The Adjusting Process

11e

Principles of Financial and Managerial Accounting

11e

Principles of Corporate Financial Accounting

Chapter 3 Principles of Financial &

Managerial Accounting
Using Excel for Success
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

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Reeve Warren Duchac
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 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.

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 Learning Objective 1

Describe the nature of

the adjusting process.

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 Nature of the Adjusting Process
➔ The accounting period concept requires
that revenues and expenses be reported in
the proper period.

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 Nature of the Adjusting Process
➔ Under the accrual basis of accounting,
revenues are reported on the income
statement in the period in which they are
earned.

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 Nature of the Adjusting Process
➔ The accounting concept supporting the
reporting of revenues when they are earned
regardless of when cash is received is
called the revenue recognition concept.

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 LO 1

Nature of the Adjusting Process

➔ The accounting concept supporting
reporting revenues and related expenses in
the same period is called the matching
concept, or matching principle.

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 LO 1

Nature of the Adjusting Process

➔ 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.

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 LO 1

The Adjusting Process

➔ 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.

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 LO 1

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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 LO 1

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.
➔ The journal entries that bring the accounts
up to date at the end of the accounting
period are called adjusting entries.

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 EE 3-1

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 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.

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 LO 1

Prepaid Expenses

(continued)
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 LO 1

Prepaid Expenses

(concluded)
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 LO 1

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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 LO 1

Unearned Revenues

(continued)

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 LO 1

Unearned Revenues

(concluded)

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 LO 1

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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 LO 1

Accrued Revenues

(continued)

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 LO 1

Accrued Revenues

(concluded)
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 LO 1

Types of Accounts Requiring Adjustment

➔ Accrued expenses are unrecorded

expenses that have been incurred and for
which cash has not yet been paid.

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 LO 1

Accrued Expenses

(continued)
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 LO 1

Accrued Expenses

(concluded)
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 EE 3-2

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 Learning Objective 2

Journalize entries for

accounts requiring
adjustment.

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 LO 2

Adjusting Entries

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 LO 2

Adjusting Entries

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 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

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 LO 2

Prepaid Expenses

Accounting Equation Impact

Assets = Liabilities + Stockholders’ Equity (Expense)
increase

decrease

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 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.

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 LO 2

Prepaid Insurance

Accounting Equation Impact

Assets = Liabilities + Stockholders’ Equity (Expense)
increase

decrease

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 LO 2

Impact of Omitting Adjusting Entries

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 EE 3-3

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 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.

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 LO 2

Unearned Revenues

Accounting Equation Impact

Assets = Liabilities + Stockholders’ Equity (Revenue)

increase
decrease
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 LO 2

Impact of Omitting Adjusting Entry

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 EE 3-4

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 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.

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 LO 2

Unearned Revenues

Accounting Equation Impact

Assets = Liabilities + Stockholders’ Equity (Revenue)

increase increase

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 LO 2

Impact of Omitting Adjusting Entry

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 EE 3-5

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 LO 2

Accrued Wages

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 LO 2

Accrued Wages
NetSolutions pays its 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.

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 LO 2

Accrued Wages

Accounting Equation Impact

Assets = Liabilities + Stockholders’ Equity (Expense)

increase increase

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 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.

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 LO 2

Impact of Omitting Adjusting Entry

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 EE 3-6

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 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.

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 LO 2

Depreciation Expense
➔ 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.

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 LO 2

Depreciation Expense
➔ 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).

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 LO 2

Depreciation Expense
➔ Accumulated depreciation accounts are
called contra accounts, or contra asset
accounts.

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 LO 2

Depreciation Expense
➔ Normal titles for fixed asset accounts and
their related contra asset accounts are:

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 LO 2

Depreciation Expense

NetSolutions estimates the depreciation on

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

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 LO 2

Depreciation Expense

Accounting Equation Impact

Assets = Liabilities + Stockholders’ Equity (Expense)

increase

increase

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 LO 2

Depreciation Expense
➔ 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

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 LO 2

Impact of Omitting Adjusting Entry

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 EE 3-7

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 EE 3-8

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 Learning Objective 3

Summarize the
adjustment process.

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 LO 3

Summary of Adjustment Process

(continued)
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 LO 3

Summary of Adjustment Process

(continued)

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 LO 3

Summary of Adjustment Process

(continued)

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 LO 3

Summary of Adjustment Process

(continued)

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 LO 3

Summary of Adjustment Process

(concluded)

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 LO 3

Adjusting Entries
Adjusting Entries—NetSolutions

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(continued)
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 LO 3

Adjusting Entries
Adjusting Entries—NetSolutions

(concluded)

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 LO 3

Ledger with Adjusting Entries

(continued)

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 LO 3

Ledger with Adjusting Entries

Ledger with
Adjusting
Entries─
NetSolutions

(continued)
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 LO 3

Ledger with Adjusting Entries

Ledger with
Adjusting
Entries─
NetSolutions

(continued)
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 LO 3

Ledger with Adjusting Entries

Ledger with
Adjusting
Entries─
NetSolutions

(concluded)
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 Learning Objective 4

Prepare an adjusted
trial balance.

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 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.

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 LO 4

Adjusted Trial Balance

Adjusted Trial
Balance

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 EE 3-9

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 LO 5

Learning Objective 5

Describe and illustrate

the use of vertical
analysis in evaluating a
company’s performance
and financial condition.

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 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.

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 LO 5

Vertical Analysis

$12,500
= .067 or 6.7%
$187,500
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 LO 5

Vertical Analysis

$3,000
= .02 or 2%
$150,000
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 EE 3-10

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 EE 3-10

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 The Adjusting Process

The End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

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