NETA POWERPOINT PRESENTATIONS TO
ACCOMPANY
VOLUME 1
Accounting
Second Canadian Edition
BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER
Adapted by Sheila Elworthy
and Tana Kristjanson
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CHAPTER 3
The Adjusting Process
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The Adjusting Process
After studying this chapter, you should be able to:
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.
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1
Describe the nature of the
adjusting process.
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Under the accrual basis of
accounting, transactions and events
are reported in the income statement
in the period in which they occur.
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Under the cash basis of accounting,
revenues and expenses are reported
in the income statement in the
period in which cash is received or
paid.
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Revenue Recognition Principle
The accounting principle supporting
the reporting of revenues when they
are earned, regardless of when cash
is received, is called the revenue
recognition principle.
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Expenses
Expenses are also reported in the
same period that they occur. Net
income reflects the economic reality
of the business.
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The Adjusting Process
Under the accrual basis, at the end of the
accounting period some of the accounts
need updating for the following reasons:
1. Some expenses are not recorded daily.
2. Some revenues and expenses are
incurred as time passes rather than as
separate transactions.
3. Some revenues and expenses may be
unrecorded.
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The Adjusting Process
The analysis and updating of
accounts at the end of the period
before the financial statements are
prepared is called the adjusting
process.
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Types of Accounts Requiring
Adjustment
Prepaid expenses are the advance
payment of future expenses and are
recorded as assets when cash is paid.
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Exhibit 2 (cont.)
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Types of Accounts Requiring
Adjustment
Unearned revenues are the advance
receipt of future revenues and are
recorded as liabilities when cash is
received.
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Exhibit 3 (cont.)
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Types of Accounts Requiring
Adjustment
Accrued revenues are unrecorded
revenues that have been earned and
for which cash has yet to be received.
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Exhibit 4 (cont.)
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Types of Accounts Requiring
Adjustment
Accrued expenses are unrecorded
expenses that have been incurred
and for which cash has not been
paid.
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Types of Accounts Requiring
Adjustment
Depreciation expense represents the
“using up” of a long-term asset.
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Exhibit 6 (cont.)
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* To the contra account
EXAMPLE EXERCISE 3-1
Accounts Requiring Adjustment
Indicate with a Yes or No whether or not each
of the following accounts normally requires
an adjusting entry.
No a. Cash
Yes b. Prepaid Rent
Yes c. Wages Expense
FOLLOW MY EXAMPLE 3-1:
Yes* d. Office equipment
Yes e. Accounts Receivable
Yes f. Unearned Rent
Left click the mouse for the answers.
For Practice: PE 3-1
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EXAMPLE EXERCISE 3-2
Type of Adjustment
Classify the following items on the next slide
as (1) prepaid expense, (2) unearned
revenue, (3) accrued revenue, (4) accrued
expense, or (5) depreciable capital asset.
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FOLLOW MY EXAMPLE 3-2
Left click the mouse for the answers.
Type of Adjustment
a. Wages owed but not yet paid.
(4) Accrued expense
b. Supplies on hand.
(1) Prepaid expense
c. Office Equipment.
(5) Depreciable capital asset
d. Fees received but not yet earned.
(2) Unearned revenue
e. Fees earned but not yet received.
(3) Accrued revenue
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For Practice: PE 3-2
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2
Journalize entries for accounts
requiring adjustment.
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Prepaid Expenses
NetSolutions’ Supplies account has a
balance of $2,800 in the unadjusted
trial balance. Some of these supplies
have been used. On December 31, a
count reveals that $1,560 of supplies
are on hand.
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Supplies
Bal.
Adj. Bal.
2,800 Dec. 31
1,560
1040
1,240 Bal.
Dec. 31
Adj. Bal.
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Supplies
5050
0
1,240
1,240
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Prepaid Expenses Insurance
NetSolutions’ prepaid insurance
account has a balance of $2,400 for
12 months of insurance coverage.
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Insurance Expense
Prepaid Insurance
Bal.
Adj. Bal.
2,400 Dec. 31
2,200
200 Dec. 31
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200
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EXAMPLE EXERCISE 3-3
Adjustment for Prepaid Expense
The prepaid insurance account had a
beginning balance of $7,500 and was debited
for $3,200 of premiums paid during the year.
Journalize the adjusting entry required at the
end of the year, assuming the amount of
unexpired insurance related to future periods
is $3,500.
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FOLLOW MY EXAMPLE 3-3
Adjustment for Prepaid Expense
Insurance Expense…………………….
7,200
Prepaid Insurance…………………
7,200
Insurance expired ($7,500 + $3,200 − $3,500).
For Practice: PE 3-3
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Unearned Revenues
NetSolutions received $360 on
December 1 for three months’ rent.
At year-end, the Unearned Rent
account has a balance of $360.
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Rent Revenue
Unearned Rent
Dec. 31
120 Bal.
Adj. Bal.
360
240
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120
Dec. 31
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EXAMPLE EXERCISE 3-4
Adjustment for Unearned Revenues
The balance in the unearned fees account,
before adjustment at the end of the year, is
$55,700. Journalize the adjusting entry
required if the amount of unearned fees at
the end of the year is $26,400.
