Week 4:

Closing The Accounts

The Adjusting Process

Learning Objective 1
1. Describe the nature of the adjusting
process.

LO 1

Nature of the Adjusting Process

The accounting period concept
requires that revenues and expenses
be reported in the proper period.
Under the accrual basis of
accounting, revenues are reported on
the income statement in the period in
which they are earned.

Nature of the Adjusting

Process

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.
The
accounting
concept supporting
reporting revenues and related
expenses in the same period is called
the matching concept, or matching
principle.

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, some of the accounts
need updating at the end of the
accounting period.

LO 1

LO 1

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.
The journal entries that bring the
accounts up to date at the end of the
accounting period are called
adjusting entries.

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.
Unearned revenues are the advance
receipt of future revenues and are
recorded as liabilities when cash is
received.

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.

Learning Objective 2
1. Describe the nature of the adjusting
process.
2. Journalize entries for accounts
requiring adjustment.

LO 2

Prepaid Expenses
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

LO 2

Prepaid Expenses

Accounting Equation Impact

Assets

Liabilities

decrease

+
increase

Owners Equity (Expense)

LO 2

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

Accounting Equation Impact

Assets

Liabilities

+
increase

decrease

Owners Equity (Expense)

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 months
rent has been earned.

LO 2

Unearned Revenues

Accounting Equation Impact

Assets

Liabilities

Owners Equity (Revenue)

increase
decrease

LO 2

Accrued Revenues
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.

LO 2

Accrued Revenues

Accounting Equation Impact

Assets

increase

Liabilities

Owners Equity (Revenue)

increase

LO 2

Accrued Wages
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.

LO 2

Accrued Wages

Accounting Equation Impact

Assets

Liabilities

increase

Owners Equity (Expense)

increase

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.

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.

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.

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

LO 2

Depreciation Expense
Normal titles for fixed asset accounts
and their related contra asset
accounts are as follows:

LO 2

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

Accounting Equation Impact

Assets

Liabilities

increase

Owners Equity (Expense)

increase

LO 2

Depreciation Expense
The difference between the original
cost of the office equipment and the
balance in the accumulated
depreciationoffice 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

Summarizing the Adjustment

Process:
Adjusting Entries

LO 3

LO 3

Adjusting Entries

LO 3

Ledger with Adjusting Entries

(continued)

Ledger with Adjusting Entries

LO 3

LO 3

Ledger with Adjusting Entries

LO 3

Ledger with Adjusting Entries

LO 4

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

Adjusted Trial Balance

Exercises

Blum Services, Inc. has the following unadjusted balances at year-en

Cash

$12,900

Prepaid insurance

2,000

Office supplies

1,300

Office equipment

10,500

Accumulated depreciationoffice
equipment

3,500

Accounts payable

2,900

Salaries payable
Unearned service revenue
Common stock

-04,500
10,000

Retained earnings

1,750

Dividends paid

5,600

Service revenue
Salary expense

13,350
3,700

Depreciation expense

-0-

Supplies expense

-0-

Insurance expense

-0-

The following information is available to use

in making adjusting entries.
1. Office supplies on hand at year-end: $250
2. Prepaid insurance expired during the year:
$325
3. Unearned revenue remaining at year-end
$2,500
4. Depreciation expense for the year $1,800
5. Accrued salaries at year-end $900

Journalise the adjusting entries.

1. Office supplies on hand at year-end:
$250
Office supplies per unadjusted TB: $1,300
Actual balance at year end: $250
Therefore, the balance needs to be adjusted
by: $1,300 - $250 = $1,050.
Journal entry:
Cr Office Supplies $1,050
Dr Supplies Expense $1,050

Journalise the adjusting entries.

2.Prepaid insurance expired
during the year: $325
Journal entry:
Cr Prepaid insurance $325
Dr Insurance Expense
$325

Journalise the adjusting entries.

3. Unearned revenue remaining at yearend $2,500
Unearned service revenue per unadjusted
TB: $4,500
Actual balance at year end: $2,500
Therefore, the balance needs to be adjusted
by: $4,500 - $2,500 = $2,000.
Journal entry:
Dr Unearned service revenue $2,000
Cr Service revenue
$2,000

Journalise the adjusting entries.

4. Depreciation expense for the year
$1,800

Journal entry:
Cr Accumulated depreciation
Dr Depreciation Expense

$1,800
$1,800

Journalise the adjusting entries.

5. Accrued salaries at year-end $900
Journal entry:
Cr Salaries payable
Dr Salaries expense

$900
$900

Using a work sheet, prepare the trial

balance, the adjustments and the adjusted
trial balance for Blum Services, Inc.

