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1、John Wiley & Sons, Inc.Prepared byMarianne Bradford, Ph. D.Bryant CollegeAccounting Principles, 6e Weygandt, Kieso, & KimmelAfter studying this chapter, you should be able to:CHAPTER 3 ADJUSTING THE ACCOUNTS1 Explain the time period assumption.2 Explain the accrual basis of accounting.3 Explain why

2、adjusting entries are needed.4 Identify the major types of adjusting entries.5 Prepare adjusting entries for prepayments.6 Prepare adjusting entries for accruals.7 Describe the nature and purpose of an adjusted trial balance.PREVIEW OF CHAPTER 3Adjusting the AccountsThe Basics of Adjusting EntriesTy

3、pes of adjusting entriesAdjusting entries for prepaymentsAdjusting entries for accrualsSummaryTiming IssuesTime period assumptionFiscal and calendar yearsAccrual vs. cash basis accountingRecognizing revenues and expensesPREVIEW OF CHAPTER 3Adjusting the AccountsPreparing the adjusted trial balancePr

4、eparing financial statementsThe Adjusted Trial Balance and Financial StatementsSTUDY OBJECTIVE 1Explain the time period assumption.TIME-PERIOD ASSUMPTIONThe time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial time periods.Accounting tim

5、e periods are generally a month, a quarter, or a year.The accounting time period of one year in length is referred to as a fiscal year.STUDY OBJECTIVE 2Explain the accrual basis of accounting.ACCRUAL BASIS OF ACCOUNTINGThe revenue recognition and matching principles are used under the accrual basis

6、of accounting.Under cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when cash is paid.Generally accepted accounting principles require accrual basis accounting because the cash basis often causes misleading financial statements.REVENUE RECOGNITION PRINCIPL

7、EThe revenue recognition principle dictates that revenue be recognized in the accounting period in which it is earned.In a service business, revenue is considered to be earned at the time the service is performed.THE MATCHING PRINCIPLEThe practice of expense recognition is referred to as the matchin

8、g principle.The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues).Revenues earnedthis monthare offset against.expensesincurred inearning therevenueILLUSTRATION 3-1 GAAP RELATIONSHIPS IN REVENUE AND EXPENSE RECOGNITIONTime-Period AssumptionEconomic life of

9、 businesscan be divided intoartificial time periodsRevenue-Recognition PrincipleRevenue recognized in the accounting period inwhich it is earnedMatching PrincipleExpenses matched with revenuesin the same period when efforts are expended to generate revenuesSTUDY OBJECTIVE 3Explain why adjusting entr

10、ies are needed.ADJUSTING ENTRIESAdjusting entries are made in order for:1 Revenues to be recorded in the period in which they are earned, and for. 2 Expenses to be recognized in the period in which they are incurred.STUDY OBJECTIVE 4Identify the major types of adjusting entries.Adjusting entries are

11、 required each time financial statements are prepared.Adjusting entries can be classified as1 prepayments (prepaid expenses or unearned revenues) OR2 accruals (accrued revenues or accrued expenses)ADJUSTING ENTRIESTYPES OF ADJUSTING ENTRIESPrepayments1 Prepaid Expenses Expenses paid in cash and reco

12、rded as assets before they are used or consumed2 Unearned Revenues cash received and recorded as liabilities before revenue is earnedTYPES OF ADJUSTING ENTRIESAccruals1 Accrued Revenues Revenues earned but not yet received in cash or recorded2 Accrued Expenses Expenses incurred but not yet paid in c

13、ash or recordedILLUSTRATION 3-3 TRIAL BALANCEThe Trial Balance is the starting place for adjusting entries.STUDY OBJECTIVE 5Prepare adjusting entries for prepayments.PREPAYMENTSPrepayments are either prepaid expenses or unearned revenues.Adjusting entries for prepayments are required to record the p

14、ortion of the prepayment that represents1 the expense incurred or2 the revenue earned in the current accounting period.ILLUSTRATION 3-4 ADJUSTING ENTRIES FOR PREPAYMENTSAdjusting EntriesAssetUnadjusted BalanceCredit Adjusting Entry (-)ExpenseDebit Adjusting Entry (+)Prepaid ExpensesLiabilityUnadjust

