Learning Objective 1
1. Describe the nature of the adjusting
process.
LO 1
LO 1
LO 1
LO 1
LO 1
LO 1
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
Liabilities
decrease
+
increase
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.
Liabilities
+
increase
decrease
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
Liabilities
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
increase
Liabilities
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
Liabilities
increase
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.
Liabilities
increase
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
LO 3
LO 3
Adjusting Entries
LO 3
(continued)
LO 3
LO 3
LO 3
LO 4
LO 4
Exercises
$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-
Journal entry:
Cr Accumulated depreciation
Dr Depreciation Expense
$1,800
$1,800
$900
$900
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
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
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