105
learning outcomes
1
Describe the purpose of adjustments
2
Prepare adjusting entries for accrued revenue
3
Prepare adjusting entries for accrued expenses
4
Prepare adjusting entries for unearned revenue
5
Prepare adjusting entries for prepaid expenses
6
Prepare adjusting entries for depreciation
7
Prepare an adjusted trial balance
Appendix
8
Prepare correcting entries
Introduction to Adjustments
Accrual-based accounting is designed to record revenues when earned and expenses when incurred.
However, cash receipts and cash payments do not always coincide with the recording of revenues
and expenses.Thus, cash can change hands in a period before or after recording revenues or expenses.
For example, if you prepaid $3,000 for one year’s insurance in January, in July the true value of the
insurance has decreased by six months and is now worth only $1,500.The value of the prepaid asset
must be adjusted to reflect its true value. The decrease in value of the assets will decrease equity,
which is recorded as an expense on the income statement.
Alternatively, you may have received cash from a customer for work to be done in the future.This
cash was initially recorded as unearned revenue. As time passes and you provide service for the
customer, the amount of work remaining to be completed (unearned revenue) decreases.The value
of unearned revenue must be adjusted to reflect its true value.The decrease in value of this liability
will increase equity, which is recorded as revenue on the income statement.
There are a number of such adjustments that need to be made to update the values of the assets and
liabilities.The process to ensure that all accounts are reported accurately at the end of the period is
called the adjusting process and is the fifth step in the accounting cycle shown in Figure 5.1.
Chapter 5
The Accounting Cycle: Adjustments
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