Adjusting the Accounts

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1. Financial Accounting
Lecture 04: Adjusting the Accounts
Chapter
3
Masud Jahan
Department of Science and Humanities
Military Institute of Science and Technology

2. Learning Objective
To explain the purpose
of adjusting entries.
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of adjusting entries.
LO1

3. At the end of the
period, we need to
make adjusting entries
to get the accounts up
to date for the financial
statements.
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4. Adjusting
entries are
needed whenever
Every
adjusting
entry involves a
Adjusting Entries
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needed whenever
revenue or expenses
affectmore than one
accounting
period.
entry involves a
change in either a
revenue or expense
and anasset
or liability.

5. Learning Objective
To describe and prepare
the four basic types of
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adjusting entries.
LO2

6. Converting
assets to
expenses
Converting
liabilities to
revenue
Types of Adjusting Entries
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Accruing
unpaid
expenses
Accruing
uncollected
revenue

7. Learning Objective
To prepare adjusting
entries to convert
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assets to expenses.
LO3

8. Prior PeriodsCurrent PeriodFuture Periods
End of Current Period
Converting Assets to Expenses
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Transaction
Paid cash in
advance of
incurring
expense
(creates an
asset).
of asset consumed
Adjusting Entry
Recognizes portion
of asset consumed
as expense, and
Reduces balance of
asset account.

9. Examples Include:
Depreciation
Converting Assets to Expenses
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Depreciation
Supplies
Expiring Prepaid Rent

10. $2,400 Prepaid Rent
Coverage for 12 Months
$200 Monthly Rent Expense
Converting Assets to Expenses
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Jan. 1 Dec. 31
$200 Monthly Rent Expense
On January 1, Prior Co. paid a one-year rent
of $2,400 in advance.

11. Initially, costs that benefit more than one
accounting period are recorded as assets.
Converting Assets to Expenses
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Jan. 1Prepaid Rent 2,400
Cash 2,400
(paid a one-year rent of $2,400 in advance)

12. The costs are expensedas they are used to
generate revenue.
Converting Assets to Expenses
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Jan.31Rent Expense 200
Prepaid Rent 200
(rent expense for January)

13. Income Statement
Cost of assets
used up in this
period to generate
Balance Sheet
Cost of assets
that benefit
future periods.
Converting Assets to Expenses
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Rent Expense
Jan 31200
Prepaid Rent
Jan 12,400 Jan 31200
Bal.2,200
period to generate
revenue.
future periods.

14. Depreciable assets are physical objects
that retain their size and shape but lose
their economic usefulness over time.
The Concept of Depreciation
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Depreciation is the systematic allocation of Depreciation is the systematic allocation of
the cost of a depreciable asset to expense.

15. The portion of an asset’s utility that is used up
must be expensed in the period used.
Fixed The asset’s
usefulness is
Depreciation
The Concept of Depreciation
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Cash
(credit)
Asset
(debit)
On date
when initial
payment is
made . . .
usefulness is
partially
consumed
during the
period.
At end of
period . . .
Depreciation
Expense
(debit)
Accumulated
Depreciation
(credit)

16. On May 2, 2007, S.A’s Lawn Care Service
purchased a lawn mower with a useful life of
50 monthsfor $2,500cash.
Using the straight-line method, calculate the
Depreciation is Only an Estimate
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Using the straight-line method, calculate the
monthly depreciation expense.
$2,500
50
=$$5050
Depreciation
expense (per
period)
=
Cost of the asset-Scrap value
Estimated useful life

17. S.A’s Lawn Care Service would make the
following adjusting entry.
Depreciation Is Only an Estimate
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GENERAL JOURNAL
Date Account Titles and Explanation DebitCredit
May31Depreciation Expense: Equipment 50
Accumulated Depreciation: Equipment 50
(to record one month's depreciation)
Contra-asset

18. S.A’s $15,000 truck is depreciated over 60
months as follows:
Depreciation Is Only an Estimate
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GENERAL JOURNAL
Date Account Titles and Explanation DebitCredit
May31Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
(to record one month's depreciation)
$15,000 ÷60 months = $250 per month

19. Income Statement
Cost of assets
used up in this
period to generate
Balance Sheet
Cost of contra
asset that will
be deducted
Converting Assets to Expenses
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May 31 50
Bal. 50
Depreciation Expense: Equipment
May 31 50
Bal. 50
Accumulated Depreciation: Equipment
period to generate
revenue.
be deducted
from asset.

20. Income Statement
Cost of assets
used up in this
period to generate
Balance Sheet
Cost of contra
asset that will
be deducted
Converting Assets to Expenses
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May 31 250
Bal.250
Depreciation Expense: Truck
May 31 250
Bal.250
Accumulated Depreciation: Truck
period to generate
revenue.
be deducted
from asset.

