1. NETA POWERPOINT PRESENTATIONS TO ACCOMPANY VOLUME 1 Accounting Second Canadian Edition BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER Adapted by Sheila Elworthy and Tana Kristjanson Copyright © 2014 by Nelson Education Ltd.1

2. CHAPTER 3 The Adjusting Process Copyright © 2014 by Nelson Education Ltd.2

3. After studying this chapter, you should be able to: Copyright © 2014 by Nelson Education Ltd.3 1.Describe the nature of the adjusting process. 2.Journalize entries for accounts requiring adjustment. 3.Summarize the adjustment process. 4.Prepare an adjusted trial balance. The Adjusting Process

4. Copyright © 2014 by Nelson Education Ltd.4 Describe the nature of the adjusting process. 1

5. Copyright © 2014 by Nelson Education Ltd.5 Under the accrual basis of accounting, transactions and events are reported in the income statement in the period in which they occur.

6. Copyright © 2014 by Nelson Education Ltd.6 Under the cash basis of accounting, revenues and expenses are reported in the income statement in the period in which cash is received or paid.

7. Copyright © 2014 by Nelson Education Ltd.7 Revenue Recognition Principle The accounting principle supporting the reporting of revenues when they are earned, regardless of when cash is received, is called the revenue recognition principle.

8. Copyright © 2014 by Nelson Education Ltd.8 Expenses Expenses are also reported in the same period that they occur. Net income reflects the economic reality of the business.

9. Copyright © 2014 by Nelson Education Ltd.9 The Adjusting Process Under the accrual basis, at the end of the accounting period some of the accounts need updating for the following reasons: 1.Some expenses are not recorded daily. 2.Some revenues and expenses are incurred as time passes rather than as separate transactions. 3.Some revenues and expenses may be unrecorded.

10. Copyright © 2014 by Nelson Education Ltd.10 The Adjusting Process The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the adjusting process.

11. Copyright © 2014 by Nelson Education Ltd.11

12. Copyright © 2014 by Nelson Education Ltd.12 Types of Accounts Requiring Adjustment Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid.

13. Copyright © 2014 by Nelson Education Ltd.13

14. Copyright © 2014 by Nelson Education Ltd.14 Exhibit 2 (cont.)

15. Copyright © 2014 by Nelson Education Ltd.15 Types of Accounts Requiring Adjustment Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received.

16. Copyright © 2014 by Nelson Education Ltd.16

17. Copyright © 2014 by Nelson Education Ltd.17 Exhibit 3 (cont.)

18. Copyright © 2014 by Nelson Education Ltd.18 Types of Accounts Requiring Adjustment Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received.

19. Copyright © 2014 by Nelson Education Ltd.19

20. Copyright © 2014 by Nelson Education Ltd.20 Exhibit 4 (cont.)

21. Copyright © 2014 by Nelson Education Ltd.21 Types of Accounts Requiring Adjustment Accrued expenses are unrecorded expenses that have been incurred and for which cash has not been paid.

22. Copyright © 2014 by Nelson Education Ltd.22

23. Copyright © 2014 by Nelson Education Ltd.23

24. Copyright © 2014 by Nelson Education Ltd.24 Types of Accounts Requiring Adjustment Depreciation expense represents the “using up” of a long-term asset.

25. 25 Copyright © 2014 by Nelson Education Ltd.

26. 26 Exhibit 6 (cont.)

27. Copyright © 2014 by Nelson Education Ltd.27 EXAMPLE EXERCISE 3-1 Accounts Requiring Adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. No Yes Yes* Yes * To the contra account FOLLOW MY EXAMPLE 3-1: For Practice: PE 3-1 a.Cash b.Prepaid Rent c.Wages Expense d. Office equipment e. Accounts Receivable f. Unearned Rent Left click the mouse for the answers.

28. Copyright © 2014 by Nelson Education Ltd.28 EXAMPLE EXERCISE 3-2 Type of Adjustment Classify the following items on the next slide as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, (4) accrued expense, or (5) depreciable capital asset.

29. Copyright © 2014 by Nelson Education Ltd.29 FOLLOW MY EXAMPLE 3-2 Type of Adjustment a.Wages owed but not yet paid. b.Supplies on hand. c.Office Equipment. d.Fees received but not yet earned. e.Fees earned but not yet received. (4) Accrued expense (1) Prepaid expense (5) Depreciable capital asset (2) Unearned revenue (3) Accrued revenue For Practice: PE 3-2 Left click the mouse for the answers.

