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Adjusting the Books

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Adjustments

Adjustments : Accounting changes to ensure that account balances are correct.

The “books” are adjusted to make sure that the financial statements are accurate.

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Prepaid Expenses

•Any prepaid expense (rent, insurance, office supplies)•considered to be CURRENT ASSETS.•recorded on the BALANCE SHEET.•When used up, the expenses are recorded on INCOME STATEMENT. •SEE PAGE 205 - 207

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Depreciation

Depreciation: allocation of the cost of a fixed asset to the fiscal periods in which it is used. (page 207-210) an expense on the income statement. Can be called amortization. corresponding account “Accumulated

Depreciation” to be recorded on the Balance Sheet.

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Contra Accounts

A contra account: offsets value of another account Can be called valuation accounts. include accounts like Accumulated

Depreciation. SEE PG 209

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What types of accounts do we know??

AssetLiabilityOwner’s EquityExpenseRevenueContra←This one is NEW!!

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Methods of Calculation Depreciation (pg 210-212)Straight-Line Method:

Allocates the same amount of depreciation to each fiscal period. (pg 214)

Declining-Balance Method: Allocates a greater amount of depreciation to

the first years of an assets life. This is the method that must be used for the

purposed of calculating Income Tax in Canada.

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Principles

The Principle of Materiality: Requires information that could affect user

decisions be included when preparing financial statements

The Principle of Conservationism: Requires, where acceptable alternative

accounting treatments, accounts choose a method that will result in lower net income and net assets.