CHAPTER 3

ADJUSTING THE
ACCOUNTS

Accounting Principles, Kieso

Chapter
3-1
 Study
Study Objectives
Objectives

1. Explain the time period assumption.

2. Explain the accrual basis of accounting.
3. Explain the reasons for adjusting entries.
4. Identify the major types of adjusting entries.
5. Prepare adjusting entries for deferrals.
6. Prepare adjusting entries for accruals.
7. Prepare adjusting entries for alternative treatment
for deferral
8. Describe the nature and purpose of an adjusted
trial balance.
Chapter
3-2
 Adjusting
Adjusting the
the Accounts
Accounts

The
The Basics
Basics of
of The
The Adjusted
Adjusted Trial
Trial
Timing
Timing Issues
Issues Adjusting Balance and
Balance and
Financial
Financial Statements
Statements
Entries

Time period Types of Preparing the

assumption adjusting entries adjusted trial
balance
Fiscal and Adjusting entries
calendar years for deferrals and Preparing
accruals financial
Accrual- vs. cash-
statements
basis accounting Alternative
Recognizing treatment for
revenues and deferrals
expenses Summary of
journalizing and
posting

Chapter LO 1 - 2 LO 2 - 7 LO 8
3-3
 Timing
Timing Issues
Issues
Time Period or Periodicity Assumption
Divide the economic life of a business into
artificial time periods
.....
Jan. Feb. Mar. Apr. Dec.

Generally a month, a quarter, or a year.

Fiscal year vs. calendar year

Chapter
3-4 LO 1 Explain the time period assumption.
 Timing
Timing Issues
Issues
Time Period or Periodicity Assumption
Exercise - 1 Classify following periods as Calendar year,
fiscal year, and interim periods
Accounting Period Period
January 1 – 31, 2013 Interim
October 1, 2013 – September 30, 2014 Fiscal
January 1 – December 31, 2013 Calendar & Fiscal
January 1 – March 2013 Interim
April 1 2013 – March 31, 2014 Fiscal
January 1 – June 30, 2013 Interim
December 29, 2012 – December 27, 2013 Fiscal
July 1, 2013 – June 30, 2014 Fiscal
Chapter
3-5 LO 1 Explain the time period assumption.
 Timing
Timing Issues
Issues

Accrual- vs. Cash-Basis Accounting

Accrual-Basis Accounting
Transactions are recorded in the periods in
which the events occur
Revenues are recognized when earned, rather
than when cash is received.
Expenses are recognized when incurred, rather
than when paid.

Chapter
3-6 LO 2 Explain the accrual basis of accounting.
 Timing
Timing Issues
Issues

Accrual- vs. Cash-Basis Accounting

Cash-Basis Accounting
Revenues are recognized when cash is received.
Expenses are recognized when cash is paid.
Cash-basis accounting is not in accordance with
generally accepted accounting principles (GAAP).

Chapter
3-7 LO 2 Explain the accrual basis of accounting.
 Timing
Timing Issues
Issues

Recognizing Revenues and Expenses

Revenue Recognition Principle
Question # 3 - Rick Marsh, a lawyer, accepts a
legal engagement in March, performs the work in
April, and is paid in May. If Marsh’s law firm
prepares monthly financial statements, when
should it recognize revenue from this
engagement?
It should recognize the revenue in April, the
accounting period in which it is earned.

Chapter
3-8 LO 2 Explain the accrual basis of accounting.
 Timing
Timing Issues
Issues

Recognizing Revenues and Expenses

Revenue Recognition Principle
Companies recognize
revenue in the accounting
period in which it is
earned.
In a service enterprise,
revenue is considered to
be earned at the time the
service is performed.
Chapter
3-9 LO 2 Explain the accrual basis of accounting.
 Timing
Timing Issues
Issues

Recognizing Revenues and Expenses

Matching Principle
In completing the engagement, Marsh pays no
costs in March, $2,000 in April and $2,500 in
May (incurred in April). How much expenses
should the firm deduct from revenue in the
month when it recognizes revenue?

Expenses of $4,500 should be deducted from the

revenues in April when the revenue is recognized.

