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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.
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3 The Adjusting Process 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. Describe the
nature of the adjusting process.
3-1 Objective 1 Describe the nature of the adjusting process. 3 3-1
Under the accrual basis of accounting, revenues are reported in the
income statement in the period in which they are earned. 3-1 The
accounting concept that supports this approach to reporting of
revenues is called the revenue recognition concept. 3-1 The
accounting concept that supports reporting revenues and related
expenses in the same period is called the matching concept, or
matching principle. 3-1 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. 3-1 The analysis and
updating of accounts at the end of the period before the financial
statements are prepared is called the adjusting process. 3-1 The
journal entries that bring the accounts up to date at the end of
the accounting period are called adjusting entries. For Practice:
PE 3-1A, PE 3-1B
3-1 Example Exercise 3-1 Indicate with a Yes or No whether or not
each of the following accounts normally requires an adjusting
entry. Cashc.Wages Expensee.Accounts Receivable Prepaid
Rentd.Office Equipmentf.Unearned Rent Follow My Example 3-1 Noc.
Yese. Yes Yesd.Nof.Yes For Practice:PE 3-1A, PE 3-1B 10 Items That
Need Adjusting 3-1 Prepaid expenses, sometimes referred to as
deferred 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. Items That Need Adjusting 3-1
Unearned revenues, sometimes referred to as deferred 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. 3-1 Insert Exhibit 1 13 Items That Need
Adjusting 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. Items That Need
Adjusting 3-1 Accrued expenses, sometimes referred to as accrued
liabilities, are expenses that have been incurred but have not been
recorded in the accounts. 3-1 16 Wages owed but not c. Fees
received but not yet yet paid. earned.
3-1 Example Exercise 3-2 Classify the following items as (1)
prepaid expense, (2) unearned revenue, (3) accrued expense, or (4)
accrued revenue. Wages owed but notc.Fees received but not yet yet
paid.earned. Supplies on hand.d.Fees earned but not yet received.
Follow My Example 3-2 Accrued expensec. Unearned revenue Prepaid
expensed.Accrued revenue 17 For Practice:PE 3-2A, PE 3-2B
Journalize entries for accounts requiring adjustment.
3-2 Objective 2 Journalize entries for accounts requiring
adjustment. 3-2 19 Adjusting Process for Prepaid Expenses 3-2
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
3-2 Supplies (balance on trial balance)$2,000 Supplies on hand,
December 31 760 Supplies used$1,240 3-2 Supplies Supplies Expense
Bal. 2,000 Dec. 31 1,240 Bal. 800
3-2 Dec Supplies Expense 2007 55 Supplies 14 Supplies used ($2,000
$760) Supplies Supplies Expense 14 55 Bal.2,000 Dec. 311,240
Bal.800 Dec. 311,240 760 2,040 22 3-2 The debit balance of $2,400
in NetSolutions Prepaid Insurance account represents the December 1
prepayment of insurance for 12 months. 3-2 Prepaid Insurance 15
Insurance Expense 56 Bal. 2,400 Dec. 31 200
3-2 31 Insurance Expense 56 Prepaid Insurance 15 Insurance
expired($2,400/12). Prepaid Insurance 15 Insurance Expense 56
Bal.2,400 Dec Dec 2,200 24 For Practice: PE 3-3A, PE 3-3B
3-2 Example Exercise 3-3 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. Follow My Example 3-3 Insurance
Expense6,750 Prepaid Insurance6,750 Insurance expired ($6,400 +
$3,600 $3,250). 25 For Practice:PE 3-3A, PE 3-3B 3-2 On December 1,
the tenant prepaid three months rent for use of an office building
owned by NetSolutions.As of December 31, only $120 has been earned.
3-2 31 Unearned Rent 120 00 23 Rent Revenue 120 00 42
3-2 31Unearned Rent 23 Rent Revenue 42 Rent earned ($360/3 months)
Unearned Rent 23 Rent Revenue 42 Dec Bal.360 Dec 240 Bal. 27 For
Practice: PE 3-4A, PE 3-4B
3-2 Example Exercise 3-4 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. Follow My Example 3-4 Unearned Fees22,600
Fees Earned22,600 Fees earned ($44,900 $22,300). 28 For Practice:PE
3-4A, PE 3-4B 3-2 NetSolutions provided $500 in services during
December for which the customer has not been billed. 3-2 31
Accounts Receivable 500 00 12 Fees Earned 500 00 41
3-2 31Accounts Receivable 12 Fees Earned 41 Accrued fees (25 hrs. x
$20) Accounts Receivable 12 Fees Earned 41 Bal.2,220 Bal.16,340 Dec
Dec 2,720 Bal. 16,840 Bal. 30 For Practice: PE 3-5A, PE 3-5B
3-2 Example Exercise 3-5 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.
Follow My Example 3-5 Accounts Receivable13,680 Fees Earned13,680
Accrued fees. 31 For Practice:PE 3-5A, PE 3-5B 3-2 At the end of
December, accrued wages amounted to $250.Without this adjusting
entry, Wages Expense is understated. 3-2 31 Wages Expense 250 00 51
Wages Payable 250 00 22 Accrued wages.
