The adjusting process
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0. 3. The Adjusting Process. 0. After studying this chapter, you should be able to:. Describe the nature of the adjusting process. Journalize entries for accounts requiring adjustment. Summarize the adjustment process. Prepare an adjusted trial balance. 0. 3-1. Objective 1.

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The Adjusting Process

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The adjusting process

0

3

The Adjusting Process


The adjusting process

0

After studying this chapter, you should be able to:

  • Describe the nature of the adjusting process.

  • Journalize entries for accounts requiring adjustment.

  • Summarize the adjustment process.

  • Prepare an adjusted trial balance.


The adjusting process

0

3-1

Objective 1

Describe the nature of the adjusting process.

3


The adjusting process

0

3-1

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


The adjusting process

0

3-1

The accounting concept that supports this approachtoreporting of revenues is called therevenue recognition concept.


The adjusting process

0

3-1

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


The adjusting process

0

3-1

Under the cash basis ofaccounting, revenues and expenses are reported in the income statement in the period in which cash is received or paid.


The adjusting process

0

3-1

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


The adjusting process

0

3-1

The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries.


The adjusting process

Example Exercise 3-1

Follow My Example 3-1

0

3-1

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

  • Cashc.Wages Expensee.Accounts Receivable

  • Prepaid Rentd.Office Equipmentf.Unearned Rent

  • Noc. Yese. Yes

  • Yesd. Nof. Yes

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

10


The adjusting process

0

3-1

Items That Need Adjusting

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.


The adjusting process

0

3-1

Items That Need Adjusting

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.


The adjusting process

0

3-1

Insert Exhibit 1

13


The adjusting process

0

3-1

Items That Need Adjusting

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.


The adjusting process

0

3-1

Items That Need Adjusting

Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts.


The adjusting process

0

3-1

16


The adjusting process

Example Exercise 3-2

Follow My Example 3-2

0

3-1

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 yet paid.earned.

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

  • Accrued expensec. Unearned revenue

  • Prepaid expensed.Accrued revenue

17

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


The adjusting process

0

3-2

Objective 2

Journalize entries for accounts requiring adjustment.


The adjusting process

0

3-2

19


The adjusting process

0

3-2

Adjusting Process for Prepaid Expenses

NetSolutions’ Suppliesaccount 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.


The adjusting process

0

3-2

Supplies (balance on trial balance)$2,000

Supplies on hand, December 31– 760

Supplies used$1,240


The adjusting process

2007

Dec. 31Supplies Expense1 240 00

760

2,040

0

3-2

55

14

Supplies1 240 00

Supplies used ($2,000 – $760)

Supplies Expense

Supplies

14

55

Bal.2,000

Dec. 311,240

Bal.800

Dec. 311,240

22


The adjusting process

0

3-2

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


The adjusting process

2,200

0

3-2

56

31 Insurance Expense200 00

Prepaid Insurance 200 00

15

Insurance expired ($2,400/12).

Prepaid Insurance

Insurance Expense

15

56

Dec. 31200

Bal.2,400

Dec. 31 200

24


The adjusting process

Example Exercise 3-3

Follow My Example 3-3

0

3-2

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.

Insurance Expense6,750

Prepaid Insurance6,750

Insurance expired ($6,400 +

$3,600 – $3,250).

25

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


The adjusting process

0

3-2

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.


The adjusting process

240

Bal.

0

3-2

23

31Unearned Rent120 00

42

Rent Revenue120 00

Rent earned ($360/3 months)

Unearned Rent

Rent Revenue

23

42

Dec. 31120

Bal.360

Dec. 31120

27


The adjusting process

Example Exercise 3-4

Follow My Example 3-4

0

3-2

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.

Unearned Fees22,600

Fees Earned22,600

Fees earned ($44,900 –

$22,300).

28

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


The adjusting process

0

3-2

NetSolutions provided $500 in services during December for which the customer has not been billed.


