DLSU - Manila

ACTBAS1- Lesson 9 ADJUSTING ENTRIES August 1, 2011

Lesson 9

Lecture Notes

The Accrual Basis and the Adjusting Process

Learning Objectives
1. The Accrual Basis 2. Nature of the Adjusting Process 3. Recording Adjusting Entries 4. Summary of Adjustment Process

Lesson 9
The Accrual Basis and the Adjusting Process

Slide # Lecture Note Topics 3 6 9 20 36 Reporting Revenue and Expense The Accrual Basis Trial Balance, Chart of Accounts Deferrals and Accruals Summary of Adjustments

Reporting Revenue and Expense TWO METHODS

Cash Basis of Accounting Accrual Basis of Accounting

Cash Basis of Accounting

4 4 4

Revenue reported when cash is received Expense reported when cash is paid Does not properly match revenues and expenses

Accrual Basis of Accounting

Revenue reported when earned Expense reported when incurred Properly matches revenues and expenses in determining net income Requires adjusting entries at end of period It just sounds mean it really isnt

Cash and Accrual Basis

Cash basis

Accrual basis

Revenue

Cash is received Earned service provided Cash is paid Incurred benefit received

Expense

The Matching Concept

Debits = Credits

Liabilities
Assets Owners Equity
Net Profit

Expenses
matching

Revenues

Net profit is determined by properly matching expenses and revenues.

NetSolutions Unadjusted Trial Balance December 31, 2010

11 12 14 15 17 18 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment 2,065 2,220 2,000 2,400 20,000 1,800

Assets

NetSolutions Unadjusted Trial Balance December 31, 2010

11 12 14 15 17 18 21 23 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent 2,065 2,220 2,000 2,400 20,000 1,800 900 360

Liabilities

NetSolutions Unadjusted Trial Balance December 31, 2010

11 12 14 15 17 18 21 23 31 32 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Chee, Capital Chris Chee, Drawing 2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000

Owners Equity

NetSolutions Unadjusted Trial Balance December 31, 2010

11 12 14 15 17 18 21 23 31 32 41 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Chee, Capital Chris Chee, Drawing Fees Earned 2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000

Revenue

16,340

NetSolutions Unadjusted Trial Balance December 31, 2010

11 12 14 15 17 18 21 23 31 32 41 51 52 54 55 59 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Salaries Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000

16,340
4,275 1,600 985 800 455 42,600

Expenses

42,600

NetSolutions Unadjusted Trial Balance December 31, 2010

11 12 14 15 17 18 21 23 31 32 41 51 52 54 55 59 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Chee, Capital Chris Chee, Drawing Fees Earned Salaries Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000

16,340
4,275 1,600 985 800 455 42,600

42,600

NetSolutions Expanded Chart of Accounts

Statement of Financial Position

1. Assets 11 Cash 12 Accounts Receivable 14 Supplies 15 Prepaid Insurance 17 Land 18 Office Equipment 19 Accumulated Depreciation Office Equipment 2. 21 22 23 Liabilities Accounts Payable Salaries Payable Unearned Rent

Statement of Comprehensive Income

4. Revenue 41 Fees Earned 42 Rent Revenue

5. Expenses 51 Salaries Expense 52 Rent Expense 53 Depreciation Expense Office Equipment 54 Utilities Expense 55 Supplies Expense 56 Insurance Expense 59 Miscellaneous Expense

3. Owners Equity 31 Chris Chee, Capital 32 Chris Chee, Drawing

Adjustments Deferrals and Accruals

Revenues Accruals Deferrals Current Period Revenue Recorded Cash Received Future Period Cash Received Revenue Recorded

Expenses Accruals Deferrals

Current Period Expense Recorded Cash Paid

Future Period Cash Paid Expense Recorded

Adjusting entries Journal entries that bring the accounts up to date at the end of the month/year.
Items that require adjusting entries: accruals deferrals provision for depreciation

Adjusting entries Accruals Accrued Revenue Accrued Expense

Accrued Revenue Also called accrued asset. Examples: Fees earned on account. Revenues that have been earned but have not been recorded in the accounts

These items require adjustments at the end of the month/year.

Adjustments Accrued Revenue

As at Dec 31, NetSolutions had provided $500 of services to customer. NetSolutions will only invoice and collect from the customer in January. However NetSolutions earned the revenue in December. The adjusting entry,

Dr Accounts Receivable Cr Fees Earned

500
500

Adjusting entries Accrued Revenue

Statement of Financial Position as at Dec 31 Current Asset Accounts Receivable 500

Statement of Comprehensive Income For the year ended Dec 31

Fees earned 500

Accrued Expense Also called accrued liabilities Expenses that have been incurred but have not been recorded in the accounts. These items require adjustments at the end of the month/year.

