National University of Management

(NUM)

Chapter III

Adjustment and Preparing

Financial Statements

Lectured by Sim Makara

Prepare by: Group of Lecture, Finance and

Accounting Department
3-1
Timing
Timing Issues
Issues

Recognizing Revenues and Expenses

Revenue Recognition Principle
Companies recognize
revenue in the accounting
period in which it is
earned.
In a service enterprise,
revenue is considered to
be earned at the time the
service is performed.

3-2
Timing
Timing Issues
Issues

Recognizing Revenues and Expenses

Matching Principle
Match expenses with
revenues in the period
when the company makes
efforts to generate
those revenues.

“Let the expenses follow

the revenues.”

3-3
The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries

Adjusting entries make it possible to report

correct amounts on the financial position
and on the statement of profit and loss.

A company must make adjusting entries

every time it prepares financial statements.

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The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries

Revenues - recorded in the period in which

they are earned.
earned
Expenses - recognized in the period in which
they are incurred.
incurred
Adjusting entries - needed to ensure that
the revenue recognition and matching
principles are followed.

3-5
Types
Types of
of Adjusting
Adjusting Entries
Entries

Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.

2. Unearned Revenues. 4. Accrued Expenses.

Revenues received in cash Expenses incurred but not
and recorded as liabilities yet paid in cash or
before they are earned. recorded.

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Trial
Trial Balance
Balance
Trial Balance – Each account is analyzed to determine
whether it is complete and up-to-date.

Moonlight Consulting - Jan. 31st (before adjusting entries)

Acct. No. Account Debit Credit
400 Sales 137,000
130 Investments $ 300,000
120 Equipment 24,000
110 Prepaid insurance 12,000
105 Accounts receivable 35,000
101 Cash 50,000
300 Mooon, capital $ 40,000
220 Note payable 200,000
210 Unearned rent revenue 24,000
200 Trade payable 20,000
$ 421,000 $ 421,000

3-7
Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals

Deferrals are either:

Prepaid expenses

OR

Unearned revenues.

3-8
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Payment of cash, that is recorded as an asset because

service or benefit will be received in the future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

insurance rent
supplies maintenance on equipment
advertising fixed assets (depreciation)

3-9
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Prepaid Expenses
Costs that expire either with the passage of time
or through use.

Adjusting entries (1) to record the expenses that

apply to the current accounting period, and (2) to
show the unexpired costs in the asset accounts.

3-10
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Adjusting entries for prepaid expenses

Increases (debits) an expense account and

Decreases (credits) an asset account.

3-11
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
On Jan. 1st, Moon Consulting paid $12,000
Example (Insurance):
for 12 months of insurance coverage. Show the journal
entry to record the payment on Jan. 1st.

Jan. 1 Prepaid Insurance 12,000

Cash 12,000

Prepaid Insurance Cash

Debit Credit Debit Credit
12,000 12,000

3-12
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
On Jan. 1st, Moon Consulting paid $12,000
Example (Insurance):
for 12 months of insurance coverage. Show the adjusting
journal entry required at Jan. 31st.

Jan. 31 Insurance Expense 1,000

Prepaid Insurance 1,000

Prepaid Insurance Insurance Expense

Debit Credit Debit Credit
12,000 1,000 1,000

11,000

3-13
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Depreciation
Buildings, equipment, and vehicles (long-lived
assets) are recorded as assets, rather than an
expense, in the year acquired.
Companies report a portion of the cost of a long-
lived asset as an expense (depreciation) during
each period of the asset’s useful life (Matching
Principle).

3-14
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
On Jan. 1st, Moon Consulting paid
Example (Depreciation):
$24,000 for equipment that has an estimated useful life of
20 years. Show the journal entry to record the purchase of
the equipment on Jan. 1st.
Jan. 1 Equipment 24,000
Cash 24,000

Equipment Cash
Debit Credit Debit Credit
24,000 24,000

3-15
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
On Jan. 1st, Moon Consulting paid
Example (Depreciation):
$24,000 for equipment that has an estimated useful life of
20 years. Show the adjusting journal entry required at Jan.
31st. ($24,000 / 20 yrs. / 12 months = $100)

Jan. 31 Depreciation Expense 100

Accumulated Depreciation 100

Depreciation Expense Accumulated Depreciation

Debit Credit Debit Credit
100 100

3-16
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”

Depreciation (Statement Presentation)

Accumulated Depreciation is a contra asset account.
Appears just after the account it offsets
(Equipment) on the balance sheet.

