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1 Chapter 3 Adjusting ProcessChapter 3 the Adjusting ProcessLearning Objective 1 Describe the nature of the adjusting process.Nature of the Adjusting Process General concept: revenues are earned when services provided.Customer requireserviceCash receivedService providedIt Is Not Related To Cash Payments And Cash Receipts.The accounting period concept : Requires that revenues and expenses be reported inthe proper period. Under the cash basis of accounting, revenues and expenses are reported onthe income statement in the period in which cash is received or paid. Under the accrual basis of accounting, revenues are reported on theincome statement in the period in which they are earned. Thus, some of theaccountsT. Nora Aldawoodneedupdatingattheendoftheaccountingperiod.
2 Chapter 3 Adjusting ProcessThe Adjusting Process The analysis and updating of accounts at the end of the period before thefinancial statements are prepared is called the adjusting process. The journal entries that bring the accounts up to date at the end of theaccounting period are called adjusting entries.Types of Accounts Requiring Adjustment1) Prepaid expenses are the advance payment of future expenses and arerecorded as assets when cash is paid.2) Unearned revenues are the advance receipt of future revenues and arerecorded as liabilities when cash is received.3) Accrued revenues are unrecorded revenues that have been earned andfor which cash has yet to be received.4) Accrued expenses are unrecorded expenses that have been incurred andfor which cash has not yet been paid.PE 3-1A page 131PE 3-2A page 131PE 3-2B page 131T. Nora Aldawood
3 Chapter 3 Adjusting ProcessLearning Objective 2 Journalize entries for accounts requiring adjustmentNetSolutionsUnadjusted Trail BalanceDecember 31, 2011Cash Account receivable . Supplies Prepaid insurance Land Office equipment Account payable Unearned rent Chris Clark, Capital Chris Clark, Drawing Fees earned Wages expense Rent expense Utilities expense Supplies expense Miscellaneous expense 16,34042,600A. Prepaid ExpensesThe entries during the period (from Ch2)C. On November 10, Net Solutions purchased supplies on account for 1,350.Supplies1,350Nov.10Account payable1,350G. Net Solutions purchased 1,350 of supplies on November 10. Chris Clark determinedthat the cost of supplies on hand on November 30 was 550.Supplies expenses800Nov. 30supplies800T. On December 23, Net Solutions paid 1,450 for supplies.SuppliesDec. 23CashT. Nora Aldawood1,4501,450
4 Chapter 3 Adjusting ProcessNet Solutions’ supplies account has a balance of 2,000 on the unadjusted trialbalance. Some of these supplies have been used. On December 31, a countreveals that the amount of supplies on hand is 760.Supplies (balance on trial balance) 2,000Supplies on hand, December 31– 760Supplies usedADec. 31 1,240Supplies ExpenseSuppliesSupplies used (2,000 – 760)1,2401,240Prepaid InsuranceI. On December 1, NetSolutions paid a premium of 2,400 for an insurance policy for liability,theft, and fire. The policy covers a one-year period.Prepaid insurance2,400Dec. 1Cash2,400The debit balance of 2,400 in NetSolutions’ prepaid insurance accountrepresents the December 1 prepayment of insurance for 12 months.Dec. 31Insurance ExpensePrepaid insuranceInsurance expired (2,400/12)200200Hints!!!!!1. All adjusting entries are prepared at the end of the period.2. Cash is never, never, never a part of an adjusting entry.3. Each adjusting entry must affect an expense (Dr.) and asset orliability (Cr.) OR a revenue (Cr.) and an asset or liability (Dr.)T. Nora Aldawood
