03-PSU-ACC 202 - Principles of Accounting 2 - 2022F - Lecture Slides

3
Chapter
The Adjusting Process
Financial
and
Managerial
Accounting
14e
Warren
Reeve Instructor: Nguyễn Thị Kim Hương - Hoàng Anh Thư
Duchac Cell: 0983.501512 0994.183.363
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Content
1. Nature of the Adjusting Entries

2. Adjusting Entries for Accruals
3. Adjusting Entries for Deferrals
4. Adjusting Entries for Depreciation
5. Summary of Adjusting Entries
6. Adjusted Trial Balance
Learning Objectives
Accrual and Cash Basis of Accounting
(slide 1 of 2)
• Under the accrual basis of accounting,

revenues are reported on the income statement
in the period in which a service has been
performed or a product has been delivered.
• The accrual basis of accounting also requires
expenses to be recorded when they are
incurred, not necessarily when cash is paid.
• Generally accepted accounting principles
(GAAP) require the accrual basis of accounting.
Accrual and Cash Basis of Accounting
(slide 2 of 2)
• 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.
• Most individuals and small service businesses
may use the cash basis of accounting. For most
large businesses, however, the cash basis will
not provide accurate financial statements for
user needs.
Revenue and Expense Recognition
(slide 1 of 2)
• Under the revenue recognition principle,

revenues are recorded when services have been
performed or products have been delivered to
customers.
o Revenue is normally measured as the assets
received, such as cash or accounts receivable.
o The process of recognizing revenues is called
revenue recognition.
Revenue and Expense Recognition
(slide 2 of 2)
• Under the expense recognition principle, the

expenses incurred in generating revenue must
be reported in the same period as the related
revenue.
This is also called the matching principle.
 By matching revenues and expenses, net income
or loss for the period is properly reported on the
income statement.
 Adjusting entries are required to properly match
revenues and expenses.
(slide 1 of 3)
• At the end of an accounting period, an

unadjusted trial balance is prepared to verify that
the total debit balances equal the total credit
balances.
• Many of these account balances are reported in
the financial statements without change.
(slide 2 of 3)
• Some accounts on the unadjusted trial balance,

however, require adjustments for the following
reasons:
o Some expenses are not recorded daily.
o Some revenues and expenses are incurred as time
passes rather than as separate transactions.
o Some revenues and expenses may be unrecorded at
the end of the accounting period.
(slide 3 of 3)
• 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.
• Thus, an adjusting entry will always involve a
revenue or an expense account and an asset or
a liability account.
Types of Accounts Requiring Adjustment
• The two general classifications of accounts

requiring adjustment are as follows:
o Accruals
o Deferrals
Types of Accounts Requiring Adjustment:
Accruals
• An accrual occurs when revenue has been
earned or an expense has been incurred but has
not been recorded.
• If the accrual is for revenue, the adjusting entry
debits an asset (Accounts Receivable) and
credits a revenue account.
• If the accrual is for an expense, the adjusting
entry debits an expense account and credits a
related liability account such as Accounts
Payable or Wages Payable.
Types of Accounts Requiring Adjustment:
Deferrals
• A deferral occurs when cash related to a future
revenue or expense has been initially recorded as a
liability or an asset.
• If the cash received is related to future revenue, it is
initially recorded as a liability called unearned
revenue.
• If the cash paid is related to a future expense, it is
initially recorded as an asset called prepaid
expense.
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.
o Examples of fixed assets include land, buildings, and
equipment.
• As time passes, a fixed asset loses its ability to

provide useful services.
o This decrease in usefulness is called depreciation.
• All fixed assets, except land, lose their

usefulness and, thus, are said to depreciate.
o As a fixed asset depreciates, a portion of its cost
should be recorded as an expense. This periodic
expense is called depreciation expense.
• The adjusting entry to record depreciation

expense is similar to the adjusting entry for
supplies used.
o The depreciation expense account is increased
(debited) for the amount of depreciation.
o However, the fixed asset account is not decreased
(credited). Instead, an account entitled Accumulated
Depreciation is increased (credited).
• The normal titles for fixed asset accounts and

their related contra asset accounts are as
follows:
• 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 follows:
Book Value of Asset = Cost of the Asset – Accumulated Depreciation of Asset
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.
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 been
paid.
Discussion question 1
Indicate with a Yes or No whether or not each of