Chapter
3-10 LO 2 Explain the accrual basis of accounting.
 Timing
Timing Issues
Issues

Recognizing Revenues and Expenses

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

“Let the expenses follow

the revenues.”

Chapter
3-11 LO 2 Explain the accrual basis of accounting.
 Timing
Timing Issues
Issues
GAAP relationships in revenue and expense recognition
Illustration 3-1

Chapter
3-12 LO 2 Explain the accrual basis of accounting.
 Timing
Timing Issues
Issues

Review Question – SSQ 3 - 1

The time period assumption states that:
a. revenue should be recognized in the accounting
period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided
into artificial time periods.
d. the fiscal year should correspond with the
calendar year.

Chapter
3-13 LO 1 Explain the time period assumption.
 Timing
Timing Issues
Issues

Review Question – SSQ 3 - 3

One of the following statements about the accrual basis
of accounting is false. That statement is:
a. Events that change a company’s financial
statements are recorded in the periods in which
the events occur.
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
3-14 LO 2 Explain the accrual basis of accounting.
 Adjusting
Adjusting the
the Accounts
Accounts

The
The Basics
Basics of
of The
The Adjusted
Adjusted Trial
Trial
Timing
Timing Issues
Issues Adjusting Balance and
Balance and
Financial
Financial Statements
Statements
Entries

Time period Types of Preparing the

assumption adjusting entries adjusted trial
balance
Fiscal and Adjusting entries
calendar years for deferrals and Preparing
accruals financial
Accrual- vs. cash-
statements
basis accounting Alternative
Recognizing treatment for
revenues and deferrals
expenses Summary of
journalizing and
posting

Chapter LO 1 - 2 LO 2 - 7 LO 8
3-15
 The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries

Revenue and Expense Recognition

 Revenues are recorded in the period in
which they are earned.
earned
 Expenses are recognized in the period in
which they are incurred.
incurred
There are situations when the trial balance –
the first summarization of transaction data,
is not up-to-date and complete.

Chapter
3-16 LO 3 Explain the reasons for adjusting entries.
 The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Situations when the trial balance is not up-to-date

Some transactions are recorded at month end

only.
 Payment of salaries
 Consumption of supplies
Some costs are paid in advance
 Rent, insurance, subscriptions,
maintenance charges, property and related
taxes, etc.
Chapter
3-17 LO 3 Explain the reasons for adjusting entries.
 The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
Situations when trial balance is not up-to-date

Some transactions are unrecorded

 Utilities and other bills received after the
month end.
 Payment of contractual commitments after
the month end like rent, service charges,
lawyers’ fees, interest, etc.
 Services rendered but unbilled, interest
income, commission revenue etc.
Chapter
3-18 LO 3 Explain the reasons for adjusting entries.
 The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries

Adjusting entries are needed to ensure that

the revenue recognition and matching
principles are followed.

Adjusting entries make it possible to report

correct amounts on the balance sheet and
on the income statement.

A company must make adjusting entries

every time it prepares financial statements.

Chapter
3-19 LO 3 Explain the reasons for adjusting entries.
 Types
Types of
of Adjusting
Adjusting Entries
Entries

Deferrals
1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.
Accruals
3. Accrued Revenues.
Revenues earned but not yet
received in cash or
recorded.

2. Unearned Revenues. 4. Accrued Expenses.

Revenues received in cash and Expenses incurred but not yet
recorded as liabilities paid in cash or recorded.
before they are earned.

Chapter
3-20 LO 4 Identify the major types of adjusting entries.
 Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals
Exercise 2 - On Jan. 1st, Xpress Consulting paid $24,000 to
Mars Real Estate Management for 3 months rent in advance.
What are the effects of this transaction on Xpress Consulting
and Mars Real Estate Management?
Jan Feb Mar
8,000 8,000 8,000

For Xpress Consulting, it is a prepayment and will be

recorded as an asset (Prepaid expense).

