Transcript
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The Adjusting The Adjusting ProcessProcess
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1. Describe the nature of the adjusting process.
2. Journalize entries for accounts requiring adjustment.
3. Summarize the adjustment process.4. Prepare an adjusted trial balance.
After studying this chapter, you should be able to:
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Describe the nature of the adjusting process.
Objective 1Objective 1Objective 1Objective 1
3-1
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Under the accrual basis of accounting, revenues are
reported in the income statement in the period in
which they are earned.
3-1
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The accounting concept that supports this approach to reporting of
revenues is called the revenue recognition concept.
3-1
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The accounting concept that supports reporting revenues and
related expenses in the same period is called the matching
concept, or matching principle.
3-1
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Under the cash basis of accounting, revenues and
expenses are reported in the income statement in the period in
which cash is received or paid.
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The analysis and updating of accounts at the end of the period before the financial statements
are prepared is called the adjusting process.
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The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries.
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Example Exercise 3-1
Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry.
For Practice: PE 3-1A, PE 3-1B 10
Follow My Example 3-1
a. No c. Yes e. Yesb. Yes d. No f. Yes
a. Cash c. Wages Expense e. Accounts Receivable
b. Prepaid Rent d. Office Equipment f. Unearned Rent
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Prepaid expenses, sometimes referred to as deferred expenses, are items that have been initially recorded as assets but are expected to become expenses
over time or through the normal operations of the business.
3-1Items That Need Adjusting
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Unearned revenues, sometimes referred to as deferred revenues, are
items that have been initially recorded as liabilities but are expected to become
revenues over time or through the normal operations of the business.
3-1Items That Need Adjusting
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Insert Exhibit 1
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Accrued revenues, sometimes referred to as accrued assets (accrued means unpaid), are
revenues that have been earned but have not been recorded in
the accounts.
3-1Items That Need Adjusting
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Accrued expenses, sometimes referred to as accrued
liabilities, are expenses that have been incurred but have
not been recorded in the accounts.
3-1Items That Need Adjusting
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Example Exercise 3-2
Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued expense, or (4) accrued revenue.
For Practice: PE 3-2A, PE 3-2B 17
Follow My Example 3-2
a. Accrued expense c. Unearned revenueb. Prepaid expense d. Accrued revenue
a. Wages owed but not c. Fees received but not yet yet paid. earned.
b. Supplies on hand. d. Fees earned but not yet received.
3-1
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Journalize entries for accounts requiring
adjustment.
Objective 2Objective 2Objective 2Objective 2
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3-2
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NetSolutions’ Supplies account has a balance of $2,000 in the
unadjusted trial balance. Some of these supplies have been used.
On December 31, a count reveals that $760 of supplies are on hand.
3-2Adjusting Process for Prepaid Expenses
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Supplies (balance on trial balance) $2,000Supplies on hand, December 31 – 760Supplies used $1,240
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Supplies 1 240 00
Supplies used ($2,000 –
$760)
Dec. 31 1,240Dec. 31 1,240
SuppliesBal. 2,000
Supplies ExpenseBal. 800
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2,040760
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Dec. 31 Supplies Expense 1 240 002007
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The debit balance of $2,400 in NetSolutions’ Prepaid
Insurance account represents the December 1 prepayment of
insurance for 12 months.
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Dec. 31 200 Dec. 31 200Prepaid InsuranceBal.
2,400
Insurance Expense15 56
2,200
31 Insurance Expense 200 00
Prepaid Insurance 200 00
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15Insurance expired
($2,400/12).
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Example Exercise 3-3
The prepaid insurance account had a beginning balance of $6,400 and was debited for $3,600 of premiums paid during the year. Journalize the adjusting entry required at the end of the year assuming the amount of unexpired insurance related to future periods is $3,250.
Follow My Example 3-3
Insurance Expense 6,750Prepaid Insurance 6,750
Insurance expired ($6,400 +$3,600 – $3,250).
For Practice: PE 3-3A, PE 3-3B25
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On December 1, the tenant prepaid three months’ rent
for use of an office building owned by NetSolutions. As of December 31, only $120
has been earned.
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Dec. 31
120
Dec. 31
120
Unearned RentBal. 360
Rent Revenue23 42
31 Unearned Rent 120 00
Rent Revenue 120 00
Rent earned ($360/3
months)
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3-2
240Bal.
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Example Exercise 3-4
The balance in the unearned fees account, before adjustment at the end of the year, is $44,900. Journalize the adjusting entry required if the amount of unearned fees at the end of the year is $22,300.
Follow My Example 3-4
Unearned Fees 22,600Fees Earned 22,600
Fees earned ($44,900 – $22,300).
For Practice: PE 3-4A, PE 3-4B28
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NetSolutions provided $500 in services during December for which the customer has not
been billed.
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Dec. 31 500Dec. 31 500
Accounts ReceivableBal. 16,340
Fees Earned12 41Bal. 2,220
31 Accounts Receivable 500 00
Fees Earned 500 00
Accrued fees (25 hrs.
x $20)
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3-2
2,720Bal. 16,840Bal.
