Ch3 The Adjusting Process

The Adjusting Process
12e
PRINCIPLES OF FINANCIAL ACCOUNTING
24e
PRINCIPLES OF ACCOUNTING
2e
Chapter 3 ACCOUNTING PRINCIPLES

Using excel for Success
Prepared by: C. Douglas Cloud

Prepared
Professorby:
Emeritus
C. Douglas
of Accounting
Cloud
Professor
Pepperdine
Emeritus
University
of Accounting
Pepperdine University
©©2012
2012Cengage
Cengage Learning.
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use. Reeve Warren Duchac
Learning Objectives
1. Describe the nature of the adjusting

process.
2. Journalize entries for accounts requiring
adjustment.
3. Summarize the adjustment process.
4. Prepare an adjusted trial balance.
5. Describe and illustrate the use of vertical
analysis in evaluating a company’s
performance and financial condition.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 1

process.
Nature of the Adjusting Process
The accounting period concept requires

that revenues and expenses be reported in
the proper period.
Under the accrual basis of accounting,

revenues are reported on the income
statement in the period in which they are
earned.
The accounting concept supporting the

reporting of revenues when they are earned
regardless of when cash is received is
called the revenue recognition concept.
LO 1
The accounting concept supporting

reporting revenues and related expenses in
the same period is called the matching
concept, or matching principle.
LO 1
Under the cash basis of accounting,

revenues and expenses are reported on
the income statement in the period in
which cash is received or paid.
LO 1
Under the accrual basis, some of the

accounts need updating at the end of the
accounting period for the following reasons:
 Some expenses are not recorded daily.
 Some revenues and expenses are
incurred as time passes rather than as
separate transactions.
 Some revenues and expenses may be
unrecorded.
LO 1
The analysis and updating of accounts at

the end of the period before the financial
statements are prepared is called the
adjusting process.
LO 1
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 accounting
period are called adjusting entries.
EE 3-1
LO 1
Types of Accounts Requiring Adjustment
Prepaid expenses are the advance

payment of future expenses and are
recorded as assets when cash is paid.
LO 1
Prepaid Expenses
(continued)
LO 1
Prepaid Expenses
(concluded)
LO 1
Unearned revenues are the advance

receipt of future revenues and are recorded
as liabilities when cash is received.
LO 1
Unearned Revenues
(continued)
LO 1
Unearned Revenues
(concluded)
LO 1
Accrued revenues are unrecorded

revenues that have been earned and for
which cash has yet to be received.
LO 1
Accrued Revenues
(continued)
LO 1
Accrued Revenues
(concluded)
LO 1
Accrued expenses are unrecorded

expenses that have been incurred and for
which cash has not yet been paid.
LO 1
Accrued Expenses
(continued)
LO 1
Accrued Expenses
(concluded)
EE 3-2

process.
adjustment.
LO 2
Adjusting Entries
Unadjusted Trial Balance
for NetSolutions
NetSolutions
Unadjusted Trial Balance
December 31, 2011
LO 2
Adjusting Entries
LO 2
Prepaid Expenses
NetSolutions’ supplies account has a balance of

$2,000 on the unadjusted trial balance. Some of
these supplies have been used. On December 31, a
count reveals that the amount of supplies on hand
is $760.
Supplies (balance on trial balance) $2,000
Supplies on hand, December 31 – 760
Supplies used $1,240
LO 2
Prepaid Expenses
Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)
increase
decrease
LO 2
Prepaid Insurance
The debit balance of $2,400 in NetSolutions’

prepaid insurance account represents the
December 1 prepayment of insurance for 12
months.
LO 2
Prepaid Insurance

increase
decrease
LO 2
Impact of Omitting Adjusting Entries
EE 3-3
LO 2
Unearned Revenues
The credit balance of $360 in NetSolutions’

unearned rent account represents the receipt of
three months’ rent on December 1 for
December, January, and February. At the end
of December, one month’s rent has been
earned.
LO 2
Unearned Revenues

Assets = Liabilities + Owner’s Equity (Revenue)
increase
decrease
LO 2
Impact of Omitting Adjusting Entry
EE 3-4
LO 2
Accrued Revenues
NetSolutions signed an agreement with Danker

Co. on December 15 to provide services at a
rate of $20 per hour. As of December 31,
NetSolutions had provided 25 hours of services.
The revenue will be billed on January 15.
LO 2
Unearned Revenues

Assets = Liabilities + Owner’s Equity (Revenue)
increase increase
LO 2
EE 3-5
LO 2
Accrued Wages
LO 2
Accrued Wages
NetSolutions pays it employees biweekly.

During December, NetSolutions paid wages of
$950 on December 13 and $1,200 on December
27. As of December 31, NetSolutions owes $250 of
wages to employees for Monday and Tuesday,
December 30 and 31.
LO 2
Accrued Wages

increase increase
LO 2
Accrued Wages
NetSolutions paid wages of $1,275 on January 10.

