Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government

THE ADJUSTING PROCESS

1. Timing Issues
Companies naturally want to have regular reports as to the progress they have made. Thus,
accountants divide the economic life of a business into artificial time periods as a guide. This
assumption is known as the time period assumption.

A. Fiscal and Calendar Years

Accounting period that companies may adopt are:

Annual Periods
● Fiscal Year - The accounting time period of one year in length

● Calendar Year – Period of time equal in length to that of the year in the calendar conventionally
in use.

Interim periods
● Monthly time period

● Quarterly time period

B. Accrual- vs. Cash-basis Accounting

Accrual-basis accounting is all about recording transactions in the periods in which the
events occur. Revenues are recognized as services are performed. Expenses are recognized as these
are incurred.

Cash-basis accounting is all about recording transactions when cash is received or given
away. Revenues are recognized when cash is received. Expenses are recognized when cash is paid.

Cash-basis accounting is not in accordance with generally accepted accounting principles

(GAAP). It tends to produce misleading financial statements. It fails to record revenue when the
services were already performed but have yet to receive cash for them. As a result, expenses are not
properly matched with revenues.
.
C. Recognizing Revenues and Expenses
Time Period Assumption

Economic life of business can be divided

into artificial time periods

Revenue Recognition Principle Expense Recognition Principle

Recognize revenue in the accounting Match expenses with revenues in the

period in which the performance period when the company makes efforts
obligation is satisfied to generate those revenues

Revenue and Expense Recognition

In accordance with generally accepted

Accountancy Academic Organizationaccounting principles (GAAP)
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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

II. Nature
A. The Adjusting Process – the analysis and updating of accounts at the end of the period
before the financial statements are prepared.
Some accounts require updating for the following reasons:
1. Some expenses are not recorded daily.
2. Some revenues and expenses are incurred as time passes rather than as separate
transactions.
3. Some revenues and expenses may be unrecorded.

B. Types of Accounts Requiring Adjustments

Four basic types of accounts require adjusting entries
1. Prepaid Expenses – are the advance payment of future expenses and are recorded
as assets when cash is paid. Cash is paid in advance for an expense.
2. Unearned Revenues – are the advance receipt of future revenues and are recorded
as liabilities when cash is received. Cash is received for an unearned revenue.
3. Accrued Revenues – unrecorded revenues that have been earned and for which
cash has yet to be received. Revenue has been earned, but has not been recorded.
4. Accrued Expenses – unrecorded expenses that have been incurred and for which
cash has yet to be paid. An expense has been incurred, but has not been recorded.

III. Recording Adjusting Entries – Practice Problems

a. Prepaid Expenses
The December 31, 2022, unadjusted trial balance of Liverpool Co. indicates a balance in the supplies
account of $1,900. In addition, the prepaid insurance account has a balance of $3,600.
Assume that on December 31 the amount of supplies on hand is $450 and that the debit balance of
$3,600 in Liverpool Co’ prepaid insurance account represents a December 1 prepayment of insurance
for 12 months.

b. Unearned Revenues
The December 31, 2022, unadjusted trial balance of Boston Inc. indicates a balance in the unearned
rent account of $510. This balance represents the receipt of three months’ rent on December 1 for
December, January and February. Show the adjusting entry at the end of December.

c. Accrued Revenues
Assume that EsurientZita. signed an agreement with Reteche Co. on December 15. The agreement
provides that EsurientZita will answer computer questions and render assistance to Reteche Co.’s
employees. The services will be billed to Reteche Co. on the fifteenth of each month at a rate of $20
per hour. As of December 31, EsurientZita had provided 25 hours of assistance to Reteche Co.

d. Accrued Expenses
GreatGatsby pays its employees biweekly. During December, GreatGatsby paid wages of $950 on
December 13 and $1,200 on December 27. As of December 31, GreatGatsby owes $250 of wages for
Monday and Tuesday, December 30 and 31.
December
Sun Mon Tue Wed Thu Fri Sat
1 2 3 4 5 6 7
8 9 10 11 12 13 14

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

15 16 17 18 19 20 21
22 23 24 25 26 27 28
29 30 31

e. Depreciation Expense
The estimated amount of depreciation on equipment for the current year is $120. Journalize.

**Key notes on Depreciation:

● Depreciation is the process of allocating the cost of an asset to expense over its useful life.

● Depreciation is an allocation concept, not a valuation one. It allocates an asset’s cost to the
periods in which it is used. Depreciation does not attempt to report the actual change in the
value of the asset.
● Accumulated Depreciation is a contra asset account that keeps track of the total amount of
depreciation expense taken over the life of the asset

**Formulas :
Cost - Salvage Value_
Useful Life Depreciable cost – Accumulated Depreciation = Book Value

IV. Summary of Adjustment Process

Asset Method
a. Prepaid Expenses
Expense xx
Asset xx
b. Unearned Revenues
Liability xx
Revenue xx
c. Accrued Revenues
Asset xx
Revenue xx
d. Accrued Expenses
Expense xx
Liability xx
e. Depreciation
Expense xx
Contra Asset xx

Expense Method
a. Prepaid Expenses
Asset xx
Expenses xx
b. Unearned Revenues
Revenue xx
Liability xx

**No expense methods for accruals as no entries occur before companies make these types of
adjusting entries

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

V. Adjusted Trial Balance - prepared after all adjusting entries have been journalized and posted.
It shows the balances of all accounts at the end of the accounting period and the effects of all
financial events that have occurred during the period. It proves the equality of the total debit and
credit balances in the ledger after all adjustments have been made. Financial statements can be
prepared directly from the adjusted trial balance.

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