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FOLLOW MY EXAMPLE 3-4
Adjustment for Unearned Revenues
Unearned Fees…………………………….
Fees Earned…………………………….
Fees earned ($55,700 – $26,400).
29,300
29,300
For Practice: PE 3-4
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Accrued Revenues
NetSolutions signed an agreement
with Dankner Co. on December 15 to
provide services at $20 per hour. As
of December 31, NetSolutions had
provided 25 hours of assistance.
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EXAMPLE EXERCISE 3-5
Adjustment for Accrued Revenues
At the end of the current year, $13,680 of
fees have been earned but have not been
billed to clients.
Journalize the adjusting entry to record the
accrued fees.
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FOLLOW MY EXAMPLE 3-5
Adjustment for Accrued Revenues
Accounts Receivable............................ 13,680
Fees Earned .................................... 13,680
Accrued fees.
For Practice: PE 3-5
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Accrued Expenses
NetSolutions pays it employees
biweekly. During December,
NetSolutions paid wages of $950 on
December 12 and $1,200 on
December 26. As of December 31,
NetSolutions owes $250 of wages to
employees for Monday, Tuesday, and
Wednesday.
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The journal entry for the payment of wages on
January 9 is shown below.
After
posting
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EXAMPLE EXERCISE 3-6
Adjustment for Accrued Expense
First Realty Co. pays weekly salaries of
$12,500 on Friday for a five-day week ending
on that day.
Journalize the necessary adjusting entry at
the end of the accounting period, assuming
that the period ends on Thursday.
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FOLLOW MY EXAMPLE 3-6
Adjustment for Accrued Expense
Salaries Expense…………………………..
10,000
Salaries Payable……………………
10,000
Accrued salaries [($12,500/5 days) × 4 days].
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Capital Assets
Capital Assets are physical resources
that are owned and used by a
business and are permanent or have
a long life.
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Depreciation
As time passes, a capital asset loses
its ability to provide useful services.
This decrease in usefulness is called
depreciation. All capital assets,
except land, depreciate.
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2
Normal titles for capital asset accounts and
their related contra asset accounts are as
follows:
Capital Asset
Land
Buildings
Store Equipment
Office Equipment
Contra Asset
None—Land is not amortized
Accumulated Depreciation—
Buildings
Accumulated Depreciation—Store
Equipment
Accumulated Depreciation—Office
Equipment
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Depreciation
NetSolutions has calculated the
amount of office equipment
depreciation at $50. The equipment
balance is $1,800.
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NetSolutions’ balance sheet would
show office equipment at cost, less
accumulated amortization.
Carrying
Value
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EXAMPLE EXERCISE 3-7
Adjustment for Depreciation
The estimated amount of depreciation on
equipment for the current year is $4,250.
Journalize the adjusting entry to record the
depreciation.
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FOLLOW MY EXAMPLE 3-7
Adjustment for Depreciation
Depreciation Expense............................ 4,250
Accumulated Depreciation—
Equipment …….................................. 4,250
Depreciation on equipment.
For Practice: PE 3-7
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EXAMPLE EXERCISE 3-8
Effect of Omitting Adjustments
For the year ended December 31, 2015, Sulek
Construction Co. mistakenly omitted
adjusting entries for (1) $9,200 of unearned
revenue that was earned, (2) earned revenue
that was not billed of $13,300, and (3)
accrued wages of $3,100. Indicate the
combined effect of the errors on (a) revenues,
(b) expenses, and (c) net income for the year
ended December 31, 2015.
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FOLLOW MY EXAMPLE 3-8
Effect of Omitting Adjustments
a. Revenues were understated by $22,500
($9,200 + $13,300).
b. Expenses were understated by $3,100.
c. Net income was understated by $19,400
($22,500 − $3,100).
For Practice: PE 3-8
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3
Summarize the adjustment
process.
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Exhibit 10 (cont.)
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4
Prepare an adjusted trial
balance.
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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.
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EXAMPLE EXERCISE 3-9
Effect of Errors on Adjusted Trial Balance
Consider each of the following errors on the
next slide individually, and indicate whether
the error would cause the adjusted trial
balance totals to be unequal. If the error
would cause the adjusted trial balance totals
to be unequal, indicate whether the debit or
credit total is higher and by what amount.
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EXAMPLE EXERCISE 3-9
Effect of Errors on Adjusted Trial Balance
a. The adjustment for accrued fees of $5,340
was journalized as a debit to Accounts
Payable for $5,340 and a credit to Fees
Earned of $5,340.
b. The adjustment for amortization of $3,260
was journalized as a debit to Amortization
Expense for $3,620 and a credit to
Accumulated Amortization for $3,260.
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FOLLOW MY EXAMPLE 3-9
Effect of Errors on Adjusted Trial Balance
a. The totals are equal even though the debit
should have been journalized to Accounts
Receivable, not to Accounts Payable.
b. The totals are unequal. The debit total is
higher by $360 ($3,620 – $3,260).
For Practice: PE 3-9
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The End
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