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Lesson 4Adjusting Accounts for Financial Statement Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Outline Describe the purpose of adjusting accounts at the end of the period. Prepare and explain adjusting entries for prepaid expenses, amortization, unearned revenues, accrued expenses, and accrued revenues. Explain how accounting adjustments link to financial statements. Explain and prepare an adjusted trial balance. Review: Time period concept Definition: the continued life of a business is divided into time periods of equal length. Review: Revenue Recognition Principle Revenue is recorded at the time it is earned regardless of whether cash or another asset has been exchanged. Review: Matching Principle Expenses are to be matched in the same accounting period as the revenues they helped to earn. Accrual and cash basis The accrual basis of accounting matches revenues earned with expenses incurred. The cash basis matches revenues received with expenses paid. It is not satisfactory for most businesses because it results in financial statements that are not comparable from period to period, except when the amounts of prepaid, unearned, and accrued items are not material. Adjust: A Step in Accounting cycle Why Need to Adjust Some events are not evidenced by the obvious documents. the effects of these events are recorded at the end of the accounting period by means of adjusting entries. The purpose of adjusting the accounts at the end of period is to make the accounting information comparable from period to period. Why Need to Adjust Adjustments are based on three generally accepted accounting principles: Time period principle. Revenue recognition principle. Matching principle. Type of Adjusting Entries Adjusting Entries – Accruals Accruals occur when revenues have been earned or expenses incurred but no cash has been exchanged. Adjusting Entries – Accruals Example: On Jun 1, 2004, Smith Inc. invests $100,000 for a bonds which pays 5%