For Mars Real Estate Management,

Management it is revenue
received in advance and will be recorded as liability
(Unearned revenue).
Chapter
3-21 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals
Exercise 2 - On Jan. 1st, Xpress Consulting paid $24,000 to
Mars Real Estate Management for 3 months rent in advance.
What are the effects of this transaction on Xpress Consulting
and Mars Real Estate Management?
Xpress Consulting Debit Credit

Prepaid rent 24,000

Cash 24,000

Mars Real Estate Debit Credit

Cash 24,000
Unearned rent revenue 24,000

Chapter
3-22 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals
Exercise 3 - On Jan. 1st, Xpress Consulting signed a rental
agreement with Mars Real Estate Management for an office
space at a monthly rent of $8,000 payable on the first day
of the following month.
What are the effects of this transaction on Xpress
Consulting and Mars Real Estate Management?
As at Jan 31, Xpress Consulting has incurred rent
expenses, but not yet paid it. It is a liability and will
be recorded as Accrued expense.

As at Jan 31, Mars Real Estate Management has

earned rent revenue, but not yet received it. It is an
asset and will be recorded as Accrued revenue.
Chapter
3-23 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals
Exercise 3 - On Jan. 1st, Xpress Consulting signed a rental
agreement with Mars Real Estate Management for an office
space at a monthly rent of $8,000 payable on the first day
of the following month.

Xpress Consulting Debit Credit

Rent expense 8,000

Accrued rent expense 8,000

Mars Real Estate Debit Credit

Accrued Rent Revenue 8,000

Rent revenue 8,000

Chapter
3-24 LO 5 Prepare adjusting entries for deferrals.
 Analyzing
Analyzing Accounts
Accounts in
in Trial
Trial Balance
Balance
Each account in the Trial Balance is analyzed to determine
whether it is complete and up-to-date. (Exercise 4)

Phoenix Consulting - Jan. 31st (before adjusting entries)

Acct. No. Account Debit Credit
100 Cash $ 50,000
105 Accounts receivable 35,000
110 Prepaid insurance 12,000
120 Equipment 24,000
130 Investments 300,000
200 Accounts payable $ 20,000
210 Unearned revenue 24,000
220 Note payable 200,000
300 Austin, capital 40,000
400 Sales 137,000
$ 421,000 $ 421,000

Chapter
3-25 LO 4 Identify the major types of adjusting entries.
 Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals

Deferrals are either:

Prepaid expenses and

OR

Unearned revenues.

Chapter
3-26 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Payment of cash, that is recorded as an asset because

service or benefit will be received in the future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

insurance rent
supplies maintenance on equipment
advertising fixed assets (depreciation)

Chapter
3-27 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Prepaid Expenses
Costs that expire either with the passage of time
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.

Chapter
3-28 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-4

Adjusting entries for prepaid expenses

Increases (debits) an expense account and

Decreases (credits) an asset account.

Chapter
3-29 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Exercise 4 (Insurance): On Jan. 1st, Phoenix Consulting
paid $12,000 for 12 months of insurance coverage. Show
the journal entry to record the payment on Jan. 1st.

Jan. 1 Prepaid Insurance 12,000

Cash 12,000

Prepaid Insurance Cash

Debit Credit Debit Credit
12,000 12,000

Chapter
3-30 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Exercise 4 (Insurance): On Jan. 1st, Phoenix Consulting
paid $12,000 for 12 months of insurance coverage. Show
the adjusting journal entry required at Jan. 31st.
Insurance Expense for Jan:? 1,000
Jan. 31 Insurance Expense 1,000
Prepaid Insurance 1,000

Prepaid Insurance Insurance Expense

Debit Credit Debit Credit
12,000 1,000 1,000

11,000
Chapter
3-31 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Exercise 5 (Supplies): On Jan. 25th, RK Enterprises
Consulting purchased supplies of $2,500 on cash. Show the
journal entry to record the payment on Jun. 25th.