This payment includes the $250 of accrued wages
recorded on December 31.
LO 2
EE 3-6
LO 2
Depreciation Expense
Fixed assets, or plant assets, are physical

resources that are owned and used by a
business and are permanent or have a long
life.
As time passes, a fixed asset loses its ability
to provide useful services. This decrease in
usefulness is called depreciation.
LO 2
All fixed assets, except land, lose their

usefulness and , thus, are said to depreciate.
As a fixed asset depreciates, a portion of its
cost should be recorded as an expense. This
periodic expense is called depreciation
expense.
LO 2
The fixed asset account is not decreased

(credited) when making the related
adjusting entry. This is because both the
original cost of a fixed asset and the
depreciation recorded since its purchase
are reported on the balance sheet. Instead,
an account entitled Accumulated
Depreciation is increased (credited).
Accumulated depreciation accounts are
called contra accounts, or contra asset
accounts.
LO 2
Normal titles for fixed asset accounts and

their related contra asset accounts are as
follows:
LO 2
NetSolutions estimates the depreciation on its

office equipment to be $50 for the month of
December.
LO 2

increase
increase
LO 2
The difference between the original cost of

the office equipment and the balance in the
accumulated depreciation—office
equipment account is called the book value
of the asset (or net book value). It is
computed as shown below.
Book Value of Asset = Cost of the Asset – Accumulated Depreciation of Asset
Book Value of Off. Equip. = Cost of Off. Equip. – Accum. Depre. of Office Equip.
Book Value of Off. Equip.= $1,800 – $50
Book Value of Off. Equip.= $1,750
LO 2
EE 3-7
EE 3-8
1. Describe the nature of the adjusting process.

adjustment.
LO 3
Summary of Adjustment Process
(continued)
LO 3
(continued)
LO 3
(continued)
LO 3
(continued)
LO 3
(concluded)
LO 3
Adjusting Entries
Adjusting Entries—NetSolutions
(continued)
LO 3
Adjusting Entries
Adjusting Entries—NetSolutions
(concluded)
LO 3
Ledger with Adjusting Entries
(continued)
LO 3
Ledger with
Adjusting
Entries─
NetSolutions
(continued)
LO 3
Ledger with
Adjusting
Entries─
NetSolutions
(continued)
LO 3
Ledger with
Adjusting
Entries─
NetSolutions
(concluded)

process.
adjustment.
LO 4
Adjusted Trial Balance
The purpose of the adjusted trial balance is

to verify the equality of the total debit and
credit balances before the financial
statements are prepared.
LO 4
Adjusted Trial Balance
Adjusted Trial
Balance
EE 3-9
LO 5

process.
adjustment.
5. Describe and illustrate the use of vertical
analysis in evaluating a company’s
performance and financial condition.
LO 5
Vertical Analysis
Comparing each item in a financial

statement with a total amount from the same
statement is referred to as vertical analysis.
LO 5
Vertical Analysis
$12,500
$187,500 = .067 or 6.7%
LO 5
Vertical Analysis
$3,000
= .02 or 2%
$150,000
EE 3-10
EE 3-10
The End
Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University
©©2012
2012Cengage
Cengage Learning.
Learning.All
All
Rights
Rights
Reserved.
Reserved.May
Maynot
notbebe
copied,
copied,
scanned,
scanned,
oror
duplicated,
duplicated,
ininwhole
wholeoror
ininpart,
part,
except
exceptfor
for
use
use
asas
permitted
permittedinina license
a license
distributed
distributedwith
witha certain
a certain
product
product
oror
service
service
oror
otherwise
otherwise
onon
a password-protected
a password-protected website
websitefor
for
classroom
classroom use.
use.

Ch3 The Adjusting Process

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Ch3 The Adjusting Process

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The Adjusting Process

PRINCIPLES OF FINANCIAL ACCOUNTING

Chapter 3 ACCOUNTING PRINCIPLES

Prepared by: C. Douglas Cloud

1. Describe the nature of the adjusting

1. Describe the nature of the adjusting

The accounting period concept requires

Under the accrual basis of accounting,

The accounting concept supporting the

The accounting concept supporting

Under the cash basis of accounting,

Under the accrual basis, some of the

The analysis and updating of accounts at

The analysis and updating of accounts at

Prepaid expenses are the advance

Unearned revenues are the advance

Accrued revenues are unrecorded

Accrued expenses are unrecorded

1. Describe the nature of the adjusting

NetSolutions’ supplies account has a balance of

Accounting Equation Impact

The debit balance of $2,400 in NetSolutions’

Accounting Equation Impact

The credit balance of $360 in NetSolutions’

Accounting Equation Impact

NetSolutions signed an agreement with Danker

Accounting Equation Impact

NetSolutions pays it employees biweekly.

Accounting Equation Impact

NetSolutions paid wages of $1,275 on January 10.

Fixed assets, or plant assets, are physical

All fixed assets, except land, lose their

The fixed asset account is not decreased

Normal titles for fixed asset accounts and

NetSolutions estimates the depreciation on its

Accounting Equation Impact

The difference between the original cost of

1. Describe the nature of the adjusting process.

1. Describe the nature of the adjusting

The purpose of the adjusted trial balance is

1. Describe the nature of the adjusting

Comparing each item in a financial

Prepared by: C. Douglas Cloud

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