Adjusting Entry - Lecture
Adjusting Entry - Lecture
ADJUSTING ENTRY
Transactions:
External transactions occur between two different entities and are easy to record
because there are always source documents evidencing the transaction
Internal transactions occur within a single entity and are more difficult to record
because source documents my not always be present
Accounting Principles
Matching Principle
o Forms the basis of accrual accounting
o States that revenue earned and the costs incurred to produce that revenue
must be recorded in the same period
Revenue Recognition Principle
o States that revenue must be recognized (recorded) in the period in which it is
earned
Expense Recognition Principle (same as the matching principle)
o States that expenses must be recorded in the period in which the related
revenue was recognized
Depreciation
All long-lived assets are depreciated except for land
Depreciation accounts for the decline in usefulness of a long-lived asset over its
useful life
Systematically records a portion of the cost of a long-lived asset as an expense to
match against the revenue in the accounting period
Depreciation expense is frequently calculated using the straight-line method
Adjusting entry for depreciation is always
The asset account is NOT credited for the decline in value; instead the credit is
recorded in a contra-asset account, accumulated depreciation
Contra-asset means an account on the asset side of the accounting equation or
balance sheet which has a normal credit balance
Net Book Value is the balance in the asset account less the balance in the related
accumulated depreciation account
ADJUSTING ENTRIES
Adjusting entries are required to record internal transactions and to bring assets and
liability accounts to their proper balances and record expenses or revenues in the
proper accounting period.
Therefore adjusting entries always affect one income statement account (revenue
or expense) and one balance sheet account (asset or liability).
Adjusting entries are prepared either when:
o The current unadjusted balance in the account is known and the amount of the
activity to be adjusted is known
o The current unadjusted balance in the account is known and the required
balance after adjustment is known.
There are two basic types of adjusting entries: Deferrals and Accruals
o Deferral is paying or receiving cash in advance without incurring the expenses
or earning the revenue.
o Accrual is incurring the expenses and earning the revenue without paying or
receiving cash.
Example #1
J Company has a $1,000 unadjusted balance in the Office Supplies account on
December 31.
Required: What is the proper adjusting entry if Johnson could determine
a. The amount of supplies remaining unused?
b. The amount of supplies actually used?
Solution#1
a. If J Company simply counted the remaining supplies on December 31 and
determined that they had a cost of $450, the Office Supplies account would look like
this:
Office Supplies
Unadjusted Balance 1,000
ADJUSTMENT -> ? Supplies Used
Required Ending Balance 450
The adjustment would be: $1,000 – 450 = $550, the amount used.
b. If J Company had required employees to fill out a form noting the supplies used
each time they were taken from the supply cabinet, the supplies used would add up
as $550. The Office Supplies account would look like this:
Office Supplies
Unadjusted Balance 1,000
ADJUSTMENT -> 550 Supplies Used
Required Ending Balance ?
Deferrals occur when cash changes hands prior to when the revenue is earned or
expense is incurred. Recording the revenue or expense is postponed or deferred
until a subsequent economic event has occurred which causes revenue to be earned
or expense to be incurred.
Deferred Revenues (also referred to as unearned revenue) are initially recorded as a
liability and adjusted at the end of the period for the portion that has been earned.
This occurs when payment is received in advance of performing the service.
Accruals occur when revenue is earned or expense is incurred prior to the cash
changing hands. Deferred revenues and deferred expenses have not been
recorded prior to preparing and recording the adjusting entry.
Accrued Revenues – are revenues that have been earned, but have not been
recorded. Payment has not been received.
Accrued Expenses – are expenses that have been incurred and a debt or liability is
owed to a third party; however neither the expenses nor liability have been
recorded.
F Company
Trial Balance
December 31
Cash 8,700
Accounts Receivable 20,600
Prepaid Insurance 4,400
Supplies 1,950
Land 45,000
Building 134,500
Accumulated Depreciation-Bldg. 86,700
Equipment 80,100
Accumulated Depreciation-Equip. 61,300
Accounts Payable 7,500
Unearned Revenue 6,000
Capital Stock 15,300
Retained Earnings 54,000
Dividends 8,000
Fees Earned 199,400
Salaries and Wages Expense 70,200
Utilities Expense 23,200
Advertising Expense 18,000
Repairs Expense 11,500
Miscellaneous Expense 4,050
Totals 430,200 430,200
Required: Journalize the adjusting entries and label them as accruals or deferrals,
adding accounts as needed.
