The Adjusting Process

DLSU Manila

Actbas1 August 1, 2011

.

Objectives
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.

The Matching Concept

Reporting Revenue and Expenses

TWO METHODS
Cash Basis of Accounting Accrual 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 Accounting

Revenue

earned Expense reported when incurred Properly matches revenues and expenses in determining net income Requires adjusting entries at end of period

reported when

The matching concept supports

reporting revenues and related expenses in the same period.
Paid P10,000 for $10,000 an advertising P10,000 campaign for a recorded as an product that will asset be introduced in 2010. 2003. 2009 Sold the P10,000 advertisedin expensed product. 2010 to match revenues 2010

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00

Unadjusted trial balance

900 00 360 00 25 000 00

4 000 00

16 340 00
4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00

900 00 360 00 25 000 00

Assets

4 000 00

16 340 00
4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00

900 00 360 00 25 000 00

4 000 00

Liabilities

16 340 00
4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00

900 00 360 00 25 000 00

4 000 00

16 340 00

Owners Equity

4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00

900 00 360 00 25 000 00

4 000 00

16 340 00
4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

Revenue

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00

Expenses
4 000 00

900 00 360 00 25 000 00 16 340 00

4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

NetSolutions Chart of Accounts

Balance Sheet
1. 11 12 14 15 17 18 19 Assets Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depreciation19 Depreciation 2. Liabilities 21 Accounts Payable 22 Wages Payable 23 Unearned Rent 3. Owners Equity 31 Chris Clark, Capital 32 Chris Clark, Drawing

Income Statement
4. Revenue 41 Fees Earned 42 Rent Revenue 5. 51 52 53 54 Accumulated 55 56 59 Expenses Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Expense

Deferred Expenses (Prepaid Expenses)

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 065 00 2 220 00 2 000 00 2 400 00 Some of these supplies have 20 000 00 1 31, a been used. On December800 00

count reveals that P760 of supplies are on hand.

4 000 00

900 00 360 00 25 000 00 16 340 00

4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

Supplies (balance on trial balance) Supplies on hand, December 31 Supplies used

2010

P2,000 760 P1,240

1 Dec. 31 Supplies Expense Supplies 2

55 14

1 240 00
1 240 00

3
4

Bal.

Supplies Expense Supplies 14 2,000 Dec. 31 1,240 Bal. 800 760 Dec. 31 1,240 2,040

55

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00

The prepayment for 24 months of 900 insurance does not reflect that 360 25 000 Decembers insurance has 4 000 00 theoretically expired. 16 340

00 00 00 00

4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

4 5 6

31 Insurance Expense
Prepaid Insurance

56
15

100 00
100 00

Prepaid Insurance Bal. 2,400 Dec. 31 2,300

15

100

Insurance Expense Dec. 31 100

56

Deferred Revenue (Unearned Revenue)

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00

Three months rent, P360, was received on December 1. As of December 31, only P120 has been 900 360 earned.
4 000 00

00 00 25 000 00 16 340 00

4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

31 Unearned Rent Rent Revenue

23 42

120 00 120 00

8
9 10

Unearned Rent Dec. 31 120 Bal.

23

360 240

Rent Revenue Dec. 31

42

120

Effect of Omitting Adjustment

Accrued Expenses (Accrued Liabilities)

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

25

2 065 00 2 220 00 At the end of December, accrued 2 000 wages amounted to00 P250. 2 400 00 Currently, Wages000 00 20 Expense is 1 800 no understated and there is 00 liability 900 00 shown for these wages. 360 00 25 000 00 4 000 00 16 340 00 4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

10

31 Wages Expense

51

250 00

11
12 13

Wages Payable

22

250 00

Wages Payable
Dec. 31

22 250

Wages Expense
Bal. Dec. 31 4,275 250

51

Effect of Omitting Adjustment

Accrued Revenues (Accrued Expenses)

NetSolutions Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 065 00 2 220 00 2 000 00 NetSolutions provided 2 400 00 P500 20 000 00 in services during December00 1 800

29

for which the customer has not been billed.

4 000 00

900 00 360 00 25 000 00 16 340 00

4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00

13

14
15 16

31 Accounts Receivable Fees Earned

12 41

500 00

500 00

Accounts Receivable 12 Bal. 2,220 Dec. 31 500 2,720

Fees Earned 41 Bal. 16,340 Dec. 31 500 16,840

Effect of Omitting Adjustment

Fixed Assets

Land

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

Building

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

Equipment

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

NetSolutions estimates the depreciation on its office equipment to be P50 for the month of December.
16

17
18 19

31 Depreciation Expense
Accumulated Depreciation

53

50 00

Office Equipment

19

50 00

Accumulated Depreciation Office Equipment Dec. 31

19

50

Depreciation Expense 53 Dec. 31 50

NetSolutions balance sheet would show the office equipment at cost, less the accumulated depreciation.

Office equipment Less accumulated depreciation

P1,800 50 P1,750

Book value

Effect of Omitting Adjustment

Summary of Basic Adjustments

NetSolutions Adjusted Trial Balance for December 31, 2010

NetSolutions Adjusted Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depreciation Accounts Payable Wages Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Rent Revenue Wages Expense Rent Expense Utilities Expense 2 065 00 2 720 00 760 00 2 300 00 20 000 00 1 800 00

41

50 900 250 240 25 000

4 000 00

00 00 00 00 00

16 840 00 120 00 4 525 00 1 600 00 985 00

Continued

NetSolutions Trial Balance December 31, 2010

42

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Utilities Expense Supplies Expense Insurance Expense Miscellaneous Expense

2 065 00 2 720 00 760 00 2 300 00 20 000 00 1 800 00 985 00 2 040 00 100 00 455 00 43 400 00 43 400 00