WEBVTT NOTE Adjusting the records at period end 1 00:00:00.000 --> 00:00:06.783 You are listening to Chapter 2 of the ACC 300 course reading, Adjusting the records at period end. 2 00:00:06.783 --> 00:00:17.649 This chapter supports course objective 1.2: analyze period-end information, prepare adjusting entries, and explain their effects on the financial statements. 3 00:00:17.649 --> 00:00:26.093 By the end, you should be able to classify the four timing patterns and compare a required ending balance with the ledger. 4 00:00:26.093 --> 00:00:36.336 You should also be able to record an adjustment and trace an omitted adjustment into the statements. This recording is a draft audio review preview. 5 00:00:36.336 --> 00:00:42.288 The written chapter remains the version to trust while this recording is under review. 6 00:00:42.288 --> 00:00:55.417 Beacon Design has been in business for 1 year. On December 31, its trial balance reports total debits of 186,400 dollars and total credits of 186,400 dollars. 7 00:00:55.417 --> 00:01:11.454 Every recorded entry has support, uses the correct accounts, and appears in the total. The trial balance accurately summarizes the transactions posted so far, but some balances are out of date. 8 00:01:11.454 --> 00:01:23.253 Beacon completed service on December 30 that it has not billed. Employees also worked in December for wages that Beacon will pay on January 5. 9 00:01:23.253 --> 00:01:40.536 An insurance policy has partly expired, a client advance has been partly earned, and Beacon has used its equipment for the year. These events must be reflected before Beacon prepares its financial statements. 10 00:01:40.536 --> 00:01:56.596 Reporting periods and the events that cross them. A business operates continuously, but financial statements cover stated periods. One activity may span several months, pay periods, or calendar years. 11 00:01:56.596 --> 00:02:13.860 Accountants must divide that activity among the periods it affects. The reporting date creates a question: how much of an activity belongs in the current period? The original cash entry or invoice may not answer it. 12 00:02:13.860 --> 00:02:27.672 The accountant may also need contracts, completion reports, timesheets, schedules, or physical counts. Adjusting entries use that evidence to bring the accounts up to date. 13 00:02:27.672 --> 00:02:41.147 Cash-basis accounting. Under cash-basis accounting, an entity records revenue when it receives cash or cash equivalents. It records expense when it pays cash or cash equivalents. 14 00:02:41.147 --> 00:02:54.091 The bank statement provides evidence for cash receipts and payments, which makes many cash-basis entries easy to verify. A company also avoids many accruals and estimates. 15 00:02:54.091 --> 00:02:59.012 Cash-basis and accrual-basis income can be the same for a period. 16 00:02:59.012 --> 00:03:10.821 That result is possible when the company has no receivables, prepaid assets, equipment, unpaid obligations, or advance payments at either end of the period. 17 00:03:10.821 --> 00:03:23.160 Cash-basis records answer a useful question: how much cash came in and went out? But cash movement and business performance do not always occur in the same period. 18 00:03:23.160 --> 00:03:35.350 The limits of the cash basis. Beacon completed 4,800 dollars of design service on December 30. It will send the invoice on January 3 and expects payment by January 20. 19 00:03:35.350 --> 00:03:43.890 Beacon's employees completed 2,700 dollars of work in December that Beacon will pay as part of the January 5 payroll. 20 00:03:43.890 --> 00:03:53.817 Under the cash method, neither the 4,800 dollars of service nor the 2,700 dollars of wages appears on the December financial statements. 21 00:03:53.817 --> 00:04:05.349 December revenue is 4,800 dollars too low, and December expense is 2,700 dollars too low. The net effect is a 2,100 dollars understatement of December income. 22 00:04:05.349 --> 00:04:16.955 January then reports revenue and expense from work completed in the prior year. The difference for a full year is not always the 2,100 dollars year-end amount. 