Adjusting the Accounts

Time period assumption Accountants divide the economic life of a business into artificial time periods. As a result, net income or loss could be get for each period. . . . . . Jan. Feb. Mar. Apr. Dec. Generally a month, a quarter, or a year. Also known as the “Periodicity Assumption”

Recognizing Revenues and Expenses Revenue Recognition Principle Companies recognize revenue in the accounting period in which it is earned regardless the actual collection of cash. In a service enterprise, revenue is considered to be earned at the time the service is performed. Matching Principle It dictates that efforts (expenses) be matched with accomplishments (revenues). According to this principle: Match expenses with revenues in the period when the company makes efforts to generate those revenues.

Recording Process (continued) (4) Adjusting Entries * Adjusting entries: are entries made at the end of the accounting period to determine revenues & expenses related to current accounting period , to insure that revenue recognition and matching principles are followed and to prepare the Financial Statements. Types of Adjusting Entries

Adjusting Entries: (1) “Office supplies” Represents short term asset such as paper, envelopes, and printer cartridges. when using supplies, the used supplies is converted to expense called supplies expense. Entries of supplies:

Required: 1) Prepare journal entry on October 5. After getting the supplies used (supplies expense), the following adjusting entry is made:- Example (1): on October 5 ,Pioneer Advertising Agency purchased office supplies costing $2,500 on account. An inventory count on October 31 reveals that $1,000 of supplies are still on hand (unused). Required: 1) Prepare journal entry on October 5. 2) Prepare Adjusting entry on October 31. journal entry Oct . 5 Supplies 2,500 AP 2,500 2) Adjusting entry Used Supplies = $ 2500 - $ 1000 = $ 1500 Oct. 31 Supplies expense 1,500 Supplies 1,500

Adjusting Entries:“Office supplies”

Adjusting Entries: (2) “Prepaid Expenses” Cash paid in advance for services will be received later. Such as: Prepaid insurance , prepaid rent. Payment of cash in advance is recorded as an asset because service or benefit will be received in the future.

Adjusting Entries:“Prepaid Expenses” Entries of Prepaid Expenses:

Adjusting Entries:“Prepaid Expenses”

Adjusting Entries:“Prepaid Expenses” Example (2) : On November 1, ABC Agency paid rent of $600 in advance for a one-year period. Required: 1) Prepare Journal entry on November 1 2) Prepare Adjusting entry on December 31. 1) Journal entry Nov. 1 Prepaid rent 600 Cash 600 2) Adjusting entry Rent expired during (Nov.1 – Dec. 31) = $ 600 / 12 * 2 = $ 100 Dec. 31 Rent expense 100 Prepaid Rent 100

Adjusting Entries: (3) “Depreciation” Buildings, Equipment, and Trucks (long-lived assets) are recorded as assets in the year acquired at their original costs. Depreciation: Is the process of allocating the cost of depreciable assets over its estimated useful life. All fixed assets subject to depreciation except land (it has unlimited useful life). Depreciation amount depended on 3 factors: 1- Cost of fixed asset. 2- Salvage value  selling price of fixed asset at its useful life end. 3- the estimated useful life.

Adjusting Entries: “Depreciation”

Adjusting Entries: “Depreciation” Ex: At April 1, 2010 Building was obtained at $27,000 , expected salvage value was $3,000 , useful life was 10 years. Required: 1- Prepare adjusting entry at Dec. 31, 2010? 2- Show the effects on the financial statements at Dec. 31, 2010 3- Prepare adjusting entry at Dec. 31, 2011? 4- Show the effects on the financial statements at Dec. 31, 2011

Adjusting Entries: “Depreciation”

Adjusting Entries: “Depreciation”

Ex. :

Adjusting Entries: (4) “Accrued Expenses” (Continued) Adjusting Entries: (4) “Accrued Expenses” Accrued (payable) Expenses Expenses incurred but not yet paid in cash or recoded, Or service received without paying cash. An adjusting entry serves two purposes: (1) It records the obligations, and (2) It recognizes the expenses.

