CH 03

Adjusting the
Accounts
Chapter Chapter
3-1 3-2 Accounting Principles, Ninth Edition
Study Objectives Adjusting the Accounts
1. Explain the time period assumption.

2. Explain the accrual basis of accounting. The Adjusted Trial
The Basics of Balance and
Timing Issues
3. Explain the reasons for adjusting entries. Adjusting Entries Financial
Statements
4. Identify the major types of adjusting entries.
Fiscal and Types of adjusting Preparing the
5. Prepare adjusting entries for deferrals. calendar years entries adjusted trial
balance
Accrual- vs. cash- Adjusting entries
6. Prepare adjusting entries for accruals. basis accounting for deferrals Preparing
financial
Recognizing Adjusting entries
7. Describe the nature and purpose of an adjusted revenues and for accruals statements
expenses Summary of
trial balance. journalizing and
posting
Chapter Chapter
3-3 3-4
Timing Issues Timing Issues
Accountants divide the economic life of a Review

business into artificial time periods The time period assumption states that:
(Time Period Assumption). a. revenue should be recognized in the accounting
period in which it is earned.
.....
Jan. Feb. Mar. Apr. Dec. b. expenses should be matched with revenues.
c. the economic life of a business can be divided
into artificial time periods.
Generally a month, a quarter, or a year. d. the fiscal year should correspond with the
calendar year.
Fiscal year vs. calendar year
Also known as the “Periodicity Assumption”
Chapter Chapter
3-5 SO 1 Explain the time period assumption. 3-6 SO 1 Explain the time period assumption.
Accrual- vs. Cash-Basis Accounting Accrual- vs. Cash-Basis Accounting

Accrual-Basis Accounting Cash-Basis Accounting
Transactions recorded in the periods in which Revenues are recognized when cash is received.
the events occur
Expenses are recognized when cash is paid.
Revenues are recognized when earned, rather
Cash-basis accounting is not in accordance with
than when cash is received.
generally accepted accounting principles (GAAP).
Expenses are recognized when incurred, rather
than when paid.
Chapter Chapter
3-7 SO 2 Explain the accrual basis of accounting. 3-8 SO 2 Explain the accrual basis of accounting.
Recognizing Revenues and Expenses Recognizing Revenues and Expenses

Revenue Recognition Principle Matching Principle
Companies recognize Match expenses with
revenue in the accounting revenues in the period
period in which it is when the company makes
earned. efforts to generate
In a service enterprise, those revenues.
revenue is considered to “Let the expenses follow
be earned at the time the the revenues.”
service is performed.
Chapter Chapter
Timing Issues
GAAP relationships Illustration 3-1

in revenue and
expense recognition
Chapter Chapter
Timing Issues The Basics of Adjusting Entries
Review Adjusting entries make it possible to report

One of the following statements about the accrual basis correct amounts on the balance sheet and on
of accounting is false. That statement is:
the income statement.
a. Events that change a company’s financial
statements are recorded in the periods in which A company must make adjusting entries
the events occur.
every time it prepares financial statements.
b. Revenue is recognized in the period in which it is
earned.
c. The accrual basis of accounting is in accord with
generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and
expenses are recorded only when cash is paid.
Chapter Chapter
3-13 SO 2 Explain the accrual basis of accounting. 3-14 SO 3 Explain the reasons for adjusting entries.
The Basics of Adjusting Entries Timing Issues
Revenues - recorded in the period in which Review

they are earned. Adjusting entries are made to ensure that:
Expenses - recognized in the period in which a. expenses are recognized in the period in which
they are incurred.
they are incurred.
b. revenues are recorded in the period in which
Adjusting entries - needed to ensure that the they are earned.
revenue recognition and matching principles c. balance sheet and income statement accounts
are followed. have correct balances at the end of an
accounting period.
d. all of the above.
Chapter Chapter
3-15 SO 3 Explain the reasons for adjusting entries. 3-16 SO 3 Explain the reasons for adjusting entries.
Types of Adjusting Entries Trial Balance
Illustration 4-2
Categories of adjusting entries Trial Balance – Each account is analyzed to determine whether
it is complete and up-to-date.
Deferrals Accruals Illustration 3-3
1. Prepaid Expenses. 3. Accrued Revenues.

Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.
2. Unearned Revenues. 4. Accrued Expenses.

Revenues received in cash Expenses incurred but not
and recorded as liabilities yet paid in cash or
before they are earned. recorded.
Chapter Chapter
3-17 SO 4 Identify the major types of adjusting entries. 3-18 SO 4 Identify the major types of adjusting entries.
Adjusting Entries for Deferrals Adjusting Entries for “Prepaid Expenses”
Deferrals are either: Payment of cash that is recorded as an asset because

service or benefit will be received in the future.
Prepaid expenses
OR Cash Payment BEFORE Expense Recorded
Unearned revenues. Prepayments often occur in regard to:

insurance rent
supplies maintenance on equipment
advertising fixed assets (depreciation)
Chapter Chapter
3-19 SO 5 Prepare adjusting entries for deferrals. 3-20 SO 5 Prepare adjusting entries for deferrals.
Adjusting Entries for “Prepaid Expenses” Adjusting Entries for “Prepaid Expenses”
Prepaid Expenses Adjusting entries for prepaid expenses

Costs that expire either with the passage of time Illustration 3-4
or through use.
Adjusting entries (1) to record the expenses that

apply to the current accounting period, and (2) to
show the unexpired costs in the asset accounts.
Increases (debits) an expense account and
Decreases (credits) an asset account.
Chapter Chapter
Illustration: Pioneer Advertising Agency purchased advertising Illustration: On October 4, Pioneer Advertising Agency paid
supplies costing $2,500 on October 5. Sierra recorded the $600 for a one-year fire insurance policy. Coverage began on
payment by increasing (debiting) the asset Advertising Supplies. October 1. Pioneer recorded the payment by increasing (debiting)
This account shows a balance of $2,500 in the October 31 trial Prepaid Insurance. This account shows a balance of $600 in the
balance. An inventory count at the close of business on October October 31 trial balance. Insurance of $50 ($600 / 12) expires
31 reveals that $1,000 of supplies are still on hand. each month.
Oct. 31 Advertising supplies expense 1,500 Oct. 31 Insurance expense 50

Advertising supplies 1,500 Prepaid insurance 50
Illustration 3-5
Illustration 3-6
Chapter Chapter
Depreciation Illustration: Pioneer Advertising estimates depreciation on the

office equipment to be $480 a year, or $40 per month.
Buildings, equipment, and vehicles (long-lived
assets) are recorded as assets, rather than an Oct. 31 Depreciation expense 40
expense, in the year acquired. Accumulated depreciation 40
Companies report a portion of the cost of a long-

Illustration 3-7
lived asset as an expense (depreciation) during

each period of the asset’s useful life (Matching
Principle).
Chapter Chapter
Depreciation (Statement Presentation) Summary Illustration 3-9
Accumulated Depreciation is a contra asset account.

Appears just after the account it offsets
(Equipment) on the balance sheet.
Illustration 3-8
Chapter Chapter
Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues”
Receipt of cash that is recorded as a liability because Unearned Revenues

the revenue has not been earned.
Company makes an adjusting entry to record the
revenue that has been earned and to show the
Cash Receipt BEFORE Revenue Recorded
liability that remains.
Unearned revenues often occur in regard to: The adjusting entry for unearned revenues results
rent magazine subscriptions in a decrease (a debit) to a liability account and an
airline tickets customer deposits increase (a credit) to a revenue account.
school tuition
Chapter Chapter
Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues”
Illustration: Pioneer Advertising Agency received $1,200 on

Adjusting entries for unearned revenues October 2 from R. Knox for advertising services expected to be
Illustration 3-10
completed by December 31. Unearned Service Revenue shows a
balance of $1,200 in the October 31 trial balance. Analysis reveals
that the company earned $400 of those fees in October.
Oct. 31 Unearned service revenue 400

Service revenue 400
Illustration 3-11
Decrease (a debit) to a liability account and