Jun. 25 Supplies 2,500

Cash 2,500

Supplies Cash
Debit Credit Debit Credit
2,500 2,500

Chapter
3-32 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Exercise 5 (Supplies): On Jan. 31st, an inventory count
reveals that $1,000 of supplies are still on hand. Show the
adjusting journal entry required at Jan. 31st.
Supplies Expense for Jan:? 1,500
Jan. 31 Supplies Expense 1,500
Supplies 1,500

Supplies Supplies Expense

Debit Credit Debit Credit
2,500 1,500 1,500

1,000
Chapter
3-33 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Depreciation
Buildings, equipment, and vehicles (long-lived
assets) are recorded as assets, rather than an
expense, in the year these are acquired.
Companies report a portion of the cost of a long-
lived asset as an expense (depreciation) during
each period of the asset’s useful life (Matching
Principle).

Chapter
3-34 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Exercise 4 (Depreciation): On Jan. 1st, Phoenix
Consulting paid $24,000 for equipment that has an
estimated useful life of 20 years. Show the journal entry
to record the purchase of the equipment on Jan. 1st.
Jan. 1 Equipment 24,000
Cash 24,000

Equipment Cash
Debit Credit Debit Credit
24,000 24,000

Chapter
3-35 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Exercise 4 (Depreciation): On Jan. 1st, Phoenix
Consulting paid $24,000 for equipment that has an
estimated useful life of 20 years. Show the adjusting
journal entry required at Jan. 31st.

Allocation of cost over useful life of 20 years

Y1 Y2 Y3 Y4 Y18 Y19 Y20
1,200 1,200 1,200 1,200 1,200 1,200 1,200

Allocation of cost for a year over 12 months

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
100 100 100 100 100 100 100 100 100 100 100 100

Chapter
3-36 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Exercise 4 (Depreciation): On Jan. 1st, Phoenix
Consulting paid $24,000 for equipment that has an
estimated useful life of 20 years. Show the adjusting
journal entry required at Jan. 31st.
Depreciation for Jan:? ($24,000 / 20 yrs. / 12 months = $100)

Jan. 31 Depreciation Expense 100

Accumulated Depreciation 100
Depreciation Expense Accumulated Depreciation
Debit Credit Debit Credit
100 100

Chapter
3-37 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Depreciation (Statement Presentation)
Accumulated Depreciation is a contra asset account.
Appears just after the account it offsets
(Equipment) on the balance sheet.

Balance Sheet Jan. 31

Assets

Equipment 24,000
Accumulated Depreciation (100)
Net Equipment 23,900
Chapter
3-38 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Depreciation (Financial Statement Presentation
over the useful life) Equipment costing $
24,000 with useful life of 20 years
Balance sheet presentation over useful life of 10 years

Y1 Y2 Y3 Y19 Y20
Cost 24,000 24,000 24,000 24,000 24,000

Accumulated
Depreciation 1,200 2,400 3,600 22,800 24,000

Net Book
Value 22,800 21,600 20,400 1,200 -

Chapter
3-39 LO 5 Prepare adjusting entries for deferrals.
 Prepaid Expenses - Summary

Accounting for Prepaid Expenses

Type of Initial Account Account Adjusting

adjustment recording in overstated understated entry

Prepaid Asset Dr. Expense

Asset Expense
expenses accounts Cr. Asset

Chapter
3-40 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”

Receipt of cash that is recorded as a liability because

the revenue has not been earned.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

rent magazine subscriptions
airline tickets customer deposits
school tuition

Chapter
3-41 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Unearned Revenues
Company makes an adjusting entry to record the
revenue that has been earned and to show the
liability that remains.

The adjusting entry for unearned revenues results

in a decrease (a debit) to a liability account and an
increase (a credit) to a revenue account.

Chapter
3-42 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Illustration 3-10

Adjusting entries for unearned revenues

Decrease (a debit) to a liability account and

Increase (a credit) to a revenue account.
Chapter
3-43 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Exercise 4 - On Jan. 1st, Phoenix Consulting received
$24,000 from Arcadia High School for 3 months rent in
advance. Show the journal entry to record the receipt on
Jan. 1st.
Jan. 1 Cash 24,000
Unearned Rent Revenue 24,000

Cash Unearned Rent Revenue

Debit Credit Debit Credit
24,000 24,000

Chapter
3-44 LO 5 Prepare adjusting entries for deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Exercise 4 - On Jan. 1st, Phoenix Consulting received $24,000
from Arcadia High School for 3 months rent in advance. Show
the adjusting journal entry required on Jan. 31st.
Rent for Jan :? 8,000
Jan. 31 Unearned Rent Revenue 8,000
Rent Revenue 8,000