Balance Sheet Jan. 31

Assets

Equipment 24,000
Accumulated Depreciation (100)
Net Equipment 23,900

3-17
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”

Receipt of cash that is recorded as a liability because

the revenue has not been earned.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

rent magazine subscriptions

airline tickets customer deposits
school tuition

3-18
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”

Unearned Revenues
Company makes an adjusting entry to record the
revenue that has been earned and to show the
liability that remains.

The adjusting entry for unearned revenues results

in a decrease (a debit) to a liability account and an
increase (a credit) to a revenue account.

3-19
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”

Adjusting entries for unearned revenues

Decrease (a debit) to a liability account and

Increase (a credit) to a revenue account.

3-20
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Example:On Jan. 1st, Moon Consulting received $24,000 from
Sana for 3 months rent in advance. Show the journal entry
to record the receipt on Jan. 1st.

Jan. 1 Cash 24,000

Unearned Rent Revenue 24,000

Cash Unearned Rent Revenue

Debit Credit Debit Credit
24,000 24,000

3-21
Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Example: On Jan. 1st, Moon Consulting received $24,000 from
Sana for 3 months rent in advance. Show the adjusting
journal entry required on Jan. 31st.

Jan. 31 Unearned Rent Revenue 8,000

Rent Revenue 8,000

Rent Revenue Unearned Rent Revenue

Debit Credit Debit Credit
8,000 8,000 24,000

16,000

3-22
Adjusting
Adjusting Entries
Entries for
for Accruals
Accruals

Made to record:
Revenues earned and

OR

Expenses incurred

in the current accounting period that have not

been recognized through daily entries.

3-23
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”

Revenues earned but not yet received in cash or

recorded.

Adjusting entry results in:

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

rent
interest
services performed

3-24
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”

Accrued Revenues
An adjusting entry serves two purposes:

(1) It shows the receivable that exists, and

(2) It records the revenues earned.

3-25
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”

Adjusting entries for accrued revenues

Increases (debits) an asset account and

Increases (credits) a revenue account.

3-26
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Example: On Jan. 1st, Moon Consulting invested $300,000 in
securities that return 5% interest per year. Show the
journal entry to record the investment on Jan. 1st.

Jan. 1 Investments 300,00

Cash 0 300,000

Investments Cash
Debit Credit Debit Credit
300,000 300,000

3-27
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Example: On Jan. 1st, Moon Consulting invested $300,000 in
securities that return 5% interest per year. Show the
adjusting journal entry required on Jan. 31st. ($300,000 x
5% / 12 months = $1,250)
Jan. 31 Interest Receivable 1,250
Interest Revenue 1,250

Interest Receivable Interest Revenue

Debit Credit Debit Credit
1,250 1,250

3-28
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”

Expenses incurred but not yet paid in cash or

recorded.

Adjusting entry results in:

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

rent taxes
interest salaries

3-29
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”

Accrued Expenses
An adjusting entry serves two purposes:

(1) It records the obligations, and

(2) It recognizes the expenses.

3-30
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”

Adjusting entries for accrued expenses

Increases (debits) an expense account and

Increases (credits) a liability account.

3-31
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Example:On Jan. 2nd, Moon Consulting borrowed $200,000 at a
rate of 9% per year. Interest is due on first of each month.
Show the journal entry to record the borrowing on Jan. 2 nd.

Jan. 2 Cash 200,00

Notes Payable 0 200,000

Cash Notes Payable

Debit Credit Debit Credit
200,000 200,000

3-32
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Example:On Jan. 2nd, Moon Consulting borrowed $200,000 at a
rate of 9% per year. Interest is due on first of each month.
Show the adjusting journal entry required on Jan. 31st.
($200,000 x 9% / 12 months = $1,500)

Jan. 31 Interest Expense 1,500

Interest Payable 1,500

Interest Expense Interest Payable

Debit Credit Debit Credit
1,500 1,500

3-33
The
The Adjusted
Adjusted Trial
Trial Balance
Balance

After all adjusting entries are journalized and

posted the company prepares another trial
balance from the ledger accounts (Adjusted Trial
Balance).

