Unit 3 - Adjusting Process Concepts
- 2. After studying this chapter, you should be able to: The Adjusting Process 3-2 1 Describe the nature of the adjusting process. 2 Journalize entries for accounts requiring adjustment. 3 Summarize the adjustment process. 4 Prepare an adjusted trial balance.
- 3. Describe the nature of the adjusting process. 1 3-3
- 4. 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. 1
- 5. Under the accrual basis of accounting , revenues are reported in the income statement in the period in which they are earned. Accrual account is required by GAAP . 1
- 6. The accounting concept supporting the reporting of revenues when they are earned regardless of when cash is received is called the revenue recognition concept . 1 Revenue Recognition Concept
- 7. The accounting concept supporting reporting revenues and related expenses in the same period is called the matching concept , or matching principle . 1 Matching Principle
- 8. The Adjusting Process Under the accrual basis, at the end of the accounting period some of the accounts need updating for the following reasons: Some expenses are not recorded daily (e.g. supplies). Some revenues and expenses are incurred as time passes rather than as separate transactions (e.g. rent / insurance) Some revenues and expenses may be unrecorded (e.g. wages, revenues) 1
- 9. The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the adjusting process . 1 The Adjusting Process
- 10. Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. Cash d. Office Equipment Prepaid Rent e. Accounts Receivable Wages Expense f. Unearned Rent 3-10 1 Example Exercise 3-1 Accounts Requiring Adjustment
- 11. Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid. 1 Types of Accounts Requiring Adjustment
- 12. Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received. Types of Accounts Requiring Adjustment 1
- 13. Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received. 1 Types of Accounts Requiring Adjustment
- 14. Accrued expenses are unrecorded expenses that have been incurred and for which cash has not been paid. 1 Types of Accounts Requiring Adjustment
- 15. 1 Type of Adjustment Example Exercise 3-2 Follow My Example 6-1 Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued expense, or (4) accrued revenue. Wages owed but not c. Fees received but not yet paid. earned. Supplies on hand. d. Fees earned but not yet received. 3-15