Rent Revenue Unearned Rent Revenue

Debit Credit Debit Credit
8,000 8,000 24,000

16,000
Chapter
3-45 LO 5 Prepare adjusting entries for deferrals.
 Unearned Revenue - Summary

Accounting for Unearned Revenue

Type of Initial Account Account Adjusting

adjustment recording in overstated understated entry

Unearned Liability Dr. Liability

Liability Revenue
revenue accounts Cr. Revenue

Chapter
3-46 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Adjusting
Adjusting Entries
Entries for
for Accruals
Accruals

Made to record:
Revenues earned and

OR

Expenses incurred

in the current accounting period that have not

been recognized through daily entries.

Chapter
3-47 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Revenues earned but not yet received in cash or
recorded.

Adjusting entry results in:

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur for:

rent
interest
services performed

Chapter
3-48 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Accrued Revenues
An adjusting entry serves two purposes:

(1) It shows the receivable that exists, and

(2) It records the revenues earned.

Chapter
3-49 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Illustration 3-13

Adjusting entries for accrued revenues

Increases (debits) an asset account and

Increases (credits) a revenue account.
Chapter
3-50 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Exercise – 4 On Jan. 1st, Phoenix Consulting invested
$300,000 in securities that return 5% interest per year.
Show the journal entry to record the investment on Jan. 1st.

Jan. 1 Investments 300,00

Cash 0 300,000

Investments Cash
Debit Credit Debit Credit
300,000 300,000

Chapter
3-51 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Exercise – 4 On Jan. 1st, Phoenix Consulting invested
$300,000 in securities that return 5% interest per year.
Show the adjusting journal entry required on Jan. 31st.
Interest for Jan:? ($300,000 x 5% x 1/ 12 months = $1,250)

Jan. 31 Interest Receivable 1,250

Interest Revenue 1,250

Interest Receivable Interest Revenue

Debit Credit Debit Credit
1,250 1,250

Chapter
3-52 LO 6 Prepare adjusting entries for accruals.
 Accrued Revenues - Summary

Accounting for Accrued Revenue

Type of Reason for Account Account Adjusting
adjustment adjustment understated understated entry

Revenue Revenue
(interest, earned but
rent, not yet Dr. Asset
Asset Revenue
services) received in Cr. Revenue
earned but cash or
not collected recorded.

Chapter
3-53 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Expenses incurred but not yet paid in cash or
recorded.

Adjusting entry results in:

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

rent taxes
interest salaries

Chapter
3-54 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Expenses
An adjusting entry serves two purposes:

(1) It records the obligations, and

(2) It recognizes the expenses.

Chapter
3-55 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Illustration 3-16

Adjusting entries for accrued expenses

Increases (debits) an expense account and

Increases (credits) a liability account.
Chapter
3-56 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Exercise - 4 On Jan. 2nd, Phoenix Consulting signed a one
year note of $200,000 at a rate of 9% per year. Interest is
due on first of each month. Show the journal entry to record
the borrowing on Jan. 2nd.
Jan. 2 Cash 200,00
Notes Payable 0 200,000

Cash Notes Payable

Debit Credit Debit Credit
200,000 200,000

Chapter
3-57 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Exercise – 4 On Jan. 2nd, Phoenix Consulting signed a one
year note of $200,000 at a rate of 9% per year. Interest is
due on first of each month. Show the adjusting journal entry
required on Jan. 31st.
Interest for Jan:? ($200,000 x 9% x 1/ 12 months = $1,500)
Jan. 31 Interest Expense 1,500
Interest Payable 1,500

Interest Expense Interest Payable

Debit Credit Debit Credit
1,500 1,500

Chapter
3-58 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Exercise 6 - Micro computer Services started operations in
September 20XX. The Company will pay salaries amounting to
$1,500 to employees on October 1st. Show the adjusting
journal entry required on Sep. 30th.

