week4.closingtheaccounts.theadjustingprocess
DESCRIPTION
accountingTRANSCRIPT
Week 4:Closing The Accounts – The Adjusting Process
Learning Objective 1
1. Describe the nature of the adjusting process.
Nature of the Adjusting Process
The accounting period concept requires that revenues and expenses be reported in the proper period.
Under the accrual basis of accounting, revenues are reported on the income statement in the period in which they are earned.
LO 1LO 1
Nature of the Adjusting Process
LO 1LO 1
The accounting concept supporting the reporting of revenues when they are earned regardless of when cash is received is called the revenue recognition concept. The accounting concept supporting reporting revenues and related expenses in the same period is called the matching concept, or matching principle.
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.
Under the accrual basis of accounting, some of the accounts need updating at the end of the accounting period.
LO 1LO 1Nature of the Adjusting
Process
The Adjusting ProcessLO 1LO 1
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.
Types of Accounts Requiring Adjustment
LO 1LO 1
Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid.
Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received.
Types of Accounts Requiring Adjustment
LO 1LO 1
Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received.
Accrued expenses are unrecorded expenses that have been incurred and for which cash has not yet been paid.
Learning Objective 2
1. Describe the nature of the adjusting process.
2. Journalize entries for accounts requiring adjustment.
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) $2,000Supplies on hand, December 31 –
760Supplies used
$1,240
Prepaid ExpensesLO 2LO 2
Prepaid ExpensesLO 2LO 2
Assets = Liabilities + Owner’s Equity (Expense)
Accounting Equation Impact
decrease
increase
LO 2LO 2
Prepaid Insurance
Assets = Liabilities + Owner’s Equity (Expense)
Accounting Equation Impact
decrease
increase
The debit balance of $2,400 in NetSolutions’ prepaid insurance account represents the December 1 prepayment of insurance for 12 months.
LO 2LO 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.
LO 2LO 2
Unearned Revenues
Assets = Liabilities + Owner’s Equity (Revenue)
Accounting Equation Impact
decreaseincrease
LO 2LO 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.
LO 2LO 2
Accrued Revenues
Assets = Liabilities + Owner’s Equity (Revenue)
Accounting Equation Impact
increase increase
LO 2LO 2
Accrued Wages
NetSolutions pays it 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.
LO 2LO 2
Accrued Wages
Assets = Liabilities + Owner’s Equity (Expense)
Accounting Equation Impact
increaseincrease
LO 2LO 2
Accrued Wages
NetSolutions paid wages of $1,275 on January 10. This payment includes the $250 of accrued wages recorded on December 31.
LO 2LO 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.
LO 2LO 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.
LO 2LO 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).
Accumulated depreciation accounts are called contra accounts, or contra asset accounts.
LO 2LO 2
Depreciation Expense
Normal titles for fixed asset accounts and their related contra asset accounts are as follows:
LO 2LO 2
Depreciation Expense
Assets = Liabilities + Owner’s Equity (Expense)
Accounting Equation Impact
increaseincrease
NetSolutions estimates the depreciation on its office equipment to be $50 for the month of December.
LO 2LO 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 – Accum. Depre. 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
Summarizing the Adjustment Process:Adjusting Entries
LO 3LO 3
Adjusting EntriesLO 3LO 3
LO 3LO 3
Ledger with Adjusting Entries
(continued)
LO 3LO 3Ledger with Adjusting Entries
LO 3LO 3
Ledger with Adjusting Entries
LO 3LO 3
Ledger with Adjusting Entries
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.
LO 4LO 4
Adjusted Trial BalanceLO 4LO 4
Exercises
Blum Services, Inc. has the following unadjusted balances at year-end.
Cash $12,900
Prepaid insurance 2,000
Office supplies 1,300
Office equipment 10,500
Accumulated depreciation–office equipment 3,500
Accounts payable 2,900
Salaries payable -0-
Unearned service revenue 4,500
Common stock 10,000
Retained earnings 1,750
Dividends paid 5,600
Service revenue 13,350
Salary expense 3,700
Depreciation expense -0-
Supplies expense -0-
Insurance expense -0-
The following information is available to use in making adjusting entries.
1. Office supplies on hand at year-end: $2502. Prepaid insurance expired during the year:
$3253. Unearned revenue remaining at year-end
$2,5004. Depreciation expense for the year $1,8005. Accrued salaries at year-end $900
Journalise the adjusting entries.
1. Office supplies on hand at year-end: $250
Office supplies per unadjusted TB: $1,300Actual balance at year end: $250Therefore, the balance needs to be adjusted
by: $1,300 - $250 = $1,050.
Journal entry:Cr Office Supplies $1,050Dr Supplies Expense $1,050
Journalise the adjusting entries.
2.Prepaid insurance expired during the year: $325
Journal entry:Cr Prepaid insurance $325Dr Insurance Expense $325
Journalise the adjusting entries.
3. Unearned revenue remaining at year-end $2,500
Unearned service revenue per unadjusted TB: $4,500
Actual balance at year end: $2,500Therefore, the balance needs to be adjusted
by: $4,500 - $2,500 = $2,000.
