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Adjusting Process

Adjusting Process. By Rachelle Agatha, CPA, MBA. Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac. 0. After studying this chapter, you should be able to:. Describe the nature of the adjusting process. Journalize entries for accounts requiring adjustment.

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Adjusting Process

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  1. Adjusting Process By Rachelle Agatha, CPA, MBA Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

  2. 0 After studying this chapter, you should be able to: • Describe the nature of the adjusting process. • Journalize entries for accounts requiring adjustment. • Summarize the adjustment process. • Prepare an adjusted trial balance.

  3. 0 Objective 1 Describe the nature of the adjusting process.

  4. 0 3-1 Under the accrual basis of accounting, revenues are reported in the income statement in the period in which they are earned.

  5. 0 3-1 The accounting concept that supports this approachtoreporting of revenues is called therevenue recognition concept.

  6. 0 3-1 The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries.

  7. 0 3-1 Accounts that are typically adjusted include: • Supplies • Prepaids • Insurance • Wages • Depreciation • Unearned Rent

  8. 0 3-1 Prepaid expenses(deferred expenses), are items that have been initially recorded as assets. Cash is paid in advance.

  9. 0 3-1 Expenses are recorded when incurred

  10. 0 3-1 Unearned Revenues (deferred revenues), are items that have been initially recorded as liabilities. Cash is received in advance but revenue is not yet earned and service not yet performed

  11. 0 3-1 Revenue is recorded when earned (service performed).

  12. 0 3-1 Accrued revenues, sometimes referred to as accrued assets(accrued means unpaid), are revenues that have been earned but have not been recorded in the accounts.

  13. 0 3-1 Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts.

  14. 0 3-2 Physical resources that are owned and used by a business and are permanent or have a long life are called fixed assets, orplant assets.

  15. 0 3-2 As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation.

  16. 0 • Fixed Asset accounts (also know as PPE) have a normal debit balance: • Equipment • Land • Buildings 3-2 Accumulated Depreciation is a Contra Asset account (normal credit balance) where depreciation expense is accumulated as it is recognized.

  17. 0 3-2 Objective 2 Journalize entries for accounts requiring adjustment.

  18. 0 • Supply Adjustment 3-2 The Supply account had a beginning balance of $1,245 and was debited for $2,860 for supplies purchased during the year. Assume the end of the year balance on hand is $1,349.

  19. 0 • Supply Adjustment “T” Accts 3-2

  20. 0 • Prepaid Adjustment 3-2 The Prepaid account had a beginning balance of $4,800 and was debited for $5,850 for premiums paid during the year. Assume the amount of unexpired insurance for future periods is $4,125.

  21. 0 • Prepaid Adjustment 3-2

  22. 0 • Unearned Fees Adjustment 3-2 The Unearned Fees account had a balance before adjustment of $23,676. Assume the amount of unearned fees at the end of the year is $7,388.

  23. 0 • Unearned Fees Adjustment 3-2

  24. 0 • Unearned Rent Adjustment 3-2 On August 1, Smith Company received $6,900 for 12 months rent. Journalize the adjusting entry for rent earned through December 31.

  25. 0 • Unearned Rent Adjustment 3-2

  26. 0 • Depreciation Expense 3-2 The estimate for depreciation on equipment for the current year is $1,820.

  27. 0 • Depreciation Expense 3-2

  28. 0 3-4 Objective 4 Prepare an adjusted trial balance.

  29. 0 3-4 The purpose of the adjusted trial balance is to verify the equality of the total debit balances and total credit balances before the financial statements are prepared.

  30. 0 Accounting Cycle • Transactions are analyzed and recorded in journal • Post Transaction from the Journal to the General Ledger • Prepare the Unadjusted Trial Balance • Adjustment data is gathered & Analyzed balance.

  31. 0 Accounting Cycle, cont • Optional end-of-period worksheet • Record Adjusting Entries • Prepare the Adjusted Trial Balance • Prepare Financial Statements balance. • Record Closing Entries & Post • Prepare a Post Closing Trial Balance

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