1. Adjusting the Accounts
Chapter 4
Adjusting the Accounts

2. Guidelines to Report Revenue and Expenses
Time Period Assumption
Economic life of business
can be divided into
artificial time periods
Revenue Recognition
Principle
Revenue recognized in
the accounting period in
which it is earned
Matching Principle
Expenses matched with
revenues in the period
when efforts are expended
to generate revenues

3. Depreciation Entry: PREPAYMENT ASSET EXPENSE Cost of Truck $15,000
2008
2009
2010
1/1/08
12/31/08
12/31/09
12/31/10
Entry:
Truck ,000
Cash ,000
Depreciation
Expense
5,000
ASSET
Accumulated
Depreciation
5,000
Depreciation
Expense
5,000
EXPENSE
Accumulated
Depreciation
10,000
CONTRA ASSET
Depreciation
Expense
5,000
Statement Presentation:
Balance Sheet
Asset
Truck
$15,000
Contra Asset
Less: Accum. Depr.
5,000
10,000
15,000
Book Value
$10,000
$ 5,000 $
Accumulated
Depreciation
15,000

4. Depreciation Year Calculation Annual Depreciation Expense
Truck – cost $10,000, useful life 5 years, and salvage value is 0. Calculate the Annual Depreciation Expense, Accumulated Depreciation and Book Value using the below table
Year
Calculation
Annual Depreciation Expense
Accumulated Depreciation
Book Value 1
10,000-0/5
2,000
8,000 2
4,000
6,000 3 4 /5 5
10,000

5. Prepayment Relationships
PREPAYMENTS
Benefits More Than One
Accounting Period
RECORD AS ASSET
RECORD AS LIABILITY
Prepaid Insurance
1,200
Cash
(Acquired one year policy)
Cash
6,000
Unearned Rent
(Received one year’s rent)
Initial
Entry
Insurance Expense
100
Prepaid Insurance
(One month expired)
Unearned Rent
500
Rent Revenue
(One month earned)
Adjusting
Entry
Benefits Consumed or
Earned in Current Period

6. Prepayment Relationships (continued)
Account Effects:
Balance Sheet
Prepaid Insurance
Unearned Rent
1,200
100
500
6,000
Bal. 1,100
Bal. 5,500
Income Statement
Insurance Expense
Rent Revenue

7. Accrual Relationships
ACCRUALS
Expense or Revenue
Not Yet Recorded
RECORD EXPENSE
RECORD REVENUE
Salaries Expense
500
Salaries Payable
(Accrued salary owed)
Accounts Receivable
1,000
Service Revenue
(Accrued revenue for services
provided)
Adjusting
Entry
Salaries Payable
500
Cash
(Paid salaries)
Cash
1,000
Accounts Receivable
(Collected account receivable)
Subsequent
Entry

8. Examples of Adjusting Entries
Instructions: For each entry indicate the name of the account
debited and the account credited.
Adjusting Entry
Account Debited
Account Credited
1. To record expired rent which
had been prepaid
2. To record supplies used
during the period
3. To record depreciation on
furniture
4. To record unearned revenue
that has been earned
5. To record salary owed but
not paid
6. To record rent earned but
not recorded.

9. Examples of Adjusting Entries (continued)
Answer:
Account
Debited
Credited
1. Rent Expense
Prepaid Rent
2. Supplies Expense
Supplies
3. Depreciation Expense
Accumulated Depreciation
4. Unearned Revenue
Revenue
5. Salary Expense
Salary Payable
6. Rent Receivable
Rent Revenue

10. Posting of Adjusting Entries
The following unadjusted accounts and related balances are provided at September 30:
Accounts Receivable……………………………….
$ 2,400
Supplies……………………………………………..
1,200
Salary Payable……………………………………..
-0-
Unearned Revenue………………………………..
500
Revenue……………………………………………..
15,000
Salary Expense……………………………………..
2,100
Depreciation Expense……………………………..
Accumulated Depreciation………………………..
3,000
Instructions: Open T-accounts and post the adjusting entries indicated from the following data:
Supplies on hand, $200.
Revenue earned but not accrued, $900.
Unearned revenue earned but not recorded, $400.
Salary owed to employees, $700.
Depreciation of $200 is recognized.

11. Accumulated Depreciation
Supplies on hand, $200.
Revenue earned but not accrued, $900.
Unearned revenue earned but not recorded, $400.
Salary owed to employees, $700.
Depreciation of $200 is recognized.
Accounts Receivable
Supplies
Salary Payable
2,400
1,000
(a) 1,000
-0-
(b)
(d) 700
3,300
200
700
Unearned Revenue
Supplies Expense
Salary Expense
(c)
500
2,100
(a) 1,000
(d)
100
2,800
Revenue
Depreciation Expense
Accumulated Depreciation
15,000
3,000
(b)
(e)
(e)
(c)
3,200
16,300

12. Posting of Adjusting Entries (continued)
Accounts Receivable
Supplies
Salary Payable
2,400
1,000
(a) 1,000
-0-
(b)
(d) 700
3,300
200
700
Unearned Revenue
Supplies Expense
Salary Expense
(c)
500
2,100
(a) 1,000
(d)
100
2,800
Revenue
Depreciation Expense
Accumulated Depreciation
15,000
3,000
(b)
(e)
(e)
(c)
3,200
16,300

13. Types of Adjusting Entries
Type of Adjustment
Reason for Adjustment
Account Balances Before Adjustment
Adjusting Entry
1. Prepaid Expenses
(a) Prepaid expenses originally recorded in asset accounts before have been used
Assets Overstated
Expenses Understated
Dr. Expenses
Cr. Assets
2. Unearned Revenues
(b) Unearned revenues initially recorded in liability accounts before have been earned
Liabilities Overstated
Revenues Understated
Dr. Liabilities
Cr. Revenues
3. Accrued Revenues
(c) Revenues earned but not yet received in cash or recorded
Assets Understated
Dr. Assets
4. Accrued Expenses
(d) Expenses incurred but not yet paid in cash or recorded
Liabilities Understated
Cr. Liabilities
Each adjusting entry affects a balance sheet
account and an income statement account.

14. Review Chapter Concepts
Topic Applied
Results
Justification
1. Time Period Assumption
Economic life of business is divided into time periods.
To provide information to prepare financial statements and tax return
2. Revenue Recognition
Revenue is recorded in period earned. Requires adjusting entries.
To record assets or decreases in liabilities and proper reporting of revenue earned.
3. Matching Principle
Record expenses in the period they occur. Requires adjusting entries.
To record liabilities or use of assets and expenses incurred in earning revenues.
4. Accrual Basis Accounting
Applies revenue recognition principle, matching principle, and time period assumption.
To record revenue when earned and expenses when incurred.