Accounts

Trial balance
Debit

Cash

Adjustments

Credit

Debit

Credit

Adjd TB
Debit

Credit

$12,90
0

Prepaid insurance

2,000

Office supplies

1,300

10,500

Office equipment
Accumulated depreciation
office equipment

3,500

Accounts payable

2,900

4,500

10,000

1,750

Salaries payable
Unearned service revenue
Common shares
Retained earnings
Dividends paid

5,600

Service revenue
Salaries expense

13,350

3,700

Depreciation expense

Supplies expense

Insurance expense

Totals

36,000

36,000

Accounts

Trial balance
Debit

Cash

Credit

Debit

Credit

Adjd TB
Debit

Credit

$12,90
0

Prepaid insurance

2,000

Office supplies

1,300

Office equipment

Adjustments

1,050

10,500

Accumulated depreciation
office equipment

3,500

Accounts payable

2,900

4,500

10,000

1,750

Salaries payable
Unearned service revenue
Common shares
Retained earnings
Dividends paid

5,600

Service revenue
Salaries expense

13,350

3,700

Depreciation expense

Supplies expense

Insurance expense

Totals

36,000

1,050

36,000

Accounts

Trial balance
Debit

Cash

Adjustments

Credit

Debit

Adjd TB

Credit

Credit

$12,90
0

Prepaid insurance

2,000

325

Office supplies

1,300

1,050

Office equipment

Debit

10,500

Accumulated depreciation
office equipment

3,500

Accounts payable

2,900

4,500

10,000

1,750

Salaries payable
Unearned service revenue
Common shares
Retained earnings
Dividends paid

5,600

Service revenue
Salaries expense

13,350

3,700

Depreciation expense

Supplies expense

1,050

Insurance expense

325

Totals

36,000

36,000

Accounts

Trial balance
Debit

Cash

Adjustments

Credit

Debit

Adjd TB

Credit

Credit

$12,90
0

Prepaid insurance

2,000

325

Office supplies

1,300

1,050

Office equipment

Debit

10,500

Accumulated depreciation
office equipment

3,500

Accounts payable

2,900

Salaries payable
Unearned service revenue

4,500

Common shares
Retained earnings
Dividends paid

2,000

10,000

1,750

5,600

Service revenue
Salaries expense

13,350

2,000

3,700

Depreciation expense

Supplies expense

1,050

Insurance expense

325

Totals

36,000

36,000

Accounts

Trial balance
Debit

Cash

Adjustments

Credit

Debit

Adjd TB

Credit

Credit

$12,90
0

Prepaid insurance

2,000

325

Office supplies

1,300

1,050

Office equipment

Debit

10,500

Accumulated depreciation
office equipment

3,500

Accounts payable

2,900

Salaries payable
Unearned service revenue

4,500

Common shares
Retained earnings
Dividends paid

2,000

10,000

1,750

5,600

Service revenue
Salaries expense

1,800

13,350

2,000

3,700

Depreciation expense

1,800

Supplies expense

1,050

Insurance expense

325

Totals

36,000

36,000

Accounts

Trial balance
Debit

Cash

Adjustments

Credit

Debit

Adjd TB

Credit

2,000

325

Office supplies

1,300

1,050

10,500
3,500

Accounts payable

2,900

Salaries payable

4,500

Common shares
Retained earnings

900
2,000

10,000

1,750

5,600

Service revenue
Salaries expense

1,800

Unearned service revenue

Accumulated depreciation
office equipment

Dividends paid

Credit

$12,90
0

Prepaid insurance
Office equipment

Debit

13,350

2,000

3,700

900

Depreciation expense

1,800

Supplies expense

1,050

Insurance expense

325

Totals

36,000

36,000

Accounts

Trial balance
Debit

Cash

Adjustments

Credit

Debit

Adjd TB

Credit

$12,90
0

Debit

Credit

12,90
0

Prepaid insurance

2,000

325

1,675

Office supplies

1,300

1,050

250

10,50
0

Office equipment

10,500

Accumulated depreciation
office equipment

3,500

Accounts payable

2,900

Salaries payable

4,500

Common shares
Retained earnings

Salaries expense

900

900

2,000

2,500

10,000

10,00

1,750

1,750

5,600

Service revenue

5,300

2,900

Unearned service revenue

Dividends paid

1,800

5,600
13,350

15,35

2,000

3,700

900

4,600

Depreciation expense

1,800

1,800

Supplies expense

1,050

1,050