1. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Chapter 3 Adjusting Accounts and Preparing Financial Statements

2. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin 123456789101112 1234 Annually 12 Monthly Quarterly Semiannually The Accounting Period Jan FebMar Apr MayJunJulAugSepOctNovDec

3. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Adjustments An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. Adjusting Accounts Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Prepaid (Deferred) expenses* Unearned (Deferred) revenues Accrued expense Accrued revenues Framework for Adjustments * including depreciation

4. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin 12/1/08 12/31/08 Year end Next pay Date Friday Record adjusting journal entry. Record adjusting journal entry. Payroll Adjustment Fanning Electronics pays its employees every Friday. This year end falls on 12/31/08 which is a Monday. The employees will not be paid their wages until the normal payday of Friday, January 4. The company’s weekly payroll is $8,750. Compute the amount of the adjustment to be recorded on 12/31/08. Mon

5. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin The payroll adjusting journal entry

6. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Straight-Line Depreciation Expense = Asset Cost - Salvage Value Useful Life Depreciation Depreciation is the process of computing expense from allocating the cost of plant and equipment over their expected useful lives.

7. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Depreciation 2008 Depreciation Expense = $20,000 - $0 5 =$4,000 Eighteen months earlier on July 1, 2007, Fanning Electronics purchased equipment for $20,000. The equipment has an estimated useful life of 5 years and Fanning does not expect the equipment to have any residual value. Let’s record depreciation expense for the year ended December 31, 2008.

8. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Equipment Depreciation Expense 7/1 20,000 (18-months earlier) 12/31 4,000 Accumulated Depreciation 12/31/07 2,000 (for 6 months) 12/31/08 4,000 Depreciation AJE

9. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Unearned (Deferred) Revenues Cash received in advance of providing products or services. Liability Revenue Unadjusted Balance Credit Adjustment Debit Adjustment

10. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Unearned (Deferred) Revenues

11. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Unearned (Deferred) Revenues On December 31, work on twenty of the twenty four homes was completed. Record the adjusting entry to recognize the revenue earned.

12. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Prepaid Insurance On September 1, 2008, Fanning Electronics paid $1,800 for a one year insurance policy. The company recorded the expenditure as a debit to Prepaid Insurance on September 1. What adjustment is required? On September 1, 2008, Fanning Electronics paid $1,800 for a one year insurance policy. The company recorded the expenditure as a debit to Prepaid Insurance on September 1. What adjustment is required?

13. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Yes, I’ve completed the work, but have not had time to bill you yet. Yes, I’ve completed the work, but have not had time to bill you yet. Accrued Revenues Revenues earned in a period that are both unrecorded and not yet received. Revenues earned in a period that are both unrecorded and not yet received. Asset Revenue Credit Adjustment Debit Adjustment

14. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Accrued Revenues Fanning Electronics completed a $7,000 contract on December 29, 2008 that had not been billed and not recorded as of 12-31-08. We need to accrue the revenue because it has been earned.

15. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Summary of adjustments

16. © The McGraw-Hill Companies, Inc., 2009 McGraw-Hill/Irwin Effect of adjusting entries