Adjusting Process

By Rachelle Agatha, CPA, MBA

Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

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• Describe the nature of the adjusting process.

• Journalize entries for accounts requiring adjustment.

• Summarize the adjustment process.

• Prepare an adjusted trial balance.

After studying this chapter, you should be able to:

Objective 1

Describe the nature of the adjusting process.

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Under the accrual basis of accounting, revenues are reported

in the income statement in the

period in which they are earned.

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5

The accounting concept that supports this approach to reporting of revenues is

called the revenue recognition concept.

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The journal entries that bring the accounts up to date at the end of

the accounting period are called adjusting

entries.

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• Supplies• Prepaids• Insurance

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Accounts that are typically adjusted

include:

• Wages• Depreciation• Unearned Rent

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Prepaid expenses (deferred expenses), are items that

have been initially recorded as assets.

Cash is paid in advance.

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Expenses are recorded when incurred

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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

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Revenueis recorded when earned

(service performed).

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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.

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Accrued expenses, sometimes referred to

as accrued liabilities, are expenses that have been incurred but have not been recorded in the

accounts.

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Physical resources that are owned and used by

a business and are permanent or have a

long life are called fixed assets, or plant

assets.

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As time passes, a fixed asset loses

its ability to provide useful services. This

decrease in usefulness is

called depreciation.

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Fixed Asset accounts (also know as PPE) have a normal debit balance:• Equipment• Land • Buildings

Accumulated Depreciation is a Contra Asset account (normal credit balance) where depreciation expense is accumulated as it is recognized.

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Journalize entries for accounts requiring

adjustment.

Objective 23-2

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3-2Supply Adjustment

Supplies Expense ................................................................. 2,756 Supplies ..................................................................... 2,756 Supplies used ($1,245 + $2,860 – $1,349).

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.

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3-2Supply Adjustment “T” Accts

dr cr+ -

1,245 2,860

2,756 1,349

DR

ASSETSUPPLIES

dr cr+ -

2,756 2,756

DRSUPPLIES EXPENSE

EXPENSE

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3-2Prepaid AdjustmentThe 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.Insurance Expense ............................................................... 6,525 Prepaid Insurance .................................................... 6,525 Insurance expired ($4,800 + $5,850 – $4,125).

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3-2Prepaid Adjustment

dr cr dr cr+ - + -

4,800 5,850

6,525 6,525 4,125$ 6,525$

DRPREPAIDASSET

DRINSURANCE EXP

EXPENSE

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3-2Unearned Fees AdjustmentThe 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.

Unearned Fees ...................................................................... 16,288 Fees Earned .............................................................. 16,288 Fees earned ($23,676 – $7,388).

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3-2Unearned Fees Adjustment

dr cr dr cr- + - +

23,676

16,288 16,288 7,388$ 16,288$

LIABILITY REVENUE

CR CRUNEARNED FEES FEE REVENUE

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

Unearned Rent ...................................................................... 2,875 Rent Revenue ............................................................ 2,875 Rent earned [($6,900/12) × 5 months].

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3-2Unearned Rent Adjustment

dr cr dr cr dr cr- + + - - +

6,900 6,900

2,875 2,875 4,025$ 6,900$ 2,875$

CR CRUNEARNED RENT RENT REVENUE

LIABILITY REVENUE

DRCASHASSET

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3-2Depreciation ExpenseThe estimate for depreciation on equipment

for the current year is $1,820.

Depreciation Expense .......................................................... 1,820 Accumulated Depreciation—Equipment ................ 1,820 Depreciation on equipment.

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3-2Depreciation Expense

dr cr dr cr+ - - +

1,820 1,820 1,820$ 1,820$

DRDEPRECIATION EXP

EXPENSE

CRACCUM DEP

CONTRA ASSET

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3-4

Prepare an adjusted trial

balance.

Objective 4

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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.

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• 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.

Accounting Cycle

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• Optional end-of-period worksheet• Record Adjusting Entries• Prepare the Adjusted Trial

Balance • Prepare Financial Statements

balance.

Accounting Cycle, cont

• Record Closing Entries & Post• Prepare a Post Closing Trial

Balance