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1 Adeng Pustikaningsih, M.Si. Dosen Jurusan Pendidikan Akuntansi Fakultas Ekonomi Universitas Negeri Yogyakarta CP: adengpustikaningsih@uny.ac.id

2 3 The Adjusting Process 2

3 After studying this chapter, you should be able to: 1. Describe the nature of the adjusting process. 2. Journalize entries for accounts requiring adjustment. 3. Summarize the adjustment process. 4. Prepare an adjusted trial balance. 3

4 3-1 Objective 1 Describe the nature of the adjusting process. 34

5 3-1 Under the accrual basis of accounting, revenues are reported in the income statement in the period in which they are earned. 5

6 3-1 The accounting concept that supports this approach to reporting of revenues is called the revenue recognition concept. 6

7 3-1 The accounting concept that supports reporting revenues and related expenses in the same period is called the matching concept, or matching principle. 7

8 3-1 Under the cash basis of accounting, revenues and expenses are reported in the income statement in the period in which cash is received or paid. 8

9 3-1 The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the adjusting process. 9

10 3-1 The journal entries that bring the accounts up to date at the end of the accounting period are called adjusting entries. 10

11 3-1 Example Exercise 3-1 Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. a. Cash c. Wages Expense e. Accounts Receivable b. Prepaid Rent d. Office Equipment f. Unearned Rent Follow My Example 3-1 a. No c. Yes e. Yes b. Yes d. No f. Yes For Practice: PE 3-1A, PE 3-1B 10 11

12 Items That Need Adjusting 3-1 Prepaid expenses, sometimes referred to as deferred expenses, are items that have been initially recorded as assets but are expected to become expenses over time or through the normal operations of the business. 12

13 Items That Need Adjusting 3-1 Unearned revenues, sometimes referred to as deferred revenues, are items that have been initially recorded as liabilities but are expected to become revenues over time or through the normal operations of the business. 13

14 3-1 Insert Exhibit

15 Items That Need Adjusting 3-1 Accrued revenues, sometimes referred to as accrued assets (accrued means unpaid), are revenues that have been earned but have not been recorded in the accounts. 15

16 Items That Need Adjusting 3-1 Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. 16

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18 3-1 Example Exercise 3-2 Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued expense, or (4) accrued revenue. a. Wages owed but not c. Fees received but not yet yet paid. earned. b. Supplies on hand. d. Fees earned but not yet received. Follow My Example 3-2 a. Accrued expense c. Unearned revenue b. Prepaid expense d. Accrued revenue For Practice: PE 3-2A, PE 3-2B 17 18

19 3-2 Objective 2 Journalize entries for accounts requiring adjustment. 19

20 Unadjusted Trial Balance for SolusiNet SolusiNet Adjusted Trial Balance December 31, 2007 Debit Balances Credit Balances Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depreciation-Equipment Accounts Payable Wages Payable Unearned Rent Cinta Cita, Capital Cinta Cita, Drawing Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Misscellaneous Expense

21 Adjusting Process for Prepaid Expenses SolusiNet Supplies account has a balance of Rp2,000,000 in the unadjusted trial balance. Some of these supplies have been used. On December 31, a count reveals that Rp760,000 of supplies are on hand. 21

22 3-2 Supplies (balance on trial balance) Rp2,000,000 Supplies on hand, December ,000 Supplies used Rp1,240,000 22

23 Dec. 31 Supplies Expense Supplies Supplies used (Rp2,000,000 Rp760,000) Bal. 2,000, ,000 Supplies Supplies Expense Dec. 31 1,240,000 Bal. 800,000 Dec. 31 1,240,000 2,040,

24 The debit balance of Rp2,400,000 in SolusiNet Prepaid Insurance account represents the December 1 prepayment of insurance for 12 months. 24

25 Insurance Expense Prepaid Insurance Insurance expired (Rp2,400,000/12). Prepaid Insurance 15 Insurance Expense 56 Bal. 2,400,000 Dec ,000 Dec ,000 2,200,