23 00:04:16.955 --> 00:04:25.714 The 4,800 dollars of revenue and 2,700 dollars of expense do not disappear under the cash basis; they move into January. 24 00:04:25.714 --> 00:04:36.152 If Beacon starts and ends the year with similar timing differences, amounts carried into the current year can offset amounts carried out of it. 25 00:04:36.152 --> 00:04:50.896 To see the comparison after startup, suppose Beacon is now ending its second year. The net effect of unbilled work and unpaid wages was 900 dollars at the start of the year and 2,100 dollars at the end. 26 00:04:50.896 --> 00:04:59.509 Cash-basis income would be understated by the 1,200 dollars increase, not by the full 2,100 dollars ending difference. 27 00:04:59.509 --> 00:05:10.896 A full-year comparison therefore depends on the change in the accrual position, not only the year-end amount. That difference often grows with the business. 28 00:05:10.896 --> 00:05:20.199 A growing company may end the year with more unbilled work, unpaid wages, and other timing differences than it had at the beginning. 29 00:05:20.199 --> 00:05:34.576 Cash-basis accounting reports some of that growth in the next period instead of the period in which it occurred. Cash-basis income can also change when managers change the timing of receipts and payments. 30 00:05:34.576 --> 00:05:45.219 Collecting from customers before year-end and delaying payments until January raises cash-basis income without changing the work performed in December. 31 00:05:45.219 --> 00:05:50.927 Delaying collections and paying expenses before year-end has the opposite effect. 32 00:05:50.927 --> 00:06:02.908 Accrual accounting reduces the effect of those cash-timing choices by reporting performance and resource use in the periods in which they occur. Check your understanding. 33 00:06:02.908 --> 00:06:16.440 Beacon completes work in December and collects the cash in January. Under accrual accounting, which month reports the revenue? Answer. December, because that is when Beacon completed the work. 34 00:06:16.440 --> 00:06:24.772 Accrual-basis accounting and adjusting entries. The work and the cash still appear, but in different periods. 35 00:06:24.772 --> 00:06:35.551 That difference matters when the financial statements are meant to report December performance and the obligations that exist on December 31. 36 00:06:35.551 --> 00:06:52.216 Accrual-basis accounting reports revenue when an entity earns it and reports expense when it consumes a resource or incurs an obligation. The related cash receipt or payment may occur in the same period or another one. 37 00:06:52.216 --> 00:07:03.224 US GAAP recognition and measurement generally use accrual accounting. The statement of cash flows separately reports cash receipts and payments. 38 00:07:03.224 --> 00:07:19.889 Throughout this course, earned is shorthand for meeting the applicable US GAAP revenue-recognition requirements. For revenue from contracts with customers, Chapter 8 explains when a performance obligation is satisfied. 39 00:07:19.889 --> 00:07:34.872 An adjusting entry updates account balances for information available at the reporting date, before the statements are prepared. This course organizes period-end entries by the purpose they serve: 40 00:07:34.872 --> 00:07:48.064 Purpose, Timing; The question it answers, Which period does this amount belong to?; An example, December wages paid in January; Covered in, This chapter. 41 00:07:48.064 --> 00:08:06.343 Purpose, Estimation; The question it answers, What amount should be recorded when measurement is uncertain?; An example, Depreciation based on an estimated useful life and salvage value; Covered in, This chapter. 42 00:08:06.343 --> 00:08:24.536 Purpose, Correction; The question it answers, Do the records accurately reflect an event that already happened?; An example, A bank service charge Beacon did not record; Covered in, Unit 4, bank reconciliations. 43 00:08:24.536 --> 00:08:41.780 Purpose, Presentation; The question it answers, Is the amount in the correct place on the statements?; An example, Debt due within 1 year, classified as current; Covered in, Unit 3, the balance sheet. 