📘 CHAPTER 3 – ADJUSTING THE ACCOUNTS

🎯 Learning Objective 1: Explain the Accrual Basis of Accounting and the

Reasons for Adjusting Entries
🔹 Accrual vs. Cash Basis Accounting
Accrual Basis Cash Basis

Revenue Recognized when earned Recognized when cash received

Expense Recognized when incurred Recognized when cash paid

Compliance ✅ IFRS-compliant ❌ Not IFRS-compliant

🔹 Time Period Assumption
 Businesses divide their operations into artificial time periods (e.g., month, quarter,
year).
 A fiscal year is any 12-month period; a calendar year runs from Jan 1 to Dec 31.
 Interim period: monthly or quarterly time period
🔹 Why Are Adjusting Entries Needed?
1. Some events aren’t recorded daily (e.g., wages).
2. Some costs expire with time, not transactions (e.g., depreciation).
3. Some revenues/expenses are unrecorded at period-end.
✅ Adjusting entries are required each time financial statements are prepared, and they
affect:
 One income statement account (revenue/expense).
 One balance sheet account (asset/liability).
🎯 Learning Objective 2: Prepare Adjusting Entries for Deferrals
🔹 Deferrals = Cash before revenue/expense is recognized
 Types: Prepaid Expenses and Unearned Revenues

📌 A. Prepaid Expenses
 Paid in advance; treated as assets until used.
 Before adjustment: Assets overstated, Expenses understated
Examples:
1. Supplies:
o Bought: $2,500 (recorded as asset)
o Count at month-end: $1,000 left
→ Used = $1,500
→ Adjustmen t:
Dr Supplies Expense 1,500
Cr Supplies 1,500
2. Insurance:
o Paid: $600 for 1 year on Oct 1
→ Monthly cost = $50
→ Adjustment on Oct 31:
Dr Insurance Expense 50
Cr Prepaid Insurance 50
3. Depreciation:
o Allocate asset cost over useful life.
o NOT a valuation → only allocation.
o If equipment depreciates $40/month:
Dr Depreciation Expense 40
Cr Accumulated Depreciation 40

📌 B. Unearned Revenues
 Received cash before performing services.
 Recorded as liabilities until earned.
 Before adjustment: Liabilities overstated, Revenues understated
Example:
  Received $1,200 on Oct 2 for services by Dec 31.
 By Oct 31: $400 completed.
→ Adjustment:
Dr Unearned Service Revenue 400
Cr Service Revenue 400

🎯 Learning Objective 3: Prepare Adjusting Entries for Accruals

🔹 Accruals = Revenue/Expense recognized before cash changes hands
 Types: Accrued Revenues and Accrued Expenses

📌 A. Accrued Revenues
 Services performed but not yet billed or recorded
 Before adjustment: Assets & Revenues understated
Example:
 $200 worth of services in Oct, billed in Nov
→ Adjustment on Oct 31:
Dr Accounts Receivable 200
Cr Service Revenue 200
 When cash is received (Nov 10):
Dr Cash 200
Cr Accounts Receivable 200

📌 B. Accrued Expenses
 Incurred but not yet paid or recorded
 Before adjustment: Liabilities & Expenses understated
Examples:
1. Interest Expense:
o Note: $5,000, 12% annual rate, signed Oct 1
→ One-month interest = $50
Dr Interest Expense 50
Cr Interest Payable 50
2. Salaries:
o $2,000/week (5 days) → $400/day
o Oct 31 = 3 unpaid days = $1,200
Dr Salaries & Wages Expense 1,200
Cr Salaries & Wages Payable 1,200
o On next payday (Nov 9), total = $4,000:
Dr Salaries & Wages Payable 1,200
Dr Salaries & Wages Expense 2,800
Cr Cash 4,000

🎯 Learning Objective 4: Adjusted Trial Balance

 Purpose: Ensure total debits = total credits after all adjustments.
 Used to prepare the income statement, balance sheet, and retained earnings
statement.

🎯 Learning Objective 5 (Optional): Alternative Treatments for Deferrals

Some companies:
 Debit expenses immediately when paid instead of recording them as assets.
 Credit revenues immediately when cash is received instead of recording as
liabilities.
Adjustment examples:
 Supplies expense initially recorded: Adjust by subtracting unused portion.
 Revenue initially recorded: Adjust by removing unearned part.

🎯 Learning Objective 6 (Optional): Financial Reporting Concepts

🔹 Qualities of Useful Information
 Type Quality Meaning
Fundamenta Reflects economic
Relevance, Faithful Representation
l reality
Comparability, Verifiability, Timeliness,
Enhancing Makes info more useful
Understandability
🔹 Assumptions in Reporting:
 Economic Entity
 Monetary Unit
 Time Period
 Going Concern
🔹 Key Principles:
 Historical Cost: Record assets at purchase price
 Fair Value: Use current market value
 Revenue Recognition: Record revenue when performance obligation is
satisfied
 Expense Recognition: Match expenses with related revenues
 Full Disclosure: Report anything that would affect user decisions
🔹 Cost Constraint:
 Only provide info if benefit > cost

✅ Summary Tips:
 Adjusting entries never touch Cash
 Always affect one income statement and one balance sheet account
 Ensure accuracy before preparing financial statements
 📘 Chapter 4 – Completing the Accounting Cycle
🎯 Learning Objective 1: Prepare a Worksheet
🔹 What is a Worksheet?
 A multi-column schedule to help accountants prepare financial statements.
 Not part of permanent records (only for internal use).
 Optional, but saves time and helps detect errors.

