Ch03_WRD25e_Instructor.pptCh03_WRD25e_Instructor.ppt

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The Adjusting
The Adjusting
Process
Process
Chapter 3
Chapter 3

Learning Objectives
Learning Objectives
1.
1. Describe the nature of the adjusting process.
Describe the nature of the adjusting process.
2.
2. Journalize entries for accounts requiring
Journalize entries for accounts requiring
adjustment.
adjustment.
3.
3. Summarize the adjustment process.
Summarize the adjustment process.
4.
4. Prepare an adjusted trial balance.
Prepare an adjusted trial balance.
5.
5. Describe and illustrate the use of vertical
Describe and illustrate the use of vertical
analysis in evaluating a company’s
analysis in evaluating a company’s
performance and financial condition.
performance and financial condition.

Learning Objective
Learning Objective
Describe the nature of the adjusting
Describe the nature of the adjusting
process.
process.
1
1

Nature of the Adjusting Process
o The
The accounting period concept
accounting period concept requires that
requires that
revenues and expenses be reported in the
revenues and expenses be reported in the
proper period.
proper period.

o Under the
Under the accrual basis of accounting
accrual basis of accounting,
,
revenues are reported on the income
revenues are reported on the income
statement in the period in which they are
statement in the period in which they are
earned.
earned.

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

o The accounting concept supporting reporting
The accounting concept supporting reporting
revenues and related expenses in the same
revenues and related expenses in the same
period is called the
period is called the matching concept
matching concept, or
, or
matching principle
matching principle.
.

o Under the
Under the cash basis of accounting
cash basis of accounting, revenues
, revenues
and expenses are reported on the income
and expenses are reported on the income
statement in the period in which cash is
statement in the period in which cash is
received or paid.
received or paid.

The Adjusting Process
o Under the accrual basis, some of the accounts
Under the accrual basis, some of the accounts
need updating at the end of the accounting
need updating at the end of the accounting
period for the following reasons:
period for the following reasons:
 Some expenses are not recorded daily.
Some expenses are not recorded daily.
 Some revenues and expenses are incurred as time
Some revenues and expenses are incurred as time
passes rather than as separate transactions.
passes rather than as separate transactions.
 Some revenues and expenses may be unrecorded.
Some revenues and expenses may be unrecorded.

o The analysis and updating of accounts at the
The analysis and updating of accounts at the
end of the period before the financial
statements are prepared is called the
statements are prepared is called the adjusting
adjusting
process
process.
.

o The analysis and updating of accounts at the
The analysis and updating of accounts at the
process.
process.
o The journal entries that bring the accounts up
The journal entries that bring the accounts up
to date at the end of the accounting period are
to date at the end of the accounting period are
called
called adjusting entries
adjusting entries.
.

Types of Accounts Requiring Adjustment
o Prepaid expenses
Prepaid expenses are the advance payment of
are the advance payment of
future expenses and are recorded as assets
future expenses and are recorded as assets
when cash is paid.
when cash is paid.

PREPAID
PREPAID
EXPENSES
EXPENSES
(continued)

PREPAID
PREPAID
EXPENSES
EXPENSES
(concluded)

o Unearned revenues
Unearned revenues are the advance receipt of
are the advance receipt of
future revenues and are recorded as liabilities
future revenues and are recorded as liabilities
when cash is received.
when cash is received.

UNEARNED
UNEARNED
REVENUES
REVENUES
(continued)

UNEARNED
UNEARNED
REVENUES
REVENUES
(concluded)

o Accrued revenues
Accrued revenues are unrecorded revenues
are unrecorded revenues
that have been earned and for which cash has
that have been earned and for which cash has
yet to be received.
yet to be received.

ACCRUED
ACCRUED
REVENUES
REVENUES
(continued)

(concluded)
ACCRUED
ACCRUED
REVENUES
REVENUES

o Accrued expenses
Accrued expenses are unrecorded expenses
are unrecorded expenses
that have been incurred and for which cash has
that have been incurred and for which cash has
yet to be paid.
yet to be paid.

