WILEY

IFRS EDITION

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont
3-1 College
 PREVIEW OF CHAPTER 3

Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
3-2
 CHAPTER

3 Adjusting the Accounts

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

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.

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 Timing Issues
Learning Objective 1
Explain the time period • Most companies need immediate feedback about how
assumption. well they are doing .
• 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.

 Also known as the “Periodicity Assumption”

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 Fiscal and Calendar Years

 Monthly and quarterly time periods are called interim periods.

 Most large companies must prepare both quarterly and annual financial statements.

 Fiscal Year = Accounting time period that is one year in length.

 Calendar Year = January 1 to December 31.

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 Fiscal and Calendar Years

Question
The time period assumption states that:

a. companies must wait until the calendar year is completed to prepare financial
statements.

b. companies use the fiscal year to report financial information.

c. the economic life of a business can be divided into artificial time periods.

d. companies record information in the time period in which the events occur.

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 Accrual- versus Cash-Basis Accounting
Learning Objective 2
Explain the accrual basis of
Accrual-Basis Accounting accounting.

 Transactions recorded in the periods in

which the events occur.

 Companies recognize revenues when they perform services (rather than when
they receive cash).

 Expenses are recognized when incurred (rather than when paid).

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 Accrual- versus Cash-Basis Accounting

Cash-Basis Accounting
 Revenues are recorded when cash is received.

 Expenses are recorded when cash is paid.

 Cash-basis accounting is not in accordance with International Financial Reporting

Standards (IFRS).

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 Recognizing Revenues and Expenses

REVENUE RECOGNITION PRINCIPLE

Recognize revenue in the accounting
period in which the performance obligation
is satisfied.

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 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.”

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 Illustration 3-1
IFRS relationships in revenue and
expense recognition

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 Recognizing Revenues and Expenses

Question
The revenue recognition principle states that:

a. revenue should be recognized in the accounting period in which a performance obligation is

satisfied.

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.

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 The Basics of Adjusting Entries
Learning Objective 3
Explain the reasons for
Adjusting Entries adjusting entries.

 Ensure that the revenue recognition and

expense recognition principles are followed.

 Necessary because the trial balance may not contain up-to-date and complete data
 Some events are not recorded daily because it is not efficient to do so.
 Some costs are not recorded during the accounting period because these costs expire
with the passage of time .
 Some items may be unrecorded. An example is a utility service bill that
will not be received until the next accounting period.
 Required every time a company prepares financial statements.

 Will include one income statement account and one statement of financial position
LO 3
3-13 account.
 Adjusting Entries

Question
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 services are performed.

c. statement of financial position and income statement accounts have correct balances at the
end of an accounting period.

d. All the responses above are correct.

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 Types of Adjusting Entries Learning Objective 4
Identify the major types of
adjusting entries.

Deferrals Accruals

1. Prepaid Expenses. Expenses paid in cash 1. Accrued Revenues. Revenues for services
before they are used or consumed. performed but not yet received in cash or
recorded.

2. Unearned Revenues. 2. Accrued Expenses. Expenses incurred but

Cash received before services are not yet paid in cash or recorded.
performed.

Illustration 3-2
Categories of adjusting entries

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 Illustration 3-3
Trial balance Each account is analyzed to determine whether it is complete and up-to-date for
financial statement purposes.
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 Adjusting Entries for Deferrals
Learning Objective 5
Deferrals are expenses or revenues that are recognized at a date Prepare adjusting entries for
deferrals.
later than the point when cash was originally exchanged. There are
two types:
 Prepaid expenses and

 Unearned revenues.

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 PREPAID EXPENSES

Payments of expenses that will benefit more than one accounting period.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

 insurance  rent
 supplies  buildings and equipment
 advertising

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 PREPAID EXPENSES

 Expire either with the passage of time or through use.

 Adjusting entry:
► Increase (debit) to an expense account and

► Decrease (credit) to an asset account.

Illustration 3-4
Adjusting entries for prepaid
expenses

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 PREPAID EXPENSES

Illustration: Yazici Advertising Inc. Inc. 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.

