Chapter 3 – The Adjusting Process
College Accounting
Name _________________________________
Accounting Concepts and Principles
1.
2.
3.
4.
Objective 1 -- Distinguish accrual accounting from cash-basis accounting
Accrual Accounting Versus Cash-Basis Accounting
_____________________________ records the effect of each transaction as it occurs.
Revenues are recognized when _________________ and expenses are recognized when _______________
_____________________________ records only cash receipts and cash payments. It ignores
receivables, payables, and depreciation.
Revenues are recognized when cash is _________________ and expenses recorded when cash is _______
Not recognized by _______________________
The Accounting Period
The basic accounting period is __________________. And all businesses prepare
_________________________________________.
Managers adopt an artificial period of time to evaluate performance
•
•
•
•
______________________________an accounting year that ends on a date other than December 31,
usually a low point in the business activity.
Some examples:
Wal-Mart -University or College--
Objective 2 – Applying the revenue and matching principles
The Revenue Principle
When is revenue recognized?
_____________________________________________________
_____________________________________________________
How much revenue should be recognized?
_____________________________________________________
Review: What does “recording” mean? (from chapter 2 concepts)
______________________________________________________________________
FYI—Which accounting method violates the Revenue Principle? __________________________ So, its not GAAP
The Matching Principle
Directs accountants to:
1. ______________________________________________________________________________
2. ______________________________________________________________________________
To match expenses against revenues means to ___________________________________________.
The goal is? ______________________________________________________
The Time-Period Concept
Ensures that __________________________________________________________________________.
This means that companies have to update all of their accounts at the end of the accounting period to
make sure all ______________________________ and all _________________________during the
period are reported in that period.
Example:
April 30
•
Salary Expense
Salary Payable
Accrued salary expense
900
900
This entry assigns salary expense to April (the month when the employee worked for the
company)
Without this entry, what happens to April’s expenses?
______________________________________________________________________
What about net income?
______________________________________________________________________
Adjusting the Accounts
Objective 3 – Make adjusting entries
At the end of the period, the accountant prepares the ______________________________________ .
The process begins with the ___________________________________________________________ .
If a trial balance omits the adjusting entries involving some revenue and expense accounts, it is said to
be what type of trial balance? _________________________________________________________
Accrual accounting requires adjusting entries (when?) ______________________________________ .
Adjusting entries assign revenues to the period when they are ________________________________
and expenses to the period when they are _______________________________________________ .
Adjusting entries also update the ______________________ and ______________________ accounts.
Adjustments are needed to properly measure two things:
1. ______________________________________________________________________________
2. ______________________________________________________________________________
Prepaids and Accruals
The two basic categories of adjustments are ___________________ and _________________________.
In a prepaid adjustment, the __________________________ occurs before an ____________________
is recorded.
Accrual adjustments are the opposite. An ________________________ records an _________________
before the cash payment.
Adjusting entries fall into five categories:
1. __________________________________________________________________________
2. __________________________________________________________________________
3. __________________________________________________________________________
4. __________________________________________________________________________
5. __________________________________________________________________________
Prepaid Expenses
Prepaid expenses are _________________________________________________________________
Examples: _________________________________________________________________________
Keep in mind: prepaid expenses are ____________________ NOT ____________________________ .
Prepaid Rent
A prepayment of rent creates an _________________ for the renter.
To record the payment of $1,000/month rent for 3 months:
April 1
Prepaid Rent
Cash
Paid rent in advance
3,000
3,000
Assuming this entry was posted to the ledger, the April 30 ledger and unadjusted trial balance would list
Prepaid Rent with a debit balance of $_____________. But is this the correct balance? ___________
At April 30, Prepaid Rent should be decreased for __________________________________________
__________________________________________________________________________________ .
This used-up portion is 1/3 of the prepayment.
Remember: An asset that has expired is a(n) _________________________.
So the adjusting entry would be:
April 30
Rent Expense
Prepaid Rent
To record rent expense
1,000
1,000
Supplies
Supplies are accounted for as __________________________________________________________ .
If $700 supplies are purchased, the transaction would be:
April 2
Supplies
Cash
Paid cash for supplies
700
700
The April 30 trial balance would list Supplies (asset) with a $700 ____________ balance. But the balance
sheet should NOT report $700 of supplies?
Why not? The cost of the supplies used during April should become ___________________________ .
How do you measure supplies expense? The businesses must count (or take inventory) of the supplies
on hand at the end of April.
In this example, the Asset available (purchased) is:
$700
Asset on hand (inventory taken) at the end of the month:
$600
Asset used during the period (Expense)
$100
The April 30 adjusting entry updates Supplies and records Supplies Expense for April:
April 30
Supplies Expense
Supplies
To record Supplies Expense
100
100
Depreciation
Plant assets are _____________________________________________________________________
__________________________________________________________________________________
Examples include ____________________________________________________________________ .
As on accountant said, “All assets except _______________ are on a march to the junkyard” because
they decline in ____________________________.
The allocation of a plant asset’s cost to expense is called _____________________________________ .
Land is an exception. We record ____________________________________________ for land.