21. Accumulated depreciation would appear
on the balance sheet as follows:
S.A’s Lawn Care Service
Partial Balance Sheet
May 31, 2001
Assets
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Assets
Cash $3,925
Accounts receivable 75
Equipment 2500
Less: Accum. depr. (50) 2450
Truck 15000
Less: Accum. depr. (250)14750

22. GENERAL JOURNAL
June Entries for Depreciation
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Date Account Titles and Explanation DebitCredit
Jun30Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
(to record one month's depreciation)
Jun30Depreciation Expense: Equipment 50
Accumulated Depreciation: Equipment 50
(to record one month's depreciation)

23. Income Statement
Cost of assets
used up in this
period to generate
Balance Sheet
Cost of contra
asset that will
be deducted
Converting Assets to Expenses
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Jun 30 50
Bal. 50
Depreciation Expense: Equipment
Op. Bal. 50
Jun 30 50
Bal.100
Accumulated Depreciation: Equipment
period to generate
revenue.
be deducted
from asset.

24. Income Statement
Cost of assets
used up in this
period to generate
Balance Sheet
Cost of contra
asset that will
be deducted
Converting Assets to Expenses
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May 31 250
Bal.250
Depreciation Expense: Truck
Op. Bal.250
May 31 250
Bal.500
Accumulated Depreciation: Truck
period to generate
revenue.
be deducted
from asset.

25. Accumulated depreciation would appear
on the balance sheet as follows:
S.A’s Lawn Care Service
Partial Balance Sheet
Jun 30, 2001
Assets
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Assets
Cash $3,925
Accounts receivable 75
Equipment 2500
Less: Accum. depr. (100) 2400
Truck 15000
Less: Accum. depr. (500)14500

26. Learning Objective
To prepare adjusting
entries to convert
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liabilities to revenue.
LO4

27. Prior PeriodsCurrent PeriodFuture Periods
End of Current Period
Converting Liabilities to Revenue
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Transaction
Collect cash
in advance of
earning
revenue
(creates a
liability).
Adjusting Entry
Recognizes portion
earned as revenue,
and
Reduces balance of
liability account.

28. Examples Include:
Converting Liabilities to Revenue
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Airline Ticket Sales
Rent received in advance

29. $6,000 Rental Contract
Coverage for 12 Months
Converting Liabilities to Revenue
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Jan. 1 Dec. 31
$500 Monthly Rental Revenue
On January 1, Prior Co. received $6,000 in
advance for a one-year rental contract.

30. Initially, revenues that benefit more than one
accounting period are recorded as liabilities.
Converting Liabilities to Revenue
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Jan. 1Cash 6,000
Unearned Rental Revenue 6,000
(collected $6,000 in advance for rent)

31. Over time, the revenue is recognized as it is
earned.
Converting Liabilities to Revenue
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Jan.31Unearned Rental Revenue 500
Rental Revenue 500
(rental revenue for January)

32. Income Statement
Revenue earned
this period.
Balance Sheet
Liability for
future periods.
Converting Liabilities to Revenue
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Rental Revenue
Jan 31500
Unearned Rental Revenue
Jan 31500 Jan 16,000
Bal.5,500
this period.future periods.

33. Learning Objective
To prepare adjusting
entries to accrue unpaid
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expenses.
LO5

34. Prior PeriodsCurrent PeriodFuture Periods
End of Current Period
Accruing Unpaid Expenses
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Transaction
Pay cash in
settlement of
liability.
Adjusting Entry
Recognizes expense
incurred, and
Records liability for
future payment.

35. Examples Include:
Hey, when do
we get paid?
Accruing Unpaid Expenses
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Rent
Wages and Salaries
Property Taxes

36. $3,000 Salaries
Expense
Accruing Unpaid Expenses
....
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May 1 June 5
On May 31, Rear Co. owes salaries of $3,000
for May. Payday is 5
th
day of next month.
May 31
....

37. Initially, an expense and a liability are
recorded.
Accruing Unpaid Expenses
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
May31Salaries Expense 3,000
Salaries Payable 3,000
(to accrue salaries owed to employees)

38. Income Statement
Cost incurred this
period to generate
revenue.
Balance Sheet
Liability to be
paid in a future
period.
Accruing Unpaid Expenses
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Salaries Expense
May 313,000
Salaries Payable
May 313,000
revenue.period.

39. Let’s look at the entry for June 5.
Accruing Unpaid Expenses
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Let’s look at the entry for June 5.