15、ed BalanceDebit Adjusting Entry (-)RevenueCredit Adjusting Entry (+)Unearned RevenuesPrepaid expenses are expenses paid in cash and recorded as assets before they are used or consumed.Prepaid expenses expire with the passage of time or through use and consumption.An asset-expense account relationshi

16、p exists with prepaid expenses.PREPAID EXPENSESPrior to adjustment, assets are overstated and expenses are understated.The adjusting entry results in a debit to an expense account and a credit to an asset account.Examples of prepaid expenses include supplies, insurance, and depreciation.PREPAID EXPE

17、NSESJOURNAL ENTRYPOSTINGADJUSTMENTOctober 31, an inventory count reveals that $1,000 of $2,500 of supplies are still on hand.ADJUSTING ENTRIES FOR PREPAYMENTS SUPPLIESADJUSTING ENTRIES FOR PREPAYMENTS INSURANCEJOURNAL ENTRYPOSTINGADJUSTMENTOctober 31, an analysis of the policy reveals that $50 of in

18、surance expires each month.Depreciation is the allocation of the cost of an asset to expense over its useful life in a rational and systematic manner.The purchase of equipment or a building is viewed as a long-term prepayment of services and, therefore, is allocated in the same manner as other prepa

19、id expenses.DEPRECIATIONDEPRECIATIONDepreciation is an estimate rather than a factual measurement of the cost that has expired.In recording depreciation, Depreciation Expense is debited and a contra asset account, Accumulated Depreciation, is credited XXXXXXIn the balance sheet, Accumulated Deprecia

20、tion is offset against the asset account. The difference between the cost of any depreciable asset and its related accumulated depreciation is referred to as the book value of the asset.DEPRECIATIONADJUSTING ENTRIES FOR PREPAYMENTS DEPRECIATIONJOURNAL ENTRYPOSTINGADJUSTMENTOctober 31, depreciation o

21、n the office equipment is estimated to be $480 a year, or $40 per month.Unearned revenues are revenues received and recorded as liabilities before they are earned.Unearned revenues are subsequently earned by rendering a service to a customer.A liability-revenue account relationship exists with unear

22、ned revenues.UNEARNED REVENUESPrior to adjustment, liabilities are overstated and revenues are understated.The adjusting entry results in a debit to a liability account and a credit to a revenue account.Examples of unearned revenues include rent, magazine subscriptions, and customer deposits for fut

23、ure services.UNEARNED REVENUESADJUSTING ENTRIES FOR PREPAYMENTS UNEARNED REVENUESJOURNAL ENTRYPOSTINGADJUSTMENTOctober 31, analysis reveals that, of $1,200 in fees, $400 has been earned in October.STUDY OBJECTIVE 6Prepare adjusting entries for accruals.ACCRUALSThe second category of adjusting entrie

24、s is accruals.Adjusting entries for accruals are required to record revenues earned and expenses incurred in the current period.The adjusting entry for accruals will increase both a balance sheet and an income statement account.Adjusting EntriesAssetDebit Adjusting Entry (+)Accrued RevenuesRevenueCr

25、edit Adjusting Entry (+)Accrued ExpensesExpenseDebit Adjusting Entry (+)LiabilityCredit Adjusting Entry (+)ILLUSTRATION 3-10 ADJUSTING ENTRIES FOR ACCRUALSAccrued revenues may accumulate with the passing of time or through services performed but not billed or collected.An asset-revenue account relat

26、ionship exists with accrued revenues.Prior to adjustment, assets and revenues are understated.The adjusting entry requires a debit to an asset account and a credit to a revenue account.ACCRUED REVENUESADJUSTING ENTRIES FOR ACCRUALS ACCRUED REVENUESOctober 31, the agency earned $200 for advertising s

27、ervices that were not billed to clients before October 31.JOURNAL ENTRYPOSTINGADJUSTMENTAccrued expenses are expenses incurred but not paid yet.A liability-expense account relationship existsPrior to adjustment, liabilities and expenses are understatedThe Adjusting Entry results in a debit to an exp