Oct. 31 Supplies Expense 1,500

Supplies 1,500

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Illustration 3-5
Adjustment for supplies

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 PREPAID EXPENSES

Illustration: On October 4, Yazici Advertising Inc. paid ₺600 for a

one-year fire insurance policy. Coverage began on October 1. Yazici
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

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Illustration 3-6
Adjustment for insurance

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 PREPAID EXPENSES

DEPRECIATION
 Buildings, equipment, and motor vehicles (assets that provide service for many
years) are recorded as assets, rather than an expense, on the date acquired.

 Depreciation is the process of allocating the cost of an asset to expense over its
useful life.

 Depreciation does not attempt to report the actual change in the value of the
asset.

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LO 5
 PREPAID EXPENSES

Illustration: For Yazici Advertising, assume that depreciation on the

equipment is ₺480 a year, or ₺40 per month.

Oct. 31

Depreciation Expense 40
Accumulated Depreciation 40

Accumulated Depreciation is called a contra asset

account.

• HELPFUL HINT
All contra accounts have increases, decreases, and normal
balances opposite to the account to which they relate.

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LO 5
 Illustration 3-7
3-26 Adjustment for depreciation LO 5
 PREPAID EXPENSES

Statement Presentation
 Accumulated Depreciation is a contra asset account (credit).
 Appears just after the account it offsets (Equipment) on the balance sheet.
 Book value is the difference between the cost of any depreciable asset and its
accumulated depreciation.

Illustration 3-8
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Statement of financial position presentation of accumulated depreciation LO 5
 PREPAID EXPENSES

Illustration 3-9
Accounting for prepaid expenses

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 UNEARNED REVENUES

Receipt of cash that is recorded as a liability because the service has not been performed.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

 Rent  Magazine subscriptions
 Airline tickets  Customer deposits

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 UNEARNED REVENUES

 Adjusting entry is made to record the revenue for services performed during the period
and to show the liability that remains at the end of the accounting period.

 Results in a decrease (debit) to a liability account and an increase (credit) to a revenue

account.

Illustration 3-10
Adjusting entries for
unearned
revenues

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 UNEARNED REVENUES

Illustration: Yazici Advertising Inc. 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 performed ₺400 of services in
October.

Oct. 31 Unearned Service Revenue 400

Service Revenue 400

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 Illustration 3-11
Service revenue accounts after adjustment

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 UNEARNED REVENUES

Illustration 3-12
Accounting for unearned revenues

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 > DO IT!
The ledger of Zhu Company on March 31, 2017, includes these selected accounts before adjusting entries
are prepared.
(amounts in thousands) Debit Credit
Prepaid Insurance ¥ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment ¥ 5,000
Unearned Service Revenue 9,200
An analysis of the accounts shows the following.
1. Insurance expires at the rate of ¥100 per month.
2. Supplies on hand total ¥800.
3. The equipment depreciates ¥200 a month.
4. One-half of the unearned service revenue was performed in March.
Prepare the adjusting entries for the month of March.

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 > DO IT!
The ledger of Zhu Company on March 31, 2017, includes these selected accounts before adjusting entries
are prepared.
(amounts in thousands) Debit Credit
Prepaid Insurance ¥ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment ¥ 5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.
1. Insurance expires at the rate of ¥100 per month.

Insurance Expense 100

Prepaid Insurance 100

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 > DO IT!
The ledger of Zhu Company on March 31, 2017, includes these selected accounts before adjusting entries
are prepared.
(amounts in thousands) Debit Credit
Prepaid Insurance ¥ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment ¥ 5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.
2. Supplies on hand total ¥800.

Supplies Expense 2,000

Supplies 2,000

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 > DO IT!
The ledger of Zhu Company on March 31, 2017, includes these selected accounts before adjusting entries
are prepared.
(amounts in thousands) Debit Credit
Prepaid Insurance ¥ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment ¥ 5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.
3. The equipment depreciates ¥200 a month.

Depreciation Expense 200

Accumulated Depreciation—Equipment 200

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 > DO IT!
The ledger of Zhu Company on March 31, 2017, includes these selected accounts before adjusting entries
are prepared.
(amounts in thousands) Debit Credit
Prepaid Insurance ¥ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment ¥ 5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.
4. One-half of the unearned service revenue was performed in March.

Unearned Service Revenue 4,600

Service Revenue 4,600

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 Adjusting Entries for Accruals
Learning Objective 6
Accruals are made to record Prepare adjusting entries for
accruals.