40. The liability is extinguished when the debt is
paid.
Accruing Unpaid Expenses
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
June5Salaries Payable 3,000
Cash 3,000
(accrued salaries of May paid)

41. Learning Objective
To prepare adjusting
entries to accrue
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uncollected revenue.
LO6

42. Prior PeriodsCurrent PeriodFuture Periods
End of Current Period
Accruing Uncollected Revenue
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Transaction
Collect cash
in settlement
of receivable.
Adjusting Entry
Recognizes revenue
earned but not yet
recorded, and
Records receivable.

43. Examples Include:
Accruing Uncollected Revenue
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Rental Revenue Earned
Work Completed But Not
Yet Billed to Customer

44. $250 Monthly
Rent
Accruing Uncollected Revenue
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Nov. 1 Dec. 5
On Nov. 30, the tenant owes Rear Co. rent of
$250. Rent is paid on the 5
th
day of next
month.
Nov. 30

45. Initially, the revenue is recognized and a
receivable is created.
Accruing Uncollected Revenue
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Nov.30Rental Revenue Receivable 250
Rental Revenue 250
(to recognize rental revenue)

46. Income Statement
Revenue earned
this period.
Balance Sheet
Receivable to
be collected in a
future period.
Accruing Uncollected Revenue
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Rental Revenue
Nov 30 250
Rental Revenue Receivable
Nov 30250
this period.future period.

47. Let’s look at the entry for Dec 5.
Accruing Uncollected Revenue
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Let’s look at the entry for Dec 5.

48. The receivable is collected in a future period.
Accruing Uncollected Revenue
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Dec.5Cash 250
Rental Rev. Receivable 250
To record accrued rent of Nov received.

49. Learning Objective
To explain the concept
of materiality.
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of materiality.
LO7

50. An item is “material” if knowledge of the
item might reasonably influence the
decisions of users of financial statements.
The Concept of Materiality
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Th e image c ann o t be display ed. Yo ur co mpu ter may no t hav e eno ug h
memor y to o pen the image, o r the image may hav e been co rr up ted.
Restart y o ur co mpu ter, and then o pen the file again. I f the red x still
app ears, y o u may hav e to delete the image and then insert it again.
Th e image c ann o t be display ed. Yo ur co mpu ter may no t hav e eno ug h
memor y to o pen the image, o r the image may hav e been co rr up ted.
Restart y o ur co mpu ter, and then o pen the file again. I f the red x still
app ears, y o u may hav e to delete the image and then insert it again.
Th e image c ann o t be display ed. Yo ur co mpu ter may no t hav e eno ug h
memor y to o pen the image, o r the image may hav e been co rr up ted.
Restart y o ur co mpu ter, and then o pen the file again. I f the red x still
app ears, y o u may hav e to delete the image and then insert it again.
Supplies
Light Bulbs
Many companies
immediately charge
the cost of
immaterialitems to
expense.

51. Learning Objective
To prepare an adjusted
trial balance and
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describe its purpose.
LO8

52. Journalize
Post entries to
Th e image can no t be display ed. Yo ur co mpu ter may no t hav e eno ug h memo ry to o pen the image, o r the image may hav e been co rr up ted. Restart y o ur co mpu ter, and then o pen the file again. I f the red x still app ears, y o u
may hav e to delete the image and then insert it again.
Prepare trial
Make end-of-
year
Effects of the Adjusting EntriesEffects of the Adjusting Entries
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Journalize
transactions.
Post entries to
the ledger
accounts.
Prepare trial
balance.
year
adjustments.
Prepare adjusted
trial balance.
Let’s look at JJ’s Lawn Care
Services’ adjusted trial balance.
Th e image can no t be display ed. Yo ur co mpu ter may no t hav e eno ug h memo ry to o pen the image, o r the image may hav e been co rr up ted. Restart y o ur co mpu ter, and then o pen the file again. I f the red x still app ears, y o u
may hav e to delete the image and then insert it again.

53. S.A's Lawn Care Service
Adjusted Trial Balance
May 31, 2007
Accounts Debit Credit
Cash 3,925$
Accounts receivable 75
Tools & equipment 2,650
Accum. depreciation: tools & eq. 50$
Truck 15,000
All balances
are taken from
the ledger
accounts on
Adjusted Trial Balance
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Truck 15,000
Accum. depreciation: truck 250
Notes payable 13,000
Accounts payable 150
Capital stock 8,000
Dividends 200
Sales revenue 750
Gasoline expense 50
Depreciation exp.: tools & eq. 50
Depreciation exp.: truck 250
Total 22,200$ 22,200$
May 31 after
preparing the
two
depreciation
adjusting
entries.

54. End of Lecture 04
THANK YOU ALL…THANK YOU ALL…