Sep. 30 Salaries Expense 1,500

Salaries Payable 1,500

Salaries Expense Salaries Payable

Debit Credit Debit Credit
1,500 1,500

Chapter
3-59 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Exercise 7 - Jay Kay Printing started operation from June
14th and paid fortnightly salaries on Friday June 25th. The next
pay day is Friday July 9th. Total salaries for a five-days week are
$2,000. Employees do not work on week-end. Show the journal
entry payment of salaries on Jun. 25th.
Salaries for two weeks = 2000 x 2 = $4,000
Jun. 25 Salaries Expense 4,000
Cash 4,000
Salaries Expense
Debit Credit
6/25 4,000

Chapter
3-60 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Exercise 7 Jay Kay Printing started operation from June 14th
and paid fortnightly salaries on Friday June 25th. The next pay
day is Friday July 9th. Total salaries for a five-days week are
$2,000. Employees do not work on week-end. Show the adjusting
journal entry required on Jun. 30th.
Salaries for three days Jun 28-30 = 2000 / 5 * 3 = $1200
Jun. 30 Salaries Expense 1,200
Salaries Payable 1,200
Salaries Expense Salaries Payable
Debit Credit Debit Credit
6/25 4,000 6/30 1,200
6/30 1,200
6/30 5,200
Chapter
3-61 LO 6 Prepare adjusting entries for accruals.
 Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Exercise 7 - Jay Kay Printing pays salaries on fortnightly
basis and the next pay day is July 9th. Total salaries for two
week are $4,000. Show the adjusting journal entry required
on Jul. 9th.

Jul. 9 Salaries Payable 1,200

Salaries Expense 2,800
Cash 4,000

July 1-2 = 2 days + July 5-9 = 5 days Total work-days = 7

Total salaries relating to July = 2,000 / 5 * 7 = 2,800

Chapter
3-62 LO 6 Prepare adjusting entries for accruals.
 Accrued Expenses - Summary

Accounting for Accrued Expenses

Type of Reason for Account Account Adjusting
adjustment adjustment understated understated entry
Expenses Expenses
(interest, have been
rent, incurred but Dr. Expenses
Expenses Liabilities
salaries) not yet paid in Cr. Liabilities
incurred but cash or
not paid recorded

Chapter
3-63 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Alternative Treatment of Prepaid
Expenses and Unearned Revenues
Some companies use an alternative
treatment for prepaid expenses and
unearned revenues.

When a company prepays an expense, it

debits that amount to an expense account.

When a company receives payment for

future services, it credits the amount to a
revenue account.
LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
Chapter
3-64
 Alternative Treatment for “Prepaid Expenses”
Exercise 4 - (Insurance): On Dec. 1st, Phoenix Consulting
paid $12,000 for 12 months of insurance coverage. The
accounting year ends on December 31st. Show the journal
entry to record the payment on Dec. 1st.

Dec. 1 Insurance Expense 12,000

Cash 12,000

Insurance Expense Cash

Debit Credit Debit Credit
12,000 12,000

Chapter
3-65 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Alternative Treatment for “Prepaid Expenses”
Exercise 4 - (Insurance): On Dec 1st, Phoenix Consulting
paid $12,000 for 12 months of insurance coverage. The
accounting year ends on December 31st. Show the adjusting
journal entry required at Dec. 31st.
Insurance Expense for Dec:? 1,000
Dec. 31 Prepaid Insurance 11,000
Insurance Expense 11,000

Insurance Expense Prepaid Insurance

Debit Credit Debit Credit
12,000 11,000 11,000

1,000

Chapter
3-66 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Alternative Treatment for “Prepaid Expenses”
Exercise 4 - (Insurance): On Dec 1st, Phoenix Consulting
paid $12,000 for 12 months of insurance coverage.
Next year, the company will record insurance expense by
transferring the amount appearing as opening balance in
prepaid insurance account.
Jan. 1 Insurance Expense 11,000
Prepaid Insurance 11,000

