1 The Adjusting Process 3 Student Version

Describe the nature of the adjusting process

Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid. 1 Types of Accounts Requiring Adjustment

Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received. Types of Accounts Requiring Adjustment 1

Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received. 1 Types of Accounts Requiring Adjustment

Accrued expenses are unrecorded expenses that have been incurred and for which cash has not been paid. 1 Types of Accounts Requiring Adjustment

Journalize entries for accounts requiring adjustment

Summary of Basic Adjustments

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. Prepaid Expenses 2 Supplies (balance on trial balance) $2,000 Supplies on hand, December 31 – 760 Supplies used $1,240

Dec. 311,240 Supplies Bal.2,000 Supplies Expense Bal ,

Effect of Omitting Adjustment

The debit balance of $2,400 in NetSolutions’ Prepaid Insurance account represents the December 1 prepayment of insurance for 12 months. Prepaid Expenses 2

Dec Prepaid Insurance Bal.2,400 Insurance Expense ,200 2 Dec

The December 31 unadjusted trial balance of NetSolutions indicates a balance in the unearned rent account of $360. Unearned Revenues 2

Dec Unearned Rent Bal.360 Rent Revenue

Rent Revenue 42 Dec Unearned Rent Bal Bal. Dec

Effect of Omitting Adjustment

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. Accrued Revenues 2

Dec Accounts Receivable Bal.16,340 Fees Earned Bal.2,220 2,720 Bal. 2

Dec Accounts Receivable Bal.16,340 Fees Earned Bal.2,220 2,720 Bal. 16,840 Bal. 2

Effect of Omitting Adjustment

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. Accrued Expenses 2

Dec Wages Payable Bal.4,275 Wages Expense Bal.4,525 2

Dec Wages Payable Bal.4,275 Wages Expense Bal.4,525 2

The journal entry for the payment of wages on January 10 is shown below. 2 After posting

Effect of Omitting Adjustment

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

Dec Depreciation ExpenseAccum. Depr.—Office Equip

Dec Depreciation Expense Dec Accum. Depr.—Office Equip

NetSolutions’ balance sheet would show office equipment at cost, less accumulated depreciation. Office equipment$1,800 Less accumulated depreciation 50$1,750 Book value 2

Summarize the adjustment process

(continued) Exhibit 7 Adjusting Entries—NetSolutions

Exhibit 7Adjusting Entries—NetSolutions (continued)

Prepare an adjusted trial balance

Exhibit 9Adjusted Trial Balance—NetSolutions