The adjusting process
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3. The Adjusting Process. Describe the nature of the adjusting process. 1. Journalize entries for accounts requiring adjustment. 2. Summarize the adjustment process. 3. 4. Prepare an adjusted trial balance. The Adjusting Process. After studying this chapter, you should be able to:. 3-2.

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The Adjusting Process

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The adjusting process

3

The Adjusting Process


The adjusting process

Describe the nature of the adjusting process.

1

Journalize entries for accounts requiring adjustment.

2

Summarize the adjustment process.

3

4

Prepare an adjusted trial balance.

The Adjusting Process

After studying this chapter, you should be able to:

3-2


The adjusting process

1

Describe the nature of the adjusting process.

3-3


The adjusting process

1

Under the accrual basis of accounting, revenues are reported in the income statement in the period in which they are earned.


The adjusting process

1

Revenue Recognition Concept

The accounting concept supporting the reporting of revenues when they are earned regardless of when cash is received is called therevenue recognition concept.


The adjusting process

1

Matching Principle

The accounting concept supporting reporting revenues and related expenses in the same period is called the matching concept, or matching principle.


The adjusting process

1

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.


The adjusting process

1

The Adjusting Process

Under the accrual basis, at the end of the accounting period some of the accounts need updating for the following reasons:

  • Some expenses are not recorded daily.

  • Some revenues and expenses are incurred as time passes rather than as separate transactions.

  • Some revenues and expenses may be unrecorded.


The adjusting process

1

The Adjusting Process

The analysis and updating of accounts at the end of the period before the financial statements are prepared is called theadjusting process.


The adjusting process

Follow My Example 3-1

Left click the mouse for the answers.

Follow My Example 6-1

For Practice: PE 3-1A, PE 3-1B

1

Example Exercise 3-1

Accounts Requiring Adjustment

Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry.

  • Cashd.Office Equipment

  • Prepaid Rente.Accounts Receivable

  • Wages Expensef.Unearned Rent

No

No

Yes

Yes

Yes

Yes

3-10


The adjusting process

1

Types of Accounts Requiring Adjustment

Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid.


The adjusting process

1

Types of Accounts Requiring Adjustment

Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received.


The adjusting process

1

Type of Adjustments: Prepaid Expenses and Unearned Revenues

Exhibit 1


The adjusting process

1

Types of Accounts Requiring Adjustment

Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received.


The adjusting process

1

Types of Accounts Requiring Adjustment

Accrued expenses are unrecorded expenses that have been incurred and for which cash has not been paid.


The adjusting process

1

Type of Adjustments: Accrued Revenues and Expenses

Exhibit 2


The adjusting process

Follow My Example 3-2

For Practice: PE 3-2A, PE 3-2B

1

Example Exercise 3-2

Type of Adjustment

Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued expense, or (4) accrued revenue.

  • Wages owed but notc.Fees received but not yet paid.earned.

  • Supplies on hand.d.Fees earned but not yet received.

Follow My Example 6-1

a. Accrued expense

c. Unearned revenue

b. Prepaid expense

d. Accrued revenue

3-17


The adjusting process

2

Journalize entries for accounts requiring adjustment.

3-18


The adjusting process

2

Exhibit 3

Unadjusted Trial Balance for NetSolutions


The adjusting process

2

Exhibit 4

Expanded Chart of Accounts for NetSolutions


The adjusting process

2

Prepaid Expenses

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.

Supplies (balance on trial balance) $2,000

Supplies on hand, December 31 – 760

Supplies used $1,240


The adjusting process

760

2,040

2

Supplies Expense

Supplies

14

55

Bal.2,000

Bal.800

Dec. 311,240

Dec. 311,240


The adjusting process

2

Prepaid Expenses

The debit balance of $2,400 in NetSolutions’ Prepaid Insurance account represents the December 1 prepayment of insurance for 12 months.


The adjusting process

2,200

2

Prepaid Insurance

Insurance Expense

15

56

Dec. 31200

Bal.2,400

Dec. 31 200


The adjusting process

Follow My Example 3-3

Insurance Expense………………………6,750

Prepaid Insurance……………………6,750

Insurance expired ($6,400 +

$3,600 – $3,250).

For Practice: PE 3-3A, PE 3-3B

2

Example Exercise 3-3

Example Exercise 3-3

Adjustment for Prepaid Expenses

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.

3-25


The adjusting process

2

Unearned Revenues

The December 31 unadjusted trial balance of NetSolutions indicates a balance in the unearned rent account of $360.


The adjusting process

2

Unearned Rent

Rent Revenue

23

42

Dec. 31120

Bal.360


The adjusting process

Unearned Rent

23

240

Dec. 31120

Bal.360

Bal.

2

Rent Revenue

42

Dec. 31120


The adjusting process

Follow My Example 3-4

Unearned Fees…………………………….22,600

Fees Earned…………………………..22,600

Fees earned ($44,900 – $22,300).

For Practice: PE 3-4A, PE 3-4B

2

Example Exercise 3-4

Adjustment for Unearned Revenue

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.

3-29


The adjusting process

2

Accrued Revenues

NetSolutions signed an agreement with Danker Co. on December 15 to provide services at $20 per hour. As of December 31, NetSolutions had provided 25 hours of assistance.


The adjusting process

Bal.

2,720

2

Fees Earned

Accounts Receivable

12

41

Bal.2,220

Bal.16,340

Dec. 31500


The adjusting process

Bal.

