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NOTE session-02

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Welcome. While people are coming in, guess which animal makes the longest annual migration. Think about whether the record is measured by a straight-line trip or by the animal's full route.

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Today we update account balances before preparing the financial statements. The work begins with evidence about what happened by June 30, then compares that evidence with what the ledger already shows.

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Last class ended with an unadjusted trial balance. Equal totals show that recorded debits equal recorded credits. They do not show that every event has been recorded in the correct period.

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By the end, you should be able to classify a period-end event, compute the needed adjustment, and trace an omitted entry into net income, assets, liabilities, and equity.

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Adjustments come after the unadjusted trial balance and before the statements. They bring the ledger up to the reporting date.

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After the adjusted trial balance, the company can prepare statements and close the temporary accounts.

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Red Cedar's trial balance is equal, but employees earned 900 dollars after the last recorded payroll. The next payday is July 3. Decide whether the June 30 balances are ready, and identify anything the ledger is missing.

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The balances are not ready. Red Cedar used employee service in June and owes 900 dollars at June 30. The records need a debit to Wages Expense and a credit to Wages Payable, both for 900 dollars.

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Cash does not change until July 3.

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Under accrual accounting, economic activity determines the reporting period. Revenue is reported when it is earned under the applicable US GAAP requirements.

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Expense is reported when a resource or service is used, or when an obligation is incurred. Cash may move before or after either one.

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Adjusting entries record period-end information that the ledger does not yet report correctly.

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They may record missing activity, update an existing balance that is out of date, or allocate or estimate a period-end amount. An adjustment may reflect more than one of these reasons.

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Start with the required balance based on contracts, timesheets, counts, or schedules at the reporting date. Compare it with the recorded balance.

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Use the difference to determine the amount and direction of the adjusting entry. After the entry is posted, the account should report the required balance.

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Timing adjustments depend on 2 facts. Ask whether cash or activity came first. Then ask whether the company provided goods or services, or received and used them. Those answers place the event in 1 of the 4 boxes.

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Red Cedar completed a 1,200 dollar tour on June 30 and will bill the customer on July 2. Activity came first, and Red Cedar provided the service. That places the event in accrued revenue.

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What should Red Cedar report at June 30 for the completed 1,200 dollar tour? Choose among no entry, revenue with a receivable, cash with revenue, or unearned revenue. Choose an answer before we trace the dates.

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The answer is B. Completing the tour on June 30 earns 1,200 dollars of revenue and creates a 1,200 dollar receivable. Sending the invoice on July 2 is an administrative step. Collection later settles the receivable.

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On June 30, debit Accounts Receivable for 1,200 dollars and credit Service Revenue for 1,200 dollars. The debit records Red Cedar's right to collect. The credit puts the revenue in the period when the tour was completed.

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Throughout this course, earned means that the applicable US GAAP revenue-recognition requirements are met. Chapter 8 explains the full customer-contract model, including when a performance obligation is satisfied.

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Now cash comes first. Red Cedar received 4,500 dollars before completing 3 tour days. Because Red Cedar still owes service, the original receipt created unearned revenue, a liability.

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By June 30, Red Cedar has completed 1 of the 3 tour days. One third of 4,500 dollars is 1,500 dollars of earned revenue. The other 3,000 dollars remains a liability because Red Cedar still owes 2 tour days.

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Recall the June 20 entry. Red Cedar debited Cash for 4,500 dollars and credited Unearned Service Revenue for 4,500 dollars. That liability is the recorded balance we compare with the service completed by June 30.

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Debit Unearned Service Revenue for 1,500 dollars and credit Service Revenue for 1,500 dollars. Cash is absent because the June 20 receipt was already recorded.

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After the adjustment, the liability is 3,000 dollars, the amount of service Red Cedar still owes.

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A prepaid expense also begins with cash. Here Red Cedar paid 3,600 dollars for 12 months of insurance. As coverage passes, the prepaid asset decreases and insurance expense increases.

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Red Cedar paid 3,600 dollars on June 1 and debited Prepaid Insurance. What entry records 1 month of coverage on June 30?

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Compute the monthly amount, then check the account names and debit and credit directions in each choice.

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The answer is C. The monthly cost is 300 dollars: 3,600 dollars divided by 12 months. Debit Insurance Expense and credit Prepaid Insurance for 300 dollars. The prepaid asset ends with a 3,300 dollar debit balance.

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Return to unpaid wages. Employees provided service before Red Cedar paid cash, so this is an accrued expense. The adjustment records an expense and a payable for the service already received.

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The timeline separates 4 events. The last payroll was recorded on June 27. Employees then earned 900 dollars through June 30. The adjustment belongs on June 30, while the next payroll and cash payment occur on July 3.

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Which entry records the June expense and the June 30 obligation? Focus on what Red Cedar received from the employees by June 30 and what it owes at that date. Cash will not move until July 3.

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The answer is B. Debit Wages Expense for 900 dollars and credit Wages Payable for 900 dollars. The expense belongs in June because employees did the work in June.

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The payable reports the obligation that remains at June 30.

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The wage amount came from completed work and payroll records. Other period-end amounts require allocation or estimation.

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Depreciation combines a recorded cost, a measurement method, and supported estimates about how long an asset will be used and what remains afterward.

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Red Cedar's equipment cost is a recorded 30,000 dollars. The example uses a 5-year useful life, no salvage value, and straight-line depreciation. Those assumptions are supplied here.

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Unit 6 explains how companies support and revise them.

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The equipment cost 30,000 dollars and has no estimated salvage value. Its estimated useful life is 5 years. Red Cedar used it for 1 full month in June. Compute June's straight-line depreciation before choosing an answer.

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The answer is A, 500 dollars. Divide 30,000 dollars by 5 years, then by 12 months. Debit Depreciation Expense and credit Accumulated Depreciation for 500 dollars.

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Equipment stays at its 30,000 dollar cost, and the carrying amount becomes 29,500 dollars.

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Red Cedar omits the 900 dollar wage adjustment. What happens to the June statements? Reconstruct the missing debit and credit, then trace each missing account change before choosing an answer.

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The answer is C. Missing the debit makes Wages Expense 900 dollars too low, so net income and equity are 900 dollars too high. Missing the credit makes Wages Payable and total liabilities 900 dollars too low.

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Assets are not affected.

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Red Cedar completed a 1,200 dollar tour on June 30, and its right to payment became unconditional then. It omitted both the revenue and the receivable.

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Before continuing, reconstruct the missing entry and decide which statement amounts are too high, too low, or unaffected.

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Without the 1,200 dollar debit to Accounts Receivable, assets are too low. Without the 1,200 dollar credit to Service Revenue, revenue, net income, and equity are too low. Liabilities do not change.

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Net income flows into equity, so the 2 understatements describe the same missing revenue. Do not add them together.

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These are 2 related tasks. To prepare an adjustment, use current evidence to determine the required balances, compare them with the recorded balances, and record the difference.

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To analyze an omitted adjustment, reconstruct the missing entry and trace each missing debit and credit to the financial statements. Both tasks begin with the event, reporting period, and affected accounts.

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Before Tuesday, read Chapter 2 on the course site and use its practice if you need another pass. The introduction assignment is due in D2L at 11:59 PM on Friday, September 4.

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Next class uses the adjusted trial balance to prepare statements and closing entries.