Accounting Adjustments and
Constructing Financial Statements
The fiscal year is the annual accounting period that a firm adopts. A firm that uses December 31 as its year-end is on a calendar-year basis.
Traditionally, fiscal years that end in January through the end of May, are labeled as the prior calendar year. For example, a fiscal year ending January 31, 2010 would be labeled fiscal 2009 because the bulk of the operations occurred in calendar 2009 rather than in 2010.
A journal entry records a transaction in a company’s “general journal.”
A general journal is a book of original entry for the initial recording of any type of transaction or accounting adjustment. It contains space for dates and for accounts to be debited and credited, columns for the amounts of the debits and credits, and a posting reference column for numbers of the accounts that are posted. Most companies have electronic journals but the basics are the same.
Posting means including the transaction amount in the affected general ledger accounts. This procedure enables company personnel to trace amounts in the ledger back to the originating journal entry and to determine which entries have been added to the ledger so that account totals are updated.
Solutions Manual, Module 3
© Cambridge Business Publishers, 2013
1. Prepaid Expenses – Allocating assets to expense to reflect expenses incurred during the period. Example: Recording supplies used by increasing (debiting) Supplies Expense and decreasing
(crediting) Supplies or recording depreciation expense and reducing PPE (or increasing accumulated depreciation).
2. Unearned Revenues – Adjusting unearned revenues to recognize only revenues earned during the period. Example: Recording service fees earned by decreasing (debiting) Unearned Service
Fees, a liability, and increasing (crediting) Service Fees Earned, an equity account.