44 00:08:41.780 --> 00:09:01.008 Purpose, Measurement; The question it answers, Does the recorded amount comply with the required measurement guidance?; An example, Inventory that must be written down; Covered in, Units 5 and 6, write-downs and impairment. 45 00:09:01.008 --> 00:09:16.834 Each timing entry in this chapter uses one income-statement account and one balance-sheet account. Estimates, corrections, presentation entries, and measurement entries may use a different structure. 46 00:09:16.834 --> 00:09:29.160 Check your understanding. Employees earn December wages that Beacon will pay in January. What type of year-end entry is this? Answer. It is a timing entry. 47 00:09:29.160 --> 00:09:43.077 The entry records December expense and the liability that exists at year-end. The rule, the four timing adjustments in this chapter. The adjusting entry does not include Cash. 48 00:09:43.077 --> 00:09:56.914 The company recorded the cash transaction earlier or will record it later. For the four timing patterns in this section, an entry that changes Cash is not an adjusting entry. 49 00:09:56.914 --> 00:10:02.640 It may instead record a cash transaction or correct an earlier omission. 50 00:10:02.640 --> 00:10:15.755 Compare the required ending balance with the ledger balance. Each timing adjustment in this section updates a balance-sheet account. Use three steps to determine the entry. 51 00:10:15.755 --> 00:10:31.767 Determine the account's required ending balance on December 31. Use evidence about the business, such as completion reports, timesheets, contracts, or physical counts. Read what the account shows in the ledger. 52 00:10:31.767 --> 00:10:44.424 Record the difference. For the timing adjustments here, that amount also enters revenue or expense. Beacon's Prepaid Insurance account shows how the three steps work: 53 00:10:44.424 --> 00:11:00.348 Step, 1. Determine the required ending balance; Evidence, The policy has 3 months left at 1,000 dollars per month.; Result, 3,000 dollars debit. Step, 2. 54 00:11:00.348 --> 00:11:15.023 Read the ledger balance; Evidence, Beacon recorded the 12,000 dollars premium and no later reduction.; Result, 12,000 dollars debit. Step, 3. 55 00:11:15.023 --> 00:11:26.784 Record the difference; Evidence, Prepaid Insurance must decrease by 9,000 dollars.; Result, 9,000 dollars credit. 56 00:11:26.784 --> 00:11:34.397 The entry debits Insurance Expense for 9,000 dollars and credits Prepaid Insurance for 9,000 dollars. 57 00:11:34.397 --> 00:11:43.593 The same calculation can start with the amount used: 1,000 dollars per month for 9 months equals 9,000 dollars of expense. 58 00:11:43.593 --> 00:11:58.820 Checking the 3,000 dollars ending asset against the policy confirms that the entry did not leave an unsupported balance. Suppose Beacon accidentally recorded the 12,000 dollars policy as 12,500 dollars. 59 00:11:58.820 --> 00:12:08.996 Recording 9,000 dollars of expense would leave a 3,500 dollars asset, but the policy supports only 3,000 dollars of remaining coverage. 60 00:12:08.996 --> 00:12:19.096 The 500 dollars difference is a recording error that Beacon must investigate and correct separately, not additional insurance expense. 61 00:12:19.096 --> 00:12:29.725 Companies use account reconciliations, schedules, physical counts, and cutoff procedures to determine each account's required ending balance. 62 00:12:29.725 --> 00:12:40.730 These procedures matter because an equal trial balance does not identify a missing adjustment or an unsupported balance. Check your understanding. 63 00:12:40.730 --> 00:12:55.730 The policy supports 3,000 dollars of Prepaid Insurance, but the ledger shows 3,500 dollars after the normal expense entry. Should Beacon record the extra 500 dollars as Insurance Expense? Answer. No. 64 00:12:55.730 --> 00:13:03.720 The unsupported 500 dollars signals a recording error that Beacon must investigate and correct separately. 65 00:13:03.720 --> 00:13:11.150 The four timing patterns: accruals and deferrals. Timing adjustments fall into four patterns. 66 00:13:11.150 --> 00:13:23.295 A deferral is a cash-first pattern: the company initially records an asset or liability and recognizes the related expense or revenue in a later period. 