ENGLISH FOR ECONOMICS

“The Adjusting Process”

Lecturer :
Aslichatul Insiyah, M.Pd.

By Group 5 :
1. Endah krisnawati (G942117087)
2. Muhammad Husni Najib (G04217041)
3. Nur Hamidah (G94217196)

PRODI EKONOMI SYARIAH

FAKULTAS EKONOMI DAN BISNIS ISLAM
UIN SUNAN AMPEL SURABAYA
2019
 Chapter 1
The Adjusting Process

A. The Adjsuting Process

At the end of accounting period, many of the account balances in the ledger can be reported
in the financial statement withaout change. For example, the balances of the cash and land
accounts are normally the amount reported on the balance sheet.
Under the accrual basis, however, some accounts in the ledger require updating. This updating is
required for the following reasons.
1. Some expenses are not recorded daily. For example, the daily use of supplies would
require many entries with small amounts. Also, managers usually do not need to
know the amount of supplies on hand on a day to day basis.
2. Some revenues and expenses are incurred as time passes rather than as separate
transactions. For example, rent received in advance (unearned rent) expires and
becomes revenue with the passage of time. Likewise, prepaid insurance expires and
becomes an expense with the passage of time.
3. Some revenues and expenses may be unrecorded. For example, a company may have
provided services to customers that is has not billed or recorded at the end of the
accounting period. Likewise, a company may not pay its employes until the next
accounting period even though the employees have earned their wages in the current
period.
The analysis and updating of accounts at the end of the period before the financial
statements are prepared is called adjusting process. All adjusting entries affect ata least
one income statement account and one balance sheet account. Thus, an adjusting entry
will alaways involve a revenue or an expenses account and an asset or a liability account.
1

B. Types of Accounts Requiring Adjustment

1 Warren Reeve Duchac, Coorporate Financial Accounting, (South Western: Charles C Thomas Publisher, LTD.,
1994), page 101.
 The financial statements are affected by two types of adjustments deferrals and
accruals. Whether a deferral or an accrual, each adjustment will affect a balance sheet
account and an income statement account.
Deferrals are created by recording a transactions in a way that delays or defers
the recognition of an expense or a revenue. Common example of defferals are described
below.
1. Prepaid expenses or deffered expenses are the advance payment of future expenses
and are recorded as assets when cash is paid, prepaid expenses become expenses over
time or during normal operations example include supplies, prepaid advertising, and
prepaid interest . McDonald’s corporation reported over 300$ million of prepaid
expenses and other current assets on a recent balance sheet.
2. Unearned revenues or defferead revenues are the advance receipt of future
revenues and are recorded as liabilities when cash is received. Unearned revenues
become earned revenues over time or during normal operations. Example include
tuition received in advance by a school, an annual retainer fee received by an
attorney, premiums received in advance by an insurance company, and magazine
subscriptions received in advance by a publisher. On a recent balance sheet,
Microsoft corporation reported over $12 billion of deffered revenue related to its
software.
Accruals are created when revenue are expense has been earned or incurred, but
has not been recorded at the end of the accounting period. Accruals are normally the
result of the revenue being earned or an expense being incurred before any cash is
received or paid. One such situation occurs when employees earn wages before the end of
the year, but are not paid until after year end.
3. Accrued expenses or accrued liabilities are expenses that have been incurred gut
have not been recorded in the accounts. An example off an accrued expense is
accrued interest on notes payable at the end if period. Other example include accrued
utility expenses and taxes. On a recent balance sheet, Home depot reported over $1.3
billion af accrued salaries and related expenses and over $1.9 billion of property
related to others.
 4. Accrued revenues or accrued assets are revenues that have been earned but have not
been recorded in the accounts. An example of an accrued revenue is fees for service
that an attorney has provided but has not billed to the client at the end of the period.
Other example include accrued interest or notes receivable and accrued rent on
property retend to others. 2
C. Adjustment Journal
Adjustment journals are journals used to record ledger accounts that need to be adjusted to
show the actual situation.
To illustrate adjusting entries, we use the December 31, 2009, unadjusted trial balance of
NetSolutions.
NetSolutions
Unadjusted Trial Balance
December 31, 2009
Debit Credit
Cash 2.065
Accounts Receivable 2.220
Supplies 2000
Prepaid Insurance 2.400
Land 20.000
Office Equipment 1.800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25.000
Chris Clark, Drawing 4.000
Fees Earned 16.340
Wages Expense 4.275
Rent Expense 1.600
Utilities Expense 985
Supplies Expense 800
Miscellaneous Expense 455
42.600 42.600
 Prepaid expenses
The balance in NetSolutions’ supplies account on December 31 is $2,000. Some of these
supplies (CDs, paper, envelopes, etc.) were used during December, and some are still on hand
(not used). If either amount is known, the other can be determined. It is normally easier to
determine the cost of the supplies on hand at the end of the month than to record daily supplies

