Scribd Logo
Upload

Welcome to Scribd!

  • 58 views

    Principles of Accounting Help Lesson #4: Adjusting Entries

    Uploaded by

    Ruffa Garcia
    Adjusting entries are made at the end of an accounting period to update account balances for items that have been incurred but not recorded, like expenses. Examples given include accruing supplies used over the period and recognizing the portion of prepaid insurance that has expired. Analyzing an adjusting entry involves identifying the accounts impacted, like an expense increasing and a prepaid asset decreasing, and calculating the adjustment amount, such as months of use multiplied by the monthly amount. Adjusting entries follow characteristics like being internal, non-cash, and involving both income statement and balance sheet accounts.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Principles of Accounting Help Lesson #4: Adjusting Entries

    Uploaded by

    Ruffa Garcia
    58 views23 pages
    Adjusting entries are made at the end of an accounting period to update account balances for items that have been incurred but not recorded, like expenses. Examples given include accruing supplies used over the period and recognizing the portion of prepaid insurance that has expired. Analyzing an adjusting entry involves identifying the accounts impacted, like an expense increasing and a prepaid asset decreasing, and calculating the adjustment amount, such as months of use multiplied by the monthly amount. Adjusting entries follow characteristics like being internal, non-cash, and involving both income statement and balance sheet accounts.

    Original Title

    Adjusting Entries

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Adjusting entries are made at the end of an accounting period to update account balances for items that have been incurred but not recorded, like expenses. Examples given include accruing supplies used over the period and recognizing the portion of prepaid insurance that has expired. Analyzing an adjusting entry involves identifying the accounts impacted, like an expense increasing and a prepaid asset decreasing, and calculating the adjustment amount, such as months of use multiplied by the monthly amount. Adjusting entries follow characteristics like being internal, non-cash, and involving both income statement and balance sheet accounts.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    58 views23 pages

    Principles of Accounting Help Lesson #4: Adjusting Entries

    Uploaded by

    Ruffa Garcia
    Adjusting entries are made at the end of an accounting period to update account balances for items that have been incurred but not recorded, like expenses. Examples given include accruing supplies used over the period and recognizing the portion of prepaid insurance that has expired. Analyzing an adjusting entry involves identifying the accounts impacted, like an expense increasing and a prepaid asset decreasing, and calculating the adjustment amount, such as months of use multiplied by the monthly amount. Adjusting entries follow characteristics like being internal, non-cash, and involving both income statement and balance sheet accounts.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 23

    Principles of Accounting Help Lesson #4

    Adjusting Entries
    By Laurie L. Swanson

    This presentation is under development.

    Adjusting Entries
    Adjusting Entries bring certain account balances up to date at the end of the accounting period.

    12/31/2010

    UPDATE

    Adjustments
    Adjusting entries are required when changes in certain accounts have not been recorded in the accounting records. Adjustments are necessary for items that have either been deferred or accrued.

    Reason for Adjustments


    It can be inefficient and costly to account for certain types of transactions on a daily basis.

    Reason for Adjustments


    An example of the inefficiency of recording certain transactions follows:
    Each time an employee removes a pen from the supplies closet, a journal entry debiting Supplies Expense and crediting Supplies for $1.25 (estimated cost of pen) should be recorded. However, it would be very costly and inefficient to try to keep up with each little transaction like this. So instead, we wait until the end of the accounting period and determine the total amount of supplies used. Then we make one adjusting entry to account for all the supplies used during the period.

    Adjusting Entries
    Adjusting Entries are necessary when accrual basis accounting is used. Adjusting entries allow businesses to adhere to the Matching Principle.

    Accrual Basis Accounting


    Under accrual basis accounting, revenues are recognized when earned (regardless of whether cash has been received) and expenses are recognized when incurred (regardless of cash payment).

    The Matching Principle


    The Matching Principle states that expenses should be matched together with the income they produced in the same time period.

    Characteristics of Adjustments
    Adjusting entries will always have the following characteristics:
    Adjusting entries are internal transactionsno new source document exists for the adjustment.