Journal entry:Dr Unearned service revenue $2,000Cr Service revenue $2,000
Journalise the adjusting entries.
4. Depreciation expense for the year $1,800
Journal entry:Cr Accumulated depreciation$1,800Dr Depreciation Expense
$1,800
Journalise the adjusting entries.
5. Accrued salaries at year-end $900
Journal entry:Cr Salaries payable $900Dr Salaries expense $900
Using a work sheet, prepare the trial balance, the adjustments and the adjusted trial balance for Blum Services, Inc.
Accounts Trial balance Adjustments Adj’d TB
Debit Credit Debit Credit Debit Credit
Cash$12,90
0
Prepaid insurance 2,000
Office supplies 1,300
Office equipment 10,500
Accumulated depreciation–office equipment 3,500
Accounts payable 2,900
Salaries payable 0
Unearned service revenue 4,500
Common shares 10,000
Retained earnings 1,750
Dividends paid 5,600
Service revenue 13,350
Salaries expense 3,700
Depreciation expense 0
Supplies expense 0
Insurance expense 0
Totals 36,000 36,000
Accounts Trial balance Adjustments Adj’d TB
Debit Credit Debit Credit Debit Credit
Cash$12,90
0
Prepaid insurance 2,000
Office supplies 1,300 1,050
Office equipment 10,500
Accumulated depreciation–office equipment 3,500
Accounts payable 2,900
Salaries payable 0
Unearned service revenue 4,500
Common shares 10,000
Retained earnings 1,750
Dividends paid 5,600
Service revenue 13,350
Salaries expense 3,700
Depreciation expense 0
Supplies expense 0 1,050
Insurance expense 0
Totals 36,000 36,000
Accounts Trial balance Adjustments Adj’d TB
Debit Credit Debit Credit Debit Credit
Cash$12,90
0
Prepaid insurance 2,000 325
Office supplies 1,300 1,050
Office equipment 10,500
Accumulated depreciation–office equipment 3,500
Accounts payable 2,900
Salaries payable 0
Unearned service revenue 4,500
Common shares 10,000
Retained earnings 1,750
Dividends paid 5,600
Service revenue 13,350
Salaries expense 3,700
Depreciation expense 0
Supplies expense 0 1,050
Insurance expense 0 325
Totals 36,000 36,000
Accounts Trial balance Adjustments Adj’d TB
Debit Credit Debit Credit Debit Credit
Cash$12,90
0
Prepaid insurance 2,000 325
Office supplies 1,300 1,050
Office equipment 10,500
Accumulated depreciation–office equipment 3,500
Accounts payable 2,900
Salaries payable 0
Unearned service revenue 4,500 2,000
Common shares 10,000
Retained earnings 1,750
Dividends paid 5,600
Service revenue 13,350 2,000
Salaries expense 3,700
Depreciation expense 0
Supplies expense 0 1,050
Insurance expense 0 325
Totals 36,000 36,000
Accounts Trial balance Adjustments Adj’d TB
Debit Credit Debit Credit Debit Credit
Cash$12,90
0
Prepaid insurance 2,000 325
Office supplies 1,300 1,050
Office equipment 10,500
Accumulated depreciation–office equipment 3,500 1,800
Accounts payable 2,900
Salaries payable 0
Unearned service revenue 4,500 2,000
Common shares 10,000
Retained earnings 1,750
Dividends paid 5,600
Service revenue 13,350 2,000
Salaries expense 3,700
Depreciation expense 0 1,800
Supplies expense 0 1,050
Insurance expense 0 325
Totals 36,000 36,000
Accounts Trial balance Adjustments Adj’d TB
Debit Credit Debit Credit Debit Credit
Cash$12,90
0
Prepaid insurance 2,000 325
Office supplies 1,300 1,050
Office equipment 10,500
Accumulated depreciation–office equipment 3,500 1,800
Accounts payable 2,900
Salaries payable 0 900
Unearned service revenue 4,500 2,000
Common shares 10,000
Retained earnings 1,750
Dividends paid 5,600
Service revenue 13,350 2,000
Salaries expense 3,700 900
Depreciation expense 0 1,800
Supplies expense 0 1,050
Insurance expense 0 325
Totals 36,000 36,000
Accounts Trial balance Adjustments Adj’d TB
Debit Credit Debit Credit Debit Credit
Cash$12,90
012,90
0
Prepaid insurance 2,000 325 1,675
Office supplies 1,300 1,050 250
Office equipment 10,50010,50
0
Accumulated depreciation–office equipment 3,500 1,800 5,300
Accounts payable 2,900 2,900
Salaries payable 0 900 900
Unearned service revenue 4,500 2,000 2,500
Common shares 10,00010,00
0
Retained earnings 1,750 1,750
Dividends paid 5,600 5,600
Service revenue 13,350 2,00015,35
0
Salaries expense 3,700 900 4,600
Depreciation expense 0 1,800 1,800
Supplies expense 0 1,050 1,050
Insurance expense 0 325 325
Totals 36,000 36,000 6,075 6,07538,70
038,70
0