The Adjusting Process Chapter 3 Student Version These

The Adjusting Process Chapter 3 Student Version These slides should be viewed using the presentation mode (left click your mouse on the icon). © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University 1

Learning Objective 1 Describe the nature of the adjusting process. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1 Nature of the Adjusting Process è The accounting period concept requires that revenues and expenses be reported in the proper period. è Under the accrual basis of accounting, revenues are reported on the income statement in the period in which they are earned. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1 Nature of the Adjusting Process è The accounting concept supporting the reporting of revenues when they are earned regardless of when cash is received is called the revenue recognition concept. è The accounting concept supporting revenues and related expenses in the same period is called the matching concept, or matching principle. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1 Nature of the Adjusting Process è 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. è Under the accrual basis of accounting, some of the accounts need updating at the end of the accounting period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1 The Adjusting Process è The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the adjusting process. è The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1 Types of Accounts Requiring Adjustment è Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid. è Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1 Types of Accounts Requiring Adjustment è Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received. è Accrued expenses are unrecorded expenses that have been incurred and for which cash has not yet been paid. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 2 Journalize entries for accounts requiring adjustment. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Prepaid Expenses Net. Solutions’ 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 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Prepaid Expenses Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) increase decrease © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Prepaid Insurance The debit balance of $2, 400 in Net. Solutions’ Prepaid Insurance account represents the December 1 prepayment for 12 months. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) increase decrease © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Unearned Revenues The credit balance of $360 in Net. Solutions’ 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Unearned Revenues Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Revenue) increase decrease © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Accrued Revenues Net. Solutions signed an agreement with Danker Co. on December 15 to provide services at a rate of $20 per hour. As of December 31, Net. Solutions had provided 25 hours of services. The revenue will be billed on January 15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Unearned Revenues Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Revenue) increase © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. increase

LO 2 Accrued Wages Net. Solutions pays it employees biweekly. During December, Net. Solutions paid wages of $950 on December 13 and $1, 200 on December 27. As of December 31, Net. Solutions owes $250 of wages to employees for Monday and Tuesday, December 30 and 31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Accrued Wages Accounting Equation Impact Assets = Liabilities increase + Stockholders’ Equity (Expense) increase © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Accrued Wages Net. Solutions paid wages of $1, 275 on January 10. This payment includes the $250 of accrued wages recorded on December 31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Depreciation Expense è Fixed assets, or plant assets, are physical resources that are owned and used by a business and are permanent or have a long life. è As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Depreciation Expense è All fixed assets, except land, lose their usefulness and , thus, are said to depreciate. è As a fixed asset depreciates, a portion of its cost should be recorded as an expense. This periodic expense is called depreciation expense. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Depreciation Expense è 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). © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Depreciation Expense è Normal titles for fixed asset accounts and their related contra asset accounts are as follows: © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Depreciation Expense Net. Solutions estimates the depreciation on its office equipment to be $50 for the month of December. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Depreciation Expense Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) increase © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2 Depreciation Expense è 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 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 3 Summarize the adjustment process. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3 Adjusting Entries—Net. Solutions © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. (continued)

LO 3 Adjusting Entries—Net. Solutions (concluded) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3 Ledger with Adjusting Entries (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3 Ledger with Adjusting Entries─ Net. Solutions (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3 Ledger with Adjusting Entries─ Net. Solutions (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3 Ledger with Adjusting Entries─ Net. Solutions (concluded) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 4 Prepare an adjusted trial balance. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 4 Adjusted Trial Balance è 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 4 Adjusted Trial Balance © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5 Learning Objective 5 Describe and illustrate the use of vertical analysis in evaluating a company’s performance and financial condition. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5 Vertical Analysis è Comparing each item in a financial statement with a total amount from the same statement is referred to as vertical analysis. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5 Vertical Analysis $12, 500 $187, 500 =. 067 or 6. 7% © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5 Vertical Analysis $3, 000 $150, 000 =. 02 or 2% © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Adjusting Process The End Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41