26 3-2 Example Exercise 3-3 The prepaid insurance account had a beginning balance of Rp6,400,000 and was debited for Rp3,600,000 of premiums paid during the year. Journalize the adjusting entry required at the end of the year assuming the amount of unexpired insurance related to future periods is Rp3,250,000. Follow My Example 3-3 Insurance Expense 6,750,000 Prepaid Insurance 6,750,000 Insurance expired (Rp6,400,000 + Rp3,600,000 Rp3,250,000). For Practice: PE 3-3A, PE 3-3B 25 26

27 On December 1, the tenant prepaid three months rent for use of an office building owned by SolusiNet. As of December 31, only Rp120,000 has been earned. 27

28 Unearned Rent Rent Revenue Rent earned (Rp360,000/3 months) Unearned Rent 23 Rent Revenue 42 Dec ,000 Bal. 360,000 Dec ,000 Bal. 240,

29 3-2 Example Exercise 3-4 The balance in the unearned fees account, before adjustment at the end of the year, is Rp44,900,000. Journalize the adjusting entry required if the amount of unearned fees at the end of the year is Rp22,300,000. Follow My Example 3-4 Unearned Fees 22,600,000 Fees Earned 22,600,000 Fees earned (Rp44,900,000 Rp22,300,000). For Practice: PE 3-4A, PE 3-4B 29 28

30 SolusiNet provided Rp500,000 in services during December for which the customer has not been billed. 30

31 Accounts Receivable Fees Earned Accrued fees (25 hrs. x Rp20,000) Accounts Receivable 12 Fees Earned 41 Bal. 2,220,000 Bal. 16,340,000 Dec ,000 Dec ,000 Bal. 2,720,000 Bal. 16,840,

32 3-2 Example Exercise 3-5 At the end of the current year, Rp13,680,000 of fees have been earned but have not been billed to clients. Journalize the adjusting entry to record the accrued fees. Follow My Example 3-5 Accounts Receivable 13,680,000 Fees Earned 13,680,000 Accrued fees. For Practice: PE 3-5A, PE 3-5B 31 32

33 At the end of December, accrued wages amounted to Rp250,000. Without this adjusting entry, Wages Expense is understated. 33

34 Wages Expense Wages Payable Accrued wages. Wages Payable 22 Wages Expense 51 Dec ,000 Bal. 4,275,000 Dec ,000 Bal. 4,525,

35 3-2 Wages Payable 22 Wages Expense 51 Dec ,000 Bal. 4,275,000 Dec ,000 Bal. 4,525,000 Closing entries will be discussed in a later chapter. For now, just be aware that Wages Expense is closed after financial statements are prepare and its balance rolled back to zero

36 3-2 The payment of January 10 wages totaling Rp1,275,000 is shown below. Jan. 10 Wages Expense Wages Payable Cash

37 3-2 Wages Payable 22 Wages Expense 51 Jan ,000 Dec ,000 Bal. 4,275,000 Dec ,000 Bal. 4,525,000 The liability is cancelled. Jan.10 1,025,000 An expense for wages of Rp1,025,000 is recorded in the new fiscal year

38 Example Exercise 3-6 PT Sumitama Daya pays weekly salaries of Rp12,500,000 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Thursday. Follow My Example 3-6 Salaries Expense 10,000,000 Salaries Payable 10,000,000 Accrued salaries (Rp12,500,000/5 x 4 days). For Practice: PE 3-6A, PE 3-6B

39 Physical resources that are owned and used by a business and are permanent or have a long life are called fixed assets, or plant assets. 39

40 3-2 As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation. 40

41 3-2 Normal titles for fixed asset accounts and their related contra asset accounts are as follows: Fixed Asset Land Buildings Store Equipment Office Equipment Contra Asset None Land is not depreciated Accumulated Depreciation Buildings Accumulate Depreciation Store Equipment Accumulated Depreciation Office Equipment 41