30. Copyright © 2014 by Nelson Education Ltd.30 Journalize entries for accounts requiring adjustment. 2

31. Copyright © 2014 by Nelson Education Ltd.31

32. Copyright © 2014 by Nelson Education Ltd.32

33. Copyright © 2014 by Nelson Education Ltd.33 Prepaid Expenses NetSolutions’ Supplies account has a balance of $2,800 in the unadjusted trial balance. Some of these supplies have been used. On December 31, a count reveals that $1,560 of supplies are on hand.

34. Copyright © 2014 by Nelson Education Ltd.34 Supplies1040 Supplies5050 Bal.2,800 Adj. Bal.1,560 Dec. 311,240 Bal.0 Dec. 311,240 Adj. Bal.1,240

35. Copyright © 2014 by Nelson Education Ltd.35 Prepaid Expenses Insurance NetSolutions’ prepaid insurance account has a balance of $2,400 for 12 months of insurance coverage.

36. Copyright © 2014 by Nelson Education Ltd.36 Prepaid Insurance Insurance Expense Dec. 31200 Bal.2,400 Adj. Bal.2,200

37. Copyright © 2014 by Nelson Education Ltd.37 EXAMPLE EXERCISE 3-3 Adjustment for Prepaid Expense The prepaid insurance account had a beginning balance of $7,500 and was debited for $3,200 of premiums paid during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $3,500.

38. Copyright © 2014 by Nelson Education Ltd.38 FOLLOW MY EXAMPLE 3-3 Adjustment for Prepaid Expense Insurance Expense……………………. 7,200 Prepaid Insurance…………………7,200 Insurance expired ($7,500 + $3,200 − $3,500). For Practice: PE 3-3

39. Copyright © 2014 by Nelson Education Ltd.39 Unearned Revenues NetSolutions received $360 on December 1 for three months’ rent. At year-end, the Unearned Rent account has a balance of $360.

40. Dec. 31120 Copyright © 2014 by Nelson Education Ltd.40 Unearned Rent Rent Revenue Bal.360 Adj. Bal.240 120Dec. 31

41. EXAMPLE EXERCISE 3-4 Adjustment for Unearned Revenues The balance in the unearned fees account, before adjustment at the end of the year, is $55,700. Journalize the adjusting entry required if the amount of unearned fees at the end of the year is $26,400. Copyright © 2014 by Nelson Education Ltd.41

42. FOLLOW MY EXAMPLE 3-4 Adjustment for Unearned Revenues Unearned Fees…………………………….29,300 Fees Earned…………………………….29,300 Fees earned ($55,700 – $26,400). Copyright © 2014 by Nelson Education Ltd.42 For Practice: PE 3-4

43. Accrued Revenues NetSolutions signed an agreement with Dankner Co. on December 15 to provide services at $20 per hour. As of December 31, NetSolutions had provided 25 hours of assistance. Copyright © 2014 by Nelson Education Ltd.43

44. Copyright © 2014 by Nelson Education Ltd.44

45. EXAMPLE EXERCISE 3-5 Adjustment for Accrued Revenues At the end of the current year, $13,680 of fees have been earned but have not been billed to clients. Journalize the adjusting entry to record the accrued fees. Copyright © 2014 by Nelson Education Ltd.45

46. FOLLOW MY EXAMPLE 3-5 Adjustment for Accrued Revenues Accounts Receivable............................ 13,680 Fees Earned.................................... 13,680 Accrued fees. For Practice: PE 3-5 Copyright © 2014 by Nelson Education Ltd.46

47. Accrued Expenses NetSolutions pays it employees biweekly. During December, NetSolutions paid wages of $950 on December 12 and $1,200 on December 26. As of December 31, NetSolutions owes $250 of wages to employees for Monday, Tuesday, and Wednesday. Copyright © 2014 by Nelson Education Ltd.47

48. Copyright © 2014 by Nelson Education Ltd.48

49. Copyright © 2014 by Nelson Education Ltd.49 The journal entry for the payment of wages on January 9 is shown below. After posting

50. Copyright © 2014 by Nelson Education Ltd.50

51. EXAMPLE EXERCISE 3-6 Adjustment for Accrued Expense First Realty Co. pays weekly salaries of $12,500 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Thursday. Copyright © 2014 by Nelson Education Ltd.51

