Module 3:

Accounting Adjustments and Constructing Financial

Statements

The Accounting Cycle

T-Accounts and Journal Entries

Capital Investment

Asset (Inventory) Transaction

Cash Dividends

All transactions between the company and its

shareholders are considered financing
transactions. This includes payment of dividends,
the issuance of stock, and any subsequent stock
repurchase.
Financing transactions affect only the balance
sheet; they do not affect the income statement.

Adjusting Accounts

Types of Adjustments

Cash received or paid before

recognition of revenue or
expense:

Prepaid expenses
Unearned revenues

Cash received or paid after

recognition of revenue or expense

Accrued expenses
Accrued revenues

Prepaid Expenses (Assets)

Assume that Apple pays $200 to purchase time on MTV for future iPod ads.

Apples cash account decreases by $200, and an asset called prepaid advertising
increases by the same amount.
When the ad is aired, the prepaid asset is used up and is removed from the balance
sheet and recognizing the cost as an expense.

Unearned Revenues (Liabilities)

Assume that Apple receives $400

cash from a customer as advance
payment on a multi-unit iPod sale to
be delivered next month.

Recognition of Unearned Revenue

as Earned Revenue

Assume that Apple delivers the iPods

a month later (but still within the
fiscal quarter).

Accrued Expenses (Liabilities)

Assume that Apples sales staff earns $100

of sales commissions this period that will not
be paid until next period.
When paid, the liability is reduced as is cash.

Accrued Revenues (Assets)

Assume that Apple delivers iPods to a

customer in Germany who will pay
next quarter. The sales price for
those units is $500 and the cost is
$400.

Apples
transactions
Unadjusted
thus
far
Trial Balance
(not 100%
Accrual Basis)
Adjusti
ng
Entries
Adjusted
Trial Balance
(100% Accrual
Basis)
Create
Financial
Statemen
ts
I/S

B/S SCF SE

Trial Balance

The trial balance is a listing of all

accounts and their balances at a point
in time.
Its purpose is to prove the
mathematical equality of debits and
credits, provide a useful tool to
uncover any accounting errors, and
help prepare the financial statements.

Adjusted Trial Balance For Apple

Preparation of the
Financial Statements

Income Statement

Preparation of the
Financial Statements

Retained Earnings Computation

Preparation of the
Financial Statements

Balance Sheet

Preparation of the
Financial Statements

Statement of Stockholders Equity

Preparation of the
Financial Statements

Statement of Cash Flows (from cash

column)

Statement of Cash Flows

Indirect Method

Operating cash flows

Cash Generated (Used) from

changes in Balance Sheet Accounts

ASSET
A/R
Beg balance

xx
xxx Cash
Collections

Accrual Basis # Credit Sales

xxx
Ending balance

xx

Cash Basis #

Cash Generated (Used) from

changes in Balance Sheet Accounts

LIABLITY
A/P
xx Beg balance
Payments xxx
Cash BasisCash
#

xxx
on

Purchases
Credit

xx Ending
balance

Accrual
Basis #

Changes to Working Capital

Accounts

Classification in the SCF

Formal Presentation of Apples SCF

Global Accounting

The way that accounting data are gathered and

recorded does not differ across accounting
standards.
The difference is that companies create information
systems that conform to the specific accounting
rules in that country.
For example, the rules for recording research
and development (R&D) costs are different in the
U.S. vis--vis Germany.
The accounting cycle of each company still involves
transactions and adjustments and a closing
process.

Closing Process

The closing process refers to the zeroing

out of revenue and expense accounts (the
temporary accounts) by transferring their
ending balances to retained earnings.
Balance sheet accounts carry over from
period to period and are called permanent
accounts.)
The result is that all income statement
accounts begin the next period with zero
balances.

Closing Process Journal Entries