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Unformatted text preview: chapter 3 The Adjusting Process ______________________________________________ OPENING COMMENTS Chapter 3 introduces students to the adjusting process. The basic idea of the matching concept was presented in Chapter 1, where expenses incurred were matched against revenues. Now in Chapter 3, matching is introduced formally and as a stand-alone concept. The matching concept is defined and discussed, and the chapter includes full coverage of the accrual basis and cash basis of accounting. Of all the accounting concepts and principles introduced in the early chapters of the text, matching is the most important. The chapter’s main emphasis is on the preparation of adjusting entries. Definitions, calculations where pertinent, and examples of the four basic types of deferrals and accruals are included. The chapter then covers the adjustment of fixed assets (depreciation). After studying the chapter, your students 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. STUDENT FAQS • Why can’t we just do cash basis accounting? • Why is unearned revenue a liability instead of a revenue account? • Adjusting entries give me a headache. Can we just skip them? • Why are adjusting entries done at the end of the accounting period instead of at the beginning? • Expired and unexpired give me problems. Is there an easy way to understand them? 31 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 32 Chapter 3 The Adjusting Process This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. • Why is matching revenues and expenses so important? • Accrual means what, again? • Deferral means what, again? • Why do we sometimes record a revenue or expense as a deferred item? Wouldn’t it be easier to always record revenue to a revenue account and remove any unearned revenue at year end? Wouldn’t be easier to always record an expense item to an expense account and them remove any unused expense at year end? • How can an expense item temporarily be treated as an asset? I thought an asset was something of value or worth, not a cost of doing business. • How can revenue temporarily be treated as a liability? I thought revenue was a good thing, not a debt or obligation. • Why can’t you debit depreciation expense and credit equipment? No other adjusting entry uses a contra account....
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- Spring '10