67 00:13:23.295 --> 00:13:39.753 An accrual is an activity-first pattern: the company records revenue or expense before the related cash moves. Use two questions to identify the pattern: Did cash move before or after the economic activity? 68 00:13:39.753 --> 00:13:46.944 Did the company provide goods or services, or did it receive or use resources or services? 69 00:13:46.944 --> 00:13:53.848 The timing-pattern table uses the company's role and the order of cash and activity. 70 00:13:53.848 --> 00:14:05.190 When a company provides goods or services after receiving cash, it reduces a contract liability, such as unearned revenue, as it performs. 71 00:14:05.190 --> 00:14:18.504 When it provides goods or services before receiving cash, it records accrued revenue and either a receivable or contract asset, as required by the contract terms. 72 00:14:18.504 --> 00:14:35.928 When a company receives or uses resources after paying cash, it reduces a prepaid asset as it uses the resource. When it receives or uses resources before paying cash, it records an accrued expense and a payable. 73 00:14:35.928 --> 00:14:51.990 The category identifies the balance-sheet account to review. It also identifies the income-statement effect: performance for a customer can create revenue, and resource use or employee service can create expense. 74 00:14:51.990 --> 00:15:05.931 Depreciation is a separate period-end adjustment. Cash timing does not identify its amount. Beacon allocates equipment cost using supported estimates instead. Check your understanding. 75 00:15:05.931 --> 00:15:20.932 Cash moved first, and Beacon still owes the customer service. Which timing pattern applies? Answer. Unearned or deferred revenue. The company reports the remaining service obligation as a liability. 76 00:15:20.932 --> 00:15:30.327 The two event-first patterns record activity missing from the ledger. The account itself may already contain other activity. 77 00:15:30.327 --> 00:15:38.207 Accounts Receivable, for example, may include many invoiced sales before Beacon adds one uninvoiced job. 78 00:15:38.207 --> 00:15:54.421 Beacon's 4,800 dollars of uninvoiced services is accrued revenue, and its 2,700 dollars of unpaid wages is an accrued expense. The two cash-first patterns are deferrals. They adjust an amount already in the ledger. 79 00:15:54.421 --> 00:16:09.952 The cash transaction records a prepaid asset or a contract liability, such as Unearned Revenue. As Beacon uses the prepaid resource or performs for the customer, the remaining asset or liability decreases. 80 00:16:09.952 --> 00:16:21.696 Accrued revenue and accrued expenses. Return to Beacon's year end. Beacon performed 4,800 dollars of design service on December 30 and has not invoiced it. 81 00:16:21.696 --> 00:16:45.984 Event, Design service; Activity date, December 30: Beacon completes 4,800 dollars of work.; Reporting date, December 31: record revenue and a receivable.; Billing, collection, or payment, Invoice January 3; collect January 20.. 82 00:16:45.984 --> 00:17:07.704 Event, Employee service; Activity date, Employees complete 2,700 dollars of work in December.; Reporting date, December 31: record expense and a payable.; Billing, collection, or payment, Pay January 5.. 83 00:17:07.704 --> 00:17:21.874 The activity date determines the reporting period. The later invoice, collection, and payment settle the resulting receivable or payable. The account to examine is Accounts Receivable. 84 00:17:21.874 --> 00:17:36.968 It should include a 4,800 dollars claim on December 31 because Beacon has done the work and its right to payment is unconditional under the contract. Sending the invoice is an administrative step. 85 00:17:36.968 --> 00:17:44.592 The ledger shows nothing for this job, so the adjusting entry records the 4,800 dollars difference: 86 00:17:44.592 --> 00:17:58.824 The December 31 adjusting entry debits Accounts Receivable, an asset, for 4,800 dollars and credits Service Revenue for 4,800 dollars. 87 00:17:58.824 --> 00:18:14.848 The credit puts the 4,800 dollars of revenue in December, when the work was done, and where the cash method left it out. When the customer pays on January 20, Beacon debits Cash and credits Accounts Receivable. 