no slide titlemrhaworth.weebly.com/uploads/2/8/0/8/2808974/ch03.pdfcalled the revenue recognition...

Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting

Pepperdine University

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1

The Adjusting Process

Chapter 3 Student Version These slides should be viewed

using the presentation mode (left

click your mouse on the icon).



Learning Objective 1

Describe the nature of

the adjusting process.



Nature of the Adjusting Process

The accounting period concept requires

that revenues and expenses be reported in

the proper period.

Under the accrual basis of accounting,

revenues are reported on the income

statement in the period in which they are

earned.

LO 1




LO 1

The accounting concept supporting the reporting of revenues when they are earned regardless of when cash is received is called the revenue recognition concept.

The accounting concept supporting

reporting revenues and related expenses in

the same period is called the matching

concept, or matching principle.



Under the cash basis of accounting,

revenues and expenses are reported on

the income statement in the period in

which cash is received or paid.

Under the accrual basis of accounting,

some of the accounts need updating at

the end of the accounting period.

LO 1





LO 1

The analysis and updating of accounts at

the end of the period before the financial

statements are prepared is called the

adjusting process.

The journal entries that bring the accounts

up to date at the end of the accounting

period are called adjusting entries.



Types of Accounts Requiring Adjustment

LO 1

Prepaid expenses are the advance

payment of future expenses and are

recorded as assets when cash is paid.

Unearned revenues are the advance

receipt of future revenues and are recorded

as liabilities when cash is received.



Types of Accounts Requiring Adjustment

LO 1

Accrued revenues are unrecorded

revenues that have been earned and for

which cash has yet to be received.

Accrued expenses are unrecorded

expenses that have been incurred and for

which cash has not yet been paid.




Journalize entries for

accounts requiring

adjustment.



NetSolutions’ Supplies account has a balance of

$2,000 on the unadjusted trial balance. Some of

these supplies have been used. On December

31, a count reveals that the amount of supplies

on hand is $760.

Supplies (balance on trial balance) $2,000

Supplies on hand, December 31 – 760

Supplies used $1,240

Prepaid Expenses

LO 2



Prepaid Expenses

LO 2

Assets = Liabilities + Stockholders’ Equity (Expense)

Accounting Equation Impact

decrease

increase



LO 2

Prepaid Insurance



decrease

increase

The debit balance of $2,400 in NetSolutions’

Prepaid Insurance account represents the

December 1 prepayment for 12 months.



LO 2

Unearned Revenues

The credit balance of $360 in NetSolutions’

Unearned Rent account represents the

receipt of three months’ rent on December 1

for December, January, and February. At the

end of December, one month’s rent has been

earned.



LO 2

Unearned Revenues

Assets = Liabilities + Stockholders’ Equity (Revenue)


decrease

increase



LO 2

Accrued Revenues

NetSolutions signed an agreement with

Danker Co. on December 15 to provide

services at a rate of $20 per hour. As of

December 31, NetSolutions had provided 25

hours of services. The revenue will be billed

on January 15.



LO 2

Unearned Revenues

Assets = Liabilities + Stockholders’ Equity (Revenue)


increase increase



LO 2

Accrued Wages

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,

December 30 and 31.



LO 2

Accrued Wages



increase increase



LO 2

Accrued Wages

NetSolutions paid wages of $1,275 on January

10. This payment includes the $250 of accrued

wages recorded on December 31.



LO 2

Depreciation Expense

Fixed assets, or plant assets, are physical

resources that are owned and used by a

business and are permanent or have a long

life.

As time passes, a fixed asset loses its ability

to provide useful services. This decrease in

usefulness is called depreciation.



LO 2


All fixed assets, except land, lose their

usefulness and , thus, are said to depreciate.

As a fixed asset depreciates, a portion of its

cost should be recorded as an expense. This

periodic expense is called depreciation

expense.



LO 2


The fixed asset account is not decreased

(credited) when making the related

adjusting entry. This is because both the

original cost of a fixed asset and the

depreciation recorded since its purchase

are reported on the balance sheet. Instead,

an account entitled Accumulated

Depreciation is increased (credited).



LO 2


Normal titles for fixed asset accounts and

their related contra asset accounts are as

follows:



LO 2


NetSolutions estimates the depreciation on

its office equipment to be $50 for the month

of December.



LO 2




increase

increase



LO 2


The difference between the original cost of

the office equipment and the balance in the

Accumulated Depreciation—Office

Equipment account is called the book value

of the asset (or net book value). It is

computed as shown below.

Book Value of Asset = Cost of the Asset – Accumulated Depreciation of Asset

Book Value of Off. Equip. = Cost of Off. Equip. – Accum. Depre. of Office Equip.

Book Value of Off. Equip. = $1,800 – $50

Book Value of Off. Equip. = $1,750




Summarize the

adjustment process.



Adjusting Entries

Adjusting Entries—NetSolutions

LO 3

(continued)



Adjusting Entries

LO 3

Adjusting Entries—NetSolutions

(concluded)



LO 3

Ledger with Adjusting Entries

(continued)



LO 3


Ledger with

Adjusting

Entries─

NetSolutions

(continued)



LO 3


Ledger with

Adjusting

Entries─

NetSolutions

(concluded)




Prepare an adjusted

trial balance.



Adjusted Trial Balance

The purpose of the adjusted trial balance is

to verify the equality of the total debit and

credit balances before the financial

statements are prepared.

LO 4



Adjusted Trial Balance

Adjusted Trial

Balance

LO 4




LO 5

Describe and illustrate

the use of vertical

analysis in evaluating a

company’s performance

and financial condition.



Vertical Analysis

Comparing each item in a financial

statement with a total amount from the

same statement is referred to as vertical

analysis.

LO 5



Vertical Analysis

LO 5

$12,500 = .067 or 6.7%

$187,500



Vertical Analysis

LO 5

$3,000 = .02 or 2%

$150,000

Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting

Pepperdine University



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