 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

Revenues for services performed but not yet received in cash or recorded.

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

 Rent  Services performed
 Interest

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 ACCRUED REVENUES

 Adjusting entry records the receivable that exists and records the revenues for services
performed.

 Adjusting entry:
► Increases (debits) an asset account and
► Increases (credits) a revenue account.

Illustration 3-13
Adjusting entries for accrued
revenues

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 ACCRUED REVENUES

Illustration: In October, Yazici Advertising Inc. performed services

worth ₺200 that were not billed to clients in October.

Oct. 31

Accounts Receivable 200

Service Revenue 200

On November 10, Yazici receives cash of ₺200 for the services performed.

Nov. 10 Cash 200

Accounts Receivable 200

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 Illustration 3-14
Adjustment for accrued revenue

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 ACCRUED REVENUES

Illustration 3-15
Accounting for accrued revenues

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 ACCRUED EXPENSES

Expenses incurred but not yet paid in cash or recorded.

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

 Interest
 Taxes
 Salaries

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 ACCRUED EXPENSES

 Adjusting entry records the obligation and recognizes the expense.

 Adjusting entry:
► Increase (debit) an expense account and
► Increase (credit) a liability account.

Illustration 3-16
Adjusting entries for accrued
expenses

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 ACCRUED INTEREST

Illustration: Yazici Advertising Inc. 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%.
Illustration 3-17
Formula for computing
interest

Oct. 31 Interest Expense 50

Interest Payable 50

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 Illustration 3-18
Adjustment for accrued interest

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 ACCRUED SALARIES AND WAGES

Illustration: Yazici paid salaries and wages 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
Calendar showing Yazici’s
pay
periods

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 Illustration 3-20
Adjustment for accrued salaries and wages

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 ACCRUED EXPENSES

Illustration 3-21
Accounting for accrued expenses

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 > DO IT!

Micro Computer Services began operations on August 1, 2017. At the end of August 2017,
management prepares monthly financial statements. The following information relates to August.
1. At August 31, the company owed its employees ¥8,000 in salaries and wages that will be
paid on September 1.
2. On August 1, the company borrowed ¥300,000 from a local bank on a 15-year mortgage.
The annual interest rate is 10%.
3. Revenue for services performed but unrecorded for August totaled ¥11,000.
Prepare the adjusting entries needed at August 31, 2017.

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 > DO IT!

Prepare the adjusting entries needed at August 31, 2017.

1. At August 31, the company owed its employees ¥8,000 in salaries and wages that will be paid
on September 1.
Salaries and Wages Expense 8,000
Salaries and Wages Payable 8,000

2. On August 1, the company borrowed ¥300,000 from a local bank on a 15-year mortgage. The
annual interest rate is 10%.
Interest Expense 2,500
Interest Payable 2,500

3. Revenue for services performed but unrecorded for August totaled ¥11,000.

Accounts Receivable 11,000

Service Revenue 11,000
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 Summary of Basic Relationships

Illustration 3-22
Summary of adjusting entries

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 The Adjusted Trial Balance and Financial Statements
Learning Objective
7
Preparing the Adjusted Trial Balance Describe the nature and
purpose of an
 Prepared after all adjusting entries are adjusted trial balance.

journalized and posted.

 Purpose is to prove the equality of debit balances and credit balances in the ledger.

 Is the primary basis for the preparation of financial statements.

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LO 7
 Illustration 3-25
Adjusted trial balance LO 7
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 Preparing the Adjusted Trail Balance

Question
Which of the following statements is incorrect concerning the adjusted trial balance?
a. (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.

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 Preparing Financial Statements

Financial Statements are prepared directly from the Adjusted Trial Balance.

Retained Earnings Statement of

Income Statement
Statement Financial Position

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 Illustration 3-26
Preparation of the income statement and retained earnings statement from the
adjusted trial balance
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 Illustration 3-27
Preparation of the statement of financial position from the
adjusted trial balance
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 > DO IT!

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 > DO IT!

(a) Determine the net income for the quarter April 1 to June 30.

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 > DO IT!

(b) Determine the total assets and total liabilities at June 30, 2017, for Skolnick Co.

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 > DO IT!

(c) Determine the amount that appears for retained earnings at June 30, 2017.

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