Adjusting the Accounts

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Chapter 4

• Adjusting the Accounts

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4-1 Guidelines to Report Revenue and Expenses
Time Period Assumption Economic life of
business can be divided into artificial time
periods
Revenue Recognition Principle Revenue recognized
in the accounting period in which it is earned
Matching Principle Expenses matched
with revenues in the period when efforts are
expended to generate revenues
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4-2 Depreciation
PREPAYMENT
ASSET
EXPENSE
Cost of Truck 15,000
2008
2009
2010
1/1/08
12/31/08
12/31/09
12/31/10
Entry Truck 15,000 Cash
15,000
Depreciation Expense
5,000
ASSET
Accumulated Depreciation
5,000
Depreciation Expense
5,000
EXPENSE
Accumulated Depreciation
5,000
CONTRA ASSET
Depreciation Expense
5,000
Statement Presentation Statement Presentation Statement Presentation Statement Presentation Statement Presentation
Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet
Asset Truck 15,000 15,000 15,000
Contra Asset Less Accum. Depr. 5,000 10,000 15,000
Book Value 10,000 5,000 -0-
Accumulated Depreciation
5,000
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4-3 Prepayment Relationships
PREPAYMENTS Benefits More Than One Accounting
Period
RECORD AS ASSET
RECORD AS LIABILITY
Prepaid Insurance 1,200
Cash 1,200
(Acquired one year policy) (Acquired one year policy) (Acquired one year policy)
Cash 6,000
Unearned Rent 6,000
(Received one years rent) (Received one years rent)
Initial Entry
Insurance Expense 100
Prepaid Insurance 100
(One month expired)
Unearned Rent 500
Rent Revenue 500
(One month earned) (One month earned) (One month earned)
Adjusting Entry
Benefits Consumed or Earned in Current Period
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4-3 Prepayment Relationships(continued)
Account Effects
Balance Sheet Balance Sheet Balance Sheet Balance Sheet
Prepaid Insurance Prepaid Insurance Unearned Rent Unearned Rent
1,200 100 500 6,000
Bal. 1,100 Bal. 5,500


Income Statement Income Statement Income Statement Income Statement
Insurance Expense Insurance Expense Rent Revenue Rent Revenue
100 500


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4-4 Accrual Relationships
ACCRUALS Expense or Revenue Not Yet Recorded
RECORD EXPENSE
RECORD REVENUE
Salaries Expense 500
Salaries Payable 500
(Accrued salary owed) (Accrued salary owed) (Accrued salary owed)
Accounts Receivable 1,000
Service Revenue 1,000
(Accrued revenue for services provided) (Accrued revenue for services provided) (Accrued revenue for services provided)
Adjusting Entry
Cash 1,000
Accounts Receivable 1,000
(Collected account receivable) (Collected account receivable) (Collected account receivable)
Subsequent Entry
Salaries Payable 500
Cash 500
(Paid salaries)
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4-5 Types of Adjusting Entries
Type of Adjustment Reason for Adjustment Account Balances Before Adjustment Adjusting Entry
1. Prepaid Expenses (a) Prepaid expenses originally recorded in asset accounts have been used Assets Overstated Expenses Understated Dr. Expenses Cr. Assets
2. Unearned Revenues (b) Unearned revenues initially recorded in liability accounts have been earned Liabilities Overstated Revenues Understated Dr. Liabilities Cr. Revenues
3. Accrued Revenues (c) Revenues earned but not yet received in cash or recorded Assets Understated Revenues Understated Dr. Assets Cr. Revenues
4. Accrued Expenses (d) Expenses incurred but not yet paid in cash or recorded Expenses Understated Liabilities Understated Dr. Expenses Cr. Liabilities
Each adjusting entry affects a balance
sheet account and an income statement account.
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4-6 Examples of Adjusting Entries
Instructions For each entry indicate the name of
the account debited and the account credited.
Adjusting Entry Account Debited Account Credited
1. To record expired rent which had been prepaid
2. To record supplies used during the period
3. To record depreciation on furniture
4. To record unearned revenue that has been earned
5. To record salary owed but not paid
6. To record rent earned but not recorded.
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4-6 Examples of Adjusting Entries(continued)
Answer
Account Debited Account Credited
1. Rent Expense Prepaid Rent
2. Supplies Expense Supplies
3. Depreciation Expense Accumulated Depreciation
4. Unearned Revenue Revenue
5. Salary Expense Salary Payable
6. Rent Receivable Rent Revenue
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4-7 Posting of Adjusting Entries
The following unadjusted accounts and related
balances are provided at September 30
Accounts Receivable. 2,400
Supplies.. 1,200
Salary Payable.. -0-
Unearned Revenue.. 500
Revenue.. 15,000
Salary Expense.. 2,100
Depreciation Expense.. -0-
Accumulated Depreciation.. 3,000

• Instructions Open T-accounts and post the
  adjusting entries indicated from the following
  data
• Supplies on hand, 200.
• Revenue earned but not accrued, 900.
• Unearned revenue earned by not recorded, 400.
• Salary owed to employees, 700.
• Depreciation of 200 is recognized.

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4-7 Posting of Adjusting Entries (continued)
Accounts Receivable Accounts Receivable Supplies Supplies Salary Payable Salary Payable
2,400 1,000 (a) 1,000 -0-
(b) 900 (d) 700
3,300 200 700

Unearned Revenue Unearned Revenue Supplies Expense Supplies Expense Salary Expense Salary Expense
(c) 400 500 -0- 2,100
(a) 1,000 (d) 700
100 1,000 2,800

Revenue Revenue Depreciation Expense Depreciation Expense Accumulated Depreciation Accumulated Depreciation
15,000 -0- 3,000
(b) 900 (e) 200 (e) 200
(c) 400 200 3,200
16,300
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4-8 Review Chapter Concepts
Topic Applied Results Justification
1. Time Period Assumption Economic life of business is divided into time periods. To provide information to prepare financial statements and tax return
2. Revenue Recognition Revenue is recorded in period earned. Requires adjusting entries. To record assets or decreases in liabilities and proper reporting of revenue earned.
3. Matching Principle Record expenses in the period they occur. Requires adjusting entries. To record liabilities or use of assets and expenses incurred in earning revenues.
4. Accrual Basis Accounting Applies revenue recognition principle, matching principle, and time period assumption. To record revenue when earned and expenses when incurred.
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4-9 PrepaymentAlternative Treatment
PREPAYMENTS Benefits More Than One Accounting
Period
RECORD AS EXPENSE
RECORD AS REVENUE
Insurance Expense 1,200
Cash 1,200
(Acquired one year policy) (Acquired one year policy) (Acquired one year policy)
Cash 6,000
Rent Revenue 6,000
(Received one years rent) (Received one years rent)
Initial Entry
Prepaid Insurance 1,100
Insurance Expense 1,100
(Eleven months unexpired) (Eleven months unexpired) (Eleven months unexpired)
Rent Revenue 5,500
Unearned Rent 5,500
(Eleven months unearned) (Eleven months unearned) (Eleven months unearned)
Adjusting Entry
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4-9 PrepaymentAlternative Treatment (continued)
Account Effects
Balance Sheet Balance Sheet Balance Sheet Balance Sheet
Prepaid Insurance Prepaid Insurance Unearned Rent Unearned Rent
1,100 5,500


Income Statement Income Statement Income Statement Income Statement
Insurance Expense Insurance Expense Rent Revenue Rent Revenue
1,200 1,100 5,500 6,000
Bal. 100 Bal. 500