Professional Documents
Culture Documents
The Adjusting
Process
Chapter
3-2
Current
Current Liabilities
Liabilities and
and Contingencies
Contingencies
The Adjusted
The Basics of
Trial Balance and
Timing Issues Adjusting
Financial
Entries
Statements
Chapter
3-3
Timing
Timing Issues
Issues
Review
The time period assumption states that:
a. revenue should be recognized in the accounting
period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided
into artificial time periods.
d. the fiscal year should correspond with the
calendar year.
Chapter
3-5 LO 1 Explain the time period assumption.
Timing
Timing Issues
Issues
Chapter
3-6 LO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
Chapter
3-7 LO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
Chapter
3-9 LO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
GAAP relationships
in revenue and
expense recognition
Illustration 3-1
Chapter
3-10 LO 2 Explain the accrual basis of accounting.
Timing
Timing Issues
Issues
Review
One of the following statements about the accrual basis
of accounting is false. That statement is:
a. Events that change a company’s financial
statements are recorded in the periods in which
the events occur.
b. Revenue is recognized in the period in which it is
earned.
c. This basis is in accord with generally accepted
accounting principles.
d. Revenue is recorded only when cash is received, and
expense is recorded only when cash is paid.
Chapter
3-11 LO 2 Explain the accrual basis of accounting.
The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Chapter
3-12 LO 3 Explain the reasons for adjusting entries.
The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Chapter
3-13 LO 3 Explain the reasons for adjusting entries.
Timing
Timing Issues
Issues
Review
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which
they are incurred.
b. revenues are recorded in the period in which
they are earned.
c. balance sheet and income statement accounts
have correct balances at the end of an
accounting period.
d. all of the above.
Chapter
3-14 LO 3 Explain the reasons for adjusting entries.
Types
Types of
of Adjusting
Adjusting Entries
Entries
Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.
Chapter
3-15 LO 4 Identify the major types of adjusting entries.
Trial
Trial Balance
Balance
Trial Balance – Each account is analyzed to determine
whether it is complete and up-to-date.
Chapter
3-16 LO 4 Identify the major types of adjusting entries.
Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals
Chapter
3-17 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Chapter
3-18 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Prepaid Expenses
Costs that expire either with the passage of time
or through use.
Adjusting entries (1) to record the expenses that
apply to the current accounting period, and (2) to
show the unexpired costs in the asset accounts.
Chapter
3-19 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-4
Adjusting entries for prepaid expenses
Chapter
3-20 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Example (Insurance): On Jan. 1st, Phoenix Consulting paid
$12,000 for 12 months of insurance coverage. Show the
journal entry to record the payment on Jan. 1st.
Chapter
3-21 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Example (Insurance): On Jan. 1st, Phoenix Consulting paid
$12,000 for 12 months of insurance coverage. Show the
adjusting journal entry required at Jan. 31st.
11,000
Chapter
3-22 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Depreciation
Buildings, equipment, and vehicles (long-lived
assets) are recorded as assets, rather than an
expense, in the year acquired.
Companies report a portion of the cost of a long-
lived asset as an expense (depreciation) during
each period of the asset’s useful life (Matching
Principle).
Chapter
3-23 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Example (Depreciation): On Jan. 1st, Phoenix Consulting
paid $24,000 for equipment that has an estimated useful
life of 20 years. Show the journal entry to record the
purchase of the equipment on Jan. 1st.
Jan. 1 Equipment 24,000
Cash 24,000
Equipment Cash
Debit Credit Debit Credit
24,000 24,000
Chapter
3-24 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Example (Depreciation): On Jan. 1st, Phoenix Consulting
paid $24,000 for equipment that has an estimated useful
life of 20 years. Show the adjusting journal entry required
at Jan. 31st. ($24,000 / 20 yrs. / 12 months = $100)
100
Chapter
3-25 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Equipment 24,000
Accumulated Depreciation (100)
Net Equipment 23,900
Chapter
3-26 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Chapter
3-27 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Unearned Revenues
Company makes an adjusting entry to record the
revenue that has been earned and to show the
liability that remains.
The adjusting entry for unearned revenues results
in a decrease (a debit) to a liability account and an
increase (a credit) to a revenue account.
Chapter
3-28 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Illustration 3-10
Adjusting entries for unearned revenues
Chapter
3-30 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Example: On Jan. 1st, Phoenix Consulting received $24,000
from Arcadia High School for 3 months rent in advance.
Show the adjusting journal entry required on Jan. 31st.
16,000
Chapter
3-31 LO 5 Prepare adjusting entries for deferrals.
Adjusting
Adjusting Entries
Entries for
for Accruals
Accruals
Made to record:
Revenues earned and
Expenses incurred
in the current accounting period that have not
been recognized through daily entries.
Chapter
3-32 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Revenues earned but not yet received in cash or
recorded.
Chapter
3-33 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Accrued Revenues
An adjusting entry serves two purposes:
(1) It shows the receivable that exists, and
(2) It records the revenues earned.
