Accounting: Financial Adjusting Process
Nature of the Adjusting Process:
Accounting period concept- when accountants determine in which period the revenues and
expenses of the business should be reported
Accrual Basis of Accounting-revenues are reported in the income statement in the period in
which they are earned
Revenue is reported when the services are provided to the customers
Cash may or may not be received
Revenue Recognition Concept-concept that supports reporting revenues when the service is
provided
Matching Concept- reporting revenues and related expenses in the same period
Cash Basis of Accounting- revenues and expenses are reported in the income statement in the
period in which cash in received or paid
All adjusting entries affect at least one income statement account and one balance sheet account
Adjusting process- analysis and updating of accounts at the end of the period before the
financial statements are prepared
An adjusting entry will always involve revenue or an expense account and an asset or a liability
account
Require Adjusting generally:
Prepaid rent
Wages expense
Accounts receivable
Unearned rent
Prepaid Expenses- or deferred expenses are items that have been initially recorded as assets but
are expected to become but are over time
Prepaid advertising
Prepaid interest
Unearned Revenues- deferred or revenues are items that have been initially recorded as
liabilities but are expected to become revenues over time
Unearned rent
Tuition received in advance
Insurance company premiums
Prepaid expenses and unearned revenues involve the receipt of cash and are delayed to future
periods
Accrued Revenues- or accrued assets are revenues that have been earned but not yet recorded in
accounts
Accrued interest on notes payable
Commissions of travel agent
Accrued Expenses- or accrued liabilities are expenses that have been incurred but have not been
recorded in the accounts
Accrued wages owed
Accrued interest on notes payable
Accrued revenues and expenses are created by unrecorded revenue that has been earned or an
unrecorded expense that has been incurred
Accrued Expense- wages owed but not yet received
Prepaid expense- supplies on hand
Unearned revenue- fees received but not yet earned
Accrued revenue- fees earned but not yet received
Depreciation Expense- periodic expense when a portion of the cost of a fixed asset is recorded
as an expense each year of its useful life
Accumulated Depreciation- or contra asset accounts are accounts off-set by other accounts;
deducted off related asset accounts on the balance sheet
Net book value- difference between two balances that has not yet been depreciated