Similarity to Prepaid Expenses
The concept of accounting for plant assets is the same as for a ________________________________ .
The major difference is _______________________________________________________________ .
Prepaid expenses expire within _________________________________, while plant assets remain
useful for several years.
If furniture is purchased on April 3 for $18,000, the following journal entry would be recorded:
April 3
Furniture
Cash
Purchased furniture
18,000
18,000
If the furniture is believed to have a useful life of 5 years and then have no value, depreciation can be
calculated by: (This method is called the _________________________________________________ ).
Cost of furniture / # of years of useful life = Annual depreciation
Example: $18,000 / 5 years
= $3600/year OR
$300/month ($3600/12 months in a year)
Depreciation Expense for the furniture for the month of April:
April 30
Depreciation Expense-furniture
Accumulated Depreciation-furniture
To record 1 month depreciation on furniture
300
300
The Accumulated Depreciation Account
Accumulated Depreciation is _________________ not furniture—because it is ___________________
____________________________________________________________________________
The Accumulated Depreciation account holds the __________________________________________
____________________________________________________________________________
Accumulated Depreciation is a _______________________________, which means an asset account
with a normal __________________________________.
A contra account has two main characteristics:

A contra account follows _________________________________________________

A contra account’s normal balance (debit or credit) is opposite __________________
_____________________________________________________________________
All contra asset accounts have _____________________ balances.
A business carries an accumulated depreciation account for each ______________________________ .
Book Value
Book Value of plant assets: (using furniture/depreciation example)
Furniture
Less: Accumulated depreciation (for April)
Book Value of the furniture
$18,000
-300
17,700
Accrued Expenses
Salary expenses for most businesses grow as employees work. This expense is said to _____________ .
Another accrued expense example is interest expense on a note payable. Interest accrues as
_______________________________.
Accrued expense refers to an expense the business has _____________________________________ .
An accrued expense always creates a ____________________________________________________ .
Companies do not make weekly journal entries to accrue expenses. Why not? ___________________
____________________________________________________________________________ .
Instead they wait until the ______________________________________________________ .
They make an ________________________________ to bring each expense (and the related
liability up-to-date for the _____________________________________________________________ .
Remember:
A prepaid expense is ___________________________________________________________
An accrued expense is __________________________________________________________
Accruing Salary Expense
If a business pays their employees two times a month (the 15th and the 30th), a monthly salary of $1,800
would be paid in two installments of $900 each. The April 15 entry:
April 15
Salary Expense
Cash
To pay salary
900
900
If the 30th fell on a weekend, “Pay Day” would not happen until May. Yet, the April 30 Trial Balance
would reflect a Salary Expense (debit) of $900. So the second payment of $900 must be accrued and an
adjusting entry is recorded:
April 30
Salary Expense
Salary Payable
To accrue salary expense
900
900
Accruing Interest Expense
Borrowing money creates a _______________________ for a Note Payable.
The entry to borrow $20,000 after signing a 1-year note payable on December 1, 2008, is:
2008
Dec 1
Cash
20,000
Note Payable
Borrowed money
20,000
Your interest on this note is payable one year later—December 1, 2009.
At December 31, 2008, the company must make an adjusting entry to record the _________________
that has accrued for the month of December. Assume one month’s interest expense on this
note is $100. The December 31 adjusting entry to accrue interest expense:
Dec 31
Interest Expense
Interest Payable
To accrue interest expense
100
100
Accrued Revenues
Businesses may earn revenue before they receive the cash. This calls for an _____________________ ,
which is a revenue ____________________________________________________________ .
If hired on April 15 to perform services for $800/month, on April 30, only ½ a month’s fee is earned
($400). The following entry would be journalized to record the revenue earned:
April 30
Accounts Receivable
Service Revenue
To accrue service revenue
400
400
Without this adjustment, the financial statements would understate both _______________________
and _____________________________________________.
All accrued revenues are accounted for similarly:
___________ a Receivable
___________ a Revenue
Unearned Revenues
Receiving cash before earning it creates a liability called _____________________________________ ;
the company owes a __________________ or _______________________ to the customer.
Only after completing the job will the business _______________ the revenue.
If $600 was collected on April 20 in advance for a service to be provided in the future, the following
entry would be recorded:
April 20
Cash
Unearned Service Revenue
Collected revenue in advance
600
600
Unearned Service Revenue is a liability because it __________________________________________
____________________________________________________________________________ .
The April 30 Trial balance shows a balance of Unearned Service Revenue of $600. But during the last 10
days of the month, the business will earn 1/3 (10 days divided by April’s 30 days) of $600, or $200. To
record the $200 revenue:
April 30
Unearned Service Revenue
Service Revenue
To record service revenue collected in advance
200
200
An unearned revenue is a ____________________, not a _______________________.
Summary of the Adjusting Process
The adjusting process has 2 purposes:
1. Measure _________________________________ on the ___________________________ .
Every adjustment affects a __________________________ or an _______________________ .
2. Update the _______________________________. Every adjustment affects an
____________________________ or a ______________________________________