chapter 3-1 adjusting the accounts. chapter 3-2 generally a month, a quarter, or a year. also known...

Chapter 3-1

Adjusting the

Accounts

Chapter 3-2

Generally a month, a quarter, or a year.Also known as the “Periodicity Assumption”

Time period Time period assumptionassumptionTime period Time period assumptionassumptionAccountants divide the economic life of a business into artificial time periods. As a result, net income or loss could be get for each period.

Jan. Feb. Mar. Apr. Dec.. . . . .

Chapter 3-3

Revenue Recognition Principle

Recognizing Revenues and Recognizing Revenues and ExpensesExpenses

Recognizing Revenues and Recognizing Revenues and ExpensesExpenses

Companies recognize revenue in the accounting period in which it is earned regardless the actual collection of cash.

In a service enterprise, revenue is considered to be earned at the time the service is performed.Matching PrincipleIt dictates that efforts (expenses) be matched with accomplishments (revenues).

According to this principle:

Match expenses with revenues in the period when the company makes efforts to generate those revenues.

Chapter 3-4

* Adjusting entries: are entries made at the end of the accounting period to determine revenues & expenses related to current accounting period , to insure that revenue recognition and matching principles are followed and to prepare the Financial Statements.

Recording Process Recording Process (continued)(continued)

(4) Adjusting Entries(4) Adjusting Entries

Recording Process Recording Process (continued)(continued)

(4) Adjusting Entries(4) Adjusting Entries

Types of Adjusting Types of Adjusting EntriesEntriesTypes of Adjusting Types of Adjusting EntriesEntries

Chapter 3-5

Adjusting Entries: (1) “Office Adjusting Entries: (1) “Office supplies”supplies”Adjusting Entries: (1) “Office Adjusting Entries: (1) “Office supplies”supplies”Represents short term asset such as paper, envelopes, and printer cartridges. when using supplies, the used supplies is converted to expense called supplies expense.

Entries of supplies:

Chapter 3-6

Example (1): on October 5 ,Pioneer Advertising Agency purchased office supplies costing $2,500 on account. An inventory count on October 31 reveals that $1,000 of supplies are still on hand (unused).Required: 1) Prepare journal entry on October 5. 2) Prepare Adjusting entry on October 31.

1)journal entry Oct . 5 Supplies 2,500 AP 2,500 2) Adjusting entry Used Supplies = $ 2500 - $ 1000 = $ 1500

Supplies 1,500

Supplies expense 1,500Oct. 31

After getting the supplies used (supplies expense), the following adjusting entry is made:-

Chapter 3-7

Adjusting Entries:“Office Adjusting Entries:“Office supplies”supplies”Adjusting Entries:“Office Adjusting Entries:“Office supplies”supplies”

Chapter 3-8

Cash paid in advance for services will be Cash paid in advance for services will be received later.received later.

Such as:Such as: Prepaid insurance , prepaid rent. Prepaid insurance , prepaid rent.

Payment of cash in advance is recorded as an Payment of cash in advance is recorded as an asset because service or benefit will be asset because service or benefit will be received in the futurereceived in the future..

Adjusting Entries: (2) “Prepaid Adjusting Entries: (2) “Prepaid Expenses”Expenses”Adjusting Entries: (2) “Prepaid Adjusting Entries: (2) “Prepaid Expenses”Expenses”

Chapter 3-9

Entries of Prepaid Expenses:

Adjusting Entries:“Prepaid Adjusting Entries:“Prepaid Expenses”Expenses”Adjusting Entries:“Prepaid Adjusting Entries:“Prepaid Expenses”Expenses”

Chapter 3-10

Adjusting Entries:“Prepaid Expenses”Adjusting Entries:“Prepaid Expenses”Adjusting Entries:“Prepaid Expenses”Adjusting Entries:“Prepaid Expenses”

Chapter 3-11

Example (2) : On November 1, ABC Agency paid rent of $600 in advance for a one-year period.

Required: 1) Prepare Journal entry on November 1 2) Prepare Adjusting entry on December 31.

1) Journal entry Nov. 1 Prepaid rent 600 Cash 6002) Adjusting entry Rent expired during (Nov.1 – Dec. 31) = $ 600 / 12 * 2 = $ 100

Prepaid Rent 100

Rent expense 100Dec. 31

Adjusting Entries:“Prepaid Expenses”Adjusting Entries:“Prepaid Expenses”Adjusting Entries:“Prepaid Expenses”Adjusting Entries:“Prepaid Expenses”

Chapter 3-12

Buildings, Equipment, and Trucks (long-lived assets) are recorded as assets in the year acquired at their original costs.

