The Adjusting Process

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The Adjusting Process

• ACG 2021 Chapter 3

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Accounting period concept

• Cash basis
• Revenues and expenses are reporting the income
  statement in the period in which cash is received
• Accrual basis
• Revenues are reported in the income statement in
  the period they are earned
• Revenue recognition concept
• Matching concept

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Adjusting Process

• The updating of accounts prior to the preparation
  of financial statements
• Adjusting entries

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Adjusting Process

• Effect income statement account and at least one
  balance sheet accounts
• Debit expense
• Credit asset/liabilities

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Types of Accounts requiring adjustment

• Prepaid expenses
• Deferred expenses or prepaid 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.
• Supplies and prepaid insurance

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Types of Accounts requiring adjustment

• Unearned revenues
• Deferred revenues or unearned 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.
  These are deposits by customers for work to be
  done in the future.
• Unearned rent

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Types of Accounts requiring adjustment

• Accrued revenues
• Accrued Revenues or Accrued Assets some
  revenues are only recorded when cash is received.
  At the end of the accounting period, there may
  be items of revenues that have been earned but
  have not been recorded

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Types of Accounts requiring adjustment

• Accrued expenses
• Accrued expenses or accrued liabilities are
  expenses that have been incurred but have not
  been recorded in the accounts.
• Wages payable

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Supplies

• For example the general ledger shows a balance
  in the supplies account of 2,000. Inventory
  shows 500 of supplies still on hand
• Supplies
• Balance 2,000
• Inventory 500
• Used up 1,500
• Supplies exp 1500
• Supplies
  1500
• Try example 1

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Example 1

• the general ledger shows that the balance in the
  supplies account is 4,000. An inventory is
  conducted of supplies and it is found that only
  2,500 of supplies is still on hand. Record the
  adjusting entry for the use of supplies.

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Prepaid insurance

• The G/L shows the balance are 6,000. The policy
  was purchased on May 1st for 12 months. Record
  the adjusting entry on Dec 31 for insurance
  expired.
• 6,000/12 500 per month
• May to Dec 8 months x 500
• 4,000 is expired

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Prepaid insurance

• Insurance exp 4,000
• Prepaid insurance 4,000
• Try example 2

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Example 2

• the general ledger shows that the balance in the
  prepaid insurance account is 12000. The policy
  was purchased on Aug 1st for 12 months. Record
  the adjusting entry for the insurance expired.

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Deferred revenues or unearned revenues

• Items that have been initially recorded as
  liabilities but are expected to become revenues
  over time
• Unearned fees liability account

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Unearned fees

• G/L shows that the balance in the unearned fees
  account is 6,000. A review of the entries shows
  that the balance should be 2,000.
• Balance 6,000
• Should be 2,000
• Fees earned 4,000

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Unearned Fees Entry

• Unearned fees 4,000
• Fees earned 4,000
• Try example 3

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Example 3

• the general ledger shows that the balance in the
  unearned fees account is 7,000. The balance
  should be 1,000. Record the adjusting entry.

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Accrued expense

• Expenses that have been incurred by have not been
  recorded in the accounts
• Wages

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Accrued wages

• Wages are paid on the second and fourth Fridays
  for the two week period. Payments were 950 on
  Dec 13 and 950 on Dec 27. The wages for Monday
  through Thursday is 250 Record the wages due.
• Wages expense 250
• Wages Payable 250

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Example 4

• Wages 5,000 per week. Dec 31 falls on Wed.
• Wages expense 3,000
• Wages payable 3,000

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Accrued revenue

• Revenues not billed to customers 2,500
• Accounts receivable 2,500
• fees earned 2,500

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Fixed Assets

• Physical resources that are owned by a business
• Depreciation
• Reduction in the value of an asset due to its
  use.
• Depreciation expense one year reduction
• Accumulation depreciation contra asset showing
  lifetime reductions
• Credit increases the account

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Depreciation Expense

• Depreciation expense 1,000
• Accumulated depreciation 1,000

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Book Value

• Cost of the asset - Accumulated depreciation

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Accounting Cycle

• After the adjusting entries are recorded in the
  journal and posted to the general ledger, an
  adjusted trial balance is prepared.
• Followed by financial statements