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Copyright © John Wiley & Sons, Inc. 1

 Financial Accounting
with IFRS 5th Edition

Wiley Custom Edition

Chapter 3
Adjusting the Accounts
Weygandt ● Kimmel
本內容僅提供給獲得授權的教師與學生線上學習使用，並禁止下載、重製或翻印。
Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 2
Chapter Outline

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 3

 Learning Objective 1
Explain the accrual basis of
accounting and the reasons
for adjusting entries.

4
Time period (or periodicity) assumption

Accountants divide the

economic life of a business into
artificial time periods.

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Fiscal and Calendar Years

• Accounting time periods are generally a month, a quarter, or a

year.
• Monthly and quarterly time periods are called interim periods.
• Most large companies must prepare both quarterly and annual
financial statements.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 6

Fiscal and Calendar Years

• Fiscal Year = Accounting time period that is one year in length.

• Calendar Year = January 1 to December 31.
• Sometimes a company’s year-end will vary from year to year,
resulting in accounting periods of either 52 or 53 weeks.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 7

Accrual- versus Cash-Basis Accounting
1. Accrual-Basis Accounting
• Transactions are recorded in the periods in which the events
occur.
• Recognize revenues when they perform services (rather than
when they receive cash).
• Recognize expenses when they incurred (rather than when paid).
• Accrual-basis accounting is in accordance with IFRS.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 8

Accrual- versus Cash-Basis Accounting

2. Cash-Basis Accounting

• Revenues are recorded when cash is received.

• Expenses are recorded when cash is paid.

• Cash-basis accounting is not in accordance with IFRS.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 9

Revenue Recognition Principle
When the company meets this performance
obligation, it recognizes revenue.
• The revenue recognition principle therefore
requires that companies recognize revenue in
the accounting period in which the
performance obligation is satisfied.
• Satisfies its performance obligation by
performing a service or providing a good to
a customer.

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Five-Step Revenue
Recognition Process

ILLUSTRATION 3.1 Five steps of revenue recognition

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Expense Recognition Principle
• Expense recognition is referred to as the
expense recognition principle.
• Recognize expenses in the period in which
they make efforts (consume assets or incur
liabilities) to generate revenue.
• Matching : indicate the relationship
between the effort expended and the
revenue generated.

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Recognizing Revenues and Expenses

ILLUSTRATION 3.2 IFRS relationships in revenue and expense recognition

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 13
The Need for Adjusting Entries
• Adjusting entries ensure that the revenue recognition and expense
recognition principles are followed.
• Required every time a company prepares financial statements.
• Will include one income statement account and one statement of
financial position account.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 14

The Need for Adjusting Entries
Why are adjusting entries required?
1. Some events are not recorded daily because it is not efficient to do so.
2. Some costs are not recorded during the accounting period because
these costs expire with the passage of time rather than as a result of
recurring daily transactions.
3. Some items may be unrecorded.

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Types of Adjusting Entries

ILLUSTRATION 3.3 Categories of adjusting entries

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Types of Adjusting Entries
Analyze each account to
determine whether it is
complete and up-to-date
for financial statement
purposes.

ILLUSTRATION 3.3 Trial balance

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 17
 Learning Objective 2
Prepare adjusting entries for
deferrals.

18
Adjusting Entries for Deferrals

Deferrals are expenses or revenues that are recognized at a date later than
the point when cash was originally exchanged.

There are two types:

• Prepaid expenses
• Unearned revenues.
Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 19
Prepaid Expenses
• Prepaid expenses are costs that expire either with the passage of time
(e.g., rent and insurance) or through use (e.g., supplies).
• Prior to adjustment, assets are overstated and expenses are understated.

ILLUSTRATION 3.5 Adjusting entries for prepaid expenses

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 20

Supplies

• Rather than record supplies expense as

the supplies are used, companies
recognize supplies expense at the end
of the accounting period.

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Supplies Adjustment Example

ILLUSTRATION 3.6 Adjustment for supplies

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Insurance
• The cost of insurance paid in advance is recorded as an increase
(debit) in the asset account Prepaid Insurance.
• At the financial statement date, companies increase (debit)
Insurance Expense and decrease (credit) Prepaid Insurance for
the cost of insurance that has expired during the period.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 23

Insurance Adjustment Example

ILLUSTRATION 3.7 Adjustment for insurance

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 24
Depreciation
• Depreciation is the process of allocating the cost of an asset to expense
over its useful life.
• Depreciation is an allocation concept, not a valuation concept.
• That is, depreciation allocates an asset’s cost to the periods in which it is
used.
• Depreciation does not attempt to report the actual change in the value of
the asset.

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Depreciation Example

ILLUSTRATION 3.8 Adjustment for depreciation

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Statement Presentation
• Use of a contra account to disclose both the cost of the equipment and
total cost expensed to date.
• Book value or carrying value: Difference between the cost of any
depreciable asset and its related accumulated depreciation.