28、ense account and a credit to a liability accountACCRUED EXPENSESADJUSTING ENTRIES FOR ACCRUALS ACCRUED INTERESTJOURNAL ENTRYPOSTINGADJUSTMENTOctober 31, the portion of the interest to be accrued on a 3-month note payable is calculated to be $50.ADJUSTING ENTRIES FOR ACCRUALS ACCRUED SALARIESJOURNAL

29、ENTRYPOSTINGADJUSTMENTOctober 31, accrued salaries are calculated to be $1,200.ILLUSTRATION 3-16 SUMMARY OF ADJUSTING ENTRIES 1 Prepaid Assets and Assets overstated Dr. Expenses expenses expenses Expenses understated Cr. Assets2 Unearned Liabilities and Liabilities overstated Dr. Liabilities revenue

30、s revenues Revenues understated Cr. Revenues3 Accrued Assets and Assets understated Dr. Assets revenues revenues Revenues understated Cr. Revenues4 Accrued Expenses and Expenses understated Dr. Expenses expenses liabilities Liabilities understated Cr. LiabilitiesSTUDY OBJECTIVE 7Describe the nature

31、and purpose of an adjusted trial balance.ADJUSTED TRIAL BALANCEAn Adjusted Trial Balance is prepared after all adjusting entries have been journalized and posted.Its purpose is to prove the equality of the total debit and credit balances in the ledger after all adjustments have been made.Financial s

32、tatements can be prepared directly from the adjusted trial balance.ILLUSTRATION 3-19 TRIAL BALANCE AND ADJUSTED TRIAL BALANCE COMPAREDPREPARING FINANCIAL STATEMENTSFinancial statements can be prepared directly from the adjusted trial balance.1 The income statement is prepared from the revenue and ex

33、pense accounts.2 The owners equity statement is derived from the owners capital and drawing accounts and the net income (or net loss) from the income statement.3 The balance sheet is then prepared from the asset and liability accounts and the ending owners capital balance as reported in the owners e

34、quity statement. ILLUSTRATION 3-20 PREPARATION OF THE INCOME STATEMENT AND THE OWNERS EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCEILLUSTRATION 3-20 PREPARATION OF THE INCOME STATEMENT AND THE OWNERS EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCEThe income statement is prepared from the revenue

35、 and expense accounts.ILLUSTRATION 3-20 PREPARATION OF THE INCOME STATEMENT AND THE OWNERS EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCEILLUSTRATION 3-20 PREPARATION OF THE INCOME STATEMENT AND THE OWNERS EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCEThe owners equity statement is prepared from

36、 the owners capital and drawing accounts and the net income (or net loss) shown in the income statement.ILLUSTRATION 3-21 PREPARATION OF THE BALANCE SHEET FROM THE ADJUSTED TRIAL BALANCEILLUSTRATION 3-21 PREPARATION OF THE BALANCE SHEET FROM THE ADJUSTED TRIAL BALANCEThe balance sheet is then prepar

37、ed from the asset and liability accounts and the ending owners capital balance as reported in the owners equity statement.STUDY OBJECTIVE 8Prepare adjusting entries for the alternative treatment of prepayments.ALTERNATIVE TREATMENTOF PREPAID EXPENSES AND UNEARNED REVENUESSome businesses use an alter

38、native treatment for prepaids and unearned revenues.Instead of debiting an asset at the time an expense is prepaid, the amount is charged to an expense account.Instead of crediting a liability at the time cash is received in advance of earning it, the amount is credited to a revenue account.This tre

39、atment of prepaid expenses and unearned revenues will ultimately result in the same effect on the financial statements as initial entries to balance sheet accounts and then adjusting entries.ALTERNATIVE ADJUSTMENTS FOR PREPAYMENTS SUPPLIESJOURNAL ENTRYPOSTINGADJUSTMENTOctober 31, an inventory count reveals that $1,000 of $2,500 of supplies are still on hand.ALTERNATIVE ADJUSTMENTS FOR PREPAYMENTS UNEARNED REVENUESJOURNAL ENTRYPOSTINGADJUSTMENTOctober 31, analysis reveals that, of $1,200 in fees, $400 has been earned in October.ILLUSTRATION 3A-7 SUMMARY OF BASIC RELATIONSHI