the following accounts normally requires
an adjusting entry:
A. Building C. Wages Expense E. Common Stock
B. Cash D. Miscellaneous Expense F. Prepaid
Insurance
Discussion question in group
Classify the following items as (1) prepaid

expense, (2) unearned revenue, (3) accrued
revenue, or (4) accrued expense:
A. Cash received for use of land next month
B. Fees earned but not received
C. Rent expense owed but not yet paid
D. Supplies on hand
2
Journalize entries for

accounts requiring
adjustment.
3-7
2
Prepaid Expenses
NetSolutions’ Supplies account has a balance of
$2,000 in the unadjusted trial balance. Some of
these supplies have been used. On December 31,
a count reveals that $760 of supplies are on hand.
Supplies (balance on trial balance) $2,000
Supplies on hand, December 31 – 760
Supplies used $1,240
2
Supplies 14 Supplies Expense 55

Bal. 2,000 Dec. 31 1,240 Bal. 800
760 Dec. 31 1,240
2,040
2
Prepaid Expenses
The debit balance of $2,400 in
NetSolutions’ Prepaid
Insurance account represents
the December 1 prepayment of
insurance for 12 months.
2
Prepaid Insurance 15 Insurance Expense 56

Dec. 31
Bal. 2,400 Dec. 31 200
200
2,200
2
Unearned Revenues
The December 31 unadjusted
trial balance of NetSolutions
indicates a balance in the
unearned rent account of $360.
2
Dec. 31 Unearned Rent 23 Rent Revenue 42

Bal. 360
120
2
Dec. 31 Unearned Rent 23 Rent Revenue 42

Bal. 360 Dec. 31120
120 Bal. 240
2
Accrued Revenues
NetSolutions signed an agreement with
Danker Co. on December 15 to
provide services at $20 per hour. As of
December 31, NetSolutions had
provided 25 hours of assistance.
2
Accounts Receivable 12 Fees Earned 41

Bal. 2,220 Bal. 16,340
Dec. 31500
Bal. 2,720
2
Accounts Receivable 12 Fees Earned 41

Bal. 2,220 Bal. 16,340
Dec. 31500 Dec. 31500
Bal. 2,720 Bal. 16,840
2
Accrued Expenses
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.
2
Wages Payable 22 Wages Expense 51

Bal. 4,275
Dec. 31 250
Bal. 4,525
2
Wages Payable 22 Wages Expense 51

Dec. 31250 Bal. 4,275
Dec. 31 250
Bal. 4,525
2
The journal entry for the payment of

wages on January 10 is shown below.
After
posting
2
NetSolutions estimates the

depreciation on its office
equipment to be $50 for
the month of December.
2
Depreciation Expense 53 Accum. Depr.—Office Equip. 19

Dec. 3150
2
Depreciation Expense 53 Accum. Depr.—Office Equip. 19

Dec. 3150 Dec. 3150
2
NetSolutions’ balance sheet would

show office equipment at cost, less
accumulated depreciation.
Office equipment $1,800
Less accumulated
depreciation 50 $1,750
Book
value
Adjusted Trial Balance
• After the adjusting entries are posted, an

adjusted trial balance is prepared.
• The adjusted trial balance verifies the equality of
the total debit and credit balances before the
financial statements are prepared.
Discussion question 2
At the end of the current year, $17,555 of fees

have been earned but have not been billed to
clients.
Journalize the adjusting entry to record the
accrued fees.
Discussion question in Group
Classify the following items as (A) prepaid expense, (B)

unearned revenue, (C) accrued revenue, or (D) accrued
expense:
1. A two-year premium paid on a fire insurance policy.
2. Fees earned but not yet received.
3. Fees received but not yet earned.
4. Salary owed but not yet paid.
5. Subscriptions received in advance by a magazine
publisher.
6. Supplies on hand.
7. Taxes owed but payable in the following period.
8. Utilities owed but not yet paid.
sinh viên tự làm bài tập và nộp cho giảng viên
Doing:
1. BE 3-4, 3-5, 3-6, 3-7
2. EX 3-13,
3. EX 3-26
4. PR 3-1A, PR 3-2A, PR 3-3A
PROBLEM IN GROUP 1A
On March 31, the following data were accumulated to

assist the accountant in preparing the adjusting entries for
Potomac Realty:
1. The supplies account balance on March 31 is $5,620.
The supplies on hand on March 31 are $1,290.
2. The unearned rent account balance on March 31 is
$5,000 representing the receipt of an advance payment
on March 1 of four months’ rent from tenants.
3. Wages accrued but not paid at March 31 are $2,290.
4. Fees accrued but unbilled at March 31 are $16,825.
5. Depreciation of office equipment is $4,600.
PROBLEM IN GROUP 1A
Instructions
1. Journalize the adjusting entries required at
March 31.
2. Briefly explain the difference between adjusting
entries and entries that would be made to
correct errors.
PROBLEM IN GROUP 2A
Selected account balances before adjustment for