Depreciation: Is the process of allocating the cost of depreciable assets over its estimated useful life. All fixed assets subject to depreciation except land (it has unlimited useful life).

Depreciation amount depended on 3 factors:

1- Cost of fixed asset.2- Salvage value selling price of fixed asset at

its useful life end. 3- the estimated useful life.

Adjusting Entries: (3) Adjusting Entries: (3) ““Depreciation” Depreciation” Adjusting Entries: (3) Adjusting Entries: (3) ““Depreciation” Depreciation”

Chapter 3-13

Adjusting Entries: Adjusting Entries: “Depreciation”“Depreciation”Adjusting Entries: Adjusting Entries: “Depreciation”“Depreciation”

Chapter 3-14

Ex:At April 1, 2010 Building was obtained at

$27,000 , expected salvage value was $3,000 , useful life was 10 years.

Required:1- Prepare adjusting entry at Dec. 31, 2010?

2- Show the effects on the financial statements at Dec. 31, 2010

3- Prepare adjusting entry at Dec. 31, 2011?4- Show the effects on the financial statements

at Dec. 31, 2011


Chapter 3-15


Chapter 3-16


Chapter 3-17

Ex. :

Chapter 3-18

Chapter 3-19

Accrued (payable) ExpensesAccrued (payable) Expenses

Expenses incurred but not yet paid in cash or recoded, Or Expenses incurred but not yet paid in cash or recoded, Or

service received without paying cash. service received without paying cash.

An adjusting entry serves two purposes:An adjusting entry serves two purposes:

(1)(1) It records the obligations, and It records the obligations, and

(2)(2) It recognizes the expenses. It recognizes the expenses.

Adjusting Entries: (4) “Accrued Adjusting Entries: (4) “Accrued Expenses”Expenses”Adjusting Entries: (4) “Accrued Adjusting Entries: (4) “Accrued Expenses”Expenses”

(Continued)

Chapter 3-20

Chapter 3-21

When a service is performed, the company makes When a service is performed, the company makes an adjusting entry to record the revenue that has an adjusting entry to record the revenue that has been earned and to show the liability that been earned and to show the liability that decreases.decreases.

The adjusting entry for unearned revenues results The adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.an increase (a credit) to a revenue account.

Adjusting Entries : (5) “Unearned Adjusting Entries : (5) “Unearned Revenues”Revenues”Adjusting Entries : (5) “Unearned Adjusting Entries : (5) “Unearned Revenues”Revenues”

Chapter 3-22

Adjusting Entries :“Unearned Adjusting Entries :“Unearned Revenues”Revenues”Adjusting Entries :“Unearned Adjusting Entries :“Unearned Revenues”Revenues”

Example (1)At September 1, 2011 Business received $12,000 in advance for service to be rendered during 6 months.

Required:1- Prepare journal entry at September 1 ?2- Prepare adjusting entry at September 30 ?3- Prepare adjusting entry at December 31 ?

Chapter 3-23


Chapter 3-24


Example (2) On October 1, Pioneer Consulting Agency received $1,200 in advance from R. Knox for consulting services expected to be completed by December 31. On October 31, Analysis reveals that the company earned $400 of those fees in October.

Required, (1) Prepare Journal entry on October 1. (2) Prepare adjusting entry on October 31.

(1) Journal entry : Oct . 1 Cash 1200 Unearned service revenue 1200

(2) Adjusting entry : Service revenue is given by $ 400

Service revenue 400

Unearned service revenue 400Oct. 31

Chapter 3-25

Accrued (Receivable) RevenuesAccrued (Receivable) RevenuesRepresent service rendered (revenue earned) Represent service rendered (revenue earned) without collecting of cash. Or, revenues earned but without collecting of cash. Or, revenues earned but not yet received in cash or recorded.not yet received in cash or recorded.

Adjusting Entries for: (6) “Accrued Adjusting Entries for: (6) “Accrued Revenues”Revenues”Adjusting Entries for: (6) “Accrued Adjusting Entries for: (6) “Accrued Revenues”Revenues”

Chapter 3-26

Adjusting Entries: “Accrued Adjusting Entries: “Accrued Revenues”Revenues”Adjusting Entries: “Accrued Adjusting Entries: “Accrued Revenues”Revenues”Example : At Dec. 31, 2011 service rendered by $15,000 not yet received or recorded. (earned $15,000 for services that had not been recorded).

