Adjusting Process
By Rachelle Agatha, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve,
Duchac
After studying this chapter, you
should be able to:
• Describe the nature of the
adjusting process.
• Journalize entries for accounts
requiring adjustment.
• Summarize the adjustment
process.
• Prepare an adjusted trial
balance.
2
Objective 1
Describe the nature of
the adjusting process.
3-1
Under the accrual
basis of accounting,
revenues are reported
in the income
statement in the period
in which they are
earned.
4
3-1
The accounting concept that
supports this approach to
reporting of revenues is called
the revenue recognition
concept.
5
3-1
The journal entries that
bring the accounts up to
date at the end of the
accounting period are
called adjusting entries.
6
3-1
Accounts that are
typically adjusted
include:
• Supplies
• Wages
• Prepaids
• Depreciation
• Insurance
• Unearned Rent
7
3-1
Prepaid expenses (deferred
expenses), are items that have
been initially recorded as assets.
Cash is paid in advance.
8
3-1
Expenses
are recorded when incurred
9
Unearned Revenues (deferred
revenues), are items that have
been initially recorded as
liabilities.
3-1
Cash is received in advance but
revenue is not yet earned and
service not yet performed
10
3-1
Revenue
is recorded when earned
(service performed).
11
3-1
Accrued revenues,
sometimes referred to as
accrued assets (accrued
means unpaid), are
revenues that have been
earned but have not
been recorded in the
accounts.
12
3-1
Accrued expenses,
sometimes referred to as
accrued liabilities, are
expenses that have been
incurred but have not
been recorded in the
accounts.
13
3-2
Physical resources that
are owned and used by
a business and are
permanent or have a
long life are called fixed
assets, or plant assets.
14
3-2
As time passes, a
fixed asset loses its
ability to provide
useful services. This
decrease in
usefulness is called
depreciation.
15
Fixed Asset accounts (also know as
PPE) have a normal debit balance:
3-2
• Equipment
• Land
• Buildings
Accumulated Depreciation is a Contra Asset
account (normal credit balance) where
depreciation expense is accumulated as it is
recognized.
16
3-2
Objective 2
Journalize entries for
accounts requiring
adjustment.
17
Supply Adjustment
3-2
The Supply account had a beginning balance of
$1,245 and was debited for $2,860 for supplies
purchased during the year. Assume the end of the
year balance on hand is $1,349.
Supplies Expense .................................................................
Supplies.....................................................................
Supplies used ($1,245 + $2,860 – $1,349).
2,756
2,756
18
Supply Adjustment “T” Accts
DR
SUPPLIES
DR
SUPPLIES EXPENSE
ASSET
EXPENSE
dr
+
cr
-
dr
+
3-2
cr
-
1,245
2,860
2,756
1,349
2,756
2,756
19
Prepaid Adjustment
3-2
The Prepaid account had a beginning balance of
$4,800 and was debited for $5,850 for premiums paid
during the year. Assume the amount of unexpired
insurance for future periods is $4,125.
Insurance Expense ...............................................................
6,525
Prepaid Insurance ....................................................
Insurance expired ($4,800 + $5,850 – $4,125).
6,525
20
Prepaid Adjustment
DR
PREPAID
ASSET
dr
cr
+
4,800
5,850
6,525
$ 4,125
3-2
DR
INSURANCE EXP
EXPENSE
dr
cr
+
-
6,525
$ 6,525
21
Unearned Fees Adjustment
3-2
The Unearned Fees account had a balance before
adjustment of $23,676. Assume the amount of
unearned fees at the end of the year is $7,388.
Unearned Fees ......................................................................
Fees Earned ..............................................................
Fees earned ($23,676 – $7,388).
16,288
16,288
22
Unearned Fees Adjustment
CR
UNEARNED FEES
LIABILITY
dr
cr
+
23,676
CR
FEE REVENUE
REVENUE
dr
cr
+
16,288
$
7,388
3-2
$
16,288
16,288
23
Unearned Rent Adjustment
3-2
On August 1, Smith Company received $6,900 for 12
months rent. Journalize the adjusting entry for rent
earned through December 31.
Unearned Rent ......................................................................
Rent Revenue............................................................
Rent earned [($6,900/12) × 5 months].
2,875
2,875
24
Unearned Rent Adjustment
CR
UNEARNED RENT
LIABILITY
dr
cr
+
6,900
DR
CASH
ASSET
dr
cr
+
6,900
2,875
$
4,025
$
6,900
3-2
CR
RENT REVENUE
REVENUE
dr
cr
+
2,875
$2,875
25
Depreciation Expense
3-2
The estimate for depreciation on equipment for the
current year is $1,820.
Depreciation Expense ..........................................................
Accumulated Depreciation—Equipment ................
Depreciation on equipment.
1,820
1,820
26
Depreciation Expense
DR
DEPRECIATION EXP
EXPENSE
dr
cr
+
-
$
1,820
1,820
3-2
CR
ACCUM DEP
CONTRA ASSET
dr
cr
+
1,820
$1,820
27
3-4
Objective 4
Prepare an
adjusted trial
balance.
28
3-4
The purpose of the
adjusted trial balance is to
verify the equality of the
total debit balances and
total credit balances
before the financial
statements are prepared.
29
Accounting Cycle
• Transactions are analyzed and
recorded in journal
• Post Transaction from the
Journal to the General Ledger
• Prepare the Unadjusted Trial
Balance
• Adjustment data is gathered &
Analyzed balance.
30
Accounting Cycle, cont
• Optional end-of-period worksheet
• Record Adjusting Entries
• Prepare the Adjusted Trial
Balance
• Prepare Financial Statements
• balance.
Record Closing Entries & Post
• Prepare a Post Closing Trial
Balance
31