Académique Documents
Professionnel Documents
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ADJUSTING ENTRIES
Resource Speaker:
Learning objectives:
1. Identify the different types of
adjustments
2. Compute for the amount of
adjustments necessary
Documents
Journal
Journalizing
1
Ledger
Posting
Working
Paper
Adjusting
1
Reporting
Statement of
Financial Position
Income Statement
Statement of Changes in
Equity
Cash Flow
Statement
Notes to Financial
Statements
7
Closing
Reversing
4
Methods of accounting
1.
Cash basis
Accrual basis
Accounts to adjust:
1.
Accruals
2.
Deferrals
3.
4.
5.
Ending inventory
(applicable to merchandising and manufacturing
businesses)
8
Things to remember:
Adjusting
Adjusting
Apply
appropriate account
relationships.
Asset & Revenue, Liability and Expense
Asset and Expense, Liability and Revenue
ACCRUALS
1.
Accrued Revenues
Accruing revenue means bringing into
existence an income that is already earned but not
yet received and not yet recorded.
Asset (Accrued revenue)
xxx
Revenue
xxx
2.
Accrued Expenses
Accruing an expense means recognizing an
incurred and unrecorded expense that is unpaid
because payment is not yet due.
Expenses
xxx
Liability (Accrued Expense)
xxx
10
Illustrative
case:
Reciprocal accounts
Star(Seller)
Accruals:
expense
Accrued revenue
Deferrals:
expense
Pre-collected revenue
Sun (Buyer)
Accrued
Prepaid
11
Accruals
Star
Company is engaged in
providing janitorial services to Sun
Food Corp. Star is paid P10,000
every Friday for a five-day a week
service that begins on Monday and
ends on Friday.
December
31 falls on a Wednesday.
12
Accruals
December 2013
Sunday Monday
1
7
8
14
15
21
22
28
29
Saturday
6
13
20
27
Saturday
3
10
16
23
30
January 2014
13
Revenue
Suns (Buyer)
P10,000
12/5/13 Utilities
P10,000
P10,000
Cash
P10,000
12/12/13 Cash
Revenue
12/19/13 Cash
Revenue
12/26/13 Cash
Revenue
P10,000
P10,000 12/12/13 Utilities
Cash
P10,000
P10,000
P10,000
P10,000
12/19/13 Utilities
P10,000
P10,000
Cash
P10,000
P10,000
12/26/13 Utilities
P10,000
Cash
P10,000
14
Star
Sun
Adjusting entry:
Adjusting entry:
12/31/13 Utilities
P6,000
Revenue
P6,000
Accrued Utilities
P6,000
Reversing entry:
1/1/14 Revenue
Reversing entry:
P6,000
Accrued Revenue
P6,000
P10,000
P10,000
P6,000
Utilities
P6,000
P10,000
15
Star
Sun
1/2/14
Cash
P10,000
Revenue
P4,000
Accrued Revenue
6,000
1/2/14
Utilities
P4,000
Accrued Utilities 6,000
Cash
P10,000
1/9/14
Cash
P10,000
Revenue
P10,000
1/9/14
Utilities
Cash
P10,000
P10,000
More to follow!
17
LO4
DEFERRALS
(Prepayments & Precollections)
(a) Prepaid expenses
Expenses that are paid in cash and
recorded as assets before they are used
or consumed
18
LO4
A.
B.
C.
D.
Question 1
The primary difference between prepaid
and accrued expenses is that prepaid
expenses have
been incurred and accrued expenses have
not
not been paid and accrued expenses have
been recorded and accrued expenses have
not
not been recorded and accrued expenses
have
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
19
LO5
Expense
Debit
adjusting
entry (+)
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
20
1 500
21
General ledger:
Prepaid Insurance
12/4
600 12/31 Adj. 50
12/31 Bal. 550
50
50
Insurance Expense
12/31 Adj. 50
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
22
Revenue
Credit
adjusting
entry (+)
23
Unearned
Revenue
General
Ledger:
12/31/A Adj.
400 12/2/A
1 600
12/310 Bal. 1,200
400
Service Revenue
12/31 Bal. 10 000
12/31 Adj.
400
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
24
Question 5
LO5
A.
B.
C.
D.
25
26
27
1/1
9,000
9,000
Office Equipment
50 000
General Ledger
Accumulated Depreciation
Office Equipment
12/31 Adj. 9,000
Depreciation Expense
12/31 Adj. 9,000
28
P50, 000
9,000
P41,000
29
1. Accrued revenue
Revenue earned by not yet received in
cash or recorded
Adjusting entry is required to:
Show receivable exists at balance date
Record income earned in the period
Adjusting entry
Asset
Debit
adjusting
entry (+)
Income
Credit
adjusting
entry (+)
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
30
Example:
Service Revenue of $200 earned, but not yet
recorded
Journal entry:
Oct. 31 Accounts Receivable
200
Service Revenue
(To record revenue for services provided)
200
General Ledger:
Accounts Receivable
31/10 Adj. 200
Service Revenue
31/10
10 000
31/10
400
31/10 Adj. 200
31/10
Bal. by
10Dr600
PowerPoint
presentation
Anne
Abraham, University of Western Sydney
31
2. Accrued expenses
Expenses incurred by not yet paid
Adjusting entry is required to:
Show record obligations at balance date
Recognise expenses incurred in the period
Adjusting entry
Expenses
Debit
adjusting
entry (+)
Liability
Credit
adjusting
entry (+)
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
32
Interest owing:
$5000 x 12% x 1/12 = $50
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
33
Journal entry
Oct. 31
Interest Expense
Interest Payable
(To accrue interest on notes payable)
50
50
General Ledger
Interest Expense
31/10 Adj. 50
Interest Payable
31/10 Adj.