The adjusting process

Bal.

Bal.

2,720

16,840

0

3-2

12

31Accounts Receivable500 00

Fees Earned500 00

41

Accrued fees (25 hrs. x $20)

Fees Earned

Accounts Receivable

12

41

Bal.2,220

Bal.16,340

Dec. 31500

Dec. 31500

30


The adjusting process

Example Exercise 3-5

Follow My Example 3-5

0

3-2

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.

Accounts Receivable13,680

Fees Earned13,680

Accrued fees.

31

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


The adjusting process

0

3-2

At the end of December, accrued wages amounted to $250. Without this adjusting entry, Wages Expenseis understated.


The adjusting process

Bal.4,525

0

3-2

51

31Wages Expense250 00

Wages Payable250 00

22

Accrued wages.

51

Wages Payable

Wages Expense

22

Dec. 31250

Bal.4,275

Dec. 31250

33


The adjusting process

Bal.4,525

0

3-2

51

Wages Payable

22

Wages Expense

Dec. 31250

Bal.4,275

Dec. 31250

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.

34


The adjusting process

0

3-2

The payment of January 10 wages totaling $1,275 is shown below.

Jan. 10Wages Expense1 025 00

Wages Payable250 00

Cash1 275 00

35


The adjusting process

Wages Payable

22

Wages Expense

51

Dec. 31250

Jan. 10250

Bal.4,275

Dec. 31250

Jan. 101,025

Bal.4,525

0

3-2

The liability is cancelled.

An expense for wages of $1,025 is recorded in the new fiscal year.

36


The adjusting process

Example Exercise 3-6

Follow My Example 3-6

0

3-2

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.

Salaries Expense10,000

Salaries Payable10,000

Accrued salaries ($12,500/5

x 4 days).

37

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


The adjusting process

0

3-2

Physical resources that are owned and used by a business and are permanent or have a long life are called fixed assets, orplant assets.


The adjusting process

0

3-2

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


The adjusting process

0

3-2

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

Fixed Asset Contra Asset

LandNone—Land is not depreciated

BuildingsAccumulated Depreciation—Buildings

Store EquipmentAccumulate Depreciation—Store

Equipment

Office EquipmentAccumulated Depreciation—Office

Equipment


The adjusting process

0

3-2

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


The adjusting process

0

3-2

53

31Depreciation Expense50 00

Accum. Depreciation—Office Equipment50 00

19

Depreciation of office equipment.

Depreciation Expense

Accum. Depr.—Office Equip.

19

53

Dec. 3150

Dec. 3150

42


The adjusting process

0

3-2

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 value


The adjusting process

Example Exercise 3-7

Follow My Example 3-7

0

3-2

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

Depreciation Expense4,250

Accumulated Depreciation—

Equipment4,250

Depreciation on equipment.

44

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


The adjusting process

0

3-3

Objective 3

Summarize the adjustment process


The adjusting process

0

3-3

46


The adjusting process

Ledger with Adjusting Entries—NetSolutions

0

3-3

47

(Continued)


The adjusting process

Ledger with Adjusting Entries—NetSolutions

0

3-3

(Continued)

48


The adjusting process

Ledger with Adjusting Entries—NetSolutions

0

3-3

(Continued)

49


The adjusting process

Ledger with Adjusting Entries—NetSolutions

0

3-3

(Concluded)

50


The adjusting process

Example Exercise 3-8

Follow My Example 3-8

0

3-3

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.

  • 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).

51

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


The adjusting process

0

3-4

Objective 4

Prepare an adjusted trial balance.


The adjusting process

0

3-4

The purpose of the adjustedtrial balanceis to verify the equality of the total debit balances and total credit balances before the financial statements are prepared.


The adjusting process

0

3-4

54


The adjusting process

Example Exercise 3-9

0

3-4

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.

  • 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.

  • 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


The adjusting process

Follow My Example 3-9

0

3-4

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

  • 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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