52. FOLLOW MY EXAMPLE 3-6 Adjustment for Accrued Expense Salaries Expense…………………………..10,000 Salaries Payable……………………10,000 Accrued salaries [($12,500/5 days) × 4 days]. Copyright © 2014 by Nelson Education Ltd.52

53. Capital Assets Capital Assets are physical resources that are owned and used by a business and are permanent or have a long life. Copyright © 2014 by Nelson Education Ltd.53

54. Depreciation As time passes, a capital asset loses its ability to provide useful services. This decrease in usefulness is called depreciation. All capital assets, except land, depreciate. Copyright © 2014 by Nelson Education Ltd.54

55. Normal titles for capital asset accounts and their related contra asset accounts are as follows: Capital Asset Contra Asset LandNone—Land is not amortized BuildingsAccumulated Depreciation— Buildings Store EquipmentAccumulated Depreciation—Store Equipment Office EquipmentAccumulated Depreciation—Office Equipment 2 Copyright © 2014 by Nelson Education Ltd.

56. Depreciation NetSolutions has calculated the amount of office equipment depreciation at $50. The equipment balance is $1,800. Copyright © 2014 by Nelson Education Ltd.56

57. Copyright © 2014 by Nelson Education Ltd.57

58. NetSolutions’ balance sheet would show office equipment at cost, less accumulated amortization. Copyright © 2014 by Nelson Education Ltd.58 Carrying Value

59. EXAMPLE EXERCISE 3-7 Adjustment for Depreciation The estimated amount of depreciation on equipment for the current year is $4,250. Journalize the adjusting entry to record the depreciation. Copyright © 2014 by Nelson Education Ltd.59

60. FOLLOW MY EXAMPLE 3-7 Adjustment for Depreciation Depreciation Expense............................ 4,250 Accumulated Depreciation— Equipment …….................................. 4,250 Depreciation on equipment. For Practice: PE 3-7 Copyright © 2014 by Nelson Education Ltd.60

61. EXAMPLE EXERCISE 3-8 Effect of Omitting Adjustments For the year ended December 31, 2015, Sulek Construction Co. mistakenly omitted adjusting entries for (1) $9,200 of unearned revenue that was earned, (2) earned revenue that was not billed of $13,300, and (3) accrued wages of $3,100. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income for the year ended December 31, 2015. Copyright © 2014 by Nelson Education Ltd.61

62. FOLLOW MY EXAMPLE 3-8 Effect of Omitting Adjustments a.Revenues were understated by $22,500 ($9,200 + $13,300). b.Expenses were understated by $3,100. c.Net income was understated by $19,400 ($22,500 − $3,100). For Practice: PE 3-8 Copyright © 2014 by Nelson Education Ltd.62

63. Summarize the adjustment process. 3 Copyright © 2014 by Nelson Education Ltd.63

64. Copyright © 2014 by Nelson Education Ltd.64

65. Exhibit 10 (cont.) Copyright © 2014 by Nelson Education Ltd.65

66. Copyright © 2014 by Nelson Education Ltd.66

67. Copyright © 2014 by Nelson Education Ltd.67

68. Prepare an adjusted trial balance. 4 Copyright © 2014 by Nelson Education Ltd.68

69. The purpose of the adjusted trial balance is to verify the equality of the total debit and credit balances before the financial statements are prepared. Copyright © 2014 by Nelson Education Ltd.69

70. Copyright © 2014 by Nelson Education Ltd.70

71. EXAMPLE EXERCISE 3-9 Effect of Errors on Adjusted Trial Balance Consider each of the following errors on the next slide individually, and indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by what amount. Copyright © 2014 by Nelson Education Ltd.71

72. EXAMPLE EXERCISE 3-9 Effect of Errors on Adjusted Trial Balance a.The adjustment for accrued fees of $5,340 was journalized as a debit to Accounts Payable for $5,340 and a credit to Fees Earned of $5,340. b.The adjustment for amortization of $3,260 was journalized as a debit to Amortization Expense for $3,620 and a credit to Accumulated Amortization for $3,260. Copyright © 2014 by Nelson Education Ltd.72

73. FOLLOW MY EXAMPLE 3-9 Effect of Errors on Adjusted Trial Balance a.The totals are equal even though the debit should have been journalized to Accounts Receivable, not to Accounts Payable. b.The totals are unequal. The debit total is higher by $360 ($3,620 – $3,260). For Practice: PE 3-9 Copyright © 2014 by Nelson Education Ltd.73

74. The End Copyright © 2014 by Nelson Education Ltd.74