ILLUSTRATION 3.9 Statement of financial position presentation of accumulated depreciation

1 Book value or carrying value: Difference between the cost of any depreciable asset
and its related accumulated depreciation.
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Prepaid Expenses Summary

ILLUSTRATION 3.10 Accounting for prepaid expenses

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Unearned Revenues
• When companies receive cash before services are performed, they
record a liability by increasing (crediting) a liability account called
unearned revenues.
• Prior to adjustment, liabilities are overstated and revenues are
understated.

ILLUSTRATION 3.10 Adjusting entries for unearned revenues

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Unearned Revenue Example

ILLUSTRATION 3.12 Service revenue accounts after adjustment

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Accounting for Unearned Revenues

ILLUSTRATION 3.12 Accounting for unearned revenues

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 Learning Objective 3
Prepare adjusting entries
for accruals.

32
Adjusting Entries for Accruals

Accruals are made to record the following:

• Revenues for services performed but not yet recorded at the
statement date – accrued revenues
• Expenses incurred but not yet paid or recorded at the statement
date – accrued expenses

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 33

Accrued Revenues
• Prior to adjustment, both assets and revenues are understated.
• An adjusting entry for accrued revenues results in an increase (a
debit) to an asset account and an increase (a credit) to a revenue
account.

ILLUSTRATION 3.14 Adjusting entries for accrued revenues

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 34
Accrued Revenue Example

ILLUSTRATION 3.15 Adjustment for accrued revenue

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Accrued Revenue Summary

ILLUSTRATION 3.16 Accounting for accrued revenues

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Accrued Expenses
• Prior to adjustment, both liabilities and expenses are understated.
• An adjusting entry for accrued expenses results in an increase (a
debit) to an expense account and an increase (a credit) to a liability
account.

ILLUSTRATION 3.17 Adjusting entries for accrued expenses

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 37
Accrued Interest – Example Part 1

ILLUSTRATION 3.18 Formula for computing interest

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Accrued Interest – Example Part 2

ILLUSTRATION 3.19 Adjustment for accrued interest

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Accrued Salaries and Wages
• Companies pay for some types of expenses, such as employee salaries
and wages, after the services have been performed.

ILLUSTRATION 3.20 Calendar showing Yazici’s pay periods

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Salaries and Wages Example

ILLUSTRATION 3.21 Adjustment for accrued salaries and wages

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Accrued Expenses Summary

ILLUSTRATION 3.22 Accounting for accrued expenses

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 42

Adjusting Entries Reminders
1) Adjusting entries should not involve debits or credits to Cash.
2) Evaluate whether the adjustment makes sense. For example, an
adjustment to recognize supplies used should increase Supplies Expense.
3) Double-check all computations.
4) Each adjusting entry affects one statement of financial position account
and one income statement account.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 43

Summary of Basic Relationships

ILLUSTRATION 3.23 Summary of adjusting entries

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General Journal
Example

ILLUSTRATION 3.24 General journal

showing adjusting entries
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General Ledger
Example
Part 1

ILLUSTRATION 3.25 General

ledger after adjustment
Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 46
General Ledger
Example
Part 2

ILLUSTRATION 3.25 General

ledger after adjustment
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 Learning Objective 4
Describe the nature and
purpose of an adjusted trial
balance.

48
Adjusted Trial Balance and Financial Statements

Adjusted trial balance:

• Proves the equality of the total debit balances and the total
credit balances in the ledger after all adjustments.
• Primary basis for the preparation of financial statements.

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Preparing the
Adjusted Trial
Balance

ILLUSTRATION 3.26
Adjusted trial balance
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Preparing Financial
Statements

ILLUSTRATION 3.27 Preparation

of the income statement and
retained earnings statement
from the adjusted trial balance
Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 51
Preparing Financial
Statements

ILLUSTRATION 3.28 Preparation

of the statement of financial
position from the adjusted trial
balance
Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 52
 Learning Objective *5
Prepare adjusting entries for
the alternative treatment of
deferrals.

53
Alternative Treatment of Deferrals

Alternative treatment:

1. When a company prepays an expense, it debits that amount to an

expense account.

2. When it receives payment for future services, it credits the amount

to a revenue account.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 54

Prepaid Expenses: Supplies Example

ILLUSTRATION 3A.1 Prepaid expenses accounts after adjustment

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Prepaid Expense: Comparison

ILLUSTRATION 3A.2 Adjustment approaches—a comparison

ILLUSTRATION 3A.3 Comparison of accounts

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Service Revenue – Example

ILLUSTRATION 3A.4 Unearned service revenue accounts after adjustment

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Unearned Revenues Comparison

ILLUSTRATION 3A.5 Adjustment approaches—a comparison

ILLUSTRATION 3A.6 Comparison of accounts

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Summary of Additional Adjustment Relationships

ILLUSTRATION 3A.7 Summary of basic relationships for deferrals

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Learning Objective *6
Discuss financial
reporting concepts.