🔹 5 Steps to Prepare a Worksheet

1. Prepare Trial Balance
→ From ledger accounts
2. Enter Adjustments
→ Based on adjusting entries (from Chapter 3)
3. Compute Adjusted Trial Balance
→ Original TB + Adjustments
4. Extend amounts to financial statement columns
→ Income Statement / Financial Position
5. Compute Net Income / Net Loss

🔹 Example – Adjustments (Yazici Advertising):

Code Entry Effect
a Supplies used ₺1,500 Supplies ↓, Expense ↑
b Insurance expired ₺50 Prepaid ↓, Expense ↑
c Depreciation ₺40 Accumulated ↑, Expense ↑
d Revenue earned from unearned revenue ₺400 Liability ↓, Revenue ↑
e Revenue accrued ₺200 Receivable ↑, Revenue ↑
f Interest accrued ₺50 Interest Payable ↑, Expense ↑
g Salaries accrued ₺1,200 Salaries Payable ↑, Expense ↑
✅ Net income is calculated by subtracting total expenses from total revenues on the
worksheet.

🎯 Learning Objective 2: Prepare Closing Entries and a Post-Closing Trial Balance

🔹 Purpose of Closing Entries
 Transfer net income or loss to Retained Earnings
 Reset temporary accounts to zero:
o Revenues
o Expenses
o Dividends

🔹 Steps to Close Accounts

1. Close Revenues → Income Summary
2. Close Expenses → Income Summary
3. Close Income Summary → Retained Earnings
4. Close Dividends → Retained Earnings

🔹 Post-Closing Trial Balance

 Includes only permanent accounts:
o Assets, Liabilities, Equity (no revenues, expenses, or dividends)
 Ensures accounting books are ready for next period

🎯 Learning Objective 3: Explain the Accounting Cycle and Prepare Correcting

Entries
🔹 9 Steps of the Accounting Cycle:
1. Analyze business transactions
2. Journalize transactions
3. Post to ledger accounts
 4. Prepare a trial balance
5. Journalize/post adjusting entries
6. Prepare adjusted trial balance
7. Prepare financial statements
8. Journalize/post closing entries
9. Prepare post-closing trial balance

🔹 Correcting Entries:
 Only made when errors are found.
 Not part of regular cycle
 You can:
o Reverse incorrect entry then do the correct one
o OR create a single correcting entry
Example Errors:
 Recorded revenue instead of reducing receivable → wrong account
 Posted equipment worth ₺4,500 as ₺450 → arithmetic error

🎯 Learning Objective 4: Classified Statement of Financial Position (Balance Sheet)

🔹 Purpose:
 Group similar assets/liabilities together to improve understanding

🔹 Sections:
Assets
 Current assets
 Long-term investments
 Property, Plant & Equipment (PPE)
 Intangible assets
Liabilities and Equity
 Current liabilities
 Non-current liabilities
 Equity (e.g. Share Capital + Retained Earnings)

🔹 Classified Balance Sheet Order

Current Assets (in order of liquidity):
1. Cash
2. Accounts Receivable
3. Inventory
4. Prepaid Items
Property, Plant, and Equipment (PPE):
 Includes land, buildings, equipment
 Depreciated over time → Accumulated Depreciation
Intangible Assets:
 Patents, Goodwill, Licenses
Long-term Investments:
 Investments not used in daily operations (stocks, land)

🎯 Learning Objective 5: Reversing Entries (Optional)

 Done at the beginning of next accounting period
 Only for specific adjusting entries (typically accruals)
 Purpose: Simplify recording regular transactions
 Exact opposite of certain previous-period adjusting entries
Example:
 Adjusted for ₺1,200 accrued salaries on Oct 31
 Reverse that entry on Nov 1 so actual Nov 9 salary payment is easier
🎯 Learning Objective 6: IFRS vs. GAAP
🔹 Similarities:
 Both require:
o Disclosure of accounting policies
o Estimates, assumptions
o Comparative info
o Annual reporting
🔹 Differences:
IFRS GAAP
Calls it "Statement of Financial Position" "Balance Sheet"
Lists non-current assets first Lists current assets first
Allows fair value for PPE Primarily historical cost
Reports “Net Assets” (Assets − Liabilities) Doesn’t use Net Assets

✅ Summary: Completing the Accounting Cycle Includes

1. Preparing the worksheet
2. Adjusting accounts
3. Creating financial statements
4. Making closing entries
5. Finalizing with post-closing trial balance
6. Optionally: reversing entries and understanding IFRS vs GAAP
📘 Chapter 5 – Accounting for Merchandise Operations

