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
•
Supplies
• Try example 1
$1500
$1500
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
• Should be
• Fees earned
$6,000
2,000
4,000
Unearned Fees Entry
• Unearned fees
•
Fees earned
• Try example 3:
$4,000
$4,000
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
•
Wages Payable
$250
$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