Financial Accounting I

Chapter 3: The Adjusting Process

Pamela Gonzalez, MBA
September 25
th
, 2013
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
Accrual Accounting vs. Cash-basis
Accounting
Cash-basis never reports receivables reporting revenues in the
wrong period when not collecting immediately. Revenues are
receipts of cash and expenses are payments made in cash.

Accruals reports transactions when they are incurred or earned.
This permits accountants to record revenues and expenses in the
appropriate periods. This is the method required and accepted by
GAAP
Accounting Principles and Concepts
GAAP
(Generally Accepted Accounting Principles)

Entity Concept
Faithful
Representation
Principle
Cost Principle
Going
Concern
Principle
Stable
Monetary Unit
Concept
One business
separate from
its owners
Data faithfully represents
the measurement or
description of that data
Assets and services
should be recorded at
their actual cost
(amount paid).
Will remain in
operation for the
foreseeable future
Stable currency
buying power
Accounting Principles and Concepts
GAAP
(Generally Accepted Accounting Principles)

Accounting Period
Concept
Revenue
Recognition
Principle
Matching Principle
Time
Period
Concept
Slice time into small
segments to
prepare financial
statements
Tells when to record
revenue and amount
to record
Measures all
expenses incurred
and matches them
against revenues
Requires information
to be recorded at
least annually
Why We Adjust the Accounts
Adjusting Entries
Accruals Prepaids
Cash payment
occurs before an
expense is recorded
or receipt occurs
before the revenue
is earned
Records an expense
before the cash
payment or it
records the revenue
before the cash is
received.
1. Prepaid expenses (prepaid)
2. Depreciation (prepaid)
3. Accrued expenses (accrual)
4. Accrued revenues (accrual)
5. Unearned revenues (prepaid)

Adjusting Entries
Prepaid Expenses
Prepaid Rent
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.



Adjusting Entries
Adjusting Entries
Accrued Expenses
Salary
Adjusting Entries
Accrued Expenses
Interest Expense
Adjusting Entries
Accrued Revenue
Adjusting Entries
Unearned Revenues
Practice!
Financial Accounting I

Chapter 3: The Adjusting Process
Pamela Gonzalez, MBA