Adjustments Accrued Expense

At the end of December, NetSolutions had accrued salaries of $250. This is Decembers salaries which is unpaid at the end of the month.

The adjusting entry, Dr Salaries Expense 250 Cr Salaries Payable 250

Statement of Financial Position as at 31 December Current Liability Salaries Payable

250

Statement of Comprehensive Income For the year ended 31 Dec Revenue less: operating expenses Salaries Expense *Paid in Nov Paid in Dec 950+1,200 Unpaid at the end of Dec

4,525* 2,125 2,150 250 4,525

Adjusting entries Deferrals Deferred Revenue Deferred Expense

Deferred Revenue Also called unearned revenue. Examples: Unearned rent Items initially recorded as liability but become revenue over time. These items require adjustments at the end of the month/year.

Business Transactions
Recap, on Dec 1 NetSolutions received $360 for three months rent beginning Dec 1.

A= Cash +360

L+ OE Unearned rent +360

General Journal
Date Description Debit Credit

Cash

360

A,E,D (Debit) Increase Decrease

Debit Credit

L,R,C (Credit) Credit Debit

Unearned rent

360

Adjustments Deferred Revenue

On December 1, NetSolutions received cash of $360 for three months rent beginning December 1. Upon cash receipt for rent revenue, 1/12 Dr Cash Cr Unearned Revenue The adjusting entry, 360 360

31/12

Dr Unearned Revenue Cr Rent Revenue

120
120

Adjusting entries Deferred Revenue

Statement of Financial Position as at 31 December Current Liability Unearned Rent 240

Statement of Comprehensive Income For the year ended 31 December Revenue Rent Revenue

120

Deferred Expense Also called prepaid expense Examples: Supplies and prepaid insurance Items initially recorded as assets but become expenses over time. These items require adjustments at the end of the month/year.

Business Transactions
Recap NetSolutions buys supplies for $2,000, agreeing to pay the supplier in the near future.

A= Supplies +2,000

L+ OE Accounts Payable +2,000

General Journal
Date Description Debit Credit

Supplies

2,000

A,E,D (Debit) Increase Decrease

Debit Credit

L,R,C (Credit) Credit Debit

Accounts Payable

2,000

Business Transactions
Entry G. The balance in NetSolutions supplies account on Dec 31 is $2,000. On Dec 31, the supplies were counted and the amount of supplies on hand Journal Generalwas $760.
Date Description Debit Credit

A= L+ OE Supplies -1,240 -1,240 Supplies exp

A,E,D (Debit) Increase Decrease

Debit Credit

L,R,C (Credit) Credit Debit

Supplies exp 1,240 Supplies

1,240

Supplies available $2,000 less $760 on hand = $1,240 used

Adjusting entries Deferred Expense

Statement of Financial Position as at 31 December Current Asset Supplies 760

Statement of Comprehensive Income For the year ended 31 December

Revenue less: operating expenses Supplies Expense

1,240

Business Transactions
Recap, on Dec 1 NetSolutions paid insurance premium of $2,400.

A= L+ Cash-2,400 Prepaid insurance +2,400

Credit

OE

General Journal
Date Description Debit

Prepaid insurance 2,400

A,E,D (Debit) Increase Decrease Debit Credit

L,R,C (Credit) Credit Debit

Cash

2,400

Adjustments Deferred Expense

On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Upon purchase, 1/12 Dr Prepaid Insurance Cr Cash 2,400 2,400

The adjusting entry,

31/12

Dr Insurance Expense Cr Prepaid Insurance

100
100

Adjusting entries Deferred Expense

Statement of Financial Position as at December 31 Current Asset Prepaid Insurance 2,300

Statement of Comprehensive Income For the year ended December 31 Revenue less: operating expenses Insurance Expense

100

Adjustments Depreciation
Fixed assets are a type of deferred expense.
A portion of the cost of the asset is recorded as an expense each month/year.

Adjustments Depreciation
The depreciation for the month is $50. The adjusting entry,

Dr Depreciation expense 50 Cr Accumulated depreciation

50

Statement of Financial Position as at December 31 Fixed Asset Office Equipment less: accumulated depreciation Office Equipment

1,800 (50) --------1,750

Statement of Comprehensive Income For the year ended December 31

Revenue less: operating expenses Depreciation Expense Office Equipment

50