Increase (a credit) to a revenue account.
Chapter Chapter
Adjusting Entries for “Unearned Revenues”
Summary
Illustration 3-12
Chapter Chapter
Adjusting Entries for Accruals Adjusting Entries for “Accrued Revenues”
Made to record: Revenues earned but not yet received in cash or

recorded.
Revenues earned and
Adjusting entry results in:
OR
Revenue Recorded BEFORE Cash Receipt
Expenses incurred
Accrued revenues often occur in regard to:
in the current accounting period that have not
rent
been recognized through daily entries.
interest
services performed
Chapter Chapter
3-35 SO 6 Prepare adjusting entries for accruals. 3-36 SO 6 Prepare adjusting entries for accruals.
Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues”
Accrued Revenues
Adjusting entries for accrued revenues
An adjusting entry serves two purposes: Illustration 3-13
(1) It shows the receivable that exists, and
(2) It records the revenues earned.
Increases (debits) an asset account and

Increases (credits) a revenue account.
Chapter Chapter
Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues”
Illustration: In October Pioneer Advertising Agency earned Summary

$200 for advertising services that had not been recorded. Illustration 3-15
Oct. 31 Accounts Receivable 200

Service Revenue 200
Illustration 3-14
Chapter Chapter
Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses”
Expenses incurred but not yet paid in cash or Accrued Expenses

recorded.
An adjusting entry serves two purposes:
Adjusting entry results in:
(1) It records the obligations, and
Expense Recorded BEFORE Cash Payment (2) It recognizes the expenses.
Accrued expenses often occur in regard to:

rent taxes
interest salaries
Chapter Chapter
Illustration: Pioneer Advertising Agency signed a three-month

Adjusting entries for accrued expenses note payable in the amount of $5,000 on October 1. The note
Illustration 3-16
requires Pioneer to pay interest at an annual rate of 12%.
Illustration 3-17
Oct. 31 Interest expense 50

Interest payable 50
Illustration 3-18
Increases (debits) an expense account and

Increases (credits) a liability account.
Chapter Chapter
Illustration: Pioneer Advertising Agency last paid salaries on

October 26; the next payment of salaries will not occur until
Summary
Illustration 3-21
November 9. The employees receive total salaries of $2,000 for a
five-day work week, or $400 per day. Thus, accrued salaries at
October 31 are $1,200 ($400 x 3 days).
Oct. 31 Salaries expense 1,200

Salaries payable 1,200
Illustration 3-20
Chapter Chapter
The Adjusted Trial Balance The Adjusted Trial Balance
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.
Chapter Chapter
3-47 SO 7 Describe the nature and purpose of an adjusted trial balance. 3-48
The Adjusted Trial Balance Preparing Financial Statements
Review Question Financial Statements are prepared directly from the

Which of the following statements is incorrect concerning Adjusted Trial Balance.
the adjusted trial balance?
a. An adjusted trial balance proves the equality of the
total debit balances and the total credit balances in
the ledger after all adjustments are made.
Owner’s
b. The adjusted trial balance provides the primary basis Balance Income
Equity
for the preparation of financial statements. Sheet Statement
Statement
c. The adjusted trial balance lists the account balances
segregated by assets and liabilities.
d. The adjusted trial balance is prepared after the
adjusting entries have been journalized and posted.
Chapter Chapter
3-49 SO 7 Describe the nature and purpose of an adjusted trial balance. 3-50 SO 7 Describe the nature and purpose of an adjusted trial balance.
Preparing Financial Statements Preparing Financial Statements

Illustration 3-26
Illustration 3-25
Preparation of
the income
statement and
owner’s
equity statement
from the
adjusted trial
balance
Chapter Chapter
3-51 3-52
Alternative Treatment of Prepaid Expenses Alternative Treatment for “Prepaid Expenses”
and Unearned Revenues
Illustration: Pioneer Advertising purchased supplies on
October 5 for $2,500 and debited Advertising
Some companies use an alternative treatment Supplies Expense for the full amount. What if an inventory
for prepaid expenses and unearned revenues. of $1,000 of advertising supplies remains on October 31?
When a company prepays an expense, it debits

