Unit 3: Adjustments for Financial Reporting
By now, you should understand the guiding principles and concepts of accounting. You will now need to learn how to synthesize this information, which often requires an adjusting journal entry. Before you can learn about adjusting entries, you will need to be able to distinguish between cash- and accrual-based accounting. There is some distinction between the two methods, and while some smaller businesses may be able to effectively use a cash basis of accounting, most organizations use an accrual basis of accounting. Because of this, we will use the accrual basis in this course.
Completing this unit should take you approximately 3 hours.
Upon successful completion of this unit, you will be able to:
- identify why adjusting entries are necessary; and
- distinguish among various types of adjusting entries.
3.1: Adjustments for Financial Reporting
Read and take notes on sections 4.1-4.10 on pages 144-173.
This chapter dives deeper into the importance of making proper adjustments so that the financial statements reflect the current condition of the organization. One of the main principles of accounting is accurate and honest presentation of the financial condition of an organization. Without the proper posting of adjustments and correcting entries, the financial statements will be incorrect.
- Section 4.2 reviews employment opportunities for someone interested in accounting.
- Section 4.3 teaches the difference between cash- and accrual-based accounting, which rests on the identification of revenues and expenses. Be sure to make a note of Exhibit14.
- Section 4.4 described snapshots. Because the ultimate goal is to obtain useful information, we need to take snapshots. Accounting is typically done within a specified period so that end users can assess the performance of a business entity. This section also discusses accounting periods, fiscal years, calendar years, adjusting entries, the matching principle, and the two classes and four types of adjusting entries. Be sure to make a note of Exhibit 16.
- Section 4.5 reviews the classes of adjusting entries and gives an example to assist with analysis.
- Section 4.6 focuses on how prepaid expenses and depreciation affect the accounting equation and the overall processing of these transactions.
- Section 4.7 discusses adjustments. In a business, there will be transactions that will not have been recorded by the end of a specified accounting cycle. These items can be identified as accrued assets or interest revenue, to name a couple. This section discusses how to process these transactions.
- In Section 4.8, note Exhibit 18.
- Section 4.9 introduces the concept of trend percentages and gives the formula to use when calculating trend percentages.
- Section 4.10 summarizes and gives a self-text. The solutions to the self-test are on pages 188 and 189.
- Section 4.2 reviews employment opportunities for someone interested in accounting.
This video goes into more detail about cash versus accrual based accounting. Compare it to what you read in the chapter previously. This will help to clarify the difference between these two methods of accounting.
3.2: Visualizing the Adjusting Journal
You watched this video in Unit 2, but it may be good to review it now that you know more about adjustments. In accounting, you can't introduce new material without referencing the previous steps.
This article breaks down completing the accounting cycle. Pay attention to the section on adjustments, the section on closing out the accounting cycle process, and the steps involved in closing the books, which we will cover in greater detail in the next unit.
- View Receive a grade
These quiz questions will help you check your understanding of the adjustment process.
Unit 3 Assessment
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.