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3
The Adjusting
Process
1
After studying this chapter, you should be
able to:
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.
2
3-1
Objective 1
Describe the nature of the
adjusting process.
33
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 accounting concept that
supports reporting revenues and
related expenses in the same
period is called the matching
concept, or matching principle.
6
3-1
Under the cash basis of
accounting, revenues and
expenses are reported in the
income statement in the period in
which cash is received or paid.
7
3-1
The analysis and updating of
accounts at the end of the period
before the financial statements
are prepared is called the
adjusting process.
8
3-1
The journal entries that bring
the accounts up to date at the
end of the accounting period
are called adjusting entries.
9
3-1
Example Exercise 3-1
Indicate with a Yes or No whether or not each of the
following accounts normally requires an adjusting entry.
a.
b.
Cash
Prepaid Rent
c. Wages Expense
e. Accounts Receivable
d. Office Equipment f. Unearned Rent
Follow My Example 3-1
a. No
b. Yes
c. Yes
d. No
For Practice: PE 3-1A, PE 3-1B
e. Yes
f. Yes
10
Items That Need Adjusting
3-1
Prepaid expenses, sometimes referred
to as deferred expenses, are items that
have been initially recorded as assets
but are expected to become expenses
over time or through the normal
operations of the business.
11
Items That Need Adjusting
3-1
Unearned revenues, sometimes
referred to as deferred revenues, are
items that have been initially recorded
as liabilities but are expected to become
revenues over time or through the
normal operations of the business.
12
3-1
Insert Exhibit 1
13
Items That Need Adjusting
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.
14
Items That Need Adjusting
3-1
Accrued expenses, sometimes
referred to as accrued
liabilities, are expenses that
have been incurred but have
not been recorded in the
accounts.
15
3-1
16
3-1
Example Exercise 3-2
Classify the following items as (1) prepaid expense, (2)
unearned revenue, (3) accrued expense, or (4) accrued
revenue.
a. Wages owed but not c. Fees received but not yet
yet paid.
earned.
b. Supplies on hand.
d. Fees earned but not yet
received.
Follow My Example 3-2
a. Accrued expense
b. Prepaid expense
c. Unearned revenue
d. Accrued revenue
For Practice: PE 3-2A, PE 3-2B
17
3-2
Objective 2
Journalize entries for
accounts requiring
adjustment.
18
Unadjusted Trial Balance
for SolusiNet
3-2
SolusiNet
Adjusted Trial Balance
December 31, 2007
Debit
Balances
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation-Equipment
Accounts Payable
Wages Payable
Unearned Rent
Cinta Cita, Capital
Cinta Cita, Drawing
Fees Earned
Rent Revenue
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Misscellaneous Expense
2
2
2
20
1
065
720
760
200
000
800
Credit
Balances
000
000
000
000
000
000
25
4
4
1
2
43
50
900
250
240
000
000
000
000
000
000
000 000
525
600
50
985
040
200
455
400
000
000
000
000
000
000
000
000
16
840 000
120 000
43
400 000
19
Adjusting Process for Prepaid Expenses
3-2
@solusinet
SolusiNet Supplies account has a
balance of Rp2,000,000 in the
unadjusted trial balance. Some of
these supplies have been used.
On December 31, a count reveals
that Rp760,000 of supplies are on
hand.
20
3-2
Supplies (balance on trial balance) Rp2,000,000
Supplies on hand, December 31
– 760,000
Supplies used
Rp1,240,000
21
3-2
2007
Dec. 31 Supplies Expense
55
1 240 000
14
Supplies
1 240 000
Supplies used
(Rp2,000,000 –
Rp760,000)
Supplies Expense
Bal. 2,000,000 Dec. 31 1,240,000 Bal. 800,000
Supplies
760,000
14
55
Dec. 31 1,240,000
2,040,000
22
22
3-2
@solusinet
The debit balance of
Rp2,400,000 in SolusiNet
Prepaid Insurance account
represents the December 1
prepayment of insurance for 12
months.
23
3-2
31 Insurance Expense
56
200 000
15
200 000
Insurance Expense
15
200,000 Dec. 31 200,000
56
Prepaid Insurance
Insurance expired
(Rp2,400,000/12).
Prepaid Insurance
Bal. 2,400,000 Dec. 31
2,200,000
24
24
3-2
Example Exercise 3-3
The prepaid insurance account had a beginning balance of
Rp6,400,000 and was debited for Rp3,600,000 of premiums
paid during the year. Journalize the adjusting entry required
at the end of the year assuming the amount of unexpired
insurance related to future periods is Rp3,250,000.
