adjusting process
DESCRIPTION
Adjusting Process. By Rachelle Agatha, CPA, MBA. Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac. 0. After studying this chapter, you should be able to:. Describe the nature of the adjusting process. Journalize entries for accounts requiring adjustment. - PowerPoint PPT PresentationTRANSCRIPT
Adjusting Process
By Rachelle Agatha, CPA, MBA
Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac
2
• 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.
4
Under the accrual basis of accounting, revenues are reported
in the income statement in the
period in which they are earned.
3-1
5
The accounting concept that supports this approach to reporting of revenues is
called the revenue recognition concept.
3-1
6
The journal entries that bring the accounts up to date at the end of
the accounting period are called adjusting
entries.
3-1
7
• Supplies• Prepaids• Insurance
3-1
Accounts that are typically adjusted
include:
• Wages• Depreciation• Unearned Rent
8
Prepaid expenses (deferred expenses), are items that
have been initially recorded as assets.
Cash is paid in advance.
3-1
9
Expenses are recorded when incurred
3-1
10
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
3-1
11
Revenueis recorded when earned
(service performed).
3-1
12
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.
3-1
13
Accrued expenses, sometimes referred to
as accrued liabilities, are expenses that have been incurred but have not been recorded in the
accounts.
3-1
14
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
15
As time passes, a fixed asset loses
its ability to provide useful services. This
decrease in usefulness is
called depreciation.
3-2
16
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.
3-2
17
Journalize entries for accounts requiring
adjustment.
Objective 23-2
18
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.
19
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
20
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 – $4,125).
21
3-2Prepaid Adjustment
dr cr dr cr+ - + -
4,800 5,850
6,525 6,525 4,125$ 6,525$
DRPREPAIDASSET
DRINSURANCE EXP
EXPENSE
22
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 – $7,388).
23
3-2Unearned Fees Adjustment
dr cr dr cr- + - +
23,676
16,288 16,288 7,388$ 16,288$
LIABILITY REVENUE
CR CRUNEARNED FEES FEE REVENUE
24
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 [($6,900/12) × 5 months].
25
3-2Unearned Rent Adjustment
dr cr dr cr dr cr- + + - - +
6,900 6,900
2,875 2,875 4,025$ 6,900$ 2,875$
CR CRUNEARNED RENT RENT REVENUE
LIABILITY REVENUE
DRCASHASSET
26
3-2Depreciation ExpenseThe estimate for depreciation on equipment
for the current year is $1,820.
Depreciation Expense .......................................................... 1,820 Accumulated Depreciation—Equipment ................ 1,820 Depreciation on equipment.
27
3-2Depreciation Expense
dr cr dr cr+ - - +
1,820 1,820 1,820$ 1,820$
DRDEPRECIATION EXP
EXPENSE
CRACCUM DEP
CONTRA ASSET
28
3-4
Prepare an adjusted trial
balance.
Objective 4
29
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
30
• 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
31
• 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