Solution #2
a. Deferred Expense
Insurance Expense 2,900
Prepaid Insurance 2,900
b. Deferred Expense
Supplies expense 1,550
Supplies 1,550
c. Deferred Expense
Depreciation Expense-Bldg. 1,750
Accum. Depr.-Equip 1,750
d. Deferred Expense
Depreciation Expense-Equip 5,800
Accum. Depr.-Equipment 5,800
e. Deferred Revenue
Unearned Revenue 4,000
Fees Earned 4,000
f. Accrued Expense
Wages Expense 2,300
Wages Payable 2,300
g. Accrued Revenue
Accounts Receivable 4,850
Fees Earned 4,850
Example #3
Required: Determine the adjusted balances of the accounts and prepare an adjusted
trial balance.
Solution #3
F Company
Adjusted Trial Balance
December 31, 20--
Cash 8,700
Accounts Receivable 25,450
Prepaid Insurance 1,500
Supplies 450
Land 45,000
Building 134,500
Accumulated Depreciation-Bldg. 88,450
Equipment 80,100
Accumulated Depreciation-Equip. 67,100
Accounts Payable 7,500
Salaries and Wages Payable 2,300
Unearned Revenue 2,000
Capital Stock 15,300
Retained Earnings 54,000
Dividends 8,000
Fees Earned 208,250
Salaries and Wages Expense 72,500
Utilities Expense 23,200
Advertising Expense 18,000
Repairs Expense 11,500
Depreciation Expense-Equipment 5,800
Depreciation Expense-Bldg. 1,750
Miscellaneous Expense 4,050
Insurance Expense 2,900
Supplies Expense 1,550
Totals 444,900 444,900
Failure to journalize and post adjusting entries at the end of the period will cause
multiple financial statement items to be misstated.
At least one balance sheet account and one income statement account for each
entry not made or incorrectly made.
Example #4
A Company failed to record accrued wages of $5,000 at the end of the period.
Required: a. Determine the adjusting entry that should have been made.
b. Determine which accounts and financial statements would have been
affected by the error.
c. Determine whether the accounts and financial statements would have
been understated or overstated and the amount of the misstatement.
Solution #4
This entry should have increased wages expense with a debit and increased wages
payable with a credit. Failing to record this entry caused the following errors:
Example #5
At the end of October, the first month of operations, the following selected data were
taken from the financial statements of C Company:
The following adjusting entries were omitted at the end of the month:
Solution #5
TRIAL BALANCE
A Trial Balance is a summary of all account balances in the general ledger. Each
account and its balance (debit or credit) is listed on the trial balance. Total of all
debit account balances must equal the total of all credit debit balances.
A trial balance is useful in determining whether the general ledger is in balance
(total debits equal total credits). It will not identify errors in the general ledger or in
preparing the trial balance for which debits equal credits or if an entry is not posted
to the general ledger at all.
Trial balances are typically prepared three times during the accounting cycle:
o Unadjusted which is prepared prior to adjusting entries
o Adjusted which is prepared after adjusting entries and is the basis for
preparing financial statements
o Post-closing which is prepared after closing entries.
IS
Type of Adjusting Pro- DR or
Account Title or
Entry Forma CR
SFP
1. ACRRUED EXPENSE EXPENSE Utilities Expense Debit IS
LIABILITY Utilities Payable Credit SFP
EXPENSE METHOD
ASSET Prepaid Insurance Debit SFP
EXPENSE Insurance Expense Credit IS
INCOME METHOD
INCOME Rent Income Debit IS
LIABILITY Unearned Rent Income Credit SFP
or:
EXPENSE Doubtful Accounts Expense Debit IS
CONTRA Allowance for Doubtful Credit SFP
ASSET Accounts
DIRECT WRITE-OFF
METHOD
EXPENSE Bad Debts / Doubtful Debit IS
Accounts Expense
ASSET Accounts Receivable Credit SFP