Chapter 3 - Adjusting entries. This chapter presents the following content: Measuring business income, adjusting entries, adjusting process, prepaid insurance, depreciation expense, accrued revenues, income statement. | Adjusting Entries Measuring Business Income Accounting period assumption Cash accounting versus accrual accounting Matching principle Materiality concept Adjusting Entries Journal entries that update the general ledger accounts to state revenues, expenses, assets, and liabilities more accurately Involve One balance sheet account One income statement account Never cash Adjusting Process Identify the accounts requiring adjustment Determine unadjusted balances Determine correct (adjusted) balances for each account Prepare adjusting entry to bring accounts in agreement with adjusted balances Deferrals A cash payment or receipt occurred in current period Must defer a portion of expense or revenue until a future period Deferrals Two situations Pay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit Deferrals Two situations Pay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit Receive a cash revenue in advance . | Adjusting Entries Measuring Business Income Accounting period assumption Cash accounting versus accrual accounting Matching principle Materiality concept Adjusting Entries Journal entries that update the general ledger accounts to state revenues, expenses, assets, and liabilities more accurately Involve One balance sheet account One income statement account Never cash Adjusting Process Identify the accounts requiring adjustment Determine unadjusted balances Determine correct (adjusted) balances for each account Prepare adjusting entry to bring accounts in agreement with adjusted balances Deferrals A cash payment or receipt occurred in current period Must defer a portion of expense or revenue until a future period Deferrals Two situations Pay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit Deferrals Two situations Pay a cost of benefit in advance and allocate cost as expenses to periods that receive benefit Receive a cash revenue in advance and allocate amounts as revenues to periods in which revenues earned Prepaid Insurance Dec. 1, paid $600 for 12 month insurance premium recording as asset, Prepaid Insurance At Dec. 31 Prepaid Insurance balance $600 Insurance Expense balance $0 Prepaid Insurance As of Dec. 31, one month’s insurance has expired and become expense Correct Dec. 31 balance Prepaid Insurance $550 Insurance Expense $50 Prepaid Insurance Adjusting entry Debit Insurance Expense $50 Increases Insurance Expense to correct balance $50 Credit Prepaid Insurance $50 Decreases Prepaid Insurance to correct balance $550 Depreciation Expense Similar to prepaid insurance but for long-term asset Decrease in asset not recorded in asset account Recorded as increase in contra asset - Accumulated Depreciation Depreciation Expense Before After Balance Sheet Trucks Accum Deprec $26,000 400 $26,000 800 Income Statement Depreciation expense $0 $400 Unearned Revenues Dec. 1, received $600 for 6 month rent recording as liability, .