🎯 LO1: Merchandising Operations and Inventory Systems

🏪 Merchandising Companies

 Buy & sell goods (khác với công ty dịch vụ chỉ cung cấp dịch vụ).
 Nguồn thu chính là Sales Revenue.
 Thu nhập = Net Sales – Cost of Goods Sold (COGS) = Gross Profit

🔁 Inventory Systems

 Perpetual: Ghi nhận liên tục từng giao dịch. Biết tồn kho và COGS mọi lúc.
 Periodic: Ghi nhận định kỳ. Tính COGS cuối kỳ theo công thức:

COGS = Beginning Inventory + Purchases – Ending Inventory

🎯 LO2: Record Purchases Under a Perpetual System

🧾 Purchases

 Ghi nhận khi nhận hàng, dùng purchase invoice làm bằng chứng.
 Ghi:

Dr Inventory
Cr Accounts Payable/Cash

🚚 Freight Costs

 Nếu FOB shipping point: người mua trả → ghi tăng Inventory
 Nếu FOB destination: người bán trả → chi phí vận chuyển (freight-out)

🔄 Returns and Allowances

 Hàng lỗi/thừa/không đúng specs → ghi:

Dr Accounts Payable
Cr Inventory

💰 Purchase Discounts (e.g., 2/10, n/30)

 Trả sớm được chiết khấu → giảm giá trị Inventory

Dr Accounts Payable
 Cr Inventory (discount)
Cr Cash (thực trả)

🎯 LO3: Record Sales Under a Perpetual System

💵 Sales Transactions (2 Entries)

1. Ghi doanh thu:

2. Dr Accounts Receivable/Cash
3. Cr Sales Revenue
4. Ghi giá vốn:
5. Dr COGS
6. Cr Inventory

🔁 Sales Returns and Allowances

 Ghi lại hàng trả:

 Dr Sales Returns & Allowances (contra-revenue)
 Cr Accounts Receivable
 Dr Inventory
 Cr COGS (nếu hàng còn dùng được)

💵 Sales Discounts

 Giảm giá nếu khách trả sớm → giảm doanh thu:

 Dr Cash
 Dr Sales Discounts
 Cr Accounts Receivable

🎯 LO4: Accounting Cycle in Merchandising

 Giống công ty dịch vụ, nhưng thêm:

o Adjust inventory nếu kiểm kê thực tế khác số sổ sách.
o Dr COGS
o Cr Inventory (nếu thiếu)
 Closing entries bao gồm:
o Đóng Sales Revenue, COGS, Expenses, Discounts, Returns vào Income
Summary
o Đóng Income Summary vào Retained Earnings
o Đóng Dividends vào Retained Earnings

🎯 LO5: Financial Statements for Merchandisers

📄 Income Statement (Multi-step)

Sales Revenue
– Sales Returns and Allowances
– Sales Discounts
= Net Sales

– COGS
= Gross Profit

– Operating Expenses
= Income from Operations

± Other Revenues/Expenses
= Net Income

📄 Comprehensive Income Statement

 Thêm các mục như unrealized gains/losses (not in net income).

📄 Classified Statement of Financial Position

 Phân loại rõ: Current assets, Non-current assets, Current liabilities, etc.

🎯 LO6: Worksheet for Merchandising Company

 Giống như service company nhưng có thêm các tài khoản:

o Inventory
o COGS
o Sales Returns and Allowances
o Sales Discounts
 Các bước: Trial balance → Adjustments → Adjusted Trial Balance → Extend →
Calculate Net Income

🎯 LO7: Periodic Inventory System (Appendix 5B)

🔄 Differences from Perpetual

 Không ghi COGS từng giao dịch → tính cuối kỳ.

 Ghi mua hàng vào Purchases account, không ghi vào Inventory.

💸 COGS Formula (under Periodic):

Beginning Inventory
+ Net Purchases (Purchases – Returns – Discounts + Freight-In)
= Cost of Goods Available for Sale
– Ending Inventory
= COGS
🎯 LO8: IFRS vs GAAP in Merchandising

Similarities Differences
Cả hai dùng perpetual hoặc
IFRS: phân loại chi phí theo function hoặc nature
periodic
GAAP cho phép single-step income statement, IFRS
Định nghĩa inventory gần giống nhau
không
Gồm comprehensive income IFRS cho phép revaluation PPE, GAAP thì không

✅ Tóm tắt nhanh kiến thức trọng tâm:

Chủ đề Ghi nhớ
Hệ thống kiểm kê Perpetual (liên tục), Periodic (định kỳ)
Sales = Net Sales – COGS = Gross Profit
Discount Terms 2/10, n/30 = 2% trong 10 ngày
2 Bút toán khi bán 1: Doanh thu, 2: Giá vốn
Closing entries Tương tự Service, thêm Inventory/COGS
IFRS vs GAAP IFRS linh hoạt hơn về trình bày và đánh giá lại tài sản