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Chapter3-1
CHAPTERCHAPTER 33
ADJUSTING THEADJUSTING THE
ACCOUNTSACCOUNTS
Financial Accounting, Sixth Edition
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Chapter3-2
1. Explain the time period assumption.
2. Explain the accrual basis of accounting.
3. Explain the reasons for adjusting entries.
4. Identify the major types of adjusting entries.5. Prepare adjusting entries for deferrals.
. Prepare adjusting entries for accruals.
!. "escribe the nature and purpose of an adjustedtrial balance.
Study ObjectivesStudy Objectives
Study ObjectivesStudy Objectives
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Chapter3-3
Adjusting the AccountsAdjusting the Accounts
Adjusting the AccountsAdjusting the Accounts
Timing IssuesTiming Issues
Timing IssuesTiming Issues
The Basis !"The Basis !"
A#$ustingA#$usting
EntriesEntries
The Basis !"The Basis !"
A#$ustingA#$usting
EntriesEntries
The A#$uste# Tria%The A#$uste# Tria%
Ba%ane an#Ba%ane an#
&inania%&inania%
StatementsStatements
The A#$uste# Tria%The A#$uste# Tria%
Ba%ane an#Ba%ane an#
&inania%&inania%
StatementsStatements
Time periodTime period
assumptionassumption
Fiscal andFiscal and
calendar yearscalendar years
Accrual- vs. cash-Accrual- vs. cash-
basis accountingbasis accounting
RecognizingRecognizing
revenues andrevenues and
expensesexpenses
Types of adjustingTypes of adjusting
entriesentries
Adjusting entriesAdjusting entries
for deferralsfor deferrals
Adjusting entriesAdjusting entries
for accrualsfor accruals
Summary ofSummary of
journalizing andjournalizing and
postingposting
reparing thereparing the
adjusted trialadjusted trial
balancebalance
reparingreparing
financialfinancialstatementsstatements
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Chapter3-'
#enerally a month$ a quarter$ or a year.
%iscal year &s. calendar year
'lso (no)n as the *Periodicity 'ssumption+
Timing IssuesTiming Issues
Timing IssuesTiming Issues
'ccountants di&ide the economic life of abusiness into artificial time periods,-ime Period 'ssumption.
O ! E"#$ain the time #eriod assum#tion%O ! E"#$ain the time #eriod assum#tion%
Jan( &e)( *ar( Apr( De(. . . . .
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Chapter3-+
-he time period assumption states that/-he time period assumption states that/
a.a. re&enue should be recogni0ed in the accountingperiod in )hich it is earned.
b. expenses should be matched )ith re&enues.
c. the economic life of a business can be di&ided intoartificial time periods.
d. the fiscal year should correspond )ith thecalendar year.
Revie&Revie&
Timing IssuesTiming Issues
Timing IssuesTiming Issues
O ! E"#$ain the time #eriod assum#tion%O ! E"#$ain the time #eriod assum#tion%
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Chapter3-,
Accrua$'(asis Accounting
-ransactions recorded in the periods in )hich
the e&ents occur
e&enuesare recogni0ed )hen earned$ ratherthan )hen cash is recei&ed.
Expensesare recogni0ed )hen incurred$ ratherthan )hen paid.
Timing IssuesTiming Issues
Timing IssuesTiming Issues
Accrua$' vs% Cash'(asis Accounting
O ) E"#$ain the accrua$ basis o* accounting%O ) E"#$ain the accrua$ basis o* accounting%
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Chapter3-
Cash'(asis Accounting
e&enuesare recogni0ed )hen cash is recei&ed.
Expensesare recogni0ed )hen cash is paid.
ashbasis accounting is not in accordance )ithgenerally accepted accounting principles ,#''P.
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Accrua$' vs% Cash'(asis Accounting
O ) E"#$ain the accrua$ basis o* accounting%O ) E"#$ain the accrua$ basis o* accounting%
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Chapter3-.
