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    Adjustments

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    Scouter Sejati
    1) Companies make adjusting entries at period end to recognize revenues and expenses in the proper accounting period based on the accrual concept, even if no cash has been received or paid yet. 2) Common accounts that require adjustments include prepaid expenses, unearned revenues, accrued revenues, and accrued expenses to allocate costs or revenues over multiple periods. 3) Examples of adjusting entries provided include prepaid insurance, unearned rent, accrued services, accrued wages, and depreciation expense.

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    Adjustments

    Uploaded by

    Scouter Sejati
    65 views16 pages
    1) Companies make adjusting entries at period end to recognize revenues and expenses in the proper accounting period based on the accrual concept, even if no cash has been received or paid yet. 2) Common accounts that require adjustments include prepaid expenses, unearned revenues, accrued revenues, and accrued expenses to allocate costs or revenues over multiple periods. 3) Examples of adjusting entries provided include prepaid insurance, unearned rent, accrued services, accrued wages, and depreciation expense.

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    1) Companies make adjusting entries at period end to recognize revenues and expenses in the proper accounting period based on the accrual concept, even if no cash has been received or paid yet. 2) Common accounts that require adjustments include prepaid expenses, unearned revenues, accrued revenues, and accrued expenses to allocate costs or revenues over multiple periods. 3) Examples of adjusting entries provided include prepaid insurance, unearned rent, accrued services, accrued wages, and depreciation expense.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    65 views16 pages

    Adjustments

    Uploaded by

    Scouter Sejati
    1) Companies make adjusting entries at period end to recognize revenues and expenses in the proper accounting period based on the accrual concept, even if no cash has been received or paid yet. 2) Common accounts that require adjustments include prepaid expenses, unearned revenues, accrued revenues, and accrued expenses to allocate costs or revenues over multiple periods. 3) Examples of adjusting entries provided include prepaid insurance, unearned rent, accrued services, accrued wages, and depreciation expense.

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    You are on page 1of 16

    Adjusting Process

    Why we need adjustments?


    • Financial Statement is prepared for a specific time period.
    • The time period assumption assumes that the economic life of a business is
    divided into artificial time periods (i.e. monthly, quarterly, semi-annually,
    annually).
    • The use of accrual basis of accounting.
    • Accrual-basis accounting means that companies record events that change a
    company's financial statements in the periods in which those events occur,
    rather than in the periods in which the company receives or pay cash.

    Companies make adjusting entries at the end of an accounting period.


    Such entries ensure that companies record revenues in the period in
    which the performance obligation is satisfied and recognize expenses in
    the period in which they are incurred.
    Accounts that need adjustments

    Prepaid Expenses: Companies make


    Advance payment of future adjusting entries for
    expenses. deferrals to record the
    Recorded as assets when cash portion of the
    is paid. prepayment that
    represents the expense
    Unearned Revenues:
    incurred or the revenue
    Advance receipt of future
    revenues. for services performed
    Recorded as liabilities when in the current
    cash is received. accounting period.
    Accounts that need adjustments

    Companies make
    Accrued Revenues:
    adjusting entries for Unrecorded revenues that have
    accruals to record been earned and for which
    revenues for services cash has yet to be received.
    performed and
    expenses incurred in
    the current accounting Accrued Expenses:
    period that have not Unrecorded expenses that
    been recognized have been incurred and for
    through daily entries. which cash has not been paid.
    Financial Reporting Concepts
    How?
    2

    Prepaid Expenses

    NetSolutions’ Supplies account has a balance of $2,000 in


    the unadjusted trial balance. Some of these supplies
    have been used. On December 31, a count reveals that
    $760 of supplies are on hand.

    Supplies (balance on trial balance) $2,000


    Supplies on hand, December 31 – 760
    Supplies used $1,240
    7
    2

    Supplies 14 Supplies Expense 55


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

    8
    2
    Prepaid Expenses
    On Dec 1 Net Solutions
    paid $2,400 as a
    premium on a 1-year
    insurance policy. The
    cash payment of $2,400
    was recorded as a debit
    to Prepaid Insurance
    and credit to Cash. The
    debit balance of $2,400
    in NetSolutions’ Prepaid
    Insurance account Prepaid Insurance 15 Insurance Expense 56
    represents the Bal. 2,400 Dec. 31 200 Dec. 31 200
    December 1 2,200
    prepayment of
    insurance for 12
    months. 9
    2
    Unearned Revenues
    On Dec 1 NetSolutions received $360 from a local retailer to rent land for 3
    months. The December 31 unadjusted trial balance of NetSolutions indicates a
    balance in the unearned rent account of $360.

    Unearned Rent 23 Rent Revenue 42


    Dec. 31 120 Bal. 360 Dec. 31 120
    Bal. 240

    10
    2
    Accrued Revenues
    NetSolutions signed an agreement with Danker Co. on December
    15 to provide services at $20 per hour. As of December 31,
    NetSolutions had provided 25 hours of assistance.

    Accounts Receivable 12 Fees Earned 41


    Bal. 2,220 Bal. 16,340
    Dec. 31 500 Dec. 31 500
    Bal. 2,720 Bal. 16,840
    11
    2
    Accrued Expenses
    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.

    Wages Payable 22 Wages Expense 51


    Dec. 31 250 Bal. 4,275
    Dec. 31 250
    Bal. 4,525
    12
    2
    On Jan 10 NetSolutions paid wages of $1,275, includes
    $250 of accrued wages recorded on Dec 31. The journal
    entry for the payment of wages on January 10 is shown
    below.

    After
    posting

    13
    2

    Depreciation
    Fixed assets are used to generate revenue, just like supplies
    which are used to generate revenue. However, unlike
    supplies, there’s no visible reduction in the quantity of the
    plant assets.
    Instead, as time passes, the plant assets lose its ability to
    provide useful services. This decrease of usefulness is called
    depreciation.

    14
    2
    NetSolutions estimates the depreciation on its office
    equipment to be $50 for the month of December.

    Depreciation Expense 53 Accum. Depr.—Office Equip. 19


    Dec. 31 50 Dec. 31 50

    15
    2

    NetSolutions’ balance sheet would show


    office equipment at cost, less Note:
    accumulated depreciation.
    LAND is NOT
    depreciated!
    Office equipment $1,800
    Less accumulated
    depreciation 50
    $1,750

    Book
    value 16

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