1. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Student Version The Adjusting Process Chapter 3 These slides should be viewed using the presentation mode (click the icon to start presentation). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Reeve Warren Duchac PRINCIPLES OF FINANCIAL ACCOUNTING PRINCIPLES OF ACCOUNTING ACCOUNTING PRINCIPLES Using excel for Success 12e 24e 2e

2. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 1 1.Describe the nature of the adjusting process.

3. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. General concept: revenues are earned when services provided. Nature of the Adjusting Process

4. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Nature of the Adjusting Process  Under the cash basis of accounting, revenues and expenses are reported on the income statement in the period in which cash is received or paid.  Under the accrual basis of accounting, revenues are reported on the income statement in the period in which they are earned. Thus, some of the accounts need updating at the end of the accounting period. LO 1  The accounting concept supporting the reporting of revenues when they are earned regardless of when cash is received is called the revenue recognition concept.

5. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Nature of the Adjusting Process LO 1  The accounting period concept requires that revenues and expenses be reported in the proper period.  The accounting concept supporting reporting revenues and related expenses in the same period is called the matching concept, or matching principle.

6. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Adjusting Process LO 1  The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the adjusting process.  The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries.

7. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Types of Accounts Requiring Adjustment LO 1  Prepaid expenses are the advance payment of future expenses and are recorded as assets when cash is paid, and become expenses over time.  Unearned revenues are the advance receipt of future revenues and are recorded as liabilities when cash is received. (These two items sometimes referred to as deferrals)

8. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Types of Accounts Requiring Adjustment LO 1  Accrued revenues are unrecorded revenues that have been earned and for which cash has yet to be received.  Accrued expenses are unrecorded expenses that have been incurred and for which cash has not yet been paid. (These two items sometimes referred to as accruals)

9. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 2 1.Describe the nature of the adjusting process. 2.Journalize entries for accounts requiring adjustment.

10. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. NetSolutions’ supplies account has a balance of $2,000 on the unadjusted trial balance. Some of these supplies have been used. On December 31, a count reveals that the amount of supplies on hand is $760. Supplies (balance on trial balance) $2,000 Supplies on hand, December 31 – 760 Supplies used $1,240 Prepaid Expenses LO 2

12. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepaid Expenses LO 2 Assets = Liabilities + Owner’s Equity (Expense) Accounting Equation Impact decrease increase

13. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. I. On December 1, NetSolutions paid a premium of $2,400 for an insurance policy for liability, theft, and fire. The policy covers a one-year period. Prepaid Insurance

14. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Prepaid Insurance Assets = Liabilities + Owner’s Equity (Expense) Accounting Equation Impact decrease increase The debit balance of $2,400 in NetSolutions’ prepaid insurance account represents the December 1 prepayment of insurance for 12 months. Dec.

15. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Exercises (prepaid expenses) 1) On Dec. 1, 2012, ABC Co. purchased an insurance policy for $10,000 that covers a 5 months period. Journalize the entry? Prepare the adjustment entry at Dec 31, 2012. 2) On Dec 1, 2012 ABC Co. paid one of its employees an advance salary of $4,000 for 4 months. Journalize the entry? Prepare the adjustment entry at Dec 31, 2012.

17. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3) On Dec 1, 2012, ABC Co. paid a 2 months advance rent of $10,000 for a lab. Journalize the entry? Prepare the adjustment entry at Dec 31, 2012. 4) On Nov 6, 2012. ABC Co. purchased supplies on account for $2,000. on Dec 31, 2012. Records show that 1,350 of supplies were used. Journalize the purchasing transaction? Prepare the adjusting entry at the end of the period. Exercises (prepaid expenses)

18. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Depreciation Expense  Fixed assets, or plant assets, are physical resources that are owned and used by a business and are permanent or have a long life.  As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation.

19. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Depreciation Expense  All fixed assets, except land, lose their usefulness and, thus, are said to depreciate.  As a fixed asset depreciates, a portion of its cost should be recorded as an expense. This periodic expense is called depreciation expense.

20. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Depreciation Expense  The fixed asset account is not decreased (credited) when making the related adjusting entry. This is because both the original cost of a fixed asset and the depreciation recorded since its purchase are reported on the balance sheet. Instead, an account entitled Accumulated Depreciation is increased (credited).  Accumulated depreciation accounts are called contra accounts, or contra asset accounts.

21. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 L. On December 4, NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800. Depreciation Expense

22. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Depreciation Expense Assets = Liabilities + Owner’s Equity (Expense) Accounting Equation Impact increase NetSolutions estimates the depreciation on its office equipment to be $50 for the month of December.

23. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Depreciation Expense  The difference between the original cost of the office equipment and the balance in the accumulated depreciation—office equipment account is called the book value of the asset (or net book value). It is computed as shown below. Book Value of Asset= Cost of the Asset – Accum. Depre. of Asset Book Value of Off. Equip.= Cost of Off. Equip. – Accum. Depre. of Office Equip. Book Value of Off. Equip.= $1,800 – $50 Book Value of Off. Equip.= $1,750

24. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exercises (Depreciation Expense) 1) ABC Co. purchased a car for $30,000 cash at Jul 1, 2010. The expected depreciation for the car is $1,250. Journalize the purchasing transaction. Journalize the adjusting entry at Dec 31, 2010. 2) ABC Co. purchased a building for $300,000 on account at May 6, 2011. The depreciation cost $10,000. Journalize the purchasing transaction. Journalize the adjusting entry at Dec 31, 2011.

25. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. K. On December 1, NetSolutions received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. NetSolutions agreed to rent the land to the retailer for three months, with the rent payable in advance. NetSolutions received $360 for three months’ rent beginning December 1. Unearned Revenues

26. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Unearned Revenues The credit balance of $360 in NetSolutions’ unearned rent account represents the receipt of three months’ rent on December 1 for December, January, and February. At the end of December, one month’s rent has been earned.

27. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Unearned Revenues Assets = Liabilities + Owner’s Equity (Revenue) Accounting Equation Impact decrease increase

28. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exersices (Unearned Revenues) 1)On the 1st of Nov, ABC Company received advance revenue of $5,000. This revenue was supposed to be received on monthly basis of $1,000. Journalize the purchasing transaction. Journalize the adjusting entry at Dec 31, 2011. 2) As of Dec 31, $7,000 of the unearned revenue became earned.  Journalize the adjusting entry at Dec 31, 2011.

29. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3) The unearned commissions account had a balance of $10,000 during the year. At Dec 31, the amount of unexpired commissions related to future periods is $4,220.  Journalize the adjusting entry at Dec 31, 2011. 4) The balance in the unearned fees account, before adjustment at the end of the year, is $44,900. The amount of unearned fees at the end of the year is $22,300.  Journalize the adjusting entry at Dec 31, 2011. Exersices (Unearned Revenues)

30. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Accrued Revenues Are unrecorded revenues that have been earned and for which cash yet to be received. Example: NetSolutions signed an agreement with Danker Co. on December 15 to provide services at a rate of $20 per hour. As of December 31, NetSolutions had provided 25 hours of services. The revenue will be billed on January 15.

31. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Assets = Liabilities + Owner’s Equity (Revenue) Accounting Equation Impact increase Accrued Revenues

32. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exercise (Accrued Revenues) 1) At the end of 2013, $13,680 of fees have been earned but have not billed to clients.  Journalize the adjusting entry at Dec 31, 2011.

33. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Accrued Expenses/Wages Are unrecorded expenses that have been incurred and for which cash yet to be paid. Example: 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, December 30 and 31. The wages of $250 will be paid on January 10, 2012.

34. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Accrued Wages Assets = Liabilities + Owner’s Equity (Expense) Accounting Equation Impact increase

35. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Accrued Wages NetSolutions paid wages of $1,275 on January 10. This payment includes the $250 of accrued wages recorded on December 31.

36. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 3 1.Describe the nature of the adjusting process. 2.Journalize entries for accounts requiring adjustment. 3.Summarize the adjustment process.

37. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Adjusting Entries Adjusting Entries—NetSolutions (continued) LO 3

38. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Adjusting Entries LO 3 Adjusting Entries—NetSolutions (concluded)

39. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Ledger with Adjusting Entries (continued)

40. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Ledger with Adjusting Entries Ledger with Adjusting Entries─ NetSolutions (continued)

41. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Ledger with Adjusting Entries Ledger with Adjusting Entries─ NetSolutions (continued)

42. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Ledger with Adjusting Entries Ledger with Adjusting Entries─ NetSolutions (concluded)

43. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ledger with Adjusting Entries

44. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

46. Learning Objective 4 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.

47. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Adjusted Trial Balance  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. LO 4

48. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Adjusted Trial Balance LO 4

49. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

51. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Student Version The Adjusting Process The End