3

The Adjusting
Process

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.
2

3-1

Objective
Objective 11
Describe the nature of the
adjusting process.

33

3-1

Under the accrual basis of

accounting, revenues are
reported in the income
statement in the period in
which they are earned.
4

3-1

The accounting concept that supports

this approach to reporting of
revenues is called the revenue
recognition concept.

3-1

The accounting concept that

supports reporting revenues and
related expenses in the same
period is called the matching
concept, or matching principle.
6

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.
7

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.
8

3-1

The journal entries that bring

the accounts up to date at the
end of the accounting period
are called adjusting entries.

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.
b.

Cash
Prepaid Rent

c. Wages Expense
e. Accounts Receivable
d. Office Equipment f. Unearned Rent

Follow My Example 3-1

a. No
b. Yes

c. Yes
d. No

For Practice: PE 3-1A, PE 3-1B

e. Yes
f. Yes
10

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.
11

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.
12

3-1

Insert Exhibit 1

13

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.
14

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.
15

3-1

16

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
b. Prepaid expense

c. Unearned revenue
d. Accrued revenue

For Practice: PE 3-2A, PE 3-2B

17

3-2

Objective
Objective 22
Journalize entries for
accounts requiring
adjustment.
18

Unadjusted Trial Balance

for SolusiNet

3-2

19

Adjusting Process for Prepaid Expenses

3-2

@solusinet

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.

20

3-2

Supplies (balance on trial balance) Rp2,000,000

Supplies on hand, December 31
760,000
Supplies used
Rp1,240,000

21

3-2
2007

Dec. 31 Supplies Expense

55

1 240 000

14

Supplies
Supplies used

1 240 000

(Rp2,000,000
Rp760,000)

Supplies

Bal.Supplies Expense

14

Bal. 2,000,000 Dec. 31 1,240,000

760,000

55

Dec.
31 1,240,000
800,000
2,040,000
22
22

3-2
@solusinet

The debit balance of

Rp2,400,000 in SolusiNet
Prepaid Insurance account
represents the December 1
prepayment of insurance for 12
months.
23

3-2
31 Insurance Expense
Prepaid Insurance
Insurance expired

56

200 000

15

200 000

Insurance Expense
15
200,000 Dec. 31 200,000

56

(Rp2,400,000/12).

Prepaid Insurance
Dec. 31
2,400,000
2,200,000

Bal.

24
24

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

3-2
@solusinet

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.
26

3-2

31 Unearned Rent
Rent Revenue
Rent earned
(Rp360,000/3
months)
Unearned Rent
23
Bal.
360,000
Bal.
120,000
240,000
Dec. 31

23

120 000

42

120 000

Rent Revenue
Dec. 31

42

120,000

27
27

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
Fees Earned
Fees earned (Rp44,900,000
Rp22,300,000).
For Practice: PE 3-4A, PE 3-4B

22,600,000
22,600,000

28
28

3-2

@solusinet

SolusiNet provided Rp500,000

in services during December
for which the customer has not
been billed.
29

3-2
31 Accounts Receivable
Fees Earned
Accrued fees (25 hrs.
x Rp20,000)

Accounts Receivable 12
Bal.
2,220,000
Dec. 31 500,000
Bal.
2,720,000

12
41

500 000

Fees Earned
Bal.
Dec. 31
Bal.

500 000

41
16,340,000
500,000
16,840,000
30
30

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
Fees Earned
Accrued fees.

For Practice: PE 3-5A, PE 3-5B

13,680,000
13,680,000

31
31

3-2
@solusinet

At the end of December,

accrued wages amounted to
Rp250,000. Without this
adjusting entry, Wages
Expense is understated.
32

3-2
31 Wages Expense
Wages Payable
Accrued wages.

Wages Payable 22
Dec. 31 250,000

51
22

250 000
250 000

Wages Expense
Bal. 4,275,000
Dec.31 250,000
Bal. 4,525,000

51

33
33

3-2

Wages Payable 22
Dec. 31 250,000

Wages Expense
Bal. 4,275,000
Dec.31 250,000

51

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.

34
34

3-2

The payment of January 10 wages totaling

Rp1,275,000 is shown below.
Jan. 10 Wages Expense
Wages Payable
Cash

1 025 000
250 000
1 275 000

35
35

3-2

Wages Payable 22
Jan. 10 250,000 Dec. 31 250,000

The
Theliability
liabilityisis
cancelled.
cancelled.

Wages Expense
Bal. 4,275,000
Dec.31 250,000
Bal. 4,525,000

51

Jan.10 1,025,000

An
Anexpense
expensefor
for
wages
wagesof
of
Rp1,025,000
Rp1,025,000isis
recorded
recordedin
inthe
the
new
newfiscal
fiscalyear.
year.

36
36

3-2
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

37
37

3-2
@solusinet

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.
38

3-2

As time passes, a fixed

asset loses its ability to
provide useful services.
This decrease in
usefulness is called
depreciation.
39

3-2

Normal titles for fixed asset accounts and their

related contra asset accounts are as follows:
Fixed Asset

Contra Asset

Land
Buildings

NoneLand is not depreciated

Accumulated Depreciation
Buildings
Accumulate DepreciationStore
Equipment
Accumulated DepreciationOffice
Equipment

Store Equipment
Office Equipment

40

3-2

@solusinet

SolusiNet estimates the

depreciation on its office
equipment to be Rp50,000
for the month of December.
41

3-2

31 Depreciation Expense
Accum. Depreciation
Office Equipment

53
19

50 000
50 000

Depreciation of
office equipment.

Depreciation Expense
Dec. 31
50,000

53

Accum. Depr.Office Equip. 19

Dec. 31
50,000
42
42

3-2

SolusiNet balance sheet would

show the office equipment at
cost, less the accumulated
depreciation.
Office equipment
Less accumulated
depreciation

Rp1,800,000
50,000 Rp1,750,000
Book
value

43

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
44

3-3

Objective
Objective 33
Summarize the
adjustment process
45

Adjusting Entry SolusiNet

3-3

46

3-3

(In Rp000)

Ledger with
Adjusting Entries
SolusiNet

(Continued)

47
47

(Continued)
Ledger with
Adjusting Entries
SolusiNet

3-3

(In Rp000)

48
48

3-3

(Continued)
Ledger with
Adjusting Entries
SolusiNet

(In Rp000)

49
49

3-3

(Concluded)
Ledger with Adjusting
EntriesSolusiNet

(In Rp000)

50
50

3-3
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 2008.
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).
51
For Practice: PE 3-8A, PE 3-8B

3-4

Objective
Objective 44
Prepare an adjusted
trial balance.
52

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.
53

3-4

54

3-4
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
Rp3,260,000.
55
55

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

56
56