88 00:18:14.848 --> 00:18:20.952 Collection settles the existing claim; it does not create revenue a second time. 89 00:18:20.952 --> 00:18:33.888 The January 20 collection entry debits Cash, an asset, for 4,800 dollars and credits Accounts Receivable, an asset, for 4,800 dollars. 90 00:18:33.888 --> 00:18:50.273 Beacon's December wages require a separate accrued-expense adjustment. The account to review is Wages Payable. It should show 2,700 dollars on December 31, the amount that employees earned and Beacon owes. 91 00:18:50.273 --> 00:19:00.984 It shows nothing for this work because payroll does not run until January 5. The adjusting entry records the 2,700 dollars difference: 92 00:19:00.984 --> 00:19:13.584 The December 31 adjusting entry debits Wages Expense for 2,700 dollars and credits Wages Payable, a liability, for 2,700 dollars. 93 00:19:13.584 --> 00:19:26.064 When Beacon pays the payroll on January 5, it debits Wages Payable and credits Cash. The payment settles the liability recorded on December 31. 94 00:19:26.064 --> 00:19:39.672 The January 5 payment entry debits Wages Payable, a liability, for 2,700 dollars and credits Cash, an asset, for 2,700 dollars. 95 00:19:39.672 --> 00:19:53.426 Prepaid expenses and unearned (deferred) revenue. In both accrual examples, the ledger contained no amount for the year-end event, so the adjustment was the full amount. 96 00:19:53.426 --> 00:20:10.435 The deferral patterns start with a recorded balance and update it for the portion used or performed. Beacon paid 12,000 dollars on April 1 for a 12-month insurance policy running from April 1 through March 31. 97 00:20:10.435 --> 00:20:25.003 Beacon recorded the payment as an asset, Prepaid Insurance, because on April 1 the entire 12 months of coverage was still ahead of it. The account to examine is Prepaid Insurance. 98 00:20:25.003 --> 00:20:32.328 Its required ending balance includes only the coverage Beacon has not used by December 31: 99 00:20:32.328 --> 00:20:49.880 Policy: 12,000 dollars for 12 months, at 1,000 dollars per month, Apr 1 to Dec 31, coverage used; Months, 9; Amount, 9,000 dollars. 100 00:20:49.880 --> 00:21:08.370 Policy: 12,000 dollars for 12 months, at 1,000 dollars per month, Jan 1 to Mar 31, coverage still ahead; Months, 3; Amount, 3,000 dollars. 101 00:21:08.370 --> 00:21:24.984 Policy: 12,000 dollars for 12 months, at 1,000 dollars per month, Total paid on April 1; Months, 12; Amount, 12,000 dollars. 102 00:21:24.984 --> 00:21:41.088 The required ending balance of Prepaid Insurance is 3,000 dollars. It shows 12,000 dollars because nothing has come out of the account since April. The entry records the 9,000 dollars difference: 103 00:21:41.088 --> 00:21:53.424 The December 31 adjusting entry debits Insurance Expense for 9,000 dollars and credits Prepaid Insurance, an asset, for 9,000 dollars. 104 00:21:53.424 --> 00:22:06.915 The 9,000 dollars is insurance expense. Prepaid Insurance now shows 3,000 dollars. The amount is an asset because Beacon still holds a right to that coverage at December 31. 105 00:22:06.915 --> 00:22:22.355 The client advance begins with a liability rather than an asset. On November 1, a client paid Beacon 6,000 dollars in advance for 6 months of design support running from November 1 through April 30. 106 00:22:22.355 --> 00:22:33.584 Beacon recorded Unearned Revenue, a contract liability, because it owed the client 6 months of work. The account to examine is Unearned Revenue. 107 00:22:33.584 --> 00:22:40.368 Its required ending balance includes only the support Beacon still owes at December 31: 108 00:22:40.368 --> 00:22:56.058 Contract: 6,000 dollars for 6 months, at 1,000 dollars per month, Nov 1 to Dec 31, support performed; Months, 2; Amount, 2,000 dollars. 109 00:22:56.058 --> 00:23:11.864 Contract: 6,000 dollars for 6 months, at 1,000 dollars per month, Jan 1 to Apr 30, support still owed; Months, 4; Amount, 4,000 dollars. 110 00:23:11.864 --> 00:23:26.856 Contract: 6,000 dollars for 6 months, at 1,000 dollars per month, Total received on November 1; Months, 6; Amount, 6,000 dollars. 111 00:23:26.856 --> 00:23:40.560 The required ending balance of Unearned Revenue is 4,000 dollars. It shows 6,000 dollars. The entry records the 2,000 dollars difference: 112 00:23:40.560 --> 00:23:52.416 The December 31 adjusting entry debits Unearned Revenue, a liability, for 2,000 dollars and credits Service Revenue for 2,000 dollars. 