The Adjusting ProcessThe Adjusting Process

DLSU – ManilaDLSU – Manila

Actbas1 Actbas1

August 1, 2011August 1, 2011.

1. Explain how the matching concept relates to the accrual basis of accounting.

2. Explain why adjustments are necessary and list the characteristics of adjusting entries.

3. Journalize entries for accounts requiring adjustment.

4. Summarize the adjustment process and prepare an adjusted trial balance.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

The Matching Concept

TWO METHODS

ReportingReporting Revenue and Expenses Revenue and Expenses

Cash Basis of AccountingAccrual Basis of Accounting

Under the cash basis for the accounting period concept, revenues

and expenses are reported in the income statement in the period in which cash is received or paid.

Under the accrual basis for the accounting period concept, revenues

are reported in the income statement in the period in which they are earned.

Accrual Basis of AccountingAccrual Basis of Accounting

Revenue reported when earnedExpense reported when incurredProperly matches revenues and

expenses in determining net income

Requires adjusting entries at end of period

Revenue reported when earnedExpense reported when incurredProperly matches revenues and

expenses in determining net income

Requires adjusting entries at end of period

The The matching conceptmatching concept supports supports reporting revenues and related reporting revenues and related expenses in the same period.expenses in the same period.

The The matching conceptmatching concept supports supports reporting revenues and related reporting revenues and related expenses in the same period.expenses in the same period.

2009 2010

Paid $10,000 for an advertising campaign for a

product that will be introduced in

2003.

Sold the advertised product.

P10,000 P10,000 expensed in expensed in

2010 to 2010 to match match

revenuesrevenues

Paid P10,000 for an advertising campaign for a

product that will be introduced in

2010.

P10,000 P10,000 recorded as an recorded as an

assetasset

NetSolutionsTrial Balance

December 31, 2010

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

Unadjusted trial

balance

Unadjusted trial

balance

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2010

AssetsAssets

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2010

LiabilitiesLiabilities

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2010

Owner’s Equity

Owner’s Equity

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2010

RevenueRevenue

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2010

ExpensesExpenses

NetSolutionsChart of Accounts

Balance Sheet Income Statement

1. Assets11 Cash12 Accounts Receivable14 Supplies15 Prepaid Insurance17 Land18 Office Equipment19 Accumulated

Depreciation19Accumulated Depreciation

2. Liabilities21 Accounts Payable22 Wages Payable23 Unearned Rent

3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing

4. Revenue41 Fees Earned42 Rent Revenue

5. Expenses51 Wages Expense52 Rent Expense53 Depreciation Expense54 Utilities Expense55 Supplies Expense56 Insurance Expense59 Miscellaneous Expense

Deferred Deferred Expenses Expenses (Prepaid (Prepaid

Expenses)Expenses)

NetSolutionsTrial Balance

December 31, 2010

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

Some of these supplies have been used. On December 31, a count reveals that P760 of

supplies are on hand.

Some of these supplies have been used. On December 31, a count reveals that P760 of

supplies are on hand.

1

2

3

4

Supplies Expense 1 240 00

Supplies 1 240 00

Supplies (balance on trial balance) P2,000Supplies on hand, December 31 – 760Supplies used P1,240

Dec. 312010

Dec. 31 1,240Dec. 31 1,240

55

14

SuppliesBal. 2,000

Supplies ExpenseBal. 800

14 55

2,040760

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2010

The prepayment for 24 months of insurance does not reflect that

December’s insurance has theoretically expired.

The prepayment for 24 months of insurance does not reflect that

December’s insurance has theoretically expired.

4

5

6

7

31 Insurance Expense 100 00

Prepaid Insurance 100 00

Dec. 31 100 Dec. 31 100

56

15

Prepaid InsuranceBal. 2,400

Insurance Expense15 56

2,300

Deferred Revenue Deferred Revenue (Unearned (Unearned Revenue)Revenue)

NetSolutionsTrial Balance

December 31, 2010

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

Three months’ rent, P360, was received on December 1. As of

December 31, only P120 has been earned.

Three months’ rent, P360, was received on December 1. As of

December 31, only P120 has been earned.

7

8

9

10

31 Unearned Rent 120 00

Rent Revenue 120 00

Dec. 31 120 Dec. 31 120

23

42

Unearned RentBal. 360

Rent Revenue23 42

240

Effect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting Adjustment

Accrued Accrued Expenses Expenses (Accrued (Accrued

Liabilities)Liabilities)

NetSolutionsTrial Balance

December 31, 2010

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

25

At the end of December, accrued wages amounted to P250.

Currently, Wages Expense is understated and there is no

liability shown for these wages.

At the end of December, accrued wages amounted to P250.

Currently, Wages Expense is understated and there is no

liability shown for these wages.

10

11

12

13

31 Wages Expense 250 00

Wages Payable 250 00

Dec. 31 250Dec. 31 250

51

22

Wages PayableBal. 4,275

Wages Expense22 51

Effect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting Adjustment

Accrued Accrued Revenues Revenues (Accrued (Accrued Expenses)Expenses)

NetSolutionsTrial Balance

December 31, 2010

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutions provided P500 in services during December for which the customer has

not been billed.

NetSolutions provided P500 in services during December for which the customer has

not been billed.

29

13

14

15

16

31 Accounts Receivable 500 00Fees Earned 500 00

Dec. 31 500Dec. 31 500

12

41

Accounts ReceivableBal. 16,340

Fees Earned12 41Bal. 2,220

2,720 16,840

Effect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting Adjustment

Fixed Fixed AssetsAssets

LandLandLandLand

Land has an infinite life; therefore, it does not depreciate.

BuildingBuildingBuildingBuilding

A building has a limited life, so it must be depreciated. The contra account used in the adjusting entry is

Accumulated Depreciation—Building

A building has a limited life, so it must be depreciated. The contra account used in the adjusting entry is

Accumulated Depreciation—Building

EquipmentEquipmentEquipmentEquipment

Because equipment has a limited life, it depreciates. The contra account used is Accumulated Depreciation—Equipment

NetSolutions estimates the NetSolutions estimates the depreciation on its office equipment depreciation on its office equipment

to be P50 for the month of December.to be P50 for the month of December.

NetSolutions estimates the NetSolutions estimates the depreciation on its office equipment depreciation on its office equipment

to be P50 for the month of December.to be P50 for the month of December.

16

17

18

19

Accumulated Depreciation—

Office Equipment 50 00

Dec. 31 50

19

Depreciation ExpenseDec. 31 50

Accumulated Depreciation—Office Equipment

19 53

53Depreciation Expense 50 0031

NetSolutions’ balance sheet would show the office

equipment at cost, less the accumulated depreciation.

NetSolutions’ balance sheet would show the office

equipment at cost, less the accumulated depreciation.

Office equipment P1,800 Less accumulated depreciation 50 P1,750

Book Book valuevalue

Effect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting Adjustment

Summary of Basic AdjustmentsSummary of Basic AdjustmentsSummary of Basic AdjustmentsSummary of Basic Adjustments

NetSolutions’ Adjusted Trial Balance for

December 31, 2010

NetSolutionsAdjusted Trial Balance

December 31, 2010

Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 840 00Rent Revenue 120 00Wages Expense 4 525 00Rent Expense 1 600 00Utilities Expense 985 00

41

Continued

NetSolutionsTrial Balance

December 31, 2010

Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Utilities Expense 985 00Supplies Expense 2 040 00Insurance Expense 100 00Miscellaneous Expense 455 00

43 400 00 43 400 00

42

The EndThe End