5 Chapter 3 Adjusting Process1) On Dec1, 2012, ABC Co. purchased an insurance policy for 10,000 thatcovers a 5 months period. Journalize the entry? Prepare the adjustment entry at Dec 31, 2012.2) On Dec 1, 2012 ABC Co. paid one of its employees an advance salary of 4,000 for 4 months. Journalize the entry?Prepare the adjustment entry at Dec 31, 2012.3) On Dec 1, 2012, ABC Co. paid a 2 months advance rent of 10,000 fora lab. Journalize the entry?Prepare the adjustment entry at Dec 31, 2012.T. Nora Aldawood
6 Chapter 3 Adjusting Process4) On Nov 6, 2012. ABC Co. purchased supplies on account for 2,000 onDec 31, 2012. Records show that 1,350 of supplies were used. Journalize the purchasing transaction. Prepare the adjusting entry at the end of the period.1Nov. 6SuppliesAccount payable2.0002Dec. 31Supplies ExpenseSuppliesSupplies used (1.350)1.350PE 3-3A page 131T. Nora Aldawood2.0001.350
7 Chapter 3 Adjusting ProcessDepreciation Expense Fixed assets, or plant assets, are physical resources that are owned and used bya business and are permanent or have a long life. As time passes, a fixed asset loses its ability to provide useful services. Thisdecrease in usefulness is called depreciation. All fixed assets, except land, lose their usefulness and, thus, are said todepreciate. As a fixed asset depreciates, a portion of its cost should be recorded as anexpense. This periodic expense is called depreciation expense.Depreciation ExpenseL. On December 4, Net Solutions purchased office equipment on account from ExecutiveSupply Co. for 1,800.office equipment1,800Dec. 4Account payable1,800NetSolutions estimates the depreciation on its office equipment to be 50 forthe month of December.DateDec. 31T. Nora AldawoodDescriptionDepreciation ExpenseAccumulated Depreciation – office equipmentDebit50Credit50
8 Chapter 3 Adjusting Process1) ABC Co. purchased a car for 30,000 cash at Jul 1, 2010. The expecteddepreciation for the car is 1,250. Journalize the purchasing transaction. Journalize the adjusting entry at Dec 31, 2010.2) ABC Co. purchased a building for 300,000 on account at May 6, 2011.The depreciation cost 10,000. Journalize the purchasing transaction. Journalize the adjusting entry at Dec 31, 2011.PE 3-7A page 132T. Nora Aldawood
9 Chapter 3 Adjusting ProcessB. Unearned RevenuesK. On December 1, Net Solutions received an offer from a local retailer to rent the landpurchased on November 5. The retailer plans to use the land as a parking lot for its employeesand customers. Net Solutions agreed to rent the land to the retailer for three months, with therent payable in advance. Net Solutions received 360 for three months’ rent beginningDecember 1.CashDec. 1360unearned rent360The credit balance of 360 in Net Solutions’ unearned rent account representsthe receipt of three months’ rent on December 1 for December, January, andFebruary. At the end of December, one month’s rent has been earned.BDec. 31Unearned rentRent revenueRent earned (360/3 months)1201201) On the 1st of Nov, ABC Company received advance revenue of 5,000.This revenue was supposed to be received on monthly basis of 1,000. Journalize the purchasing transaction.Journalize the adjusting entry at Dec 31, 2011.2) As of Dec 31, 7,000 of the unearned revenue became earned. Journalize the adjusting entry at Dec 31, 2011.3) The unearned commissions account had a balance of 10,000 during theyear. At Dec 31, the amount of unexpired commissions related to futureperiods is 4,220. Journalize the adjusting entry at Dec 31, 2011.4) The balance in the unearned fees account, before adjustment at the endof the year, is 44,900. The amount of unearned fees at the end ofthe year is 22,300. Journalize the adjusting entry at Dec 31, 2011.T. Nora Aldawood
