The Measurement Process:
If under the Accrual-Basis – entries from that calendar year must be adjusted at the end of the year to remain in parity, these Adjusting Entries record events that have occurred but have not been recorded.
End-of-Period Adjusting Entry: see Illustration 3-3
Understand Prepaid Expenses, Deferred Revenues, Accrued Expenses, Accrued Revenues (pages 113-125)
Prepaid expenses are cost of assets in one period that will be recorded in a future period. These payments create future benefits. so they are recorded as assets. The adjusting entry for a prepaid expense always includes a debit an expense account (increase an expense) and a credit to an asset account (decrease an asset).
Depreciable Assets: depreciation is the process of allocating the cost of an asset over the useful life of the asset.
Accumulated Depreciation: when an asset is reduced indirectly, which is a Contra Account. The normal balance in the Accumulated Depreciation contra asset is a credit, which is opposite to the normal debit balance in an asset account.
Deferred Revenues: company received cash in advance of from a customer for products or services to be provided in the future. The adjusting for a Deferred Revenue always includes a debit to a liability account (decrease a liability) and a credit to a revenue account (increase in revenue).
Accrued Expenses: A cost to produce revenue, but has not paid cash for that cost. The adjusting entry of an accrued expense always includes a debit to an expense account (increase an expense) and a credit to a liability account (increase in liability).
Accrued Salaries verses Accrued Utility Costs verses Accrued Interests (page 118-120)
Accrued Revenues: company provides services but the customer hasn’t paid. The adjusting entry for an accrued revenue always includes a debit to an asset account (increase an asset) and a credit to a revenue account (increase a revenue).
ADJUSTING ENTRIES: Unnecessary in two cases, (1) for transactions that do not involve revenues or expenses acttivities, and (2) for transactions that result in revenues or expenses being recorded at the same time as the cash flow.
Illustration 3-9 gives a example of Posting Adjusting Entries – this can reveal just how confusing an Ledger can be.
Adjusted Trial Balance: is a list of all accounts and their balances after we have updated account balances for adjusting entries.