Adjusting Entries : (5) “Unearned Revenues” When a service is performed, the company makes an adjusting entry to record the revenue that has been earned and to show the liability that decreases. The adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.

Adjusting Entries :“Unearned Revenues” Example (1) At September 1, 2011 Business received $12,000 in advance for service to be rendered during 6 months. Required: 1- Prepare journal entry at September 1 ? 2- Prepare adjusting entry at September 30 ? 3- Prepare adjusting entry at December 31 ?

Adjusting Entries :“Unearned Revenues”

Adjusting Entries :“Unearned Revenues” Example (2) On October 1, Pioneer Consulting Agency received $1,200 in advance from R. Knox for consulting services expected to be completed by December 31. On October 31, Analysis reveals that the company earned $400 of those fees in October. Required, (1) Prepare Journal entry on October 1. (2) Prepare adjusting entry on October 31. (1) Journal entry : Oct . 1 Cash 1200 Unearned service revenue 1200 (2) Adjusting entry : Service revenue is given by $ 400 Oct. 31 Unearned service revenue 400 Service revenue 400

Adjusting Entries for: (6) “Accrued Revenues” Accrued (Receivable) Revenues Represent service rendered (revenue earned) without collecting of cash. Or, revenues earned but not yet received in cash or recorded.

Adjusting Entries: “Accrued Revenues” Example : At Dec. 31, 2011 service rendered by $15,000 not yet received or recorded. (earned $15,000 for services that had not been recorded). Required: 1- Prepare adjusting entry at December 31. 2- Show the effects on financial statements.

EX. Neosho River Resort opened for business on June 1 with eight air-conditioned units. Its trial balance before adjustment on August 31 is as follows:   Other data: 1. Insurance expires at the rate of $400 per month. 2. A count on August 31 shows $600 of supplies on hand. 3. Annual depreciation is $6,000 on cottages and $2,400 on furniture. 4. Unearned rent revenue of $4,100 was earned prior to August 31. 5. Salaries of $400 were unpaid at August 31. 6. Rentals of $1,000 were due from tenants at August 31. (Use Accounts Receivable.) Instructions Journalize the adjusting entries on August 31 for the 3-month period June 1–August 31.  

(5) The Adjusted Trial Balance *After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance). Its purpose is to prove the equality of debit balances and credit balances in the ledger and to prepare the Financial Statements. * Adjusted trial balance is a list of accounts and their balances after the company has made all adjustments. To prepare the adjusted trial balance and financial statements, the following steps should be followed: - Preparing adjusting entries. - Post adjusting entries to their ledgers and compute the balances after adjustments (BAA). - Preparing adjusted trial balance. - Preparing financial statements.

The Adjusted Trial Balance Form:

Exercise The trial balance of Ragland Agency on March 31 , 2011 includes the following accounts before adjusting entries have been prepared:

An analysis of the accounts shows the following: a. Supplies on hand at March 31, $5,000 b. The prepaid rent for 2 years started at Jan. 1, 2011. c. The equipment is depreciated at $1,000 monthly. d. Accrued salaries at March 31 are $9,000 e. $8,000 of the unearned Service revenue has been earned. f. Services provided but not recorded total $6,000. Instructions 1) Prepare the adjusting entries at March 31 and post the adjusting entries, assuming that adjusting entries are made quarterly. 2) Prepare the adjusted trial balance at March 31 3) Prepare the financial statements for the quarter ended March 31  

(1) Adjusting entries at March 31 Date Account’s title & expl. Dr. Cr. March 31 Supplies expense Supplies 10,000 Rent expense Prepaid rent 1,500 Depreciation exp. Equip. Accumulated dep. Equip. 3,000 Salaries expense Salaries payable 9,000 Unearned Service revenue Service revenue 8,000 AR 6,000

Ragland Agency Adjusted Trial balance At March 31