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Financial Accounting I

Chapter 3: The Adjusting Process

Pamela Gonzalez, MBA

September 25th, 2013

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The Adjusting Process

Adjusting the

Books

Process of updating the

accounts at the end of the

period, this requires special

journal entries.

Accrual Accounting Record effects as it occurs

Cash-basis Accounting

Records effects when cash

is received or paid

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Accounting Principles and Concepts

GAAP

(Generally Accepted Accounting Principles)

Entity Concept

FaithfulRepresentation

Principle

Cost PrincipleGoing Concern

Principle

StableMonetary Unit

Concept

One business

separate from

its owners

Data faithfully representsthe measurement or

description of that data

Assets and servicesshould be recorded at

their actual cost

(amount paid).

Will remain in

operation for the

foreseeable future

Stable currency

buying power

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Why We Adjust the Accounts

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Adjusting Entries

AccrualsPrepaids

Cash payment

occurs before an

expense is recorded

or receipt occursbefore the revenue

is earned

Records an expense

before the cash

payment or it

records the revenuebefore the cash is

received.

1. Prepaid expenses (prepaid)

2. Depreciation (prepaid)3. Accrued expenses (accrual)

4. Accrued revenues (accrual)

5. Unearned revenues (prepaid)

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Adjusting Entries

Prepaid Expenses

Prepaid Rent

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Adjusting Entries

Depreciation

Plant assets are long-lived tangible assets used in the operation of a

business. Examples include buildings, equipment, furniture, and

automobiles. As a business uses the assets, their value and usefulness

decline. The allocation of a plant assets cost to expense is called

depreciation.

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Adjusting Entries

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Adjusting Entries

Accrued Expenses

Salary

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Adjusting Entries

Accrued Revenue

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Adjusting Entries

Unearned Revenues

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Practice!

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Financial Accounting I

Chapter 3: The Adjusting Process

Pamela Gonzalez, MBA