The Adjusting Process

1. The Adjusting Process ACG 2021 Chapter 3

2. Accounting period concept: • Cash basis • Revenues and expenses are reporting the income statement in the period in which cash is received • Accrual basis • Revenues are reported in the income statement in the period they are earned • Revenue recognition concept • Matching concept

3. Adjusting Process • The updating of accounts prior to the preparation of financial statements • Adjusting entries

4. Adjusting Process • Effect income statement account and at least one balance sheet accounts • Debit expense • Credit asset/liabilities

5. Types of Accounts requiring adjustment • Prepaid expenses • Deferred expenses – or prepaid expenses – are items that have been initially recorded as assets but are expected to become expenses over time or through the normal operations of the business. • Supplies and prepaid insurance

6. Types of Accounts requiring adjustment • Unearned revenues • Deferred revenues or unearned revenues: are items that have been initially recorded as liabilities but are expected to become revenues over time or through the normal operations of the business. These are deposits by customers for work to be done in the future. • Unearned rent

7. Types of Accounts requiring adjustment • Accrued revenues: • Accrued Revenues or Accrued Assets – some revenues are only recorded when cash is received. At the end of the accounting period, there may be items of revenues that have been earned but have not been recorded

8. Types of Accounts requiring adjustment • Accrued expenses • Accrued expenses or accrued liabilities – are expenses that have been incurred but have not been recorded in the accounts. • Wages payable

9. For example: the general ledger shows a balance in the supplies account of $2,000. Inventory shows $500 of supplies still on hand Supplies Balance $2,000 Inventory 500 Used up 1,500 Supplies exp $1500 Supplies $1500 Try example 1 Supplies

10. Example 1 • the general ledger shows that the balance in the supplies account is $4,000. An inventory is conducted of supplies and it is found that only $2,500 of supplies is still on hand. Record the adjusting entry for the use of supplies.

11. Prepaid insurance • The G/L shows the balance are $6,000. The policy was purchased on May 1st for 12 months. Record the adjusting entry on Dec 31 for insurance expired. • $6,000/12 = 500 per month • May to Dec = 8 months x $500 = • $4,000 is expired

12. Prepaid insurance • Insurance exp $4,000 • Prepaid insurance $4,000 • Try example 2

13. Example 2: • the general ledger shows that the balance in the prepaid insurance account is $12000. The policy was purchased on Aug 1st for 12 months. Record the adjusting entry for the insurance expired.

14. Deferred revenues or unearned revenues • Items that have been initially recorded as liabilities but are expected to become revenues over time • Unearned fees – liability account

15. Unearned fees • G/L shows that the balance in the unearned fees account is $6,000. A review of the entries shows that the balance should be $2,000. • Balance $6,000 • Should be 2,000 • Fees earned 4,000

16. Unearned Fees Entry • Unearned fees $4,000 • Fees earned $4,000 • Try example 3:

17. Example 3 • the general ledger shows that the balance in the unearned fees account is $7,000. The balance should be $1,000. Record the adjusting entry.

18. Accrued expense • Expenses that have been incurred by have not been recorded in the accounts • Wages

19. Accrued wages • Wages are paid on the second and fourth Fridays for the two week period. Payments were $950 on Dec 13 and $950 on Dec 27. The wages for Monday through Thursday is $250 Record the wages due. • Wages expense $250 • Wages Payable $250

20. Example 4: • Wages $5,000 per week. Dec 31 falls on Wed. • Wages expense $3,000 • Wages payable $3,000

21. Accrued revenue • Revenues not billed to customers $2,500 • Accounts receivable $2,500 • fees earned $2,500

22. Fixed Assets • Physical resources that are owned by a business • Depreciation • Reduction in the value of an asset due to its use. • Depreciation expense – one year reduction • Accumulation depreciation: contra asset showing lifetime reductions • Credit – increases the account

23. Depreciation Expense • Depreciation expense $1,000 • Accumulated depreciation 1,000

24. Book Value Cost of the asset - Accumulated depreciation

25. Accounting Cycle • After the adjusting entries are recorded in the journal and posted to the general ledger, an adjusted trial balance is prepared. • Followed by financial statements