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The Adjusting Process

3. The Adjusting Process. Describe the nature of the adjusting process. 1. Journalize entries for accounts requiring adjustment. 2. Summarize the adjustment process. 3. 4. Prepare an adjusted trial balance. The Adjusting Process. After studying this chapter, you should be able to:. 3-2.

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The Adjusting Process

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  1. 3 The Adjusting Process

  2. Describe the nature of the adjusting process. 1 Journalize entries for accounts requiring adjustment. 2 Summarize the adjustment process. 3 4 Prepare an adjusted trial balance. The Adjusting Process After studying this chapter, you should be able to: 3-2

  3. 1 Describe the nature of the adjusting process. 3-3

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

  5. 1 Revenue Recognition Concept The accounting concept supporting the reporting of revenues when they are earned regardless of when cash is received is called therevenue recognition concept.

  6. 1 Matching Principle The accounting concept supporting reporting revenues and related expenses in the same period is called the matching concept, or matching principle.

  7. 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.

  8. 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: • 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.

  9. 1 The Adjusting Process The analysis and updating of accounts at the end of the period before the financial statements are prepared is called theadjusting process.

  10. Follow My Example 3-1 Left click the mouse for the answers. Follow My Example 6-1 For Practice: PE 3-1A, PE 3-1B 1 Example Exercise 3-1 Accounts Requiring Adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. • Cash d. Office Equipment • Prepaid Rent e. Accounts Receivable • Wages Expense f. Unearned Rent No No Yes Yes Yes Yes 3-10

  11. 1 Types of Accounts Requiring Adjustment Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid.

  12. 1 Types of Accounts Requiring Adjustment Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received.

  13. 1 Type of Adjustments: Prepaid Expenses and Unearned Revenues Exhibit 1

  14. 1 Types of Accounts Requiring Adjustment Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received.

  15. 1 Types of Accounts Requiring Adjustment Accrued expenses are unrecorded expenses that have been incurred and for which cash has not been paid.

  16. 1 Type of Adjustments: Accrued Revenues and Expenses Exhibit 2

  17. Follow My Example 3-2 For Practice: PE 3-2A, PE 3-2B 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. • Wages owed but not c. Fees received but not yet paid. earned. • 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

  18. 2 Journalize entries for accounts requiring adjustment. 3-18

  19. 2 Exhibit 3 Unadjusted Trial Balance for NetSolutions

  20. 2 Exhibit 4 Expanded Chart of Accounts for NetSolutions

  21. 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

  22. 760 2,040 2 Supplies Expense Supplies 14 55 Bal. 2,000 Bal. 800 Dec. 31 1,240 Dec. 31 1,240

  23. 2 Prepaid Expenses The debit balance of $2,400 in NetSolutions’ Prepaid Insurance account represents the December 1 prepayment of insurance for 12 months.

  24. 2,200 2 Prepaid Insurance Insurance Expense 15 56 Dec. 31 200 Bal. 2,400 Dec. 31 200

  25. Follow My Example 3-3 Insurance Expense……………………… 6,750 Prepaid Insurance…………………… 6,750 Insurance expired ($6,400 + $3,600 – $3,250). For Practice: PE 3-3A, PE 3-3B 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. 3-25

  26. 2 Unearned Revenues The December 31 unadjusted trial balance of NetSolutions indicates a balance in the unearned rent account of $360.

  27. 2 Unearned Rent Rent Revenue 23 42 Dec. 31 120 Bal. 360

  28. Unearned Rent 23 240 Dec. 31 120 Bal. 360 Bal. 2 Rent Revenue 42 Dec. 31 120

  29. Follow My Example 3-4 Unearned Fees……………………………. 22,600 Fees Earned………………………….. 22,600 Fees earned ($44,900 – $22,300). For Practice: PE 3-4A, PE 3-4B 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. 3-29

  30. 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.

  31. Bal. 2,720 2 Fees Earned Accounts Receivable 12 41 Bal. 2,220 Bal. 16,340 Dec. 31 500

  32. Bal. Bal. 2,720 16,840 2 Fees Earned Accounts Receivable 12 41 Bal. 2,220 Bal. 16,340 Dec. 31 500 Dec. 31 500

  33. Follow My Example 3-5 Accounts Receivable……………………. 13,680 Fees Earned………………………….. 13,680 Accrued fees. For Practice: PE 3-5A, PE 3-5B 2 Example Exercise 3-5 Adjustment for Accrued Fees 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. 3-33

  34. 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.

  35. Bal. 4,525 2 22 Wages Payable Wages Expense 51 Bal. 4,275 Dec. 31 250

  36. Bal. 4,525 2 22 Wages Payable Wages Expense 51 Dec. 31 250 Bal. 4,275 Dec. 31 250

  37. 2 The journal entry for the payment of wages on January 10 is shown below. After posting

  38. Exhibit 5 2 Accrued Wages

  39. Follow My Example 3-6 Salaries Expense……………………….. 10,000 Salaries Payable…………………….. 10,000 Accrued salaries [($12,500 ÷ 5 days) × 4 days]. For Practice: PE 3-6A, PE 3-6B 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. 3-39

  40. 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.

  41. 2 Depreciation As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation.

  42. 2 Normal titles for fixed asset accounts andtheir relatedcontra assetaccounts are asfollows: Fixed AssetContra Asset Land None—Land is not depreciated Buildings Accumulated Depreciation— Buildings Store Equipment Accumulated Depreciation—Store Equipment Office Equipment Accumulated Depreciation—Office Equipment

  43. 2 NetSolutions estimates the depreciation on its office equipment to be $50 for the month of December.

  44. 2 Depreciation Expense Accum. Depr.—Office Equip. 19 53 Dec. 31 50

  45. 2 Depreciation Expense Accum. Depr.—Office Equip. 19 53 Dec. 31 50 Dec. 31 50

  46. 2 NetSolutions’ balance sheet would show office equipment at cost, less accumulated depreciation. Office equipment $1,800 Less accumulated depreciation 50 $1,750 Book value

  47. Follow My Example 3-7 Depreciation Expense………...……….. 4,250 Accumulated Depreciation— Equipment………………………….. 4,250 Depreciation on equipment. For Practice: PE 3-7A, PE 3-7B 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. 3-47

  48. 3 Summarize the adjustment process. 3-48

  49. 3 Exhibit 7 Adjusting Entries—NetSolutions (continued)

  50. 3 Exhibit 7 Adjusting Entries—NetSolutions (continued) .

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