Follow My Example 3-3
Insurance Expense
6,750,000
Prepaid Insurance
6,750,000
Insurance expired (Rp6,400,000 +
Rp3,600,000 – Rp3,250,000).
For Practice: PE 3-3A, PE 3-3B
25
3-2
@solusinet
On December 1, the tenant
prepaid three months’ rent
for use of an office building
owned by SolusiNet. As of
December 31, only
Rp120,000 has been earned.
26
3-2
31 Unearned Rent
Rent Revenue
Rent earned
(Rp360,000/3
months)
Unearned Rent
23
Dec. 31 120,000 Bal.
360,000
Bal.
240,000
23
42
120 000
120 000
Rent Revenue
42
Dec. 31 120,000
27
27
3-2
Example Exercise 3-4
The balance in the unearned fees account, before
adjustment at the end of the year, is Rp44,900,000.
Journalize the adjusting entry required if the amount of
unearned fees at the end of the year is Rp22,300,000.
Follow My Example 3-4
Unearned Fees
Fees Earned
Fees earned (Rp44,900,000 –
Rp22,300,000).
For Practice: PE 3-4A, PE 3-4B
22,600,000
22,600,000
28
28
3-2
@solusinet
SolusiNet provided Rp500,000
in services during December
for which the customer has not
been billed.
29
3-2
31 Accounts Receivable
Fees Earned
Accrued fees (25 hrs.
x Rp20,000)
Accounts Receivable 12
Bal.
2,220,000
Dec. 31 500,000
Bal.
2,720,000
12
41
500 000
Fees Earned
Bal.
Dec. 31
Bal.
500 000
41
16,340,000
500,000
16,840,000
30
30
3-2
Example Exercise 3-5
At the end of the current year, Rp13,680,000 of fees have
been earned but have not been billed to clients. Journalize
the adjusting entry to record the accrued fees.
Follow My Example 3-5
Accounts Receivable
Fees Earned
Accrued fees.
For Practice: PE 3-5A, PE 3-5B
13,680,000
13,680,000
31
31
3-2
@solusinet
At the end of December,
accrued wages amounted to
Rp250,000. Without this
adjusting entry, Wages
Expense is understated.
32
3-2
31 Wages Expense
Wages Payable
Accrued wages.
Wages Payable 22
Dec. 31 250,000
51
22
250 000
250 000
Wages Expense
Bal. 4,275,000
Dec.31 250,000
Bal. 4,525,000
51
33
33
3-2
Wages Payable 22
Dec. 31 250,000
Wages Expense
Bal. 4,275,000
Dec.31 250,000
Bal. 4,525,000
51
Closing entries will be discussed in a later chapter.
For now, just be aware that Wages Expense is
closed after financial statements are prepare and its
balance rolled back to zero.
34
34
3-2
The payment of January 10 wages totaling
Rp1,275,000 is shown below.
Jan. 10 Wages Expense
Wages Payable
Cash
1 025 000
250 000
1 275 000
35
35
3-2
Wages Payable 22
Jan. 10 250,000 Dec. 31 250,000
The liability is
cancelled.
Wages Expense
Bal. 4,275,000
Dec.31 250,000
Bal. 4,525,000
51
Jan.10 1,025,000
An expense for
wages of
Rp1,025,000 is
recorded in the
new fiscal year.
36
36
3-2
Example Exercise 3-6
PT Sumitama Daya pays weekly salaries of Rp12,500,000 on
Friday for a five-day week ending on that day. Journalize the
necessary adjusting entry at the end of the accounting period,
assuming that the period ends on Thursday.
Follow My Example 3-6
Salaries Expense
10,000,000
Salaries Payable
10,000,000
Accrued salaries (Rp12,500,000/5
x 4 days).
For Practice: PE 3-6A, PE 3-6B
37
37
3-2
@solusinet
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.
38
3-2
As time passes, a fixed
asset loses its ability to
provide useful services.
This decrease in
usefulness is called
depreciation.
39
3-2
Normal titles for fixed asset accounts and their
related contra asset accounts are as follows:
Fixed Asset
Contra Asset
Land
Buildings
None—Land is not depreciated
Accumulated Depreciation—
Buildings
Accumulate Depreciation—Store
Equipment
Accumulated Depreciation—Office
Equipment
Store Equipment
Office Equipment
40
3-2
@solusinet
SolusiNet estimates the
depreciation on its office
equipment to be Rp50,000
for the month of December.
41
3-2
31 Depreciation Expense
Accum. Depreciation—
Office Equipment
53
19
50 000
50 000
Depreciation of
office equipment.