ACCRUED
ACCRUED
EXPENSES
EXPENSES
(continued)

ACCRUED
ACCRUED
EXPENSES
EXPENSES
(concluded)

Learning Objective
Learning Objective
Journalize entries for accounts
Journalize entries for accounts
requiring adjustment.
requiring adjustment.
2
2

ADJUSTING
ADJUSTING
ENTRIES
ENTRIES

Prepaid Expenses
Prepaid Expenses
o NetSolutions’ supplies account has a balance of
NetSolutions’ supplies account has a balance of
$2,000 on the unadjusted trial balance. Some of
$2,000 on the unadjusted trial balance. Some of
these supplies have been used. On December
these supplies have been used. On December
31, a count reveals that the amount of supplies
31, a count reveals that the amount of supplies
on hand is $760.
on hand is $760.
Supplies (balance on trial balance) $2,000
Supplies on hand, December 31 – 760
Supplies used $1,240

PREPAID
PREPAID
EXPENSES
EXPENSES
Assets = Liabilities + Owner’s Equity (Expense)
Accounting Equation Impact
decrease
increase

Prepaid Insurance
Prepaid Insurance
o The debit balance of $2,400 in NetSolutions’
The debit balance of $2,400 in NetSolutions’
prepaid insurance account represents the
prepaid insurance account represents the
December 1 prepayment of insurance for 12
December 1 prepayment of insurance for 12
months.
months.

decrease
increase
PREPAID
PREPAID
INSURANCE
INSURANCE

Impact of Omitting Adjusting Entries
Impact of Omitting Adjusting Entries

Unearned Revenues
Unearned Revenues
o The credit balance of $360 in NetSolutions’
The credit balance of $360 in NetSolutions’
unearned rent account represents the receipt
unearned rent account represents the receipt
of three months’ rent on December 1 for
of three months’ rent on December 1 for
December, January, and February. At the end of
December, January, and February. At the end of
December, one month’s rent has been earned.
December, one month’s rent has been earned.

UNEARNED
UNEARNED
REVENUES
REVENUES
Assets = Liabilities + Owner’s Equity (Revenue)
decrease
increase

Impact of Omitting Adjusting Entry
Impact of Omitting Adjusting Entry

Accrued Revenues
Accrued Revenues
o NetSolutions signed an agreement with Danker
NetSolutions signed an agreement with Danker
Co. on December 15 to provide services at a
Co. on December 15 to provide services at a
rate of $20 per hour. As of December 31,
rate of $20 per hour. As of December 31,
NetSolutions had provided 25 hours of
NetSolutions had provided 25 hours of
services.The revenue will be billed on January
services.The revenue will be billed on January
15.
15.

UNEARNED
UNEARNED
REVENUES
REVENUES
Assets = Liabilities + Owner’s Equity (Revenue)
increase increase

Accrued Expenses: Accrued Wages
Accrued Expenses: Accrued Wages

Accrued Wages
Accrued Wages
o NetSolutions pays it employees biweekly.
NetSolutions pays it employees biweekly.
During December, NetSolutions paid wages of
During December, NetSolutions paid wages of
$950 on December 13 and $1,200 on
$950 on December 13 and $1,200 on
December 27. As of December 31,
December 27. As of December 31,
NetSolutions owes $250 of wages to employees
NetSolutions owes $250 of wages to employees
for Monday and Tuesday, December 30 and 31.
for Monday and Tuesday, December 30 and 31.

ACCRUED WAGES
ACCRUED WAGES
increase
increase

Accrued Wages
Accrued Wages
o NetSolutions paid wages of $1,275 on January
NetSolutions paid wages of $1,275 on January
10.This payment includes the $250 of accrued
10.This payment includes the $250 of accrued
wages recorded on December 31.
wages recorded on December 31.

IMPACT OF
IMPACT OF
OMITTING
OMITTING
ADJUSTING
ADJUSTING
ENTRY
ENTRY

Depreciation Expense
o Fixed assets, or plant assets, are physical
Fixed assets, or plant assets, are physical
resources that are owned and used by a
resources that are owned and used by a
business and are permanent or have a long
business and are permanent or have a long
life.
life.
o As time passes, a fixed asset loses its ability to
As time passes, a fixed asset loses its ability to
provide useful services.This decrease in
provide useful services.This decrease in
usefulness is called
usefulness is called depreciation
depreciation.
.

