Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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CHAPTER 3
ADJUSTING ACCOUNTS FOR FINANCIAL STATEMENTS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Explain the importance of
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3-3, 3-4
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3-1, 3-3,
how it improves financial
C2. Explain accrual accounting and
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3-2, 3-9
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3-1, 3-3
C3. Identify the types of
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3-3, 3-4
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3-1, 3-4
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adjustments link to financial
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3-8
3-4, 3-5,
GL 3-2
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A1. Explain how accounting
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3-4, 3-5,
3-2, 3-3,
3-1, 3-3,
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A2. Compute profit margin and
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3-10
3-5
3-1, 3-2,
3-13, 3-14
GL 3-2,
SP, ES
3-11, 3-12,
3-6,
P2. Explain and prepare an adjusted
trial balance.
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3-3, 3-4,
GL 3-2, SP,
ES
P3. Prepare financial statements
from an adjusted trial balance.
3-8, 3-9
3-3, 3-4,
3-5, SP,
GL 3-2
accounting for prepaids.
P4A. Explain the alternatives in
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3-11, 3-12
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periodic reporting and the time
3-4, 3-5,
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Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and
Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows
instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.
Connect Insight
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto–graded and provide
instant feedback to the student.
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
NEW opener—re:char and entrepreneurial assignment.
Streamlined accrual-basis vs cash-basis section.
New box on how accounting is used to clawback false gains.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
I. Timing and Reporting
A. The Accounting Period
To provide timely information, accounting systems prepare reports
at regular intervals.
1. Time-period principle assumes that an organization’s activities
can be divided into specific time periods such as a month, a
2. Annual reporting period:
a. Calendar year—January 1 to December 31.
b. Fiscal year—any twelve consecutive months or 52 weeks
B. Accrual Basis versus Cash Basis
Accrual basis is consistent with GAAP. Improves
1. Accrual basis—applies adjustments so that revenues are
recognized when services and products are delivered and
2. Cash basis—revenues are recognized when cash is received
and expenses are recognized when cash is paid. Cash basis is
not consistent with GAAP.
C. Recognizing Revenues and Expenses
1. The revenue recognition principle requires revenue be
recorded when goods or services are provided to customers.
2. The expense recognition (or matching) principle aims to
record expenses in the same period as the revenues earned as a
result of these expenses.
II. Adjusting Accounts—An adjusting entry is recorded to bring an asset
or liability account balance to its proper amount. This entry also
updates the related expense or revenue account.
Adjustments are necessary for transactions that extend over more
than one period.
three-month quarter, a six-month interval, or a year for
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
B. Adjusting Prepaid (Deferred) Expenses
1. Prepaid expenses (including depreciation) are assets paid for
expenses and decreasing (crediting) assets (with the exception
of depreciation on plant and equipment).
2. Common prepaid items are supplies, prepaid insurance,
prepaid rent and depreciation.
3. Adjusting entries for prepaids involve increasing (debiting)
1. Depreciation is the process of allocating the cost of plant
assets over their expected useful lives.
2. Adjusting entries for depreciation expense involve increasing
(debiting) expenses and increasing (crediting) a special
3. Book value is a term used to describe the asset less its contra-
asset (accumulated-depreciation).
D. Adjusting Unearned (Deferred) Revenues
(liabilities) become earned revenues (revenues).
1. Unearned revenues (also called deferred revenues) are
liabilities created by cash received in advance of providing
2. Adjusting entries for unearned revenues involve increasing
(crediting) revenues and decreasing (debiting) unearned
revenues.
E. Adjusting Accrued Expenses
increasing (debiting) expenses and increasing (crediting)
2. Common accrued expenses are salaries, interest, rent, and
taxes.
3. Adjusting entries for recording accrued expenses involve
called deferred expenses, are assets. As the assets are used,
their costs become expenses.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
F. Adjusting Accrued Revenues
2. Accrued revenues commonly result from partially completed
jobs or interest earned.
3. Adjusting entries for recording accrued revenues involve
increasing (debit) assets and increasing (credit) revenues. (The
asset is a “receivable.”)
G. Links to Financial Statements
Each adjusting entry affects one or more income statement
III. Trial Balance and Financial Statements
A. Adjusted Trial Balance
A list of accounts and balances prepared after adjusting entries are
recorded and posted to the ledger.
