The Accounting Cycle: Step 5 Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

Step 5: The Adjusting Process Reason for adjusting is to make the financial statements as accurate as possible The Revenue Recognition Principle helps us to recognize any and all revenue earned The Matching Principle requires we match all expenses incurred during a period to all revenues earned in that period

The Adjusting Process - Continued Revenue Recognition Revenue is recognized when earned, regardless of whether cash is received Revenue is also recognized when an exchange of assets takes place Matching Principle The principle states that in order to have the most accurate financials, we match revenues earned with those expenses incurred in order to generate those revenues

Types of Adjustments Deferrals Cash comes first and recognition of expenses is deferred until they are incurred and of revenue until it is earned Examples are Prepaid Insurance, Supplies, Depreciation and Unearned Revenue Accruals Cash comes later and expenses and revenues are recognized at the time they are incurred and earned Examples are Salaries Payable, Interest Payable and Interest Receivable

Step 5 Adjustments a1. account for one month expired insurance a2. ending balance supplies = 700; adjust for supplies used a3. equipment expected to have a 5 year (60 month) life and 1,200 salvage value; account for one month's depreciation expense a4. received 5,700 for services to be performed next month (no calculations required) a5. assistant earned 2,000 not yet paid (no calculations required) a6. compute one month's interest expense on note using simple interest

Adjustments with Calculations account for one month expired insurance ==> 4,800 /12 = 400 per month a2. ending balance supplies = 700; adjust for supplies used ==> 1,300 - 700 = 600 in supplies used a3. equipment expected to have a 5 year (60 month) life and 1,200 salvage value; account for one month's depreciation expense ==> (7,200 - 1,200) / 60 = 100 per month a4. received 5,700 for services to be performed next month (no calculations required) a5. assistant earned 2,000 not yet paid (no calculations required) a6. compute one month's interest expense on note using simple interest ==> Interest = Principal * Rate * Time ==> 10,000 * .06 * 1 = 600 per year or 50 per month

Adjustment for Prepaid Insurance   a1. insurance expense 400 prepaid insurance b. 4,800 4,400

Adjustment for Supplies   a2. supplies expense 600 supplies f. 1,300 700

Adjustment for Depreciation   a3. depreciation expense - furniture 100 acumulated deprec - furniture deprec exp - furniture accum deprec - furniture

Adjustment for Unearned Revenue   a4. cash 5,700 unearned revenue a. 35,000 b. 4,800 c. 3,000 d. 5,000 e. 10,000 f. 1,300 g. 4,500 h. 2,000 j. 3,600 k. 1,000 l. 4,000 38,500

Adjustment for Wages Payable   a5. wages expense 2,000 wages payable h. 4,000

Adjustment for Interest on Note   a6. interest expense 50 interest payable

Step 5 - Conclusion Next time, in Step 6 we will take what happened here in Step 5 and create the Adjusted Trial Balance. Then, we’ll use that Adjusted Trial Balance information to create the Financial Statements as part of Step 7.