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Example Exercise 3-5
At the end of the current year, $13,680 of fees have been earned but have not been billed to clients. Journalize the adjusting entry to record the accrued fees.
Follow My Example 3-5
Accounts Receivable 13,680Fees Earned 13,680
Accrued fees.
For Practice: PE 3-5A, PE 3-5B 31
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At the end of December, accrued wages amounted to
$250. Without this adjusting entry, Wages Expense is understated.
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Dec. 31 250Dec. 31 250
Wages Payable Bal.
4,275
Wages Expense22 51
31 Wages Expense 250 00
Wages Payable 250 00
Accrued wages.
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Bal. 4,525
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Dec. 31 250Dec. 31 250
Wages Payable Bal.
4,275
Wages Expense22 51
Bal. 4,525
3-2
Closing entries will be discussed in a later chapter. For now, just be aware that Wages Expense is
closed after financial statements are prepare and its balance rolled back to zero.
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The payment of January 10 wages totaling $1,275 is shown below.
Jan. 10 Wages Expense 1 025 00
Wages Payable 250 00
Cash 1 275 00
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3-2
Dec. 31 250Dec. 31 250
Wages Payable Bal.
4,275
Wages Expense22 51
Bal. 4,525
Jan. 10 1,025
Jan. 10 250
An expense for wages of $1,025 is
recorded in the new fiscal year.
An expense for wages of $1,025 is
recorded in the new fiscal year.
The liability is cancelled.
The liability is cancelled.
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Example Exercise 3-6
Sanregret Realty Co. pays weekly salaries of $12,500 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Thursday.
Follow My Example 3-6
Salaries Expense 10,000Salaries Payable 10,000
Accrued salaries ($12,500/5x 4 days).
For Practice: PE 3-6A, PE 3-6B 37
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Physical resources that are owned and used by a business and are permanent or have a
long life are called fixed assets, or plant assets.
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As time passes, a fixed asset loses its ability to provide useful services.
This decrease in usefulness is called
depreciation.
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Normal titles for fixed asset accounts and their related contra asset accounts are as follows:
Fixed Asset Contra Asset
Land None—Land is not depreciatedBuildings Accumulated Depreciation—
BuildingsStore Equipment Accumulate Depreciation—Store
EquipmentOffice Equipment Accumulated Depreciation—Office
Equipment
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NetSolutions estimates the depreciation on its office
equipment to be $50 for the month of December.
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Dec. 31 50Depreciation Expense
Dec. 31 50Accum. Depr.—Office Equip. 1953
31 Depreciation Expense 50 00
Accum. Depreciation—
Office Equipment 50 00
Depreciation of
office equipment.
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NetSolutions’ balance sheet would show the office
equipment at cost, less the accumulated depreciation.
Office equipment $1,800 Less accumulated depreciation 50 $1,750
Book Book valuevalue
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Example Exercise 3-7
The estimated amount of depreciation on equipment for the current year is $4,250. Journalize the adjusting entry to record the depreciation.
Follow My Example 3-7
Depreciation Expense 4,250Accumulated Depreciation— Equipment 4,250
Depreciation on equipment.
For Practice: PE 3-7A, PE 3-7B 44
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Summarize the adjustment process
Objective 3Objective 3Objective 3Objective 3
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(Continued)
Ledger with Adjusting Entries
—NetSolutions47
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(Continued) 3-3Ledger with
Adjusting Entries—NetSolutions
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(Continued) 3-3Ledger with
Adjusting Entries—NetSolutions
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(Concluded) 3-3Ledger with
Adjusting Entries—NetSolutions
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Example Exercise 3-8
For the year ending December 31, 2008, Mann Medical Co. mistakenly omitted adjusting entries for (1) $8,600 of unearned revenue that was earned, (2) earned revenue that was not billed of $12,500, and (3) accrued wages of $2,900. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income for 2008.
Follow My Example 3-8
a. Revenues were understated by $21,100 ($8,600 + $12,500).
b. Expenses were understated by $2,900.c. Net income was understated by $18,200 ($8,600
+12,500 – $2,900).
For Practice: PE 3-8A, PE 3-8B51
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3-4
Prepare an adjusted trial balance.
Objective 4Objective 4Objective 4Objective 4
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The purpose of the adjusted trial balance is to verify the
equality of the total debit balances and total credit
balances before the financial statements are prepared.
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Example Exercise 3-9
For each of the following errors, considered individually, indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much.a. The adjustment for accrued fees of $5,340 was
journalized as a debit to Accounts Payable for $5,340 and a credit to Fees Earned of $5,340.
b. The adjustment for depreciation of $3,260 was journalized as a debit to Depreciation Expense for $3,620 and a credit to Accumulated Depreciation for $3,260. 55
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Follow My Example 3-9
a. The totals are equal even though the debit should have been to Accounts Receivable instead of Accounts Payable.
b. The totals are unequal. The debit total is higher by $360 ($3,620 – $3,260).
For Practice: PE 3-9A, PE 3-9B
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