3-2 31Wages Expense 51 Wages Payable 22 Accrued wages. Wages
Payable Wages Expense 51 22 Dec Bal.4,275 Dec Bal.4,525 33 3-2
Wages Payable 22 Wages Expense 51 Dec Bal.4,275 Dec Bal.4,525
Closing entries will be discussed in a later chapter.For now, just
be aware that this account is closed after financial statements are
prepare and its balance rolled back to zero. 34 The payment of
January 10 wages totaling $1,275 is shown below.
3-2 The payment of January 10 wages totaling $1,275 is shown below.
Jan. 10Wages Expense Wages Payable Cash 35 3-2 Dec. 31 250 Wages
Payable Bal. 4,275 Wages Expense 22 51
3-2 Dec Wages Payable Bal.4,275 Wages Expense 22 51 Bal.4,525 Jan.
101,025 Jan The liability is cancelled. An expense for wages of
$1,025 is recorded in the new fiscal year. 36 For Practice: PE
3-6A, PE 3-6B
3-2 Example Exercise 3-6 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.
Follow My Example 3-6 Salaries Expense10,000 Salaries Payable10,000
Accrued salaries ($12,500/5 x 4 days). 37 For Practice:PE 3-6A, PE
3-6B 3-2 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. 3-2 As time passes, a fixed asset loses its ability
to provide useful services.This decrease in usefulness is
calleddepreciation. 3-2 Normal titles for fixed asset accounts and
their related contra asset accounts are as follows: Fixed
AssetContra Asset LandNoneLand is not depreciated
BuildingsAccumulated DepreciationBuildings Store
EquipmentAccumulate DepreciationStore Equipment Office
EquipmentAccumulated DepreciationOffice 3-2 NetSolutions estimates
the depreciation on its office equipment to be $50 for the month of
December. Accum. Depr.Office Equip.
3-2 31Depreciation Expense 53 Accum. DepreciationOffice Equipment
19 Depreciation of office equipment. Depreciation Expense 53 Accum.
Depr.Office Equip. 19 Dec Dec 42 3-2 NetSolutions balance
sheetwould show the office equipment at cost, less the accumulated
depreciation. Office equipment$1,800 Less accumulated depreciation
$1,750 Book value Accumulated Depreciation Equipment 4,250
Depreciation on equipment.
3-2 Example Exercise 3-7 The estimated amount of depreciation on
equipment for the current year is $4,250.Journalize the adjusting
entry to record the depreciation. Follow My Example 3-7
DepreciationExpense4,250 Accumulated Depreciation Equipment4,250
Depreciation on equipment. 44 For Practice:PE 3-7A, PE 3-7B
Summarize the adjustment process
3-3 Objective 3 Summarize the adjustment process 3-3 46 Ledger with
Adjusting EntriesNetSolutions
3-3 Ledger with Adjusting EntriesNetSolutions 47 (Continued) Ledger
with Adjusting EntriesNetSolutions
Ledger with Adjusting EntriesNetSolutions 3-3 (Continued) 48 Ledger
with Adjusting EntriesNetSolutions
Ledger with Adjusting EntriesNetSolutions 3-3 (Continued) 49 Ledger
with Adjusting EntriesNetSolutions
Ledger with Adjusting EntriesNetSolutions 3-3 (Concluded) 50
Revenues were understated by $21,100 ($8,600 + $12,500).
3-3 Example Exercise 3-8 For the year ending December 31, 2008,
Mann Medical Co. mistakenly omitted adjusting entries for (1)
$8,600 of unearned revenue that was earned, (2) earned revenue that
was not billed of $12,500, and (3) accrued wages of $2,900.Indicate
the combined effect of the errors on (a) revenues, (b) expenses,
and (c) net income for 2008. Follow My Example 3-8 Revenues were
understated by $21,100 ($8,600 + $12,500). Expenses were
understated by $2,900. Net income was understated by $18,200 ($8,
,500 $2,900). 51 For Practice:PE 3-8A, PE 3-8B Prepare an adjusted
trial balance.
3-4 Objective 4 Prepare an adjusted trial balance. 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. 3-4 54 3-4 Example Exercise 3-9 For each
of the following errors, considered individually, indicate whether
the error would cause the adjusted trial balance totals to be
unequal.If the error would cause the adjusted trial balance total
to be unequal, indicate whether the debit or credit total is higher
and by how much. The adjustment for accrued fees of $5,340 was
journalized as a debit to Accounts Payable for $5,340 and a credit
to Fees Earned of $5,340. The adjustment for depreciation of $3,260
was journalized as a debit to Depreciation Expense for $3,620 and a
credit to Accumulated Depreciation for $3,260. 55 For Practice: PE
3-9A, PE 3-9B
3-4 Follow My Example 3-9 The totals are equal even though the
debit should have been to Accounts Receivable instead of Accounts
Payable. The totals are unequal.The debit total is higher by $360
($3,620 $3,260). For Practice:PE 3-9A, PE 3-9B 56