Oct. 31 Advertising supplies 1,000
that amount to an expense account.
Advertising supplies expense 1,000
When a company receives payment for future
services, it credits the amount to a revenue Illustration 3A-1
account.
Chapter Chapter
3-53 SO 8 Prepare adjusting entries for the alternative treatment of deferrals. 3-54 SO 8 Prepare adjusting entries for the alternative treatment of deferrals.
Alternative Treatment for “Prepaid Expenses” Alternative Treatment for “Unearned Revenues”
Illustration: Assume that Pioneer Advertising received

Adjustment approaches—a comparison $1,200 for future services on October 2 and credited the
Illustration 3A-2 entire amount to Service Revenue. If at the statement
date Pioneer has not performed $800 of the services, it
would make an adjusting entry.
Oct. 31 Service revenue 800

Unearned service revenue 800
Illustration 3A-4
Chapter Chapter
Alternative Treatment for “Unearned Revenues” Summary of Additional Adjustment Relationships
Adjustment approaches—a comparison Illustration 3A-7

Illustration 3A-5
Chapter Chapter
Copyright
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.”
Chapter
3-59

CH 03

Uploaded by

Copyright:

Available Formats

You might also like

CH 03

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 03

Uploaded by

Copyright:

Available Formats

Adjusting the

Study Objectives Adjusting the Accounts

1. Explain the time period assumption.

Accountants divide the economic life of a Review

Timing Issues Timing Issues

Accrual- vs. Cash-Basis Accounting Accrual- vs. Cash-Basis Accounting

Recognizing Revenues and Expenses Recognizing Revenues and Expenses

GAAP relationships Illustration 3-1

Review Adjusting entries make it possible to report

The Basics of Adjusting Entries Timing Issues

Revenues - recorded in the period in which Review

1. Prepaid Expenses. 3. Accrued Revenues.

2. Unearned Revenues. 4. Accrued Expenses.

Adjusting Entries for Deferrals Adjusting Entries for “Prepaid Expenses”

Deferrals are either: Payment of cash that is recorded as an asset because

OR Cash Payment BEFORE Expense Recorded

Unearned revenues. Prepayments often occur in regard to:

Prepaid Expenses Adjusting entries for prepaid expenses

Adjusting entries (1) to record the expenses that

Oct. 31 Advertising supplies expense 1,500 Oct. 31 Insurance expense 50

Depreciation Illustration: Pioneer Advertising estimates depreciation on the

Companies report a portion of the cost of a long-

lived asset as an expense (depreciation) during

Depreciation (Statement Presentation) Summary Illustration 3-9

Accumulated Depreciation is a contra asset account.

Receipt of cash that is recorded as a liability because Unearned Revenues

Illustration: Pioneer Advertising Agency received $1,200 on

Oct. 31 Unearned service revenue 400

Decrease (a debit) to a liability account and

Adjusting Entries for Accruals Adjusting Entries for “Accrued Revenues”

Made to record: Revenues earned but not yet received in cash or

(1) It shows the receivable that exists, and

(2) It records the revenues earned.

Increases (debits) an asset account and

Illustration: In October Pioneer Advertising Agency earned Summary

Oct. 31 Accounts Receivable 200

Expenses incurred but not yet paid in cash or Accrued Expenses

Accrued expenses often occur in regard to:

Illustration: Pioneer Advertising Agency signed a three-month

Oct. 31 Interest expense 50

Increases (debits) an expense account and

Illustration: Pioneer Advertising Agency last paid salaries on

Oct. 31 Salaries expense 1,200

The Adjusted Trial Balance The Adjusted Trial Balance

After all adjusting entries are journalized and posted

Its purpose is to prove the equality of debit balances

Review Question Financial Statements are prepared directly from the

Preparing Financial Statements Preparing Financial Statements

When a company prepays an expense, it debits

Illustration: Assume that Pioneer Advertising received

Oct. 31 Service revenue 800

Adjustment approaches—a comparison Illustration 3A-7

You might also like