The Adjusting Process

1
3
The Adjusting Process
2
1
Under the accrual basis of accounting, revenues
are reported in the income statement in the
period in which they are earned.
3
1
Revenue Recognition Concept
The accounting concept supporting the reporting
of revenues when they are earned regardless of
when cash is received is called the revenue
recognition concept.
4
1
Matching Principle
The accounting concept supporting reporting
revenues and related expenses in the same period
is called the matching concept, or matching
principle.
5
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.
6
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

1. Some expenses are not recorded daily.

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

1. Some revenues and expenses may be unrecorded.

7
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.
8
1
Types of Accounts Requiring Adjustment
Prepaid expenses are the advance payment of
future expenses and are recorded as assets when
cash is paid.
9
1
Types of Accounts Requiring Adjustment
Unearned revenues are the advance receipt of
future revenues and are recorded as liabilities
when cash is received.
10
1
Types of Accounts Requiring Adjustment
Accrued revenues are unrecorded revenues that
have been earned and for which cash has yet to be
received.
11
1
Types of Accounts Requiring Adjustment
Accrued expenses are unrecorded expenses that
have been incurred and for which cash has not
been paid.
12
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.

1. Wages owed but not c. Fees received but not yet
   paid. earned.
2. 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
13
2
Exhibit 3
Unadjusted Trial Balance for NetSolutions
14
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
15
2
Prepaid Expenses
The debit balance of 2,400 in NetSolutions
Prepaid Insurance account represents the December
1 prepayment of insurance for 12 months.
16
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.
3-26
17
2
Unearned Revenues
The December 31 unadjusted trial balance of
NetSolutions indicates a balance in the unearned
rent account of 360.
18
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.
3-31
19
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.
20
2
Example Exercise 3-5
Adjustment for Accrued Revenues
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.
3-36
21
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.
22
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.
3-43
23
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.
24
2
Depreciation
As time passes, a fixed asset loses its ability
to provide useful services. This decrease in
usefulness is called depreciation.
25
2
Normal titles for fixed asset accounts and their
related contra asset accounts are as follows
Fixed Asset Contra Asset
Land NoneLand is not depreciated Buildings Accu
mulated Depreciation Buildings Store
Equipment Accumulated DepreciationStore
Equipment Office Equipment Accumulated
DepreciationOffice Equipment
26
2
NetSolutions estimates the depreciation on its
office equipment to be 50 for the month of
December.
27
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.
3-52
28
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.