Adjusting Process

Nature of the Adjusting Process
The accounting period concept requires that

revenues and expenses be reported in the proper
period.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Under the accrual basis of accounting, revenues

are reported on the income statement in the period
in which they are earned.
2
The accounting concept supporting the reporting

of revenues when they are earned regardless of
when cash is received is called the revenue
recognition concept.
3
LO 1
The accounting concept supporting reporting

revenues and related expenses in the same period
is called the matching concept, or matching
principle.
4
LO 1
Types of Accounts Requiring Adjustment
Prepaid expenses are the advance payment of

future expenses and are recorded as assets when
cash is paid.
5
LO 1
Prepaid Expenses
6
(continued)
LO 1
Prepaid Expenses
(concluded)
7
LO 1
Unearned revenues are the advance receipt of

future revenues and are recorded as liabilities
when cash is received.
8
LO 1
Unearned Revenues
(continued)
9
LO 1
Unearned Revenues
(concluded)
10
LO 1
Accrued revenues are unrecorded revenues that

have been earned and for which cash has yet to be
received.
11
LO 1
Accrued Revenues
12
(continued)
LO 1
Accrued Revenues
13
(concluded)
LO 1
Accrued expenses are unrecorded expenses that

have been incurred and for which cash has not yet
been paid.
14
LO 1
Accrued Expenses
(continued)
15
LO 1
Accrued Expenses
(concluded)
16
LO 2
Adjusting Entries
Unadjusted Trial Balance
for NetSolutions
NetSolutions
Unadjusted Trial Balance
December 31, 2011
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LO 2
Adjusting Entries
18
LO 2
Prepaid Expenses
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) $2,000
Supplies on hand, December 31 – 760
Supplies used $1,240
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LO 2
Prepaid Expenses
Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)
increase
decrease
20
LO 2
Prepaid Insurance
The debit balance of $2,400 in NetSolutions’

prepaid insurance account represents the
December 1 prepayment of insurance for 12
months.
21
LO 2
Prepaid Insurance

increase
decrease
22
LO 2
Impact of Omitting Adjusting Entries
23
LO 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.
24
LO 2
Unearned Revenues

Assets = Liabilities + Owner’s Equity (Revenue)
increase
decrease
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LO 2
Impact of Omitting Adjusting Entry
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LO 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.
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LO 2
Unearned Revenues

Assets = Liabilities + Owner’s Equity (Revenue)
increase increase
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LO 2
Impact of Omitting Adjusting Entry
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LO 2
Accrued Wages
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LO 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.
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LO 2
Accrued Wages

increase increase
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LO 2
Accrued Wages
NetSolutions paid wages of $1,275 on January 10.

This payment includes the $250 of accrued wages
recorded on December 31.
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LO 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.
34
LO 2
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.
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LO 2
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.
36
LO 2
Normal titles for fixed asset accounts and their

related contra asset accounts are as follows:
37
LO 2
NetSolutions estimates the depreciation on its

office equipment to be $50 for the month of
December.
38
LO 2

increase
increase
39
LO 2
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
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LO 3
Summary of Adjustment Process
(continued)
41
LO 3
(continued)
42
LO 3
(continued)
43
LO 3
(continued)
44
LO 3
(concluded)
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LO 3
Adjusting Entries
Adjusting Entries—NetSolutions
(continued)
46
LO 3
Adjusting Entries
Adjusting Entries—NetSolutions
(concluded)
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LO 3
Ledger with Adjusting Entries
(continued)
48
LO 3
Ledger with
Adjusting
Entries─
NetSolutions
(continued)
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LO 3
Ledger with
Adjusting
Entries─
NetSolutions
(continued)
50
LO 3
Ledger with
Adjusting
Entries─
NetSolutions
(concluded)
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LO 4
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.
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LO 4
Adjusted Trial Balance
Adjusted Trial
Balance
53

Adjusting Process

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Adjusting Process

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Nature of the Adjusting Process

The accounting period concept requires that

Under the accrual basis of accounting, revenues

The accounting concept supporting the reporting

The accounting concept supporting reporting

Prepaid expenses are the advance payment of

Unearned revenues are the advance receipt of

Accrued revenues are unrecorded revenues that

Accrued expenses are unrecorded expenses that

NetSolutions’ supplies account has a balance of

Accounting Equation Impact

The debit balance of $2,400 in NetSolutions’

Accounting Equation Impact

The credit balance of $360 in NetSolutions’

Accounting Equation Impact

NetSolutions signed an agreement with Danker

Accounting Equation Impact

NetSolutions pays it employees biweekly.

Accounting Equation Impact

NetSolutions paid wages of $1,275 on January 10.

Fixed assets, or plant assets, are physical resources

All fixed assets, except land, lose their usefulness

The fixed asset account is not decreased (credited)

Normal titles for fixed asset accounts and their

NetSolutions estimates the depreciation on its

Accounting Equation Impact

The difference between the original cost of the

Book Value of Asset = Cost of the Asset – Accumulated Depreciation of Asset

The purpose of the adjusted trial balance is to

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