Depreciation Expense
Dec. 31
50,000
53
Accum. Depr.—Office Equip. 19
Dec. 31
50,000
42
42
3-2
SolusiNet balance sheet would
show the office equipment at
cost, less the accumulated
depreciation.
Office equipment
Less accumulated
depreciation
Rp1,800,000
50,000
Rp1,750,000
Book
value
43
3-2
Example Exercise 3-7
The estimated amount of depreciation on equipment for the
current year is Rp4,250,000. Journalize the adjusting entry
to record the depreciation.
Follow My Example 3-7
Depreciation Expense
4,250,000
Accumulated Depreciation—
Equipment
4,250,000
Depreciation on equipment.
For Practice: PE 3-7A, PE 3-7B
44
44
3-3
Objective 3
Summarize the
adjustment process
45
Adjusting Entry SolusiNet
3-3
JOURNAL
Date
Description
Adjusting Entries
Dec. 2007 31 Supplies Expense
Supplies
Supplies used (Rp2,000,000 - Rp 760,000)
Post
Ref
Debit
55
14
1 240 000
31 Insurance Expense
Prepaid Insurance
Insrance expired (Rp2,400,000/12 months)
56
15
200 000
31 Unearned Rent
Rent Revenue
Rent earned (Rp360,000/3months)
23
42
120 000
31 Accounts Receivable
Fees Earned
Accrued fees (25 hrs. Rp20,000)
12
41
500 000
31 Wages Expense
Wages Payable
Accrued wages.
51
22
250 000
31 Depreciation Expense
Accum. Depr.-Office Equip.
Depreciation on office equip.
53
19
50 000
Credit
1 240 000
200 000
120 000
500 000
250 000
50 000
46
3-3
(In Rp000)
Ledger with
Adjusting
Entries—SolusiNet
(Continued)
47
47
(Continued)
Ledger with
Adjusting
Entries—SolusiNet
3-3
(In Rp000)
48
48
3-3
(Continued)
Ledger with
Adjusting
Entries—SolusiNet
(In Rp000)
49
49
3-3
(Concluded)
Ledger with Adjusting
Entries—SolusiNet
(In Rp000)
50
50
3-3
Example Exercise 3-8
For the year ending December 31, 2008, Mega Medika
mistakenly omitted adjusting entries for (1) Rp8,600,000 of
unearned revenue that was earned, (2) earned revenue that
was not billed of Rp12,500,000, and (3) accrued wages of
Rp2,900,000. Indicate the combined effect of the errors on
(a) revenues, (b) expenses, and (c) net income for 2008.
Follow My Example 3-8
a. Revenues were understated by Rp21,100,000
(Rp8,600,000 + Rp12,500,000).
b. Expenses were understated by Rp2,900,000.
c. Net income was understated by Rp18,200,000
(Rp8,600,000 +Rp12,500,000 – Rp2,900,000).
For Practice: PE 3-8A, PE 3-8B
51
3-4
Objective 4
Prepare an adjusted
trial balance.
52
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.
53
3-4
SolusiNet
Adjusted Trial Balance
December 31, 2007
Debit
Balances
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation-Equipment
Accounts Payable
Wages Payable
Unearned Rent
Cinta Cita, Capital
Cinta Cita, Drawing
Fees Earned
Rent Revenue
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Misscellaneous Expense
2
2
2
20
1
065
720
760
200
000
800
Credit
Balances
000
000
000
000
000
000
25
4
4
1
2
43
50
900
250
240
000
000
000
000
000
000
000 000
525
600
50
985
040
200
455
400
000
000
000
000
000
000
000
000
16
840 000
120 000
43
400 000
54
3-4
Example Exercise 3-9
For each of the following errors, considered individually,
indicate whether the error would cause the adjusted trial
balance totals to be unequal. If the error would cause the
adjusted trial balance total to be unequal, indicate whether
the debit or credit total is higher and by how much.
a. The adjustment for accrued fees of Rp5,340,000 was
journalized as a debit to Accounts Payable for Rp5,340,000
and a credit to Fees Earned of Rp5,340,000.
b. The adjustment for depreciation of Rp3,260,000 was
journalized as a debit to Depreciation Expense for
Rp3,620,000 and a credit to Accumulated Depreciation for
Rp3,260,000.
55
55
3-4
Follow My Example 3-9
a. The totals are equal even though the debit should
have been to Accounts Receivable instead of
Accounts Payable.
b. The totals are unequal. The debit total is higher by
Rp360,000 (Rp3,620,000 – Rp3,260,000).
For Practice: PE 3-9A, PE 3-9B
56
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