50
34
35
Journal entry
Oct. 31
Salaries Expense
Salaries Payable
(To record accrued salaries)
1200
1200
General Ledger
Salaries Expense
26/10
4000
31/10 Adj. 1200
31/10 Bal. 5200
Salaries Payable
31/10 Adj. 1200
36
LO6
A.
B.
C.
D.
Question 6
Failure to prepare an adjusting entry at the end
of a period to record an accrued revenue would
cause
profit to be overstated
an understatement of assets and an
understatement of revenues
an understatement of revenues and an
understatement of liabilities
an understatement of revenues and an
overstatement of liabilities
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
37
LO7
38
$ 5 000
2 500
1 200
500
4 000
900
$28 700
10 000
10 000
500
40
5 000
2 500
800
1 200
50
10 000
10 600
5 200
1 500
900
50
50
40
PowerPoint presentation by Dr Anne
$28
700
$30 190
$30 19039
Abraham, University of Western Sydney
Preparing financial
statements
The income statement is prepared
from the revenue and expense
accounts
The statement of changes in equity is
Current prepared using the owners
capital and drawings accounts and net
profit (or loss) from income statement
The statement of financial position is
prepared from asset and liability
accounts and ending owners capital
balance reported in statement of
changes in equity
40
Account
Debit Credit
Cash
$15 200
Accounts Receivable
200
Advertising Supplies
1 000
Prepaid Insurance
550
Office Equipment
5 000
Accumulated Depreciation
- Office Equipment
$
40
Bank Loan
5 000
Notes Payable
2 500
Unearned Income
800
Salaries Payable
1 200
Interest Payable
50
CR Hill, Capital
-CR Hill, Drawings
500
Service Revenue
10 600
Salaries Expense
5 200
Advertising Supplies Expense 1 500
Rent Expense
900
Insurance Expense
50
Interest Expense
50
Depreciation Expense
40
$30 190 $30 190
Income
Service revenue
$10 600
Expenses
Salaries expense
$5 200
Advertising supplies expense 1 500
Rent expense
900
Insurance expense
50
Interest expense
50
Depreciation expense
40
Total expenses
7 740
Profit
$ 2 860
$
0
10 000
10 000
2 860
12 860
Less: Drawings
500
PowerPoint presentation by Dr Anne
CR Hill Capital,
October
$2 360
Abraham,31
University
of Western Sydney
41
PIONEER
ADVERTISING AGENCY
PIONEER
ADVERTISING
AGENCY
Statement Balance
of Financial
SheetPosition
as at
as at
3131October
October2010
2007
Account
Debit
Cash
$15 200
Accounts Receivable
200
Advertising Supplies
1 000
Prepaid Insurance
550
Office Equipment
5 000
Accumulated Depreciation
- Office Equipment
Notes Payable
Accounts Payable
Unearned Income
Salaries Payable
Interest Payable
CR Hill, Capital
CR Hill, Drawings
500
Service Revenue
Salaries Expense
5 200
Advertising Supplies Expense 1 500
Rent Expense
900
Insurance Expense
50
Interest Expense
50
Depreciation Expense
40
$30 190
Credit
40
5 000
2 500
800
1 200
50
10 000
10 600
$30 190
Assets
Assets
Cash
Cash
$15
$15200
200
Accounts
Receivable
200
Accounts
Receivable
200
Adverting
Supplies
000
Adverting
Supplies
1 1000
PrepaidInsurance
Insurance
550
Prepaid
550
Office
OfficeEquipment
Equipment
$5$5
000000
Less:Accumulated
Accumulated
Depreciation 40 404 960
4 960
Less:
Depreciation
Total
TotalAssets
Assets
$21
$21910
910
Liabilitiesand
andOwners
Owners
Equity
Liabilities
Equity
Liabilities
Liabilities
NotesPayable
Payable
Notes
$5 000
Accounts
Payable
2 500
Accounts
Payable
UnearnedIncome
Income
800
Unearned
SalariesPayable
Payable
1 200
Salaries
InterestPayable
Payable
50
Interest
Total
liabilities
9 550
Total
liabilities
OwnersEquity
Equity
Owners
CRHill,
Hill,Capital
Capital
12 360
CR
Total
Liabilities
Total
Liabilities
and
Owners
Equity
$21 910
910
and
Owners
Equity
42
Question 7
LO7
A.
B.
C.
D.
43
APPENDIX
ALTERNATIVE TREATMENT OF PREPAID
EXPENSES AND UNEARNED REVENUE
LO8
44
ALTERNATIVE TREATMENT
continued
Oct. 31
Advertising Supplies
Advertising Supplies Expense
(To record supplies inventory)
1 000
1 000
45
ALTERNATIVE TREATMENT
continued
Oct. 31
Service Revenue
Unearned Revenue
(To record unearned revenue)
800
800
General Ledger:
Unearned Revenue
31/10 Adj.
800
Service Revenue
31/10 Bal.
800 2/10
1200
31/10 Bal.
400
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney
46
Question 8
LO8
A.
B.
C.
D.
47