Fortson Company The Adjusting Process

Journalize entries for accounts requiring adjustment. Key Points At the end of the period, adjusting entries are needed for prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. In addition, an adjusting entry is necessary to record depreciation on fixed assets. Learning Outcomes • Prepare an adjusting entry for a prepaid expense. • Prepare an adjusting entry for an unearned revenue. • Prepare an adjusting entry for an accrued revenue. • Prepare an adjusting entry for an accrued expense. • Prepare an adjusting entry for depreciation expense. Summarize the adjustment process. Key Points A summary of adjustments, including the type of adjustment, reason for the adjustment, the adjusting entry, and the effect of omitting an adjustment on the financial statements, is shown in Exhibit 8. Learning Outcome • Determine the effect on the income statement and balance sheet of omitting an adjusting entry for prepaid expense, unearned revenue, accrued revenue, accrued expense, and depreciation. Example Practice Exercises Exercises EE3-3 PE3-3A, 3-3B EE3-4 PE3-4A, 3-4B EE3-5 PE3-5A, 3-5B EE3-6 PE3-6A, 3-6B EE3-7 PE3-7A, 3-7B Example Practice Exercises Exercises EE3-8 PE3-8A, 3-8B Prepare an adjusted trial balance. Key Points After all the adjusting entries have been posted, the equality of the total debit balances and total credit balances is verified by an adjusted trial balance. Learning Outcomes • Prepare an adjusted trial balance. • Determine the effect of errors on the equality of the adjusted trial balance. Example Practice Exercises Exercises EE3-9 PE3-9A, 3-9B Describe and illustrate the use of vertical analysis in evaluating a company’s performance and financial condition. Key Points Comparing each item on a financial statement with a total amount from the same statement is called vertical analysis. On the balance sheet, each asset is expressed as a percent of total assets, and each liability and stockholders’ equity is expressed as a percent of total liabilities and stockholders’ equity. On the income statement, each revenue and expense is expressed as a percent of total revenues or fees earned. Learning Outcomes • Describe vertical analysis. • Prepare a vertical analysis report of a financial statement. Example Practice Exercises Exercises EE3-10 PE3-10A, 3-10B

Chapter 3 The Adjusting Process

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Chapter 3 The Adjusting Process