113 00:23:52.416 --> 00:24:04.735 The 2,000 dollars is service revenue, earned by performing 2 months of the contract. Neither entry changes Cash because the cash transactions were recorded earlier. 114 00:24:04.735 --> 00:24:11.345 Each adjustment reduces an asset or liability to the amount that remains on December 31. 115 00:24:11.345 --> 00:24:25.316 If Beacon had adjusted insurance monthly through November, Prepaid Insurance would show 4,000 dollars (12,000 dollars less 8 months at 1,000 dollars per month) before the December entry. 116 00:24:25.316 --> 00:24:33.504 The supported ending balance would still be 3,000 dollars, so the December adjustment would be 1,000 dollars: 117 00:24:33.504 --> 00:24:49.992 Suppose Beacon has adjusted insurance through November. The December 31 entry debits Insurance Expense for 1,000 dollars and credits Prepaid Insurance, an asset, for 1,000 dollars. 118 00:24:49.992 --> 00:25:02.343 Prepaid Insurance ends at 3,000 dollars whether Beacon adjusts once at year-end or once each month. Insurance Expense for the year also totals 9,000 dollars. 119 00:25:02.343 --> 00:25:10.839 The frequency of the adjustments changes the amount left for the final entry, not the final annual balances. 120 00:25:10.839 --> 00:25:19.728 The accountant must therefore read the ledger rather than assume that the full annual adjustment is still needed. 121 00:25:19.728 --> 00:25:26.316 Estimates use evidence about an uncertain amount. Some period-end amounts cannot be known exactly. 122 00:25:26.316 --> 00:25:40.971 The company applies the required measurement method to available evidence and documents the estimates used in that method. Beacon's approved timesheets provide the 2,700 dollars wage accrual. Depreciation is different. 123 00:25:40.971 --> 00:25:52.063 The equipment invoice provides its cost, but no invoice states exactly how long Beacon will use the equipment or how much Beacon will recover when it stops using it. 124 00:25:52.063 --> 00:26:03.155 Beacon estimates the useful life and salvage value from the equipment's expected use, condition, maintenance, technological change, and available market information. 125 00:26:03.155 --> 00:26:17.339 An estimate is not a guess chosen to reach a desired income amount. It is a measurement based on the best evidence available at the reporting date. Different reasonable assumptions can produce different amounts. 126 00:26:17.339 --> 00:26:27.490 Beacon must document its method and assumptions and revise the estimate when new evidence changes what it reasonably expects. Check your understanding. 127 00:26:27.490 --> 00:26:42.078 Why is the 2,700 dollars wage accrual different from estimated depreciation? Answer. Approved timesheets determine the wage amount. Depreciation also requires supported assumptions about useful life and salvage value. 128 00:26:42.078 --> 00:26:56.061 Depreciation uses the asset's cost, its expected salvage value, and its expected useful life. The invoice supports the cost. The salvage value and useful life require judgment based on the available evidence. 129 00:26:56.061 --> 00:27:05.136 The calculation below uses those inputs to compute depreciation and present the asset. Unit 6 addresses later changes in the estimates. 130 00:27:05.136 --> 00:27:18.000 Depreciation. Beacon bought equipment on January 2 for 18,000 dollars. It expects to use the equipment for 5 years and recover 3,000 dollars at the end. 131 00:27:18.000 --> 00:27:30.695 The depreciable amount is 15,000 dollars (18,000 dollars - 3,000 dollars). Beacon uses straight-line depreciation, one method permitted under US GAAP. 132 00:27:30.695 --> 00:27:45.167 It assigns 3,000 dollars to each full year (15,000 dollars divided by 5 years). The credit uses Accumulated Depreciation, a contra account, rather than reducing Equipment. 133 00:27:45.167 --> 00:27:54.984 A contra account has the opposite normal balance from its related account and reduces that account for presentation. 