TIP: This chapter is an extremely important one. A good understanding of this chapter and an ability to think and work quickly with the concepts incorporated herein are necessary for comprehending subsequent chapters. Pay close attention when studying this chapter.
TIP: Notice that each adjusting entry discussed in this chapter involves a balance sheet account and an income statement account.
TIP: Notice that none of the adjusting entries discussed in Chapter 3 involve the Cash account. Therefore, if you are instructed to record adjusting entries, double check your work when it is completed. If you have used the Cash account in any adjusting entry, it is very likely in error. (The only time Cash belongs in an adjusting entry is when a bank reconciliation discloses a need to adjust the Cash account—this will be explained in Chapter 7—or when an error has been made that involves the Cash account, in which case a correcting entry is required.)
TIP: Keep in mind that for accrued items (accrued revenues and accrued expenses), the related cash flow follows the period in which the relevant revenue or expense is recognized; whereas, with prepayment type items (unearned revenues and prepaid expenses), the related cash flow precedes the period in which the relevant revenue or expense is recognized.
For example, assume the accounting period is the calendar year. Consider an accrued expense such as accrued salaries at the end of 2014 An adjusting entry will be recorded ...