Atlantic Coast Realty at July 31, the end of
the current year, are as follows:
PROBLEM IN GROUP 2A
Data needed for year-end adjustments are as follows:

• Unbilled fees at July 31, $11,150.
• Supplies on hand at July 31, $900.
• Rent expired, $6,000.
• Depreciation of equipment during year, $8,950.
• Unearned fees at July 31, $2,000.
• Wages accrued but not paid at July 31, $4,840.
Instructions
Journalize the six adjusting entries required at July 31,
based on the data presented.
PROBLEM IN GROUP 3A
Reliable Repairs & Service, an electronics repair store,

prepared the following unadjusted trial
balance at the end of its first year of operations:
PROBLEM IN GROUP 3A
For preparing the adjusting entries, the following

data were assembled:
A. Fees earned but unbilled on April 30 were $9,850.
B. Supplies on hand on April 30 were $4,660.
C. Depreciation of equipment was estimated to be $6,470
for the year.
D. The balance in unearned fees represented the April 1
receipt in advance for services to be provided. During
April, $15,000 of the services were provided.
E. Unpaid wages accrued on April 30 were $5,200.
PROBLEM IN GROUP 3A
Instructions
1. Journalize the adjusting entries necessary on
April 30, 2018.
2. Determine the revenues, expenses, and net
income of Reliable Repairs & Service before the
adjusting entries.
3. Determine the revenues, expense, and net
income of Reliable Repairs & Service after the
adjusting entries.
4. Determine the effect of the adjusting entries on
Retained Earnings.
Learn more
https://www.youtube.com/watch?v=0-lZRwsalGU

03-PSU-ACC 202 - Principles of Accounting 2 - 2022F - Lecture Slides

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

03-PSU-ACC 202 - Principles of Accounting 2 - 2022F - Lecture Slides

Uploaded by

Copyright:

Available Formats

3

The Adjusting Process

1. Nature of the Adjusting Entries

• Under the accrual basis of accounting,

• Under the cash basis of accounting, revenues

• Under the revenue recognition principle,

• Under the expense recognition principle, the

• At the end of an accounting period, an

• Some accounts on the unadjusted trial balance,

• The analysis and updating of accounts at the

• The two general classifications of accounts

• Fixed assets, or plant assets, are physical

• As time passes, a fixed asset loses its ability to

• All fixed assets, except land, lose their

• The adjusting entry to record depreciation

• The normal titles for fixed asset accounts and

• The difference between the original cost of the

Prepaid expenses are the

Unearned revenues are the

Accrued revenues are unrecorded

Accrued expenses are unrecorded

Indicate with a Yes or No whether or not each of

Classify the following items as (1) prepaid

Journalize entries for

Supplies 14 Supplies Expense 55

Prepaid Insurance 15 Insurance Expense 56

Dec. 31 Unearned Rent 23 Rent Revenue 42

Dec. 31 Unearned Rent 23 Rent Revenue 42

Accounts Receivable 12 Fees Earned 41

Accounts Receivable 12 Fees Earned 41

Wages Payable 22 Wages Expense 51

Wages Payable 22 Wages Expense 51

The journal entry for the payment of

NetSolutions estimates the

Depreciation Expense 53 Accum. Depr.—Office Equip. 19

Depreciation Expense 53 Accum. Depr.—Office Equip. 19

NetSolutions’ balance sheet would

• After the adjusting entries are posted, an

At the end of the current year, $17,555 of fees

Classify the following items as (A) prepaid expense, (B)

On March 31, the following data were accumulated to

Selected account balances before adjustment for

Data needed for year-end adjustments are as follows:

Reliable Repairs & Service, an electronics repair store,

For preparing the adjusting entries, the following

You might also like