Revenue Recognition Princi#$e
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Recogni+ing Revenues and E"#enses
O ) E"#$ain the accrua$ basis o* accounting%O ) E"#$ain the accrua$ basis o* accounting%
ompanies recogni0e
re&enue in the accountingperiod in )hich it isearned.
In a ser&ice enterprise$re&enue is considered tobe earned at the time theser&ice is performed.
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Chapter3-/
,atching Princi#$e
Timing IssuesTiming IssuesTiming IssuesTiming Issues
Recogni+ing Revenues and E"#enses
O ) E"#$ain the accrua$ basis o* accounting%O ) E"#$ain the accrua$ basis o* accounting%
atch expenses )ith
re&enues in the period)hen the company ma(esefforts to generatethose re&enues.
-et the e"#enses *o$$o&the revenues%.
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Chapter3-10
Timing IssuesTiming IssuesTiming IssuesTiming Issues
O ) E"#$ain the accrua$ basis o* accounting%O ) E"#$ain the accrua$ basis o* accounting%
/AAP re$ationshi#sin revenue ande"#ense recognition
/AAP re$ationshi#sin revenue ande"#ense recognition
I$$ustration 3'!I$$ustration 3'!
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Chapter3-11
ne of the follo)ing statements about the accrual basisof accounting is false. -hat statement is/
a. E&ents that change a company6s financial
statements are recorded in the periods in )hichthe e&ents occur.
b. e&enue is recogni0ed in the period in )hich it isearned.
c. -he accrual basis is in accord )ith generallyaccepted accounting principles.
d. e&enue is recorded only )hen cash is recei&ed$ andexpense is recorded only )hen cash is paid.
Revie&Revie&
Timing IssuesTiming IssuesTiming IssuesTiming Issues
O ) E"#$ain the accrua$ basis o* accounting%O ) E"#$ain the accrua$ basis o* accounting%
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Chapter3-12
'djusting entries ma(e it possible to reportcorrect amounts on the ba$ance sheetandon the income statement.
' company must ma(e adjusting entriese&ery time it prepares financial statements.
The (asics o* Adjusting EntriesThe (asics o* Adjusting EntriesThe (asics o* Adjusting EntriesThe (asics o* Adjusting Entries
O 3 E"#$ain the reasons *or adjusting entries%O 3 E"#$ain the reasons *or adjusting entries%
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Chapter3-13
RevenuesRevenues recorded in the period in )hich recorded in the period in )hichthey are earnedthey are earned.
E"#ensesE"#enses recogni0ed in the period in )hich recogni0ed in the period in )hich
they are incurredthey are incurred.
Adjusting entriesAdjusting entries needed to ensure that needed to ensure thatthethe re&enue recognitionre&enue recognitionandand matchingmatching
principlesprinciplesare follo)ed.are follo)ed.
The (asics o* Adjusting EntriesThe (asics o* Adjusting EntriesThe (asics o* Adjusting EntriesThe (asics o* Adjusting Entries
O 3 E"#$ain the reasons *or adjusting entries%O 3 E"#$ain the reasons *or adjusting entries%
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Chapter3-1'
'djusting entries are made to ensure that/
a. expenses are recogni0ed in the period in )hich
they are incurred.b. re&enues are recorded in the period in )hich
they are earned.
c. balance sheet and income statement accounts
ha&e correct balances at the end of anaccounting period.
d. all of the abo&e.
Revie&Revie&
Timing IssuesTiming IssuesTiming IssuesTiming Issues
O 3 E"#$ain the reasons *or adjusting entries%O 3 E"#$ain the reasons *or adjusting entries%
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Chapter3-1+
Ty#es o* Adjusting EntriesTy#es o* Adjusting EntriesTy#es o* Adjusting EntriesTy#es o* Adjusting Entries
0e*erra$s
!% Pre#aid E"#enses%Expenses paid in cash and recorded asassets before they are used or consumed.