42 SolusiNet estimates the depreciation on its office equipment to be Rp50,000 for the month of December. 42

43 Depreciation Expense Accum. Depreciation Office Equipment Depreciation of office equipment. Depreciation Expense Dec , Accum. Depr. Office Equip. 19 Dec ,

44 3-2 SolusiNet balance sheet would show the office equipment at cost, less the accumulated depreciation. Office equipment Rp1,800,000 Less accumulated depreciation 50,000 Rp1,750,000 Book value 44

45 3-2 Example Exercise 3-7 The estimated amount of depreciation on equipment for the current year is Rp4,250,000. Journalize the adjusting entry to record the depreciation. Follow My Example 3-7 Depreciation Expense 4,250,000 Accumulated Depreciation Equipment 4,250,000 Depreciation on equipment. For Practice: PE 3-7A, PE 3-7B 44 45

46 3-3 Objective 3 Summarize the adjustment process 46

47 Adjusting Entry SolusiNet 3-3 JOURNAL Post Date Description Ref Debit Credit Adjusting Entries Dec Supplies Expense Supplies Supplies used (Rp2,000,000 - Rp 760,000) 31 Insurance Expense Prepaid Insurance Insrance expired (Rp2,400,000/12 months) 31 Unearned Rent Rent Revenue Rent earned (Rp360,000/3months) 31 Accounts Receivable Fees Earned Accrued fees (25 hrs. Rp20,000) 31 Wages Expense Wages Payable Accrued wages. 31 Depreciation Expense Accum. Depr.-Office Equip Depreciation on office equip. 47

48 (In Rp000) 3-3 (Continued) Ledger with Adjusting Entries SolusiNet 47 48

49 (Continued) 3-3 Ledger with Adjusting Entries SolusiNet (In Rp000) 48 49

50 Ledger with Adjusting Entries SolusiNet (Continued) 3-3 (In Rp000) 49 50

51 Ledger with Adjusting Entries SolusiNet (Concluded) 3-3 (In Rp000) 51 50

52 Example Exercise 3-8 For the year ending December 31, 2008, Mega Medika mistakenly omitted adjusting entries for (1) Rp8,600,000 of unearned revenue that was earned, (2) earned revenue that was not billed of Rp12,500,000, and (3) accrued wages of Rp2,900,000. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income for Follow My Example 3-8 a. Revenues were understated by Rp21,100,000 (Rp8,600,000 + Rp12,500,000). b. Expenses were understated by Rp2,900,000. c. Net income was understated by Rp18,200,000 (Rp8,600,000 +Rp12,500,000 Rp2,900,000). For Practice: PE 3-8A, PE 3-8B

53 3-4 Objective 4 Prepare an adjusted trial balance. 53

54 3-4 The purpose of the adjusted trial balance is to verify the equality of the total debit balances and total credit balances before the financial statements are prepared. 54

55 3-4 SolusiNet Adjusted Trial Balance December 31, 2007 Debit Balances Credit Balances Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depreciation-Equipment Accounts Payable Wages Payable Unearned Rent Cinta Cita, Capital Cinta Cita, Drawing Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Misscellaneous Expense

56 Example Exercise 3-9 For each of the following errors, considered individually, indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much. a. The adjustment for accrued fees of Rp5,340,000 was journalized as a debit to Accounts Payable for Rp5,340,000 and a credit to Fees Earned of Rp5,340,000. b. The adjustment for depreciation of Rp3,260,000 was journalized as a debit to Depreciation Expense for Rp3,620,000 and a credit to Accumulated Depreciation for Rp3,260,

57 3-4 Follow My Example 3-9 a. The totals are equal even though the debit should have been to Accounts Receivable instead of Accounts Payable. b. The totals are unequal. The debit total is higher by Rp360,000 (Rp3,620,000 Rp3,260,000). For Practice: PE 3-9A, PE 3-9B 57 56