o All fixed assets, except land, lose their
All fixed assets, except land, lose their
usefulness and , thus, are said to
usefulness and , thus, are said to depreciate
depreciate.
.
o As a fixed asset depreciates, a portion of its
As a fixed asset depreciates, a portion of its
cost should be recorded as an expense.This
cost should be recorded as an expense.This
periodic expense is called
periodic expense is called depreciation
depreciation
expense
expense.
.

o The fixed asset account is not decreased
The fixed asset account is not decreased
(credited) when making the related adjusting
(credited) when making the related adjusting
entry.This is because both the original cost of
entry.This is because both the original cost of
a fixed asset and the depreciation recorded
a fixed asset and the depreciation recorded
since its purchase are reported on the balance
since its purchase are reported on the balance
sheet. Instead, an account entitled
sheet. Instead, an account entitled
Accumulated Depreciation
Accumulated Depreciation is increased
is increased
(credited).
(credited).
o Accumulated depreciation accounts are called
Accumulated depreciation accounts are called
contra accounts
contra accounts, or
, or contra asset accounts
contra asset accounts.
.

o Normal titles for fixed asset accounts and their
Normal titles for fixed asset accounts and their
related contra asset accounts are as follows:
related contra asset accounts are as follows:

o NetSolutions estimates the depreciation on its
NetSolutions estimates the depreciation on its
office equipment to be $50 for the month of
office equipment to be $50 for the month of
December.
December.

DEPRECIATION
DEPRECIATION
EXPENSE
EXPENSE
increase
increase

o The difference between the original cost of the
The difference between the original cost of the
office equipment and the balance in the
office equipment and the balance in the
accumulated depreciation—office equipment
accumulated depreciation—office equipment
account is called the
account is called the book value
book value of the asset
of the asset
(or
(or net book value
net book value). It is computed as shown
). It is computed as shown
below.
below.
Book Value of Asset = Cost of the Asset – Accumulated Depreciation of Asset
Book Value of Off. Equip. = Cost of Off. Equip. – Acc. Deprec. of Office Equip.
Book Value of Off. Equip.= $1,800 – $50
Book Value of Off. Equip.= $1,750

Learning Objective
Learning Objective
3
3

SUMMARY OF
SUMMARY OF
ADJUSTMENT
ADJUSTMENT
PROCESS
PROCESS
(continued)

(continued)
SUMMARY OF
SUMMARY OF
ADJUSTMENT
ADJUSTMENT
PROCESS
PROCESS

(concluded)
SUMMARY OF
SUMMARY OF
ADJUSTMENT
ADJUSTMENT
PROCESS
PROCESS

(continued)
LEDGERWITH
LEDGERWITH
ADJUSTING
ADJUSTING
ENTRIES
ENTRIES

LEDGER
LEDGER
WITH
WITH
ADJUSTING
ADJUSTING
ENTRIES
ENTRIES

Ch03_WRD25e_Instructor.pptCh03_WRD25e_Instructor.ppt

LEDGERWITH
LEDGERWITH
ADJUSTING
ADJUSTING
ENTRIES
ENTRIES

Learning Objective
Learning Objective
4
4

Adjusted Trial Balance
Adjusted Trial Balance
o The purpose of the
The purpose of the adjusted trial balance
adjusted trial balance is to
is to
verify the equality of the total debit and credit
verify the equality of the total debit and credit
balances before the financial statements are
balances before the financial statements are
prepared.
prepared.

ADJUSTED TRIAL
ADJUSTED TRIAL
BALANCE
BALANCE

Learning Objective
Learning Objective
Describe and illustrate the use of
Describe and illustrate the use of
vertical analysis in evaluating a
vertical analysis in evaluating a
company’s performance and
company’s performance and
financial condition
financial condition
5
5

Vertical Analysis
Vertical Analysis
o Comparing each item in a financial statement
Comparing each item in a financial statement
with a total amount from the same statement is
with a total amount from the same statement is
referred to as
referred to as vertical
vertical analysis
analysis.
.

Vertical Analysis
Vertical Analysis
$12,500
= .067 or 6.7%
$187,500

Vertical Analysis
Vertical Analysis
$3,000
= .02 or 2%
$150,000

The Adjusting
The Adjusting
Process
Process
The End
The End

Ch03_WRD25e_Instructor.pptCh03_WRD25e_Instructor.ppt

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