CH 3

EX.
The ledger account balances for Galaxie Company are listed

below.
Accounts Payable $ 6,000
Accounts Receivable 7,000
Cash 5,200
Owner’s Capital 11,000
Owner’s Drawings 4,000
Service Revenue 30,000
Salaries and Wages Expense 20,800
Unearned Service Revenue 2,000
Utilities Expense 12,000
Required:
Prepare a trial balance in proper form for Galaxie at December
31, 2021.
1
Answer:
GALAXIE Company
Trial Balance
December 31, 2021
Debit Credit
Cash $5,200
Unearned Service Revenue 2,000
Utilities Expense 12,000
$49,000 $49,000
2
EX:
The trial balance of Red House Painters shown below does not
balance.
RED HOUSE PAINTERS
Trial Balance
June 30, 2022
Debit Credit
Cash $ 2,780
Supplies 600
Equipment 8,300
Maintenance and Repairs Expense 1,600
Totals $25,800 $26,929
An examination of the ledger and journal reveals the following
errors:
1. Each of the above listed accounts has a normal balance per the
general ledger.
2. Cash of $270 received from a customer on account was debited
to Cash $720 and credited to Accounts Receivable $720.
3. A withdrawal of $400 by the owner was posted as a credit to
Owner’s Drawings, $400 and credit to Cash $400.
4. A debit of $300 was not posted to Salaries and Wages Expense.
5. The purchase of equipment on account for $700 was recorded
as a debit to Repair Expense and a credit to Accounts Payable
for $700.
6. Services were performed on account for a customer, $510, for
which Accounts Receivable was debited $510 and Service
Revenue was credited $51.
7. A payment on account for $235 was credited to Cash for $235
and credited to Accounts Payable for $253.
Required:
3
Prepare a correct trial balance.
Answer:
RED HOUSE PAINTERS
Trial Balance
June 30, 2022
Debit Credit
Cash [2,780 – 450 (2)] $ 2,330
Accounts Receivable [7,420 + 450 (2)] 7,870
Supplies 600
Equipment [8,300 + 700 (5)] 9,000
Accounts Payable [9,777 – 253 – 253(7)] $ 9,289
Owner’s Drawings [1,300 + 400 + 400 (3)] 2,100
Service Revenue [15,200 + 459 (6)] 15,659
Salaries and Wages Expense [3,800 + 300 (4)] 4,100
Maintenance and Repairs Expense [1,600 – 700 (5)] 900
Totals $26,900 $26,900
4
CHAPTER 3
Adjusting the Accounts
Learning Objectives:
After studying this chapter, you should be
able to:
1. Explain the time period assumption.
2. Explain the accrual basis of accounting.
3. Explain the reasons for adjusting
entries.
4. Identify the major types of adjusting
entries.
5. Prepare adjusting entries for deferrals.
6. Prepare adjusting entries for accruals.
7. Describe the nature and purpose of an
adjusted trial balance.
5
Timing Issues
Accountants divide the economic life of a
business into artificial time periods
(Time Period Assumption).
- Generally a month, a quarter, or a
year.
- Fiscal year versus calendar year
- Also known as the “Periodicity
Assumption”
Accrual- versus Cash-Basis Accounting
(1) Accrual-Basis Accounting
- Transactions recorded in the periods
in which the events occur
- Revenues are recognized when earned,
rather than when cash is received.
- Expenses are recognized when
incurred, rather than when paid.
Cash-Basis Accounting
- Revenues are recognized when cash is
received.
- Expenses are recognized when cash is
paid.
- Cash-basis accounting is not in
accordance with generally accepted
accounting principles (GAAP).
6
Recognizing Revenues and Expenses
Revenue Recognition Principle
Companies recognize revenue in the
accounting period in which it is earned.
In a service enterprise, revenue is
considered to be earned at the time the
service is performed regardless cash
collection.
Matching Principle
Match expenses with revenues in the
period when the company makes efforts to
generate those revenues.
“Let the expenses follow the revenues.”
Note:
1- Cash basis accounting leads to
mismatching between revenues and
expenses.
2- Accrual basis accounting leads to
sound matching between revenues
and expenses.
3- The adoption of accrual basis
accounting is the cause of end of
period adjustments.
7
The Basics of Adjusting Entries
- Adjusting entries make it possible to
report correct amounts on the balance
sheet and on the income statement.
- A company must make adjusting entries

every time it prepares financial
statements.
- Revenues are recorded in the period in

which they are earned.
- Expenses are recognized in the period in

which they are incurred.
- Adjusting entries are needed to ensure

that the revenue recognition and
matching principles are followed.
8
Types of Adjusting Entries
Deferrals Accruals
(1)Prepaid Expenses: (1)Accrued Revenues:
Amounts paid in Revenues earned but
cash and recorded as not yet received in
assets before they are cash or recorded
used or consumed. (assets).
(2)Unearned Revenues: (2)Accrued Expenses:

Amounts received in Expenses incurred
cash and recorded as but not yet paid in
liabilities before they cash or recorded
are earned. (liabilities).
Example (1):
Prepare adjusting entries for the following
transactions.
1. Depreciation on equipment is $800 for the
accounting period.
Depreciation Expense- Equip.................. 800
Accumulated Depreciation-Equip. 800
2. There was no beginning balance of supplies and

purchased $500 of office supplies during the
9
period. At the end of the period $80 of supplies
were on hand.
Supplies Expense...................................... 420
Supplies............................................ 420
($500 – $80)
3. Beginning balance of supplies was $100 and
purchased $500 of office supplies during the
period. At the end of the period $70 of supplies
were remaining.
Supplies Expense...................................... 530

Supplies............................................ 530
($100+500 –70)
4. Prepaid rent had a $1,000 normal balance prior to
adjustment. By year end $600 was unexpired.
Rent Expense......................................... 400

Prepaid Rent.................................... 400
($1,000 – $600)
5. Prepaid insurance had a $3,000 normal balance

prior to adjustment. By year end $1,000 was
expired.
Insurance Expense................................ 1,000
Prepaid Insurance........................... 1,000
($1,000)
10

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EX.

The ledger account balances for Galaxie Company are listed

- A company must make adjusting entries

- Revenues are recorded in the period in

- Expenses are recognized in the period in

- Adjusting entries are needed to ensure

(2)Unearned Revenues: (2)Accrued Expenses:

2. There was no beginning balance of supplies and

Supplies Expense...................................... 530

Rent Expense......................................... 400

5. Prepaid insurance had a $3,000 normal balance

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