of Prepaid
Prepaid Expenses
Expenses
and
and Unearned
Unearned Revenues
Revenues
APPENDIX
Some companies use an alternative treatment for
prepaid expenses and unearned revenues.
When a company prepays an expense, it debits that
amount to an expense account.
When a company receives payment for future services,
it credits the amount to a revenue account.

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SO 8 Prepare adjusting entries for the alternative treatment of deferrals.

Alternative
Alternative Treatment
Treatment for
for Prepaid
Prepaid Expenses
Expenses
Illustration: Pioneer Advertising purchased supplies on
October 5 for $2,500 and debited Advertising
Supplies Expense for the full amount. What if an inventory
of $1,000 of advertising supplies remains on October 31?
Oct. 31

Advertising supplies

1,000

Advertising supplies expense

1,000
Illustration 3A-1

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SO 8 Prepare adjusting entries for the alternative treatment of deferrals.

Alternative
Alternative Treatment
Treatment for
for Prepaid
Prepaid Expenses
Expenses

Adjustment approachesa comparison

Illustration 3A-2

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SO 8 Prepare adjusting entries for the alternative treatment of deferrals.

Alternative
Alternative Treatment
Treatment for
for Unearned
Unearned Revenues
Revenues
Illustration: Assume that Pioneer Advertising received $1,200
for future services on October 2 and credited the entire amount
to Service Revenue. If at the statement date Pioneer has not
performed $800 of the services, it would make an adjusting
entry.
Oct. 31

Service revenue
Unearned service revenue

800
800
Illustration 3A-4

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SO 8 Prepare adjusting entries for the alternative treatment of deferrals.

Alternative
Alternative Treatment
Treatment for
for Unearned
Unearned Revenues
Revenues

Adjustment approachesa comparison

Illustration 3A-5

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SO 8 Prepare adjusting entries for the alternative treatment of deferrals.

Summary
Summary of
of Additional
Additional Adjustment
Adjustment Relationships
Relationships

Illustration 3A-7

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SO 8 Prepare adjusting entries for the alternative treatment of deferrals.

Copyright
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
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Request for further information should be addressed to the
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programs or from the use of the information contained herein.

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