1. The Accounting Cycle: Step 5
Professor Eric Carstensen
MiraCosta College

2. 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

3. 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

4. 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

5. 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

6. 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, = 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) / 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

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

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

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

10. 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

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

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

13. 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.