134 00:27:54.984 --> 00:28:11.880 The December 31 depreciation entry debits Depreciation Expense for 3,000 dollars. It credits Accumulated Depreciation for 3,000 dollars. Accumulated Depreciation is a contra-asset account. 135 00:28:11.880 --> 00:28:25.574 Under these assumptions, Accumulated Depreciation has a required credit balance of 3,000 dollars after year 1, 6,000 dollars after year 2, and 9,000 dollars after year 3. 136 00:28:25.574 --> 00:28:40.476 A depreciation schedule provides an independent total to compare with the ledger. The credit goes to Accumulated Depreciation, not Equipment. Equipment stays at its 18,000 dollars cost. 137 00:28:40.476 --> 00:28:55.056 Under the stated assumptions, Accumulated Depreciation increases by 3,000 dollars for each full year of use. The balance sheet reports both accounts and the difference between them: 138 00:28:55.056 --> 00:29:14.016 Balance sheet at December 31, Equipment; Amount, 18,000 dollars. Balance sheet at December 31, Less: accumulated depreciation; Amount, negative 3,000 dollars. 139 00:29:14.016 --> 00:29:22.416 Balance sheet at December 31, Carrying amount; Amount, 15,000 dollars. 140 00:29:22.416 --> 00:29:37.596 The carrying amount is the amount at which the asset is reported once accumulated depreciation has been deducted. It is not what the equipment would sell for, and it is not what Beacon would pay to replace it. 141 00:29:37.596 --> 00:29:51.033 It is the part of the cost Beacon has not yet assigned to an expense. Why not reduce Equipment directly? The two balances answer different questions. Equipment reports the asset's cost. 142 00:29:51.033 --> 00:29:57.352 Accumulated Depreciation reports how much of that cost Beacon has allocated to expense. 143 00:29:57.352 --> 00:30:09.990 A 15,000 dollars carrying amount by itself could describe a 16,000 dollars asset that has received little depreciation or an 80,000 dollars asset that has received much more. 144 00:30:09.990 --> 00:30:18.271 Reporting cost and accumulated depreciation separately preserves information that the net amount alone would hide. 145 00:30:18.271 --> 00:30:29.529 Unit 4 uses the same presentation idea when an allowance for credit losses is deducted from gross receivables. The schedule can also reveal a missed entry. 146 00:30:29.529 --> 00:30:39.552 Suppose Beacon records 3,000 dollars in years 1 and 2 but misses year 3. A normal 3,000 dollars year 4 entry produces this ledger balance: 147 00:30:39.552 --> 00:30:57.202 The Accumulated Depreciation T-account at the end of year 4 has four expected credits of 3,000 dollars each. The company recorded the year 1, year 2, and normal year 4 entries, but omitted the year 3 entry. 148 00:30:57.202 --> 00:31:06.456 The ledger therefore has a 9,000-dollar credit balance instead of the required 12,000-dollar credit balance. 149 00:31:06.456 --> 00:31:20.488 The depreciation schedule requires a 12,000 dollars credit balance at the end of year. The 9,000 dollars ledger balance is 3,000 dollars too low because the year 3 credit is. missing. 150 00:31:20.488 --> 00:31:31.990 Beacon should not record the full 6,000 dollars ledger-to-schedule difference as year 4 Depreciation Expense. Half belongs to the missed year 3 entry. 151 00:31:31.990 --> 00:31:47.326 Beacon must identify the cause and apply the guidance for correcting a prior-period error. The balance comparison finds the discrepancy; it does not determine the correction. Check your understanding. 152 00:31:47.326 --> 00:32:03.735 Beacon missed last year's depreciation. Why should it not automatically record the entire ledger-to-schedule difference as this year's Depreciation Expense? Answer. Part of the difference belongs to the prior year. 153 00:32:03.735 --> 00:32:16.464 Recording the full amount this year could misstate current-year income. If Beacon omits this entry, annual net income and assets are each overstated by 3,000 dollars. 154 00:32:16.464 --> 00:32:31.566 Where accounting judgment enters. Some entries follow directly from fixed evidence. If Beacon's completion report shows 4,800 dollars of service completed on December 30, that revenue belongs in December. 