Comm 201 Chapter 4 Seminotes

Chapter 4 Overview

Analyzing Transactions

  • Prepare Unadjusted Trial Balance

  • Prepare Adjusting Journal Entries & Post to Accounts

  • Prepare Adjusted Trial Balance

  • Prepare Closing Journal Entries & Post to Accounts

  • Prepare Financial Statements

  • Prepare Post-Closing Trial Balance

Reasons for Adjustments

  • Adjustments are necessary to accurately reflect the financial position of a company at the end of a period.

    • Deferral Adjustments: Transactions that occur before cash changes hands (e.g., prepaid expenses, deferred revenues).

    • Accrual Adjustments: Transactions that occur after cash changes hands (e.g., accrued expenses, accrued revenues).

Types of Adjustments

Deferral Adjustments

  • Deferred Revenue: Cash collected for services not yet provided.

  • Prepaid Expense: Payments made in advance for services or goods to be received in the future.

Example of Deferral:

  • Depreciation: Allocating the cost of a tangible asset over its useful life.

Accrual Adjustments

  • Accrued Revenue: Revenue earned but not yet collected in cash.

  • Accrued Expense: Expenses incurred but not yet paid.

Financial Statements and Examples

Balance Sheet Example (Zip Car Corporation)

  • Assets include cash, accounts receivable, supplies, prepaid rent, and vehicles.

  • Liabilities include wages payable and deferred revenue.

Income Statement Example (Zip Car Corporation)

  • Revenues include service revenue.

  • Expenses include wages, supplies, rent, and depreciation expense.

Learning Activities

Learning Activity 4-1: Journal Entries for Deferral Transactions

  1. Hockey Helpers: Paid $2,000 cash on September 30 for future rental.

    • Initial Entry: Rent Expense.

    • Adjusting Journal Entry (AJE) at month-end.

  2. Super Stage Shows: Received $6,000 for future events.

    • Initial Entry: Cash.

    • AJE at month-end to recognize earned revenue.

  3. Risky Ventures: Paid $3,000 for insurance across three months.

    • Initial Entry: Insurance Expense.

    • AJE to recognize incurred insurance expense.

Learning Activity 4-2: Preparing Adjusting Journal Entries

  1. Wages payable of $3,600 not recorded.

  2. Supplies purchased for $500; $100 remains unused.

  3. Accrued interest of $250 on a note receivable.

  4. Service revenue of $2,000 partially earned (1/4).

Closing Process Explained

  • Closing temporary accounts at the end of each accounting period resets balances to zero for revenue and expense accounts.

    • Example Entries:

      • Dr. Revenues

      • Cr. Expenses

      • Cr. Retained Earnings

      • Dr. Retained Earnings

      • Cr. Dividends Declared

Adjusted Trial Balance and Financial Statements

  • An adjusted trial balance is prepared to ensure that the total debits equal total credits.

  • Financial statements include the adjusted income statement, balance sheet, and statement of retained earnings.

Income Statement & Balance Sheet Sample (Prairie Proud)

  • Income Statement shows revenues and expenses leading to net income.

  • Balance Sheet lists assets, liabilities, and shareholders' equity components.

Learning Activity 4-5: Practice the Closing Process

  • Refer to the adjusted trial balance and prepare closing entries.

Final Thoughts on Adjustments

  • Adjustments ensure accurate representation of financial results and health of the company. They are critical for presenting properly prepared financial statements that reflect the company's activities during the reporting period.