Adjustments
The purpose of adjustments
To ensure that all the accounts are as accurate as they can be before the financial statements are prepared.
Prepaid Expenses
Expenses that have been paid in advance. e.g. Rent, Insurance They have value until they are used it up, once prepaid expenses have been used up; they become Expenses Prepaid Rent → Rent Expense TLDR, Money you set aside for bills
Supplies
Must be adjusted because over the Fiscal Period some supplies are used up. Supplies → Supplies Expense
Depreciation
The loss of value of a Fixed asset over a period of time
Accounts
Depreciation Expense - Equipment Accumulated Depreciation - Equipment
Accumulated Depreciation A contra asset, it reduces the original value of a fixed asset and is recorded on the balance sheet.
Methods
Straight-Line Method
Either the original cost of the asset is multiplied by the depreciation rate for the fiscal period to determine the amount of the adjustment. Or this formula is used This method produces depreciation figures that are the same each year.
Salvage Value
The value of a product after it has been fully depreciated.
Declining Balance method
Fixed Assets are depreciated by an equal percentage per fiscal period based on the asset’s Book Value. Take the original cost of the asset and subtract anything in the accumulated depreciation account and then multiply by the depreciation rate.
Salvage value is not taken into consideration
Book Value
This method produces depreciation figures that are larger in the early years and smaller in the later years.
What method does the Canada Customs and Revenue Agency use?
They normally require companies to use the declining balance method of depreciation when completing their income tax forms.