)% 1nearned Revenues% ash recei&ed and recorded asliabilities before re&enue is earned.
Accrua$s
!% Accrued Revenues%e&enues earned but not yet recei&ed incash or recorded.
)% Accrued E"#enses% Expenses incurred but not yet paid incash or recorded.
O 2 Identi*y the major ty#es o* adjusting entries%O 2 Identi*y the major ty#es o* adjusting entries%
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Chapter3-1,
Tria$ (a$anceTria$ (a$ance7 Each account is analy0ed to determine)hether it is complete and uptodate.
Tria$ (a$anceTria$ (a$anceTria$ (a$anceTria$ (a$ance
O 2 Identi*y the major ty#es o* adjusting entries%O 2 Identi*y the major ty#es o* adjusting entries%
PIONEER ADVERTISING AGENCY INC.
Trial Balance
October 31, 2008
Account Debit Credit
Cash $ 15,200Advertising Supplies 2,500
Prepaid Insurance 600
!!ice "#uipent 5,000
%otes Pa&able $ 5,000
Accounts Pa&able 2,500
'nearned (evenue 1,200
Coon Stoc) 10,000
(etained "arnings 0
Dividends 500
Service (evenue 10,000
Salaries "*pense +,000
(ent "*pense 00
$2-,.00 $ 2-,.00
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Chapter3-1
0e*erra$sare either/
Prepaid expenses or
8nearned re&enues.
Adjusting Entries *or 0e*erra$sAdjusting Entries *or 0e*erra$sAdjusting Entries *or 0e*erra$sAdjusting Entries *or 0e*erra$s
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
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Chapter3-1.
Payment of cash$ that is recorded as an asset becausePayment of cash$ that is recorded as an asset becauseser&ice or benefit )ill be recei&ed in the future.ser&ice or benefit )ill be recei&ed in the future.
Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.
insuranceinsurance
suppliessupplies'd&ertising'd&ertising
rentrent
ash Paymentash Payment Expense ecordedExpense ecorded(E4ORE
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
Prepayments often occur in regard to/Prepayments often occur in regard to/
buildingbuilding
purchasespurchasese9uipmente9uipmentpurchasespurchases
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Chapter3-1/
Pre#aid E"#ensesosts that expire either )ith the passage of timeor through use.
'djusting entries
,1to record the expenses that apply to thecurrent accounting period$ and
,2to sho) the unexpired costs in the assetaccounts.
Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
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Chapter3-20
Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
I$$ustration 3'2'djusting entries for prepaid expenses
Increases ,debits an expense account and
"ecreases ,credits an asset account.
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Chapter3-22
E"am#$eE"am#$e 5Insurance65Insurance677n ct/ +th, Pioneer Advertising paidn ct/ +th, Pioneer Advertising paid$600 !or a one&ear !ire insurance polic&/$600 !or a one&ear !ire insurance polic&/
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Chapter3-23
0e#reciation=uildings$ e9uipment$ and &ehicles ,longli&edassets are recorded as assets$ rather than anexpense$ in the year ac9uired.
ompanies report a portion of the cost of a longli&ed asset as an expense ,depreciation duringeach period of the asset6s useful life ,atching
Principle.
Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
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Chapter3-2'
E"am#$eE"am#$e 50e#reciation650e#reciation677n ct. 2n ct. 2ndnd
$ Pioneer 'd&ertising$ Pioneer 'd&ertisingpaid :5$;;; for office e9uipment that has an expectedpaid :5$;;; for office e9uipment that has an expecteduseful life of 1; years.
