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The Adjusting Process

Learn about the nature of the adjusting process in accounting, types of accounts requiring adjustment, and journalizing entries for adjustment. Includes examples and a summary of the adjustment process.

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The Adjusting Process

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  1. 3 The Adjusting Process Student Version

  2. 1 Describe the nature of the adjusting process. 3-2

  3. 1 Types of Accounts Requiring Adjustment Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid.

  4. 1 Types of Accounts Requiring Adjustment Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received.

  5. 1 Types of Accounts Requiring Adjustment Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received.

  6. 1 Types of Accounts Requiring Adjustment Accrued expenses are unrecorded expenses that have been incurred and for which cash has not been paid.

  7. 2 Journalize entries for accounts requiring adjustment. 3-7

  8. Summary of Basic Adjustments

  9. 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

  10. 760 2,040 2 Supplies Expense Supplies 14 55 Bal. 2,000 Bal. 800 Dec. 31 1,240 Dec. 31 1,240

  11. Effect of Omitting Adjustment

  12. 2 Prepaid Expenses The debit balance of $2,400 in NetSolutions’ Prepaid Insurance account represents the December 1 prepayment of insurance for 12 months.

  13. 2,200 2 Prepaid Insurance Insurance Expense 15 56 Dec. 31 200 Bal. 2,400 Dec. 31 200

  14. 2 Unearned Revenues The December 31 unadjusted trial balance of NetSolutions indicates a balance in the unearned rent account of $360.

  15. 2 Unearned Rent Rent Revenue 23 42 Dec. 31 120 Bal. 360

  16. Unearned Rent 23 240 Dec. 31 120 Bal. 360 Bal. 2 Rent Revenue 42 Dec. 31 120

  17. Effect of Omitting Adjustment

  18. 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.

  19. Bal. 2,720 2 Fees Earned Accounts Receivable 12 41 Bal. 2,220 Bal. 16,340 Dec. 31 500

  20. Bal. Bal. 2,720 16,840 2 Fees Earned Accounts Receivable 12 41 Bal. 2,220 Bal. 16,340 Dec. 31 500 Dec. 31 500

  21. Effect of Omitting Adjustment

  22. 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.

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

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

  25. 2 The journal entry for the payment of wages on January 10 is shown below. After posting

  26. Effect of Omitting Adjustment

  27. 2 NetSolutions estimates the depreciation on its office equipment to be $50 for the month of December.

  28. 2 Depreciation Expense Accum. Depr.—Office Equip. 19 53 Dec. 31 50

  29. 2 Depreciation Expense Accum. Depr.—Office Equip. 19 53 Dec. 31 50 Dec. 31 50

  30. 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

  31. 3 Summarize the adjustment process. 3-26

  32. 3 Exhibit 7 Adjusting Entries—NetSolutions (continued)

  33. 3 Exhibit 7 Adjusting Entries—NetSolutions (continued) .

  34. 4 Prepare an adjusted trial balance. 3-29

  35. 4 Exhibit 9 Adjusted Trial Balance—NetSolutions

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