IV. Preparing Financial Statements—Prepare financial statements
directly from information in the adjusted trial balance. The following
preparation order shows the flow of information from one statement to
another:
A. Income Statement
B. Statement of Owner’s Equity
V. Decision Analysis—Profit Margin
A. Used to evaluate operating results by measuring the ratio of a
company’s net income to sales. Also called return on sales.
revenue.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
VI. Appendix 3A—Alternative Accounting for Prepayments
A. Prepaid expenses may originally be recorded with debits to
expense accounts instead of assets. If so, then adjusting entries
must transfer the cost of the unused portions from expense
If so, then adjusting entries must transfer the unearned portions
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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VISUAL #3-1
ACCRUAL BASIS ACCOUNTING
(Follows GAAP)
requires that the
Income Statement
(for a period)
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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VISUAL #3-2
DEFERRALS
The converse of statements in Visual #3-1 also applies.
Revenue not earned or expense not incurred results in Deferrals*
UNEARNED = LIABILITY *
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
VISUAL #3-3
ADJUSTMENTS
TYPE
GENERALIZED*
ENTRY
AMOUNT
1A. Prepaid (deferred)
expenses—initially recorded as
assets
Dr. _________ Expense
Cr. the Asset* acct.
Amount used, or
consumed, or expired
1C. Prepaid (deferred)
appendix)
Dr. the Asset** acct.
Cr. ________ Expense
Amount left, or
not consumed, or
2A. Unearned revenues—
(revenue received in advance)
initially record as liability
(unearned account)
Dr. Unearned ________
Cr. the Revenue** acct.
Amount earned to date
2B. Unearned revenues—
(revenue received in advance)
initially recorded as a revenue
(alternate treatment—
appendix)
Dr. the Revenue** acct.
Cr. Unearned________
Amount still not
earned
3. Accrued expenses—
recorded)
Cr. _________ Payable
Amount accrued
4. Accrued revenues
Dr. ________ Receivable
Amount accrued
*Note: (1) Each adjustment affects a Balance Sheet Account and an Income
Statement Account and (2) CASH NEVER appears in an adjustment.
**Title or account name varies.
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Chapter 3 Alternate Demonstration Problem – 1
On July 1, 2017, Howard M. Tenant, Inc., rents office space from John Q.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
Solution: Chapter 3 Alternate Demonstration Problem – 1
Tenant
Landlord
7/1/17
Prepaid Rent …………….
2,400
Cash ………………………..
2,400
Cash
2,400
2,400
12/31/17
Rent Expense …………..
Unearned Rent Rev.
Prepaid Rent ……..
Rent Revenue
12/31/18
Rent Expense …………..
1,200
Unearned Rent Rev.
1,200
*Prepaid Rent …….
1,200
Rent Revenue
1,200
12/31/19
*Rent Expense ………….
Unearned Rent Rev.
Prepaid Rent ……..
Rent Revenue
Unearned Rent
An Alternative Solution (Based on the Appendix)
Tenant
Landlord
7/1/17
Rent Expense …………..
2,400
Cash ………………………..
2,400
Cash ………………….
2,400
Rent Rev. ………….
2,400
12/31/17
Prepaid Rent ……………
1,800
Rent Rev.
1,800
1,800
*12/31/18
Rent Expense …………..
1,200
Unearned Rent Rev.
1,200
Prepaid Rent ……..
1,200
Rent Revenue
1,200
*12/31/19
Rent Expense …………..
Unearned Rent Rev.
Prepaid Rent ……..
Rent Revenue
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Chapter 3 Alternate Demonstration Problem – 2
The trial balance of Large Company, Inc., at the end of its annual
accounting period is as follows:
LARGE COMPANY, INC.
Trial Balance
December 31, 2017
Cash ………………………………………………………………..
$ 4,000
Accounts Receivable………………………………..
400
Supplies …………………………………………………………
Equipment ………………………………………………………
Accumulated Depreciation—Equipment ……………
$ 2,000
Revenue ………………………………………………………….
Salaries Expense ……………………………………………..
Totals ………………………………………………………………
$54,000
$54,000
Additional information:
1. Expired insurance, $400.
Required:
Prepare adjusting entries.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 3 Solution: Alternate Demonstration Problem – 2
1.
Insurance Expense …………………………………….
400
Prepaid Insurance ………………………………..
400
Supplies Expense ………………………………………
1,300
Supplies ………………………………………………
1,300
Depreciation Expense Equip. ……………………..
1,000
Accumulated Depreciation Equip. …………
1,000
Salaries Expense ……………………………………….
Salaries Payable …………………………………..
Accounts Receivable …………………………………
Revenue ……………………………………………..
500