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Chapter3-2+
E"am#$eE"am#$e 50e#reciation650e#reciation677n ct. 2n ct. 2ndnd$ Pioneer 'd&ertising$ Pioneer 'd&ertisingpaid :5$;;; for office e9uipment that has an expected usefulpaid :5$;;; for office e9uipment that has an expected usefullife of 1; years. 92;6
'ccumulated depreciation 4;
"epreciation expense 4;>an. 31
"ebit redit
"epreciation Expense
4;4; 4;4;
"ebit redit
'ccumulated "epreciation
4;4;
Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
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Chapter3-2,
0e#reciation 5Statement Presentation6'ccumulated "epreciation?is a contra assetaccount.
'ppears just after the account it offsets,E9uipment on the balance sheet.
Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.Adjusting Entries *or -Pre#aid E"#enses.
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
Office equipment $5,000
Less: Accumulated depeciation!Office Equipment "0 $",#0
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Chapter3-2
eceipt of cash that is recorded as a liability becauseeceipt of cash that is recorded as a liability becausethe re&enue has not been earned.the re&enue has not been earned.
Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.
rentrent
maga0ine subscriptionsmaga0ine subscriptionscustomer deposits forcustomer deposits forfuture ser&icefuture ser&ice
ash eceiptash eceipt e&enue ecordede&enue ecorded(E4ORE
sale of airline tic(etssale of airline tic(ets
school tuitionschool tuition
8nearned re&enues often occur in regard to/8nearned re&enues often occur in regard to/
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
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Chapter3-2.
1nearned Revenuesompany ma(es an adjusting entry to record there&enue that has been earned and to sho) the
liability that remains.-he adjusting entry for unearned re&enues resultsin a decrease ,a debit to a liability account and anincrease ,a credit to a re&enue account.
O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.
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Chapter3-2/ O O Pre#are adjusting entries *or de*erra$s%Pre#are adjusting entries *or de*erra$s%
I$$ustration 3'!;'djusting entries for unearned re&enues
"ecrease ,a debit to a liability account and
Increase ,a credit to a re&enue account.
Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.Adjusting Entries *or -1nearned Revenues.
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Chapter3-30
E"am#$e7E"am#$e7n ct. 2n ct. 2ndnd
$ Pioneer 'd&ertising recei&ed :1$2;;$ Pioneer 'd&ertising recei&ed :1$2;;from . @nox for ser&ices to be completed by "ecember 31.from . @nox for ser&ices to be completed by "ecember 31.
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Chapter
3-31
E"am#$e7E"am#$e7n ct/ 2nd, Pioneer Advertising received $1,200n ct/ 2nd, Pioneer Advertising received $1,200!ro (/ no* !or services to be copleted b& Deceber 1/!ro (/ no* !or services to be copleted b& Deceber 1/
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Chapter
3-32
ade to record/
e&enues earned and
Expenses incurredin the current accounting period that ha&e notbeen recogni0ed through daily entries.
Adjusting Entries *or Accrua$sAdjusting Entries *or Accrua$sAdjusting Entries *or Accrua$sAdjusting Entries *or Accrua$s
O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%
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Chapter
3-33
e&enues earned but not yet recei&ed in cash ore&enues earned but not yet recei&ed in cash orrecorded.recorded.
Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.
interestinterestrentrent
ser&ices performedser&ices performed
(E4ORE
'ccrued re&enues often occur in regard to/'ccrued re&enues often occur in regard to/
ash eceiptash eceipte&enue ecordede&enue ecorded
'djusting entry results in/'djusting entry results in/
O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%
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Chapter
3-3'
Accrued Revenues'n adjusting entry ser&es t)o purposes/
,1 It sho)s the recei&able that exists$ and
,2 It records the re&enues earned.
Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.
O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%
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Chapter
3-3+
I$$ustration 3'!3'djusting entries for accrued re&enues
Increases ,debits an asset account and
Increases ,credits a re&enue account.
O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%
Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.Adjusting Entries *or -Accrued Revenues.
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Chapter
3-3,
E"am#$e7E"am#$e7In ctober Pioneer 'd&ertising earned :2;; forctober Pioneer 'd&ertising earned :2;; forad&ertising ser&ices that ha&e not been recorded.
