Accounting Chapter 4: Adjustments

Chapter 4: Adjustments

• Purpose of Adjustments: To ensure financial statements accurately reflect the financial position and performance of a company. Adjustments correct for transactions that haven't yet been recorded or that need to be recognized over a partial period.

• Accrual vs. Deferral Adjustments: Accrual adjustments record revenues or expenses that have been earned or incurred but not yet received or paid. Deferral adjustments account for items paid or received in advance, but not yet used or consumed.

• Accounting Process: This involves steps like:

• Identifying transactions that are not yet recorded in the initial accounting period.

• Journalizing appropriate adjusting entries.

• Posting these adjusted entries to the general ledger.

• Preparing financial statements.

• Steps Before and After Adjustments: Steps before adjustments typically involve recording business transactions into the journal. Steps after adjustments involve preparing financial reports and other accounting reports based on the updated information from the adjusting entries.

• Financial Statements: Create Adjusted Trial Balance, Balance Sheet and Statement of Retained Earnings.

• Key Accounts:

• Accumulated Depreciation: Tracks total depreciation of fixed assets.

• Depreciation Expense: Amount of fixed asset used each period.

• Interest Revenue: Income earned from interest.

• Payables: Amounts owed to suppliers.

• Expenses: Costs incurred during a period.

• Dividends Declared/Payable: Dividends the company has declared and must pay.

• Types of Adjustments: Calculations for partial periods (e.g., 6-month policy for 1 month).

• Adjusted Trial Balance Normal Balances: Analyze the debit and credit balances of accounts in the adjusted trial balance.

• Classified Balance Sheet: Use the classified format to show the company's assets, liabilities, and equity, categorized for better analysis. Calculates book value of assets like equipment or buildings.

• Closing Process: Identifies accounts that need closing, (temporary accounts), such as revenue, expenses, and dividends to their appropriate closing accounts like retained earnings.

Chapter 5: Fraud, Internal Control & Cash

• Fraud Triangle: Three elements (Incentive, Opportunity, Rationalization) that create an environment for fraud.

• Sarbanes-Oxley Act: Requires stronger internal controls for publicly traded companies to reduce fraudulent activity and ensure financial reporting accuracy.

• Principles of Internal Control: Policies and procedures adopted to safeguard assets and ensure accuracy of financial reporting.

• Bank Reconciliation:

• Deposits in Transit: Deposits recorded by the company but not yet recorded by the bank.

• Outstanding Checks: Checks issued by the company but not yet presented to the bank for payment.

• NSF Checks: Checks that the bank has marked as non-sufficient funds, meaning there was no sufficient funds in the account to cover the check.

• Journal Entries: Record journal entries related to discrepancies discovered during bank reconciliations.

• Final Cash Amount: Determine and record the final cash amount for the balance sheet based on the reconciliation.

Chapter 13: Financial Ratios

• Types of Analysis:

• Horizontal Analysis: Percentage change in financial statement items between periods. ((Current Year - Prior Year) / Prior Year)

• Vertical Analysis: Expresses each financial statement item as a percentage of a base amount (Net Sales for Income statement, or Total Assets for Balance Sheet).

• Ratio Analysis: Classifies ratios into profitability, liquidity, and solvency.

• Learn Formulas and Interpretations: Learn how to apply these formulas and how to understand the interpretation of the results.

Test-Taking Strategies

• Preparation: Consistent studying and use of course resources.

• Relaxation: Deep breathing and focus before the test.

• Prioritization: Begin with questions you know to build confidence and time management skills.

• Time Management: Spend one hour on problems, then move to multiple-choice questions. Avoid excessive time on a single question.

• Confidence: Attempt all questions.

This quiz covers Chapter 4 on Adjustments in Accounting, focusing on the importance of adjustments for the accuracy of financial statements. It explains accrual and deferral adjustments, their role in the accounting process, and the necessary steps before and after making adjustments.