SESSION 5

PREPARING FINANCIAL STATEMENTS

PREPARATION DES ETATS FINANCIERS

PRINCIPLES…AGAIN

ACCRUAL BASISMATCHINGACCOUNTING PERIODGOING CONCERN

Every principle is important, but during this session we focus only

on these 4 principles

WHY DO WE NEED ADJUSTING ENTRIES?

NORMAL TRANSACTIONS VS ADJUSTING TRANSACTIONS

EXPLICIT TRANSACTIONS VS IMPLICIT TRANSACTIONS

AT THE HEART OF ACCRUAL ACCOUNTING

ADJUSTING ENTRIES

Remember!

Four types

1 – REVENUES EARNED BUT NOT RECORDED (ACCRUAL OF UNRECORDED REVENUES)

RECOGNITION OF REVENUES EARNED BUT NOT YET RECEIVED

EXAMPLES : UNBILLED SALES, UNBILLED FEES

ACCOUNTING RECORDS ACCOUNTS RECEIVABLE : INCREASE REVENUES : INCREASE (THEN, OE :

INCREASE)

2 – REVENUES RECORDED BUT UNEARNED (EARNING OF REVENUES RECEIVED IN ADVANCE)

DEFINITION : ADVANCES FROM CUSTOMERS FOR GOODS OR SERVICES TO BE DELIVERED LATER

= UNEARNED REVENUE = DEFERRED REVENUE = DEFERRED CREDIT

EXAMPLES : SUBSCIPTIONS RECEIVED BY A NEWSPAPER, RENT RECEIVED IN ADVANCE, TICKETS SOLD & NOT USED IN AN AIRLINES COMPANY

3 – EXPENSES CONSUMED BUT NOT RECORDED (ACCRUAL OF UNRECORDED EXPENSES)

WHAT IS THE PROBLEM ?EXAMPLES : WAGES, SOCIAL

SECURITY EXPENSES, TELEPHONE, INTEREST EXPENSES, INCOME TAX

ACCOUNTING RECORDS : INCREASE OF AN EXPENSE (THEN,

OE : DECREASE) INCREASE OF A LIABILITY

4 – EXPENSES RECORDED BUT NOT CONSUMED (EXPIRATION OF UNEXPIRED COSTS)

ADJUSTMENTS ARE MADE TO MARK TO THE GRADUAL EXPIRATION OF COSTS

PRODUCT COSTS AND PERIOD COSTS

EXAMPLES : RENT, INVENTORY, DEPRECIATION, INSURANCE, OFFFICE SUPPLIES

VALUE ADJUSTMENTS TO ASSET ACCOUNTS

FIXED ASSET ACCOUNTS What is the problem? What is the answer? Examples?

CURRENT ASSET ACCOUNTS What is the problem? What is the answer? Examples?

RECORDING PROCESS

TRANSACTIONSDOCUMENTATION JOURNALLEDGERUNADJUSTED TRIAL BALANCEPOST ADJUSTMENTSADJUSTED TRIAL BALANCEFINANCIAL STATEMENTS