Bal.

2,720

16,840

2

Fees Earned

Accounts Receivable

12

41

Bal.2,220

Bal.16,340

Dec. 31500

Dec. 31500


The adjusting process

Follow My Example 3-5

Accounts Receivable…………………….13,680

Fees Earned…………………………..13,680

Accrued fees.

For Practice: PE 3-5A, PE 3-5B

2

Example Exercise 3-5

Adjustment for Accrued Fees

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.

3-33


The adjusting process

2

Accrued Expenses

NetSolutions pays it employees biweekly. During December, NetSolutions paid wages of $950 on December 13 and $1,200 on December 27. As of December 31, NetSolutions owes $250 of wages to employees for Monday and Tuesday.


The adjusting process

Bal.4,525

2

22

Wages Payable

Wages Expense

51

Bal.4,275

Dec. 31250


The adjusting process

Bal.4,525

2

22

Wages Payable

Wages Expense

51

Dec. 31250

Bal.4,275

Dec. 31250


The adjusting process

2

The journal entry for the payment of wages on January 10 is shown below.

After posting


The adjusting process

Exhibit 5

2

Accrued Wages


The adjusting process

Follow My Example 3-6

Salaries Expense………………………..10,000

Salaries Payable……………………..10,000

Accrued salaries [($12,500 ÷ 5 days) × 4 days].

For Practice: PE 3-6A, PE 3-6B

2

Example Exercise 3-6

Adjustment for Accrued Expenses

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.

3-39


The adjusting process

2

Fixed Assets

Fixed assets, or plant assets, are physical resources that are owned and used by a business and are permanent or have a long life.


The adjusting process

2

Depreciation

As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation.


The adjusting process

2

Normal titles for fixed asset accounts andtheir relatedcontra assetaccounts are asfollows:

Fixed AssetContra Asset

LandNone—Land is not depreciated

BuildingsAccumulated Depreciation—Buildings

Store EquipmentAccumulated Depreciation—Store

Equipment

Office EquipmentAccumulated Depreciation—Office

Equipment


The adjusting process

2

NetSolutions estimates the depreciation on its office equipment to be $50 for the month of December.


The adjusting process

2

Depreciation Expense

Accum. Depr.—Office Equip.

19

53

Dec. 3150


The adjusting process

2

Depreciation Expense

Accum. Depr.—Office Equip.

19

53

Dec. 3150

Dec. 3150


The adjusting process

2

NetSolutions’ balance sheet would show office equipment at cost, less accumulated depreciation.

Office equipment$1,800

Less accumulated

depreciation 50$1,750

Book value


The adjusting process

Follow My Example 3-7

Depreciation Expense………...………..4,250

Accumulated Depreciation—

Equipment…………………………..4,250

Depreciation on equipment.

For Practice: PE 3-7A, PE 3-7B

2

Example Exercise 3-7

Adjustment for Depreciation

The estimated amount of depreciation on equipment for the current year is $4,250. Journalize the adjusting entry to record the depreciation.

3-47


The adjusting process

3

Summarize the adjustment process.

3-48


The adjusting process

3

Exhibit 7

Adjusting Entries—NetSolutions

(continued)


The adjusting process

3

Exhibit 7

Adjusting Entries—NetSolutions (continued)

.


The adjusting process

3

Exhibit 8

Ledger with Adjusting Entries—NetSolutions

(continued)


The adjusting process

3

Ledger with Adjusting Entries—NetSolutions (continued)

Exhibit 8


The adjusting process

3

Ledger with Adjusting Entries—NetSolutions (continued)

Exhibit 8


The adjusting process

3

Ledger with Adjusting Entries—NetSolutions (continued)

Exhibit 8


The adjusting process

3

Example Exercise 3-8

Effect of Omitting Adjustments

For the year ending December 31, 2010, Mann Medical Co. mistakenly omitted adjusting entries for (1) $8,600 of unearned revenue that was earned, (2) earned revenue of $12,500 that was not billed, and (3) accrued wages of $2,900. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income for 2010.

3-55


The adjusting process

For Practice: PE 3-8A, PE 3-8B

Follow My Example 3-8

3

Example Exercise 3-8 (continued)

  • Revenues were understated by $21,100 ($8,600 + $12,500).

  • Expenses were understated by $2,900.

  • Net income was understated by $18,200 ($8,600 +12,500 – $2,900).

3-56


The adjusting process

4

Prepare an adjusted trial balance.

3-57


The adjusting process

4

The purpose of the adjusted trial balance is to verify the equality of the total debit and credit balances before the financial statements are prepared.


The adjusting process

4

Exhibit 9

Adjusted Trial Balance—NetSolutions


The adjusting process

4

Example Exercise 3-9

Example Exercise 3-9

Effect of Errors on Adjusted Trial Balance

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 totals to be unequal, indicate whether the debit or credit total is higher and by how much.

  • 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.

(continued)

3-60


The adjusting process

Follow My Example 3-9

  • The totals are equal even though the debit should have been to Accounts Receivable instead of Accounts Payable.

For Practice: PE 3-9A, PE 3-9B

4

Example Exercise 3-9 (continued)

Example Exercise 3-9

Example Exercise 3-9

Example Exercise 3-9

  • 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.

  • The totals are unequal. The debit total is higher by $360 ($3,620 – $3,260).

3-61


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