Insurance Expense Prepaid Insurance

Debit Credit Debit Credit
11,000 11,000 11,000

Chapter
3-67 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Alternative Treatment
Alternative Treatment for
for “Unearned
“Unearned Revenues”
Revenues”
Exercise 4 - On Dec. 1st, Phoenix Consulting received
$24,000 from Arcadia High School for 3 months rent in
advance. The accounting year ends on December 31st. Show
the journal entry to record the receipt on Dec. 1st.
Dec. 1 Cash 24,000
Rent Revenue 24,000

Cash Rent Revenue

Debit Credit Debit Credit
24,000 24,000

Chapter
3-68 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Alternative
Alternative Treatment
Treatment for
for “Unearned
“Unearned Revenues”
Revenues”
Exercise 4 - On Dec. 1st, Phoenix Consulting received
$24,000 from Arcadia High School for 3 months rent in
advance. The accounting year ends on December 31st. Show
the adjusting journal entry required on Dec. 31st.
Rent for Dec:? 8,000
Dec. 31 Rent Revenue 16,000
Unearned Rent Revenue 16,000
Unearned Rent Revenue Rent Revenue
Debit Credit Debit Credit
16,000 16,000 24,000

8,000
Chapter
3-69 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Alternative
Alternative Treatment
Treatment for
for “Unearned
“Unearned Revenues”
Revenues”
Exercise 4 - On Dec. 1st, Phoenix Consulting received
$24,000 from Arcadia High School for 3 months rent in
advance. The accounting year ends on December 31st.
Next year, the company will record rent revenue by
transferring the amount appearing as opening balance in
unearned revenue account.
Jan 1 Unearned Rent Revenue 16,000
Rent Revenue 16,000
Unearned Rent Revenue Rent Revenue
Debit Credit Debit Credit
16,000 16,000 16,000

Chapter
3-70 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Summary of Basic Relationships for Deferrals

Type of Method Initial Account Account Adjusting

adjustment recording overstated understated entry
in
Asset Asset Expense Dr. Expense
Normal accounts Cr. Asset
Prepaid
expenses Expense Expense Asset Dr. Asset
Alternate accounts Cr. Expense

Liability Liability Revenue Dr. Liability

Normal accounts Cr. Revenue
Unearned
revenue Revenue Revenue Liability Dr. Revenue
Alternate accounts Cr. Liability

Chapter
3-71 LO 7 Prepare adjusting entries for the alternative treatment of deferrals.
 Adjusting
Adjusting the
the Accounts
Accounts

The
The Basics
Basics of
of The
The Adjusted
Adjusted Trial
Trial
Timing
Timing Issues
Issues Adjusting Balance and
Balance and
Financial
Financial Statements
Statements
Entries

Time period Types of Preparing the

assumption adjusting entries adjusted trial
balance
Fiscal and Adjusting entries
calendar years for deferrals and Preparing
accruals financial
Accrual- vs. cash-
statements
basis accounting Alternative
Recognizing treatment for
revenues and deferrals
expenses Summary of
journalizing and
posting

Chapter LO 1 - 2 LO 2 - 7 LO 8
3-72
 The
The Adjusted
Adjusted Trial
Trial Balance
Balance

When 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 after
all adjustments.

Chapter
3-73 LO 8 Describe the nature and purpose of an adjusted trial balance.
 The
The Adjusted
Adjusted Trial
Trial Balance
Balance
Adjusted Trial Balance Debit Credit
Cash $ 50,000
Accounts receivable 35,000
Interest receivable 1,250
Prepaid insurance 11,000
Equipment 24,000
Accumulated depreciation $ 100
Investments 300,000
Accounts payable 20,000
Interest payable 1,500
Unearned revenue 16,000
Note payable 200,000
Austin, capital 40,000
Sales 137,000
Interest revenue 1,250
Rent revenue 8,000
Interest expense 1,500
Depreciation expense 100
Insurance expense 1,000
$ 423,850 $ 423,850
Chapter
3-74 LO 8 Describe the nature and purpose of an adjusted trial balance.
 Timing
Timing Issues
Issues
Review Question - 3 - 5
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which
they are incurred.
b. revenues are recorded in the period in which
they are earned.
c. balance sheet and income statement accounts
have correct balances at the end of an
accounting period.
d. all of the above.