10 Chapter 3 Adjusting ProcessPE 3-4A page 131C. Accrued RevenuesNetSolutions signed an agreement with Danker Co. on December 15 to provideservice to Danker. As of December 31, NetSolutions had provided 500 ofservices. The revenue will be billed on January 15.CDec. 31Accounts receivableFees earnedAccrued fees (25 hrs. * 20)500500PE 3-5A page 1311) At the end of 2013, 13,680 of fees have been earned but have notbilled to clients. Journalize the adjusting entry at Dec 31, 2011.D. Accrued WagesOn 31 Dec, the amount of accrued wages was 250.DDec. 31Wages expenseWages payableAccrued wagesPE 3-6A page 132T. Nora Aldawood250250
11 Chapter 3 Adjusting ProcessLearning Objective 3 Summarize the adjustment process.Adjusting Entries Adjusting Entries—NetSolutionsJournalDateADec. 31Dec. 31Dec. 31BCDDec. 31Dec. 31Dec. 31T. Nora AldawoodDescriptionSupplies ExpenseSuppliesSupplies used (2,000 – 760)Insurance ExpensePrepaid insuranceInsurance expired (2,400/12)Debit1,240200Depreciation ExpenseAccumulated Depreciation – office equipmentDepreciation on office equipment50Unearned rentRent revenueRent earned (360/3 months)120Accounts receivableFees earnedAccrued fees (25 hrs. * 20)500Wages expenseWages payableAccrued wages250Credit1,24020050120500250
12 Chapter 3 Adjusting ProcessLedger with Adjusting EntriesT al. 2,0651,3501,450Bal. 2,0008001,240760Land20,000Bal. 20,000Bal.Miscellaneous expenses275180455T. Nora AldawoodFees earned7,5003,1001,7502,8701,12050016,840 Bal.Unearned Rent120360240 Bal.SuppliesBal.Chris Clark, Capital25,00025,000 Bal.Account payable9501,3504001,800900900 Bal.Wages expenses2,1259501,200250Bal. 4,525Rent expenses800800Bal. 1,600
13 Chapter 3 Adjusting ProcessSupplies expensesUtilities expenses8001,240Bal. 2,040Bal.Chris Clark, Drawing2,0002,000Bal. 4,000Prepaid insurance2,400Bal. 2,200Account receivables6501,7501,120500Bal. 2,7201,800Bal.Bal.120120 Bal.Bal.T. Nora Aldawood1,800Accumulated Depreciation – officeequipment5050 Bal.Rent revenueInsurance expense200200200office equipmentWages payable250250450310225985Bal.Depreciation Expense5050
14 Chapter 3 Adjusting ProcessLearning Objective 4 Prepare an adjusted trial balance.Adjusted Trial Balance The purpose of the adjusted trial balance is to verify the equality of thetotal debit and credit balances before the financial statements areprepared.NetSolutionsAdjusted Trail BalanceDecember 31, 2011Cash Account receivable . Supplies Prepaid insurance Land Office equipment Accumulated depreciation – office equipment Account payable Wages Payable Unearned rent Chris Clark, Capital Chris Clark, Drawing Fees earned Rent Revenue Wages expense Rent expense Depreciation Expenses Utilities expense Supplies expense Insurance expense Miscellaneous expense T. Nora 1,600509852,04020045543,40043,400
15 Chapter 3 Adjusting ProcessIllustrative Problem page 128PE 3-1A page 131PE 3-2A page 131PE 3-2B page 131PE 3-3A page 131PE 3-4A page 131PE 3-5A page 131PE 3-6A page 132PE 3-7A page 132EX 3-1 page 133PR 3-1A page 138PR 3-5A page 140&141T. Nora Aldawood
15 Chapter 3 Adjusting ProcessExpensesPrepaid ExpenseAdvance payment for future expenseAccrued ExpenseExpense has been incurredrecorded & not paid)recorded as assetsrecorded as Liabilities(NotJournal EntryPrepaid Expensexxxcashxxxpaid an expense in advanceNo entry has been recordedAdjusting EntryExpensexxxExpensexxxPrepaid expensexxxliability (payable)xxxadjustment for prepaid expenseadjustment for accrued expenseRevenuesUnearned RevenueAdvance receipt for future revenuesAccrued Revenueunrecorded revenue (has not receivedcash)recorded as Liabilitiesrecorded as assetsJournal Entrycashxxxunearned revenuexxxreceived cash for unearned revenueNo entry has been recordedAdjusting Entryunearned revenuexxxAsset (receivable)xxxrevenuexxxrevenuexxxadjustment for unearned revenueadjustment for accrued revenueDepreciation ExpenseDepreciation ExpensexxxAccumulated Depreciation – Fixed assetsxxxDepreciation on fixed assets
2 Chapter 3 Adjusting Process T. Nora Aldawood The Adjusting Process 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
