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Adjusted Trial Balance

  • Objective 4: Adjusted Trial Balance
    • Prepared after adjusting entries are posted.
    • Verifies the equality of total debit and credit balances before financial statements.
    • If the adjusted trial balance doesn't balance, an error occurred.
    • Errors can still occur even if the adjusted trial balance agrees (e.g., omitting an adjusting entry).
    • Exhibit 11 shows an example for NetSolutions as of December 31, 2015.
    • Financial statements are prepared using classified balance sheets.

Effect of Errors on Adjusted Trial Balance

  • Objective 4: Effect of Errors

  • Errors can cause adjusted trial balance totals to be unequal.

  • Example Exercise 3-9:

    • Accrued fees adjustment of 5,340 journalized as a debit to Accounts Payable instead of Accounts Receivable.

  • Depreciation adjustment of 3,260 journalized with an incorrect debit amount of 3,620 to Depreciation Expense.

Financial Analysis and Interpretation: Vertical Analysis

  • Objective 5: Vertical Analysis

    • Compares each item in a financial statement with a total amount from the same statement.
    • Useful for analyzing relationships within the financial statement.

  • Balance Sheet: Each asset item is stated as a percentage of total assets.

  • Each liability and owners' equity item is stated as a percentage of total liabilities and owners' equity.

  • Income Statement: Each item is stated as a percentage of revenues or fees earned.

  • Vertical analysis is useful for analyzing changes in financial statements over time.

*Example with J. Holmes, Attorney-at-Law:
* Increase in wages expense (2%) is unfavorable.
* Increase in utilities expense (0.7%) is unfavorable.
* Decrease in supplies expense (0.6%) is favorable.
* Net income decreased as a percentage of fees earned from 52.8% to 50.7%.

  • Comparisons with industry averages can enhance analysis.

*Example with Pandora Media, Inc.:
* Vertical analysis reveals that advertising revenue as a percent of total revenue increased 0.9% from Year 1 to Year 2.
* Subscription revenues fell by the same percent.
* Expenses as a percent of total revenues increased 3.8% from Year 1 to Year 2.
* Marketing and selling expenses declined from 26.3% to 23.7%.
* General and administrative expenses increased from 10.3% to 12.9%.
* Content acquisition costs increased from 50.3% to 54.2%.
* Loss from operations increased from (0.2%) to (4.0%).

  • Example Exercise 3-10: Vertical Analysis Example
    • Vertical analysis may indicate favorable or unfavorable trends.

Key Points

  • Accrual Basis of Accounting: Revenues are reported in the period earned, and expenses are matched with revenues.

  • Adjusting Process: Updating accounts at the end of the accounting period.

  • Each adjusting entry affects an income statement and balance sheet account.

  • The four types of accounts requiring adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.

Adjusting Entries

  • Adjusting entries are needed for:

    • Prepaid expenses
    • Unearned revenues
    • Accrued revenues
    • Accrued expenses

  • An adjusting entry is necessary to record depreciation on fixed assets.

Adjustment Process Summary

  • Exhibit 8: Summary of adjustments, including type, reason, adjusting entry, and effect of omitting the adjustment.

  • Adjusted Trial Balance

    • Verifies equality of debit and credit balances after posting adjusting entries.

Vertical Analysis

  • Compares each item on a financial statement with a total amount from the same statement.

  • Balance Sheet: Each asset is expressed as a percentage of total assets; each liability and owners' equity item, as a percentage of total liabilities and owners' equity.

  • Income Statement: Each revenue and expense is expressed as a percentage of total revenues or fees earned.

Key Terms

  • Accounting period concept

  • Accrual basis of accounting

  • Accrued expenses

  • Accrued revenues

  • Accumulated Depreciation

  • Adjusted trial balance

  • Adjusting entries

  • Adjusting process

  • Book value of asset

  • Cash basis of accounting

  • Contra accounts

  • Depreciate

  • Depreciation

  • Depreciation expense

  • Fixed assets

  • Matching concept

  • Prepaid expenses

  • Revenue recognition concept

  • Unearned revenues

  • Vertical analysis