Chapter
3-75 LO 3 Explain the reasons for adjusting entries.
 Timing
Timing Issues
Issues
Review Question - 3 - 14
Which of the following statements is incorrect
concerning 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.
b. The adjusted trial balance provides the primary
basis for the preparation of financial statements.
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
3-76 LO 8 Describe the nature and purpose of an adjusted trial balance.
 Preparing
Preparing Financial
Financial Statements
Statements

Financial
Financial Statements
Statements are
are prepared
prepared directly
directly from
from the
the
Adjusted
Adjusted Trial
Trial Balance.
Balance.

Owner’s Statement
Balance Income
Equity of Cash
Sheet Statement
Statement Flows

Chapter
3-77 LO 8 Describe the nature and purpose of an adjusted trial balance.
 Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit
Cash $ 50,000 Income Statement
Accounts receivable 35,000
Interest receivable 1,250 Incom e Sta te m e nt
Prepaid insurance 11,000 F or the M onth Ende d J a n. 3 1 , 2 0 0 8
Equipment 24,000
Re ve nue s:
Accumulated depreciation $ 100
Investments 300,000 Sales $ 13 7 ,0 0 0
Accounts payable 20,000 Interest revenue 1,2 5 0
Interest payable 1,500 Rent revenue 8 ,0 0 0
Unearned revenue 16,000
T otal revenue 14 6 ,2 5 0
Note payable 200,000
Austin, capital 40,000 Expe nse s:
Sales 137,000 Interest expense 1,5 0 0
Interest revenue 1,250 D epreciation expense 10 0
Rent revenue 8,000
Insurance expense 1,0 0 0
Interest expense 1,500
Depreciation expense 100 T otal expenses 2 ,6 0 0
Insurance expense 1,000 N e t incom e $ 14 3 ,6 5 0
$ 423,850 $ 423,850

Chapter
3-78 LO 8 Describe the nature and purpose of an adjusted trial balance.
 Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit
Cash $ 50,000
Accounts receivable 35,000
Interest receivable 1,250
Prepaid insurance 11,000
Equipment 24,000
Accumulated depreciation
Investments 300,000
$ 100
Statement of
Accounts payable 20,000 Owner’s Equity
Interest payable 1,500 S ta te m e nt of O w ne r's E quity
Unearned revenue 16,000
F or the M onth E nde d J a n. 3 1 , 2 0 0 8
Note payable 200,000
Austin, capital 40,000
Sales 137,000 Austin, Capital, J an. 1 $ 4 0 ,0 0 0
Interest revenue 1,250 + N et incom e 14 3 ,6 5 0
Rent revenue 8,000 - D raw ings 0
Interest expense 1,500
Austin, Capital, J an. 3 1 $ 18 3 ,6 5 0
Depreciation expense 100
Insurance expense 1,000
$ 423,850 $ 423,850

Chapter
3-79 LO 8 Describe the nature and purpose of an adjusted trial balance.
 Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit Balance Sheet Jan. 31, 2008
Cash $ 50,000 Assets
Accounts receivable 35,000 Cash $ 50,000
Interest receivable 1,250 Accounts receivable 35,000
Prepaid insurance 11,000 Interest receivable 1,250
Equipment 24,000 Prepaid insurance 11,000
Accumulated depreciation $ 100
Investments 300,000
Investments 300,000
Equipment 24,000
Accounts payable 20,000
Interest payable 1,500
Accum. Depreciation (100)
Unearned revenue 16,000 23,900
Note payable 200,000 Total assets $ 421,150
Austin, capital 40,000 Liabilities & Owner's Equity
Sales 137,000 Accounts payable $ 20,000
Interest revenue 1,250 Interst payable 1,500
Rent revenue 8,000
Unearned revenue 16,000
Interest expense 1,500
Note payable 200,000
Depreciation expense 100
Insurance expense 1,000
Austin, capital 183,650
$ 423,850 $ 423,850 Total liab. & equity $ 421,150

Chapter
3-80 LO 8 Describe the nature and purpose of an adjusted trial balance.
 Adjusting
Adjusting the
the Accounts
Accounts

QUESTIONS

Accounting Principles, Kieso

Chapter
3-81