    Adjusting entries are non-cash transactionsthe Cash account will never be used in an adjusting entry. Adjusting entries will always involve at least one income statement account and one balance sheet account.

    How to Analyze an Adjusting Entry


    When analyzing an adjusting entry, look for the item that has not been recorded but should have been. This information is often not explicit and must be inferred from the data given. For expenses, look for the amount used. For revenue, look for the amount earned.

    Analyzing an Adjusting Entry: An Example


    You have the following data about an adjustment:
    Prepaid $15,000 for 12 months of insurance on Sept 1 of the current year. Make the appropriate adjustment as of the end of the fiscal period.

    Analyzing an Adjusting Entry: An Example


    Original Entry: On Sept 1 the following entry would be recorded when the insurance was prepaid: Prepaid Insurance 15,000 Cash 15,000 Prepaid Insurance is an asset account it is an amount owned by the company that has economic value.

    Analyzing an Adjusting Entry: An Example


    Each month, a portion of the prepaid insurance expires. At the end of the fiscal period, the Prepaid Insurance and Insurance Expense accounts must be updated for the insurance that has expired (been used).

    Analyzing an Adjusting Entry: An Example


    Lets divide the analysis of this transaction into two parts: 1.What accounts are involved? When something is used up it indicates an expense account. In this case, we need to debit Insurance Expense for the expired insurance. Furthermore, the asset, Prepaid Insurance, has decreased so we will credit this asset.

    2.What is the amount of the adjustment? See the next slide for the calculation of the amount of expired insurance.

    Analyzing an Adjusting Entry: An Example


    $15,000 for 12 months= $1,250/month (15,000/12) ------Policy purchased on Sept 1. Months that have expired between purchase and fiscal year-end = 4 (Sept, Oct, Nov, Dec) Amount of adjustment = $5,000 ($1,250/month X 4 months)

    Record the Adjustment


    Adjusting entries are always recorded on the last day of the fiscal period. For our example, the fiscal period closes on Dec 31. The adjustment is journalized as follows:
    DATE ACCOUNT POST REF DEBIT CREDIT

    Dec

    31

    Insurance Expense Prepaid Insurance

    5000 00 5000 00

    Analyzing an Adjusting Entry: Another Example


    Lets try another example. You have the following data about an adjustment:
    You received $12,000 advance cash on November 1 for a painting job you are to complete over the next three months.

    Analyzing an Adjusting Entry: Another Example


    Original Entry: On November 1, Cash would be debited and a liability account called Unearned Painting Revenue would be credited. The liability account is credited because you owe the customer. You owe the customer painting services.) Cash 12,000 Unearned Painting Rev 12,000

    Analyzing an Adjusting Entry: Another Example


    Each month as you perform painting services, you are earning a portion of the unearned revenue. At the end of the fiscal period, the Unearned Painting Revenue and Painting Revenue accounts must be updated for the revenue that has now been earned.

    Completing the Adjustment


    We have performed step 1 of the analysis: the accounts involved are Unearned Painting Revenue (a liability) and Painting Revenue (a revenue). So far, the adjusting entry looks as follows:
    DATE ACCOUNT POST REF DEBIT CREDIT

    Dec

    31

    Unearned Painting Revenue Painting Revenue

    Note that as we perform the services owed, the liability decreases (this is accomplished by debiting Unearned Painting Revenue) and the revenue earned increases (this is accomplished by crediting Painting Revenue).

    Step 2: What amount is Used in the Adjustment?


    $12,000 for 3 months= $4,000/month (12,000/3) ------Cash advance received on November 1. Two months of work have been completed by the fiscal year-end (Nov and Dec) Amount of adjustment = $8,000 ($4,000/month X 2 months)

    Complete the Adjusting Entry


    Now fill in the amount of the adjustment:

    DATE

    ACCOUNT

    POST REF

    DEBIT

    CREDIT

    Dec

    31

    Unearned Painting Revenue Painting Revenue

    8,000 00 8,000 00

    Next Step
    You are now closer to completing the accounting cycle. You can continue to practice adjusting entries by choosing the Adjusting Entries Practice presentation.

    The next step in the accounting cycle is to prepare an Adjusted Trial Balance.

    You might also like