Required:1- Prepare adjusting entry at December 31.2- Show the effects on financial statements.

Chapter 3-27

EX. Neosho River Resort opened for business on June 1 with eight air-conditioned units. Its trial balance before adjustment on August 31 is as follows:

Other data:1. Insurance expires at the rate of $400 per month.2. A count on August 31 shows $600 of supplies on hand.3. Annual depreciation is $6,000 on cottages and $2,400 on furniture.4. Unearned rent revenue of $4,100 was earned prior to August 31.5. Salaries of $400 were unpaid at August 31.6. Rentals of $1,000 were due from tenants at August 31. (Use Accounts Receivable.)

InstructionsJournalize the adjusting entries on August 31 for the 3-month period June 1–August 31.

Chapter 3-28

Chapter 3-29

(5) The Adjusted Trial (5) The Adjusted Trial BalanceBalance(5) The Adjusted Trial (5) The Adjusted Trial BalanceBalance

* Adjusted trial balance is a list of accounts and their balances after the company has made all adjustments. To prepare the adjusted

trial balance and financial statements, the following steps should be followed:

- Preparing adjusting entries.

- Post adjusting entries to their ledgers and compute the balances after

adjustments (BAA).

- Preparing adjusted trial balance.

- Preparing financial statements.

*After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance). Its purpose is to prove the equality of debit balances and credit balances in the ledger and to prepare the Financial Statements.

Chapter 3-30

The Adjusted Trial Balance The Adjusted Trial Balance Form:Form:The Adjusted Trial Balance The Adjusted Trial Balance Form:Form:

Chapter 3-31

Exercise The trial balance of Ragland Agency on March 31 , 2011 includes the following accounts before adjusting entries have been prepared:

Chapter 3-32

An analysis of the accounts shows the following:

a. Supplies on hand at March 31, $5,000b. The prepaid rent for 2 years started at Jan. 1, 2011.c. The equipment is depreciated at $1,000 monthly.d. Accrued salaries at March 31 are $9,000e. $8,000 of the unearned Service revenue has been earned.f. Services provided but not recorded total $6,000.

Instructions1) Prepare the adjusting entries at March 31 and post the adjusting entries, assuming that adjusting entries are made quarterly.2) Prepare the adjusted trial balance at March 31 3) Prepare the financial statements for the quarter ended March 31

Chapter 3-33

Date Account’s title & expl. Dr. Cr.March 31 Supplies expense

Supplies10,000

10,000

March 31 Rent expense Prepaid rent

1,5001,500

March 31 Depreciation exp. Equip. Accumulated dep. Equip.

3,0003,000

March 31 Salaries expense Salaries payable

9,0009,000

March 31 Unearned Service revenue Service revenue

8,0008,000

March 31 AR Service revenue

6,0006,000

(1) Adjusting entries at March 31

Chapter 3-34

- Posting: : BBA balance before adjustment.

BAA balance af ter adjustment.

Dr. Supplies expense Cr. March 31 adj. 10,000 BAA 10,000

Dr. Supplies Cr. BBA 15,000 March 31 adj. 10,000

BAA 5,000

Dr. Rent expense Cr. March 31 adj. 1,500

BAA 1,500

Dr. Prepaid rent Cr. BBA 12,000 March 31 adj. 1,500

BAA 10,500

Dr. Dep. Expense – equip. Cr. March 31 adj. 3,000

BAA 3,000

Dr. Acc. Dep. – equip. Cr.

BBA 30,000 March 31 adj. 3,000

BAA 33,000

Dr. Salaries expense Cr. BBA 18,000 March 31 adj. 9,000

BAA 27,000

Dr. Salaries payable Cr . 3/ 31 adj. 9,000 BAA 9,000

Dr. Unearned Service revenue Cr . March 31 adj. 8,000 BBA 10,000

BAA 2,000

Dr. Service revenue Cr.

BBA 70,000 March 31 adj. 8,000 March 31 adj. 6,000

BAA 84,000

Dr. AR Cr. BBA 25,000 March 31 adj. 6,000

BAA 31,000

Chapter 3-35

chapter 3-1 adjusting the accounts. chapter 3-2 generally a month, a quarter, or a year. also known...

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