Chapter
3-34 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Illustration 3-13
Adjusting entries for accrued revenues
Investments Cash
Debit Credit Debit Credit
300,000 300,000
Chapter
3-36 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Example: On Jan. 1st, Phoenix Consulting invested
$300,000 in securities that return 5% interest per year.
Show the adjusting journal entry required on Jan. 31st.
($300,000 x 5% / 12 months = $1,250)
Jan. 31 Interest receivable 1,250
Interest revenue 1,250
Chapter
3-37 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Expenses incurred but not yet paid in cash or
recorded.
Chapter
3-38 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) It recognizes the expenses.
Chapter
3-39 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Illustration 3-16
Adjusting entries for accrued expenses
Chapter
3-41 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Example: On Jan. 2nd, Phoenix Consulting borrowed $200,000
at a rate of 9% per year. Interest is due on first of each
month. Show the adjusting journal entry required on Jan. 31st.
($200,000 x 9% / 12 months = $1,500)
Jan. 31 Interest expense 1,500
Interest payable 1,500
Chapter
3-42 LO 6 Prepare adjusting entries for accruals.
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Expenses
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) it recognizes the expenses.
Chapter
3-43 LO 6 Prepare adjusting entries for accruals.
The
The Adjusted
Adjusted Trial
Trial Balance
Balance
Chapter
3-44 LO 7 Describe the nature and purpose of an adjusted trial balance.
Timing
Timing Issues
Issues
Review
Which of the following statements is incorrect
concerning the adjusted trial balance?
a. An adjusted trial balance proves the equality of the
total debit balances and the total credit balances in
the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary
basis for the preparation of financial statements.
c. The adjusted trial balance lists the account balances
segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the
adjusting entries have been journalized and posted.
Chapter
3-45 LO 7 Describe the nature and purpose of an adjusted trial balance.
Preparing
Preparing Financial
Financial Statements
Statements
Financial
Financial Statements
Statements are
are prepared
prepared directly
directly from
from the
the
Adjusted
Adjusted Trial
Trial Balance.
Balance.
Statement
Statement
Balance Income of
of Cash
Sheet Statement Retained
Flows
Earnings
Chapter
3-46 LO 7 Describe the nature and purpose of an adjusted trial balance.
Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit
Cash $ 50,000 Income Statement
Accounts receivable 35,000
Interest receivable 1,250 Income Statement
Prepaid insurance 11,000
For the Month Ended Jan. 31,
Equipment 24,000
Accumulated depreciation $ 100 Revenues:
Investments 300,000 Sales $ 137,000
Accounts payable 20,000 Interest revenue 1,250
Interest payable 1,500
Rent revenue 8,000
Unearned revenue 16,000
Total revenue 146,250
Note payable 200,000
Austin, capital 40,000 Expenses:
Sales 137,000 Interest expense 1,500
Interest revenue 1,250 Depreciation expense 100
Rent revenue 8,000 Insurance expense 1,000
Interest expense 1,500
Total expenses 2,600
Depreciation expense 100
Insurance expense 1,000
Net income $ 143,650
$ 423,850 $ 423,850
Chapter
3-47 LO 7 Describe the nature and purpose of an adjusted trial balance.
Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit
Cash $ 50,000
Accounts receivable 35,000
Interest receivable 1,250
Prepaid insurance 11,000
Equipment 24,000
Accumulated depreciation
Investments 300,000
$ 100
Statement of
Accounts payable 20,000 Owners’ Equity
Interest payable 1,500
Statement of Owners' Equity
Unearned revenue 16,000
Note payable 200,000 For the Month Ended Jan. 31,
Austin, capital 40,000
Sales 137,000 Austin, Capital, Jan. 1 $ 40,000
Interest revenue 1,250 + Net income 143,650
Rent revenue 8,000 - Drawings 0
Interest expense 1,500 Austin, Capital, Jan. 31 $ 183,650
Depreciation expense 100
Insurance expense 1,000
$ 423,850 $ 423,850
Chapter
3-48 LO 7 Describe the nature and purpose of an adjusted trial balance.
Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit Balance Sheet Jan. 31
Cash $ 50,000 Assets
Accounts receivable 35,000
Cash $ 50,000
Interest receivable 1,250
Accounts receivable 35,000
Prepaid insurance 11,000
Equipment 24,000 Interest receivable 1,250
Accumulated depreciation $ 100 Prepaid insurance 11,000
Investments 300,000 Equipment 24,000
Accounts payable 20,000 Accum. Depreciation (100)
Interest payable 1,500 Investments 300,000
Unearned revenue 16,000
Total assets $ 421,150
Note payable 200,000
Liabilities & Owners' Equity
Austin, capital 40,000
Sales 137,000 Accounts payable $ 20,000
Interest revenue 1,250 Interst payable 1,500
Rent revenue 8,000 Unearned revenue 16,000
Interest expense 1,500 Note payable 200,000
Depreciation expense 100 Austin, capital 183,650
Insurance expense 1,000
Total liab. & equity $ 421,150
$ 423,850 $ 423,850
Chapter
3-49 LO 7 Describe the nature and purpose of an adjusted trial balance.
Copyright
Copyright
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Chapter
3-50