Scribd
Upload
4 views1 page

Lecture Note #4

Adjusting entries at the end of the accounting period are essential for accurate income measurement and balance sheet valuation, involving deferrals and accruals. Adjusted balances are used to prepare financial statements including the Income Statement, Statement of Stockholders' Equity, and Balance Sheet. Temporary accounts are closed to zero to update Retained Earnings and facilitate the accumulation of income in the next period.

Uploaded by

3B01 CHAN HOI YING JANICE
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
4 views1 page

Lecture Note #4

Adjusting entries at the end of the accounting period are essential for accurate income measurement and balance sheet valuation, involving deferrals and accruals. Adjusted balances are used to prepare financial statements including the Income Statement, Statement of Stockholders' Equity, and Balance Sheet. Temporary accounts are closed to zero to update Retained Earnings and facilitate the accumulation of income in the next period.

Uploaded by

3B01 CHAN HOI YING JANICE
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Lecture Notes – Chapter 4

4-1 What’s the purpose of adjustments and what should be adjusted?


Adjusting entries are necessary at the end of the accounting period to measure income properly,
correct errors, and provide for adequate valuation of balance sheet accounts. There are four types:
Deferrals:
 Revenue earned and cash received in the past (recorded as a liability)— ↑ revenue, ↓ liability
 Expense incurred and cash paid in the past (recorded as an asset)— ↑ expense, ↓ assets
Accruals:
 Revenue earned and cash to be received in the future (not yet recorded)— ↑ revenue, ↑ asset
(receivable)
 Expense incurred and cash to be paid in the future (not yet recorded)— ↑ expense, ↑ liability
(payable)
Important Note: Recording adjusting entries has no effect on the Cash account.
4-2 Adjustments and preparing financial statements
Adjusted account balances are used in preparing the following financial statements:
 Income Statement:
o Operating Revenues − Operating Expenses = Operating Income (or Loss) +/− Other Items =
Pretax income − Income tax expense = Net income and Earnings Per Share
 Statement of Stockholders’ Equity:
o (Beginning Common Stock + New issuances) + (Beginning Additional Paid-in Capital + New
issuances) − (Beginning Treasury Stock + New stock repurchases) + (Beginning Retained
Earnings + Net Income − Dividends Declared) = Ending Stockholders’ Equity
 Balance Sheet:
o [Current Assets + Noncurrent assets = Total Assets] = [Current Liabilities + Noncurrent
Liabilities + Stockholders’ Equity = Total Liabilities and Stockholders’ Equity]
4-3 Closing the books
Temporary accounts (revenues, expenses, gains, and losses) are closed to a zero balance at the end of the
accounting period to allow for the accumulation of income items in the following period and to update
Retained Earnings. To close these accounts, debit each revenue and gain account, credit each expense and
loss account, and record the difference (equal to net income) to Retained Earnings.
Debit Credit
(CE) Each revenue (−R, −SE) XX
Each gain (−R, −SE) XX
Each expense (−E, +SE) XX
Each loss (−E, + SE) XX
Retained Earnings (+SE)* XX
* The credit to Retained Earnings assumes net income is positive. If the total of expenses/losses exceeds
the total of revenues/gains, Retained Earnings would be debited (reduced) for the amount of the net loss.

You might also like