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The Adjusting Process

The Adjusting Process. Chapter 3. Learning Objectives. Describe the nature of the adjusting process. Journalize entries for accounts requiring adjustment. Summarize the adjustment process. Prepare an adjusted trial balance.

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The Adjusting Process

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  1. The Adjusting Process Chapter 3

  2. Learning Objectives • Describe the nature of the adjusting process. • Journalize entries for accounts requiring adjustment. • Summarize the adjustment process. • Prepare an adjusted trial balance. • Describe and illustrate the use of vertical analysis in evaluating a company’s performance and financial condition.

  3. Learning Objective 1 • Describe the nature of the adjusting process.

  4. Nature of the Adjusting Process • The accounting period concept requires that revenues and expenses be reported in the proper period.

  5. Nature of the Adjusting Process • Under the accrual basis of accounting, revenues are reported on the income statement in the period in which they are earned.

  6. Nature of the Adjusting Process • The accounting concept supporting the reporting of revenues when they are earned regardless of when cash is received is called the revenue recognition concept.

  7. LO 1 Nature of the Adjusting Process • The accounting concept supporting reporting revenues and related expenses in the same period is called the matchingconcept, or matching principle.

  8. LO 1 Nature of the Adjusting Process • Under the cash basis of accounting, revenues and expenses are reported on the income statement in the period in which cash is received or paid.

  9. LO 1 The Adjusting Process • Under the accrual basis, some of the accounts need updating at the end of the accounting period 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.

  10. LO 1 The Adjusting Process • The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the adjusting process.

  11. LO 1 The Adjusting Process • The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the adjusting process. • The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries.

  12. EE 3-1

  13. LO 1 Types of Accounts Requiring Adjustment • Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid.

  14. LO 1 Prepaid Expenses (continued)

  15. LO 1 Prepaid Expenses (concluded)

  16. LO 1 Types of Accounts Requiring Adjustment • Unearned revenues are the advance receipt of futurerevenues and are recorded as liabilities when cash is received.

  17. LO 1 Unearned Revenues (continued)

  18. LO 1 Unearned Revenues (concluded)

  19. LO 1 Types of Accounts Requiring Adjustment • Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received.

  20. LO 1 Accrued Revenues (continued)

  21. LO 1 Accrued Revenues (concluded)

  22. LO 1 Types of Accounts Requiring Adjustment • Accrued expensesare unrecorded expenses that have been incurred and for which cash has not yet been paid.

  23. LO 1 Accrued Expenses (continued)

  24. LO 1 Accrued Expenses (concluded)

  25. EE 3-2

  26. Learning Objective 2 • Describe the nature of the adjusting process. • Journalize entries for accounts requiring adjustment.

  27. LO 2 Adjusting Entries Unadjusted Trial Balance for NetSolutions NetSolutions Unadjusted Trial Balance December 31, 2011

  28. LO 2 Adjusting Entries

  29. LO 2 Prepaid Expenses NetSolutions’ suppliesaccount has a balance of $2,000 on the unadjusted trial balance. Some of these supplies have been used. On December 31, a count reveals that the amount of supplies on hand is $760. Supplies (balance on trial balance) $2,000 Supplies on hand, December 31 – 760 Supplies used $1,240

  30. Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) LO 2 Prepaid Expenses increase decrease

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

  32. Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) LO 2 Prepaid Insurance increase decrease

  33. LO 2 Impact of Omitting Adjusting Entries

  34. EE 3-3

  35. LO 2 Unearned Revenues The credit balance of $360 in NetSolutions’ unearned rentaccount represents the receipt of three months’ rent on December 1 for December, January, and February. At the end of December, one month’s rent has been earned.

  36. Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Revenue) LO 2 Unearned Revenues increase decrease

  37. LO 2 Impact of Omitting Adjusting Entry

  38. EE 3-4

  39. LO 2 Accrued Revenues NetSolutions signed an agreement with Danker Co. on December 15 to provide services at a rate of $20 per hour. As of December 31, NetSolutions had provided 25 hours of services. The revenue will be billed on January 15.

  40. Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Revenue) LO 2 Unearned Revenues increase increase

  41. LO 2 Impact of Omitting Adjusting Entry

  42. EE 3-5

  43. LO 2 Accrued Wages

  44. LO 2 Accrued Wages • 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, December 30 and 31.

  45. Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) LO 2 Accrued Wages increase increase

  46. LO 2 Accrued Wages NetSolutions paid wages of $1,275 on January 10. This payment includes the $250 of accrued wages recorded on December 31.

  47. LO 2 Impact of Omitting Adjusting Entry

  48. EE 3-6

  49. LO 2 Depreciation Expense • Fixed assets, orplant assets, are physical resources that are owned and used by a business and are permanent or have a long life. • As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation.

  50. LO 2 Depreciation Expense • All fixed assets, except land, lose their usefulness and , thus, are said to depreciate. • As a fixed asset depreciates, a portion of its cost should be recorded as an expense. This periodic expense is called depreciation expense.

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