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Chapter
3-3
Expenses incurred but not yet paid in cash or recorded.Expenses incurred but not yet paid in cash or recorded.
Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.
interestinterestrentrent
(E4ORE
'ccrued expenses often occur in regard to/'ccrued expenses often occur in regard to/
ash Paymentash PaymentExpense ecordedExpense ecorded
taxestaxessalariessalaries
'djusting entry results in/'djusting entry results in/
O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%
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Chapter
3-3.
Accrued E"#enses'n adjusting entry ser&es t)o purposes/
,1It records the obligations$ and
,2It recogni0es the expenses.
Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.
O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%
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Chapter
3-3/
I$$ustration 3'!?'djusting entries for accrued expenses
Increases ,debits an expense account and
Increases ,credits a liability account.
O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%
Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.
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Chapter
3-'0
Botes payable 5$;;;
ash 5$;;;ct. 1
"ebit redit
ash
5$;;;5$;;; 5$;;;5$;;;
"ebit redit
Botes Payable
E"am#$e7E"am#$e7n ct 1n ct 1stst$ Pioneer 'd&ertising signed a :$5;;;$ 3$ Pioneer 'd&ertising signed a :$5;;;$ 3month note payable at a rate of 12C per year. -he totalmonth note payable at a rate of 12C per year. -he totalinterest due on the note at its due date is :15; ,:5$;;; Dinterest due on the note at its due date is :15; ,:5$;;; D12C D 312.
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Chapter
3-'1
E"am#$e7E"am#$e7n ct 1st, Pioneer Advertising signed a $,5000, n ct 1st, Pioneer Advertising signed a $,5000,
onth note pa&able at a rate o! 123 per &ear/ 4he total interestonth note pa&able at a rate o! 123 per &ear/ 4he total interestdue on the note at its due date isdue on the note at its due date is 9!; 589:;;; " !)@< = !)9!; 589:;;; " !)@< = !)
months6months6//
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Chapter
3-'2
Accrued E"#enses'n adjusting entry ser&es t)o purposes/
,1It records the obligations$ and
,2it recogni0es the expenses.
Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.Adjusting Entries *or -Accrued E"#enses.
O ?O ? Pre#are adjusting entries *or accrua$s%Pre#are adjusting entries *or accrua$s%
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Chapter
3-'3
'fter all adjusting entries are journali0ed andposted the company prepares another trialbalance from the ledger accounts ,Adjusted Tria$(a$ance.
Its purpose is to pro&e the e9uality of debitbalances and credit balances in the ledger.
The Adjusted Tria$ (a$anceThe Adjusted Tria$ (a$anceThe Adjusted Tria$ (a$anceThe Adjusted Tria$ (a$ance
O O 0escribe the nature and #ur#ose o* an adjusted tria$ ba$ance%0escribe the nature and #ur#ose o* an adjusted tria$ ba$ance%
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Chapter
3-''
Fhich of the follo)ing statements is incorrect concerningthe adjusted trial balanceG
a. 'n adjusted trial balance pro&es the e9uality of the
total debit balances and the total credit balances inthe ledger after all adjustments are made.
b. -he adjusted trial balance pro&ides the primary basisfor the preparation of financial statements.
c. -he adjusted trial balance lists the account balancesfrom largest to smallest.
d. -he adjusted trial balance is prepared after theadjusting entries ha&e been journali0ed and posted.
Revie&Revie&
Timing IssuesTiming IssuesTiming IssuesTiming Issues
O O 0escribe the nature and #ur#ose o* an adjusted tria$ ba$ance%0escribe the nature and #ur#ose o* an adjusted tria$ ba$ance%
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Chapter
3-'+
%inancial
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Chapter
3-',
Income
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Chapter
3-'
etained Earnings
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Chapter
3-'.
=alance
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Chapter
*opyright H 2;;A >ohn Filey