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Adjusting entries

ACCRUALS

NO CASH

REVENUE EARNED BUT NOT RECORDED at end of


period

Debit RECEIVABLE
Credit REVENUE

Examples:

Sold $1,500 worth of merchandise to a customer on December


31, 2005 (year end). The sale had not been recorded.

Accounts receivable 1,500


Sales 1,500

We invested in a 12%, $100,000 bond issued by another


company; interest was paid semi-annually on October 1 and
April 1.

Record the interest earned at year end December 31, 2005.


12%* 100,000 = 12,000 Annually or $1,000 per month
3 months * $1,000 = $3,000 interest earned

Interest receivable 3,000


Interest revenue 3,000
Adjusting entries
ACCRUALS

NO CASH

EXPENSE INCURRED BUT NOT RECORDED at end of


period

Debit EXPENSE
Credit PAYABLE

Examples:

Owed employees $12,000 for salaries for work done in the last
week of December 2005 (year end). The expense had not been
recorded.

Salaries expense 12,000


Salaries payable 12,000

We sold a 12%, $100,000 bond to investors; interest was paid


semi-annually on October 1 and April 1.
Record the interest owed at year end December 31, 2005.
12%* 100,000 = 12,000 Annually or $1,000 per month
3 months * $1,000 = $3,000 interest earned

Interest expense 3,000


Interest payable 3,000
Adjusting entries
PREPAIDS OR DEFERRALS
REVENUES

CASH RECEIVED BEFORE REVENUE EARNED,


REVENUE RECORDED WHEN EARNED.

Adjusting entry NO CASH

Debit Liability (Unearned Revenue)


Credit Revenue Account

Example:

We received $24,000 from a customer on January 2, 2005 to


provide fire insurance coverage for two years, 2005 and
2006. The bookkeeper had recorded the transaction on
January 2nd by dr cash and cr unearned revenue.

Record the adjusting entry on December 31, 2005 (year end)


Earned during 2005 = ½ of 24,000 or $12,000

Unearned revenue 12,000


Insurance revenue 12,000
Adjusting entries
PREPAIDS OR DEFERRALS
EXPENSES

CASH PAID OUT BEFORE ASSET USED (EXPENSE


INCURRED)
EXPENSE RECOGNIZED WHEN ASSET USED.

Adjusting entry NO CASH

Debit EXPENSE
Credit ASSET

Examples: Prepaid insurance; Supplies

1. We paid $24,000 on January 2, 2005 for a fire insurance


policy that provided fire insurance coverage for three
years, 2005, 2006 and 2007. The bookkeeper had recorded
the transaction on January 2nd by dr prepaid insurance and
cr cash.

Record the adjusting entry on December 31, 2005 (year end)


Used during 2005 = 1/3rd of 24,000 or $ 8,000

Insurance expense 8,000


Prepaid insurances 8,000
Examples: Prepaid insurance; Supplies, Buildings

2. We had $2,000 worth of supplies on hand on January 1,


2005; we purchased $15,000 worth of supplies during 2005
and had $1,200 of supplies on hand at December 31, 2005

1/1/05 $ 2,000
Purchased, 2005 15,000
Available for use $17,000
On hand 12/31/05 ( 1,200)
Supplies USED $ 15,800

Adjusting entry:
Supplies expense 15,800
Supplies 15,800
3. Building–Depreciation

Adjusting entry NO CASH

Debit EXPENSE
Credit CONTRA ASSET

Depreciation expense XXXX


Accumulated depreciation XXXX

We bought a building for $250,000, expected life 25 years, no


expected salvage value.

Cost - Salvage Value = Annual Depreciation expense


Expected life

250,000 - 0 = 10,000 per year


25 years

Adjusting Entry (EVERY YEAR)

Depreciation expense 10,000


Accumulated depreciation 10,000