2 Carl S Warren, Survey of Accounting, (South Western: Education Publishing, 2010 ), Fourth Edition, page 87-88.
used. Assuming that on December 31 the amount of supplies on hand is $760, the amount to be
transferred from the asset account to the expense account is $1,240, computed as follows:
Supplies Available during December (Balance of Account) $2,000
Supplies on hand, December 31 $ 760
Supplies used (amount of adjustment) $1,240
Date Description Debit Credit
2009
3 Supplies Expense 1,240
Dec
1
Supplies 1,240
Supplies used (2000-760)
Supplies Expense
Supplies Bal. 800
Bal. 2000 Dec.31 1.240
Dec.31 1.240
Adj.Bal 760
Adj.Bal 2.040

The debit balance of $2,400 in NetSolutions Prepaid Insurance account represents the
December 1 prepayment of insurance for 12 months.
3 Insurance Expense 200
1
Prepaid Insurance 200
Insurance Expired (2.400/12)

Prepaid Insurance
Bal. Dec.31
Insurance Expense
2.400 200 Dec.31
Adj.Bal 200
2.200

 Unearned Revenue
On December 1, the tenant prepaid three months’ rent for use of an office building owned
by NetSolutions. As of December 31, only $120 has been earned.
3 Unearned Rent 120
1
Rent Revenue 120
 Rent Earned (360/3)

Unearned Rent
Dec.31 Bal.
Rent Revenue
120 360 Dec.31
Adj.Bal 120
240

 Accrued Revenues
NetSolutions provided $500 in services during December for which the customer has not
been billed.
3 Accounts Receivable 500
1
Fees Earned 500
Accrued fees (24hrs x 20)

Unearned Rent Fees Earned

Bal.
Bal.
2.200
16.340
Dec.31
Dec.31 500
500
Adj.Bal
Adj.Bal
16.840
2.720

 Accrued Expenses
At the end of December, accrued wages amounted to $250. Without this adjusting entry,
Wages Expense is understated.
3 Wages Expense 250
1
Wages Payable 250
Accrued Wages

Wages Payable
Dec.31
 Wages Expense
Bal.
250 4.275
Dec.31
250
The payment of January 10 wages totaling
Adj.Bal
$1,275, An expense for wages of $1,025 is
4.525
recorded in the new fiscal year, is shown below.
Jan. 1 Wages Expense 1.025
0
Wages Payable 250
Cash 1.275

 Depreciation Expense
NetSolutions estimates the depreciation on its office equipment to be $50 for the month
of December.
3 Depresiation Expense 50
1
Accumulated Depreciation-Office Equip 50
Depreciation on Office Equipment

Depreciation Expense Accumulated depreciaton – Office Equip

Dec.31 Dec.31
50 50

Office Equipment $1.800

Less Accumulated Depreciation $ 50
$1.750

D. Summarize The Adjusment Process

 Summary of adjustments include types of adjustments, adjusting journal entries, and
the effect of adjustments in financial statements. Adjustment journal entries are dated the last
day of the period. However, because the process of gathering information about adjustments
takes time, the journal entries are usually recorded on the date after the last day of the period.
Each adjustment journal is usually supported by an explanation.

E. Adjusted Trial Balance

A list of adjusted balances is prepared after all adjusting journal entries are posted. The
adjusted balance list checks the balance of the amount of debit and credit balance before
preparing financial reports.

VOCABULARY PRACTICE
 I. Find the synonym of :
1. Adjust 6. Expense
2. Balance 7. Revenue
3. Ledger 8. Amount
4. Report 9. Provide
5. Require 10. Employee

II. Find the antonym of :

1. Deferral 6. Interest
2. Accrual 7. Retainer
3. Affect 8. Attorney
4. Recognition 9. Incur
5. Advertise 10. Salary

III. Comprehension
1. What is the adjusting process?
2. What are affected the adjustment financial statements?
3. What is the function of the adjusting journal?
4. What the types of adjustment are included in the summary of adjustments?
5. When is a list of adjustment balances prepared?