Adjusting Process

1. Adjusting Process By Rachelle Agatha, CPA, MBA Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

2. 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.

3. 0 Objective 1 Describe the nature of the adjusting process.

4. 0 3-1 Under the accrual basis of accounting, revenues are reported in the income statement in the period in which they are earned.

5. 0 3-1 The accounting concept that supports this approachtoreporting of revenues is called therevenue recognition concept.

6. 0 3-1 The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries.

7. 0 3-1 Accounts that are typically adjusted include: • Supplies • Prepaids • Insurance • Wages • Depreciation • Unearned Rent

8. 0 3-1 Prepaid expenses(deferred expenses), are items that have been initially recorded as assets. Cash is paid in advance.

9. 0 3-1 Expenses are recorded when incurred

10. 0 3-1 Unearned Revenues (deferred revenues), are items that have been initially recorded as liabilities. Cash is received in advance but revenue is not yet earned and service not yet performed

11. 0 3-1 Revenue is recorded when earned (service performed).

12. 0 3-1 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.

13. 0 3-1 Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts.

14. 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.

15. 0 3-2 As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation.

16. 0 • Fixed Asset accounts (also know as PPE) have a normal debit balance: • Equipment • Land • Buildings 3-2 Accumulated Depreciation is a Contra Asset account (normal credit balance) where depreciation expense is accumulated as it is recognized.

17. 0 3-2 Objective 2 Journalize entries for accounts requiring adjustment.

18. 0 • Supply Adjustment 3-2 The Supply account had a beginning balance of $1,245 and was debited for $2,860 for supplies purchased during the year. Assume the end of the year balance on hand is $1,349.

19. 0 • Supply Adjustment “T” Accts 3-2

20. 0 • Prepaid Adjustment 3-2 The Prepaid account had a beginning balance of $4,800 and was debited for $5,850 for premiums paid during the year. Assume the amount of unexpired insurance for future periods is $4,125.

21. 0 • Prepaid Adjustment 3-2

22. 0 • Unearned Fees Adjustment 3-2 The Unearned Fees account had a balance before adjustment of $23,676. Assume the amount of unearned fees at the end of the year is $7,388.

23. 0 • Unearned Fees Adjustment 3-2

24. 0 • Unearned Rent Adjustment 3-2 On August 1, Smith Company received $6,900 for 12 months rent. Journalize the adjusting entry for rent earned through December 31.

25. 0 • Unearned Rent Adjustment 3-2

26. 0 • Depreciation Expense 3-2 The estimate for depreciation on equipment for the current year is $1,820.

27. 0 • Depreciation Expense 3-2

28. 0 3-4 Objective 4 Prepare an adjusted trial balance.

29. 0 3-4 The purpose of the adjusted trial balance is to verify the equality of the total debit balances and total credit balances before the financial statements are prepared.

30. 0 Accounting Cycle • Transactions are analyzed and recorded in journal • Post Transaction from the Journal to the General Ledger • Prepare the Unadjusted Trial Balance • Adjustment data is gathered & Analyzed balance.

31. 0 Accounting Cycle, cont • Optional end-of-period worksheet • Record Adjusting Entries • Prepare the Adjusted Trial Balance • Prepare Financial Statements balance. • Record Closing Entries & Post • Prepare a Post Closing Trial Balance