The Adjusting Process

ACG 2021 Chapter 3

Accounting period concept:• Cash basis

– Revenues and expenses are reporting the income statement in the period in which cash is received

• Accrual basis– Revenues are reported in the income

statement in the period they are earned

• Revenue recognition concept• Matching concept

Adjusting Process• The updating of

accounts prior to the preparation of financial statements

• Adjusting entries

Adjusting Process• Effect income

statement account and at least one balance sheet accounts

• Debit expense– Credit

asset/liabilities

Types of Accounts requiring adjustment

• Prepaid expenses– Deferred expenses

– or prepaid expenses – are items that have been initially recorded as assets but are expected to become expenses over time or through the normal operations of the business.

– Supplies and prepaid insurance

Types of Accounts requiring adjustment

• Unearned revenues– Deferred revenues or unearned

revenues: are items that have been initially recorded as liabilities but are expected to become revenues over time or through the normal operations of the business. These are deposits by customers for work to be done in the future.

– Unearned rent

Types of Accounts requiring adjustment

• Accrued revenues:– Accrued Revenues or Accrued

Assets – some revenues are only recorded when cash is received. At the end of the accounting period, there may be items of revenues that have been earned but have not been recorded

Types of Accounts requiring adjustment

• Accrued expenses– Accrued expenses or

accrued liabilities – are expenses that have been incurred but have not been recorded in the accounts.

• Wages payable

Supplies– For example: the general ledger shows a

balance in the supplies account of $2,000. Inventory shows $500 of supplies still on hand

• Supplies – Balance $2,000– Inventory 500– Used up 1,500

• Supplies exp $1500• Supplies $1500

• Try example 1

Example 1

• the general ledger shows that the balance in the supplies account is $4,000. An inventory is conducted of supplies and it is found that only $2,500 of supplies is still on hand. Record the adjusting entry for the use of supplies.

•

Prepaid insurance• The G/L shows the balance are

$6,000. The policy was purchased on May 1st for 12 months. Record the adjusting entry on Dec 31 for insurance expired.

• $6,000/12 = 500 per month• May to Dec = 8 months x $500

= • $4,000 is expired

Prepaid insurance• Insurance exp $4,000• Prepaid insurance $4,000

• Try example 2

Example 2:

• the general ledger shows that the balance in the prepaid insurance account is $12000. The policy was purchased on Aug 1st for 12 months. Record the adjusting entry for the insurance expired.

•

Deferred revenues or unearned revenues

• Items that have been initially recorded as liabilities but are expected to become revenues over time

• Unearned fees – liability account

Unearned fees• G/L shows that the balance in

the unearned fees account is $6,000. A review of the entries shows that the balance should be $2,000.

• Balance $6,000• Should be 2,000• Fees earned 4,000

Unearned Fees Entry

• Unearned fees $4,000• Fees earned

$4,000• Try example 3:

Example 3

• the general ledger shows that the balance in the unearned fees account is $7,000. The balance should be $1,000. Record the adjusting entry.

•

Accrued expense

• Expenses that have been incurred by have not been recorded in the accounts

– Wages

Accrued wages• Wages are paid on the second

and fourth Fridays for the two week period. Payments were $950 on Dec 13 and $950 on Dec 27. The wages for Monday through Thursday is $250 Record the wages due.

• Wages expense $250• Wages Payable

$250

Example 4:• Wages $5,000 per week. Dec

31 falls on Wed.

• Wages expense $3,000• Wages payable

$3,000

Accrued revenue

• Revenues not billed to customers $2,500

• Accounts receivable $2,500• fees earned

$2,500

Fixed Assets• Physical resources that are

owned by a business

• Depreciation– Reduction in the value of an

asset due to its use.

– Depreciation expense – one year reduction

– Accumulation depreciation: contra asset showing lifetime reductions

• Credit – increases the account

Depreciation Expense

• Depreciation expense $1,000

• Accumulated depreciation 1,000

Book Value

Cost of the asset - Accumulated depreciation

Accounting Cycle

• After the adjusting entries are recorded in the journal and posted to the general ledger, an adjusted trial balance is prepared.

• Followed by financial statements