Its purpose is to prove the equality of debit

balances and credit balances in the ledger.

3-34
Adjusted
Adjusted Trial
Trial Balance
Balance
Adjusted Trial Balance Debit Credit
Sales 137,000
Interest revenue 1,250
Rent revenue 8,000
Interest expense 1,500
Depreciation expense 100
Insurance expense 1,000
Investments 300,000
Equipment 24,000
Accumulated depreciation $ 100
Prepaid insurance 11,000
Interest receivable 1,250
Accounts receivable 35,000
Cash $ 50,000
Moon, capital 40,000
Note payable 200,000
Unearned revenue 16,000
Interest payable 1,500
Trade payable 20,000
$ 423,850 $ 423,850
3-35
Preparing
Preparing Financial
Financial Statements
Statements

Financial
Financial Statements
Statements are
are prepared
prepared directly
directly from
from the
the
Adjusted
Adjusted Trial
Trial Balance.
Balance.

Owner’s
Balance Income
Equity
Sheet Statement
Statement

3-36
 Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit
Statement of Profit
Sales 137,000
Interest revenue 1,250 and Loss
Rent revenue 8,000 Statement of Profit and Loss
Interest expense 1,500 For the Month Ended Jan. 31, 2022
Depreciation expense 100
Revenues:
Insurance expense 1,000
Sales $ 137,000
Investments 300,000
Equipment 24,000 Interest revenue 1,250
Accumulated depreciation $ 100 Rent revenue 8,000
Prepaid insurance 11,000 Total revenue 146,250
Interest receivable 1,250 Expenses:
Accounts receivable 35,000 Interest expense 1,500
Cash $ 50,000 Depreciation expense 100
Moon, capital 40,000 Insurance expense 1,000
Note payable 200,000
Total expenses 2,600
Unearned revenue 16,000
Interest payable 1,500 Net income $ 143,650
Trade payable 20,000
$ 423,850 $ 423,850 3-37
 Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit
Sales 137,000
Interest revenue 1,250
Rent revenue 8,000
Statement of
Interest expense 1,500
Depreciation expense 100 Owner’s Equity
Insurance expense 1,000
Investments 300,000 Statement of Owner's Equity
Equipment 24,000 For the Month Ended Jan. 31, 2022
Accumulated depreciation $ 100
Prepaid insurance 11,000 Moon, Capital, Jan. 1 $ 40,000
Interest receivable 1,250 + Net income 143,650
Accounts receivable 35,000 - Drawings 0
Cash $ 50,000 Moon, Capital, Jan. 31 $ 183,650
Moon, capital 40,000
Note payable 200,000
Unearned revenue 16,000
Interest payable 1,500
Trade payable 20,000
$ 423,850 $ 423,850 3-38
 Preparing
Preparing Financial
Financial Statements
Statements
Adjusted Trial Balance Debit Credit
Statement of Financial Position
Sales 137,000
Jan. 31, 2022
Interest revenue 1,250
Assets
Rent revenue 8,000
Interest expense 1,500 Investments 300,000
Depreciation expense 100 Equipment 24,000
Insurance expense 1,000 Accum. Depreciation (100)
Investments 300,000 Prepaid insurance 11,000
Equipment 24,000 Interest receivable 1,250
Accumulated depreciation $ 100 Accounts receivable 35,000
Prepaid insurance 11,000 Cash $ 50,000
Interest receivable 1,250 Total assets $ 421,150
Accounts receivable 35,000 Owner's Equity & Liabilities
Cash $ 50,000 Moon, capital, Jan. 31, 2022 183,650
Moon, capital 40,000
Note payable 200,000
Note payable 200,000
Unearned revenue 16,000
Unearned revenue 16,000
Interst payable 1,500
Interest payable 1,500
Trade payable 20,000 Trade payable $ 20,000
Total equity & Liabilities $ 421,150
$ 423,850 $ 423,850
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