155 00:32:31.566 --> 00:32:47.483 Judgment remains in three places. Completeness. An omitted adjustment can leave the trial balance equal. Account reconciliations, cutoff work, and review procedures help identify activity that has not been recorded. 156 00:32:47.483 --> 00:33:02.585 Measurement. An estimate requires a method, relevant evidence, and supported assumptions. The evidence may support one amount or a range of reasonable amounts, depending on the estimate. Period and scope. 157 00:33:02.585 --> 00:33:11.691 Contract terms, completion evidence, and the applicable accounting guidance determine whether an event belongs in December. 158 00:33:11.691 --> 00:33:19.464 When the facts require judgment, the accountant documents the evidence and the reason for the conclusion. 159 00:33:19.464 --> 00:33:34.867 The effect of an omitted adjustment on the statements. Because each of these entries touches one income-statement account and one balance-sheet account, omitting one misstates both statements. 160 00:33:34.867 --> 00:33:43.291 If Beacon omits the 4,800 dollars revenue accrual, December's net income is understated by 4,800 dollars. 161 00:33:43.291 --> 00:33:52.517 Assets are understated by the same 4,800 dollars, and so is equity, since net income closes into retained earnings. 162 00:33:52.517 --> 00:34:05.112 If Beacon omits the 2,700 dollars wage accrual, net income is overstated by 2,700 dollars, and liabilities are understated by the same amount. Omitting both: 163 00:34:05.112 --> 00:34:28.513 Omission, The 4,800 dollars revenue accrual; Net income, understated 4,800 dollars; Assets, understated 4,800 dollars; Liabilities, no effect; Equity, understated 4,800 dollars. 164 00:34:28.513 --> 00:34:51.253 Omission, The 2,700 dollars wage accrual; Net income, overstated 2,700 dollars; Assets, no effect; Liabilities, understated 2,700 dollars; Equity, overstated 2,700 dollars. 165 00:34:51.253 --> 00:35:12.936 Omission, Both; Net income, understated 2,100 dollars; Assets, understated 4,800 dollars; Liabilities, understated 2,700 dollars; Equity, understated 2,100 dollars. 166 00:35:12.936 --> 00:35:24.325 The income statement is off by 2,100 dollars, which is far less than either error on its own, while both balance-sheet lines are wrong by considerably more. 167 00:35:24.325 --> 00:35:36.297 A reviewer scanning net income for a large variance sees nothing. Review an adjustment before using it. A colleague or software tool may prepare an adjusting entry. 168 00:35:36.297 --> 00:35:51.190 The reviewer remains responsible for the evidence, checks, and final decision. Before accepting the entry, the reviewer should answer these questions: Which entity and reporting date does the entry cover? 169 00:35:51.190 --> 00:36:04.769 Which documents and accounting guidance support it? Does an independent calculation produce the same amount? Do the date, accounts, and debit and credit sides match the underlying event? 170 00:36:04.769 --> 00:36:16.595 Is any required fact missing or inconsistent with another source? Suppose a proposed entry debits Wages Expense and credits Cash for 2,700 dollars on December 31. 171 00:36:16.595 --> 00:36:28.495 The entry balances, and the timesheets support the expense amount. The January 5 pay date shows that cash did not leave Beacon in December, so the credit is wrong. 172 00:36:28.495 --> 00:36:44.118 The reviewer changes the credit to Wages Payable and records the timesheets and pay date as support. If the timesheets are missing or conflict with the payroll record, the reviewer cannot support the 2,700 dollars. 173 00:36:44.118 --> 00:36:57.769 The entry needs more evidence before it can be accepted. For each adjustment, determine the supported ending balance, compare it with the ledger, and record the current-period difference. 174 00:36:57.769 --> 00:37:08.136 Then trace both sides of the missing entry to the financial statements. A trial balance can remain equal even when the ledger omits the entry. 175 00:37:08.136 --> 00:37:22.574 Return to the written chapter for the optional lessons and on-page practice. For each adjustment, determine the required ending balance, compare it with the ledger, and record the current-period difference. 176 00:37:22.574 --> 00:37:27.480 Then trace both sides of an omitted entry to the financial statements.