The Adjusting Process ACG 2021 Chapter 3

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

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

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

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

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

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

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

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

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.

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

Prepaid insurance Insurance exp $4,000 Prepaid insurance $4,000 Try example 2

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.

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

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

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

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.

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

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

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

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

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

Depreciation Expense Depreciation expense $1,000 Accumulated depreciation 1,000

Book Value Cost of the asset - Accumulated depreciation

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