60
Qualities of Useful Information
The IASB developed a Conceptual Framework for Financial
Reporting.
• The primary objective of financial reporting is to provide financial
information that is useful to investors and creditors for making
decisions about providing capital.
• Useful information should possess two fundamental qualities,
relevance and faithful representation

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Qualities of Useful Information

ILLUSTRATION 3B.1 Fundamental qualities of useful information

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Enhancing Qualities
IASB also describes a number of enhancing qualities of useful information.
These include comparability, verifiability, timeliness, and understandability.
• Comparability results when different companies use the same accounting
principles.
• Consistency means that a company uses the same accounting principles and
methods from year to year.
• Information is verifiable if independent observers, using the same methods,
obtain similar results.
• For accounting information to have relevance, it must be timely.
• Information has the quality of understandability if it is presented in a clear and
concise fashion.
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Assumptions in Financial Reporting

ILLUSTRATION 3B.2 Key assumptions in financial reporting

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Assumptions in Financial Reporting

ILLUSTRATION 3B.2 Key assumptions in financial reporting

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Principles in Financial Reporting

Measurement Bases

• IFRS generally uses one of two measurement bases

• The historical cost basis
• The current value basis

• Trade-offs between relevance and faithful representation.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 66

Measurement Bases
Historical Cost Basis
• The historical cost basis dictates that companies record and continue
to report assets at their cost.
Current Value Basis
• The current value basis indicates that assets and liabilities should be
reported at current value.
• Current value information may be more useful than historical cost for
certain types of assets and liabilities.

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Further Principles in Financial Reporting
Revenue Recognition Principle
• Requires that companies recognize revenue in the accounting period
in which the performance obligation is satisfied.

Expense Recognition Principle

• Dictates that companies recognize expense in the period in which
they make efforts to generate revenue. Thus, expenses follow
revenues.

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Further Principles in Financial Reporting
Full Disclosure Principle
• Requires that companies disclose all circumstances and events that
would make a difference to financial statement users.
• If an important item cannot reasonably be reported directly in one of
the four types of financial statements, then it should be discussed in
notes that accompany the statements.

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Cost Constraint

• It weighs the cost that companies will incur to provide the

information against the benefit that financial statement users will
gain from having the information available.

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 Learning Objective 7
Compare the procedures
for adjusting entries
under IFRS and U.S.
GAAP.
71
A Look at U.S. GAAP
• Both the IASB and FASB have established and continue to
develop their conceptual frameworks that will enable companies
to better use the same principles to record transactions
consistently over time.

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Key Points
• Both frameworks are designed to address a common set of issues including
the following.
• What is the primary objective of financial reporting?
• What are the qualitative characteristics that make accounting information useful?
• What are the elements that make up the financial statements?
• What basis should be used to measure and report?
• What criteria should be used to determine when revenue should be recognized and
when expenses have been incurred?
• What guidelines should be established for disclosing financial information?
• IASB and the FASB were working for a period of time to converge their
conceptual frameworks.
Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 73
Similarities
• Like IFRS, companies applying GAAP use accrual-basis accounting
to ensure that they record transactions that change a company’s
financial statements in the period in which events occur.
• Similar to IFRS, cash-basis accounting is not in accordance with
GAAP.
• GAAP also divides the economic life of companies into artificial
time periods. Under both GAAP and IFRS, this is referred to as the
time period assumption. GAAP requires that companies present a
complete set of financial statements, including comparative
information annually.
Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 74
Similarities
• The form and content of financial statements are very similar
under GAAP and IFRS. Any significant differences will be
discussed in those chapters that address specific financial
statements.
• Revenue recognition fraud is a major issue in U.S. financial
reporting. The same situation exists for most other countries as
well

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 75

Differences
• Prior to the issuance of a new joint revenue recognition standard by
the IASB and the FASB, GAAP had more than 100 rules dealing with
revenue recognition. Many of these rules were industry-specific.
Revenue recognition under IFRS was determined primarily by a single
standard, IAS 18. Despite this large disparity in the detailed guidance
devoted to revenue recognition, the general revenue recognition
principles required by IFRS were similar to those under GAAP.
• Internal controls are a system of checks and balances designed to
detect and prevent fraud and errors.

Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 76

Differences
• Under IFRS, revaluation to fair value of items such as land and
buildings is permitted. This is not permitted under GAAP.
• Under IFRS, the term “income” includes both revenues, which arise
during the normal course of operating activities, and gains, which
arise from activities outside of the normal sales of goods and services.
The term income is not used this way under GAAP. Instead, under
GAAP income refers to the net difference between revenues and
expenses. Expenses under IFRS include both those costs incurred in
the normal course of operations, as well as losses that are not part of
normal operations. This is in contrast to GAAP, which defines each
separately.
Ch 3 Adjusting the Accounts Copyright © John Wiley & Sons, Inc. 77
 Copyright

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Ch 3 Adjusting the Accounts