Chapter 4: Adjustments, Financial Statements, and
Financial Results
Wednesday, September 14, 2022
3:29 PM
○ Why adjustments are needed
○ Accounting systems record most recurring daily transactions, particularly any involving
cash
■ Cash is not always received in the period the company fulfills its actions or paid
in the period the company incurs related expense
○ Adjustments: entries necessary at the end of each accounting period to report revenues
and expenses in the proper period and assets and liabilities at appropriate amounts
■ Aka adjusting journal entries
■ They involve both income statement and balance sheet accounts
1. Revenues: are recorded when (or as) the seller fulfills its performance
obligation to the customer (the revenue recognition principle)
2. Expenses: are recorded in the same period as the revenues to which
they relate (the expense recognition or "matching" principle)
3. Assets: are report at amounts representing economic benefits that
remain at the end of the current period
4. Liabilities: are reported at amounts owned at the end of the current
period that will require a future sacrifice of resources
■ Companies wait until the end of the accounting period to adjust their accounts
because daily adjustments would be time-consuming and costly
○ Deferral Adjustments
■ We say an expense or revenue has been deferred if we have postponed
reporting it on the income statement until a later period
■ Deferral adjustments are used to decrease balance sheet accounts and increase
corresponding income statement accounts
1. Previously deferred amounts exist on the balance sheet because the
company paid cash before incurring the expense or received cash before
earning revenue
2. When the revenues are generated or expenses incurred the previous
deferred amounts are adjusted and amounts are transferred to the
income statement using a deferral adjustment
■ Each deferral adjustment involves one asset and one expense account, or one
liability and one revenue account
, ■
○ Accrual adjustments
■ Needed when a company has generated revenue or incurred an expense in the
current period but has not yet recorded it because the related cash will not be
received or paid until a later period
■ Accrual adjustments are used to record revenue or expenses when they occur
prior to receiving or paying cash and to adjust corresponding balance sheet
accounts
■ Each accrual adjustment involves one asset and one revenue account, or one
liability and one expense account
1. Differs from deferral adjustments, which pair assets with expenses and
liabilities with revenues
○ Making required adjustments
○ Adjustments are made at the end of each accounting period immediately prior to
preparing an adjusted trial balance and financial statements
○ Adjusting journal entries: Entries necessary at the end of each accounting period to
report revenues and expenses in the proper period and assets and liabilities at
appropriate amounts
■ Aka adjustments
●
Financial Results
Wednesday, September 14, 2022
3:29 PM
○ Why adjustments are needed
○ Accounting systems record most recurring daily transactions, particularly any involving
cash
■ Cash is not always received in the period the company fulfills its actions or paid
in the period the company incurs related expense
○ Adjustments: entries necessary at the end of each accounting period to report revenues
and expenses in the proper period and assets and liabilities at appropriate amounts
■ Aka adjusting journal entries
■ They involve both income statement and balance sheet accounts
1. Revenues: are recorded when (or as) the seller fulfills its performance
obligation to the customer (the revenue recognition principle)
2. Expenses: are recorded in the same period as the revenues to which
they relate (the expense recognition or "matching" principle)
3. Assets: are report at amounts representing economic benefits that
remain at the end of the current period
4. Liabilities: are reported at amounts owned at the end of the current
period that will require a future sacrifice of resources
■ Companies wait until the end of the accounting period to adjust their accounts
because daily adjustments would be time-consuming and costly
○ Deferral Adjustments
■ We say an expense or revenue has been deferred if we have postponed
reporting it on the income statement until a later period
■ Deferral adjustments are used to decrease balance sheet accounts and increase
corresponding income statement accounts
1. Previously deferred amounts exist on the balance sheet because the
company paid cash before incurring the expense or received cash before
earning revenue
2. When the revenues are generated or expenses incurred the previous
deferred amounts are adjusted and amounts are transferred to the
income statement using a deferral adjustment
■ Each deferral adjustment involves one asset and one expense account, or one
liability and one revenue account
, ■
○ Accrual adjustments
■ Needed when a company has generated revenue or incurred an expense in the
current period but has not yet recorded it because the related cash will not be
received or paid until a later period
■ Accrual adjustments are used to record revenue or expenses when they occur
prior to receiving or paying cash and to adjust corresponding balance sheet
accounts
■ Each accrual adjustment involves one asset and one revenue account, or one
liability and one expense account
1. Differs from deferral adjustments, which pair assets with expenses and
liabilities with revenues
○ Making required adjustments
○ Adjustments are made at the end of each accounting period immediately prior to
preparing an adjusted trial balance and financial statements
○ Adjusting journal entries: Entries necessary at the end of each accounting period to
report revenues and expenses in the proper period and assets and liabilities at
appropriate amounts
■ Aka adjustments
●
