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. Supplies
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
Used up 1,500
Supplies exp $1500
Supplies $1500
Try example 1

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 $ 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 ,000
Fees earned ,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