Chapter 8 Adjustments

1. Chapter 8 Adjustments Main Points 1. Apportioning Recorded Expenses 2. Apportioning Recorded Revenues Time Allocated: 4 Periods

2. Learning Objectives In this chapterthe students will learn: • how to prepare adjusting entries to allocate revenues and expenses to the period. • how to post adjusting entries to the ledger. • how to do the post-adjustment trial balance.

3. Revision Questions: 1. What is posting? 2. When is posting usually done? 3. What’s the result caused by errors in the process of recording and calculating in the journal? 4. Does the balance of debits and credits mean that there is not any error during the recording and calculating? Why or Why not? 5. What is the reason of the unbalance of the trial balance?

4. Revision (1) Questions & Answers: 1. What is posting? Journal entries are transferred to the ledger. This process is called posting. 2. When is posting usually done? Posting is usually done after several entries have been made, for example, at the end of the day, depending on the number of transactions.

5. Revision (2) 3. What’s the result caused by errors in the process of recording and calculating in the journal? The result is that the total of the debits do not equal the total of the credits. 4. Does the balance of debits and credits mean that there is not any error during the recording and calculating? No, it doesn’t. 5. What is the reason of the unbalance of the trial balance? The reason is calculating a ledger account balance wrongly or summarizing the debits and credits of the trial balance wrongly.

6. What? Warm-up Discussion: 1. After making a trial balance, what do we need to do at the end of the accounting period, usually at the end of the month? Prepare adjusting entries to record accrued and deferred accounts. 2. What’s the next step then? Post adjusting entries to the ledger accounts. 3. Do we need to prepare the adjusted trial balance after that? Yes, we do.

7. Presentation Adjusting entries are prepared at the end of the accounting period, usually at the end of the month. Accountants use adjusting entries to apply the accrual accounting to transactions to allocate revenues and expenses to the period in which they usually belong to.

8. 1. Apportioning Recorded Expenses Questions: 1. What are prepaid expenses? 2. Please give some examples of prepaid expenses. 3. Is the portion of the expired expenditure considered as an expense or assets? 4. What’s the result if the prepaid expenses are not adjusted?

9. 1. Apportioning Recorded Expenses (1) Questions & Answers: 1. What are prepaid expenses? Prepaid expenses are the expenses paid before the service is shared. 2. Please give some examples of prepaid expenses. Examples include prepaid rent, prepaid insurance, and prepaid supplies.

10. 1. Apportioning Recorded Expenses (2) 3. Is the portion of the expenditure that expires considered as an expense or an asset? It is considered as an expense of the month. 4. What’s the result if the prepaid expense are not adjusted? If the prepaid expense are not adjusted, the assets will be exaggerated and the expenses will be understated.

11. 1. Illustrations of Adjustments (3) Prepaid Expenses (1) At the early period of March, George Ross Photocopy Company purchased photocopy supplies and office supplies. Suppose that $500 of photocopy supplies and $300 of office supplies are used up at the end of March.(The used-up supplies is treated as expense for the month. Assets decreased. Owner’s equity decreased.) Dr. Photocopy Supplies Expense $500 Cr. Photocopy Supplies $500 Dr. Office Supplies Expenses $300 Cr. Office Supplies $300

12. 1. Illustrations of Adjustments (4) Prepaid Expenses (2) On March 6, George Ross Photocopy paid $4,800 for a year’s rent in advance. By March 31, one twelfth of $4,800, $400 has expired. (The used-up expenditure became expense for the month. Assets decreased. Owner’s equity decreased.) Dr. Rent Expense $400 Cr. Prepaid Rent $500

13. 1. Illustrations of Adjustments (5) Prepaid Expenses (3) On March 8, the agency paid $600 for a one-year insurance policy. By the end of March, one-twelfth of the protection had expired. (The expired expenditure became expense for the month. Assets decreased. Owner’s equity decreased.) Dr. Insurance Expense $50 Cr. Prepaid Insurance $50

14. 2. Apportioning Recorded Revenues Questions: 1. May revenues be received before service are rendered? 2. Does unearned revenues belong to liability account or revenue account? Why? 3. Should we adjust depreciation of plant assets at the end of the month?

15. 2. Apportioning Recorded Revenues (1) Questions & Answers: 1. May revenues be received before service are rendered? Yes. Revenues may be received before service are provided. 2. Why should unearned revenues be liability? When a company receives money from customers, it has the obligation to deliver goods or provide services. Therefore unearned revenues should be liability. 3. Should we adjust depreciation of plant assets at the end of the month? Yes, we should.

16. 2. Illustrations of Adjustments (2) Unearned Revenues (1) On March 14, George’s agency received $1,300 as an advance fee for copying works to be done for an advertisement agency. Suppose that $500 of the copying works was finished and accepted by the advertisement agency. (Liabilities decreased. Owner’s equity increased.) Dr. Unearned Photocopy Fees $500 Cr. Photocopy Fees Earned $500

17. 2. Illustrations of Adjustments (3) Depreciation of Plant Assets (1) On March 7, the George Ross Photocopy purchased photocopy equipment and office equipment for $2,000 and $5,300 respectively. Suppose that the George Ross Photocopy Company estimates that the photocopy equipment and office equipment will last for five years and the salvage value is zero at the end of the useful life. Calculation: Annual Depreciation for Photocopy Equipment = ($2,000 – 0) / 5 = $400 Annual Depreciation for Office Equipment = ($5,300 – 0) / 5 = $1,060 Monthly Depreciation = Annual Depreciation / 12 Monthly Depreciation for Photocopy Equipment = $400 / 12 = $33.3 Monthly Depreciation for Office Equipment = $1,060 / 12 = $88.3

18. 2. Illustrations of Adjustments (3) Depreciation of Plant Assets (2) Dr. Depreciation Expense, Photocopy Equipment $33.3 Cr. Photocopy Equipment $33.3 Dr. Depreciation Expense, Office Equipment $88.3 Cr. Office Equipment $88.3

19. Practice Post the adjusting entries to the ledger and prepare the post-adjustment trial balance.

20. In-class Activities 1. Do further reading on Page 55-57 and get more information aboutadjustments. 2. Further discuss the four questions in Exercise Two on Page 62 with your partners.

21. In-class Activities (1) Answers for Exercise Two: 1. What are the adjustments made for? Adjustments are made for allocate revenues and expenses to the period in which they actually belong to. 2. Does the prepaid expense account belong to asset account or expense account? Why? It belongs to asset account. Because companies often make payments that span more than one period. These payments are debited an asset account. At the end of the accounting period, the amount expired is transferred from the asset account to the expense account.

22. In-class Activities (2) 3. Why are the prepaid expenses adjusted? Because the expired expenditure is considered as an expense, and the rest that hasn’t expired is still treated as assets. If the prepaid expenses are not adjusted, the assets will be exaggerated and the expenses will be understated. 4. Does the unearned revenues account belong to liability account or revenue account? Why? It belongs to liability account. Revenues may be received before service are provided. When a company receives money from customers, it has the obligation to deliver goods or provide services. Therefore, unearned revenues should be liability.

23. Homework 1. Review Chapter 8 to get further understanding. 2. Do Exercise One on Page 61 and write assignment. 3. Preview Chapter 9.