Adjusting Entries
PRESENTED BY
04/18/17 3
CONTENT
04/18/17 4
Adjusting Entries bring certain account balances up to date at the end of the accounting period.
Adjusting Entries
4/30/2017
UPDATE
Adjustments are necessary for items that have either been deferred or accrued.
ADJUSTING ENTRIES
Adjusting entries are made in order for:
• revenues to be recorded in the period in which they are earned
• expenses to be recognized in the period in which they are incurred
PIONEER ADVERTISING AGENCY Trial Balance October 31, 2005 Debit Credit Cash $ 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable $ 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 C. R. Byrd, Capital 10,000 C. R. Byrd, Drawing 500 Service Revenue 10,000 Salaries Expense 4,000 Rent Expense 900 $ 28,700 $ 28,700
The Trial Balance is the starting place for adjusting entries.
The Trial Balance is the starting place for adjusting entries.
TYPES OF ADJUSTING ENTRIES
1.Prepaid Expenses2. Unearned Revenues
1.Accrued Revenues2. Accrued Expenses
Deferrals
ADJUSTING ENTRIES FOR DEFERRALS
Asset
Unadjusted Balance
Credit Adjusting Entry (-)
Expense
Debit Adjusting Entry (+)
Prepaid Expenses
Liability
Unadjusted Balance
Debit Adjusting Entry (-)
Revenue
Credit Adjusting Entry (+)
Unearned Revenues
insurance
supplies
advertising
Cash Payment Expense RecordedBEFORE
rent
equipment
buildings
Prepayments often occur in regard to:
Prepaid Expenses
LO 2
Illustration: Pioneer Advertising purchased
supplies costing $2,500 on October 5 .An
inventory count at the close of business on
October 31 reveals that $1,000 of supplies are
still on hand.
Supplies 1,500
Supplies Expense 1,500Oct. 31
SUPPLIES
Adjusting Entries
(Adjusting supplies(2500-1000))
Illustration: On October 4, Pioneer
Advertising paid $600 for a one-year fire
insurance policy. This account shows a balance
of $600 in the October 31 trial balance.
Prepaid Insurance 50
Insurance Expense 50Oct. 31
INSURANCE
(Adjusting insurance ($600 ÷ 12))
Adjusting Entries
40
Illustration: For Pioneer Advertising,
assume that depreciation on the
equipment is $480 a year.
Accumulated depreciation 40
Depreciation expenseOct. 31
Accumulated Depreciation is called a contra asset account.
DEPRECIATION
(Adjusting insurance ($480 ÷ 12))
Adjusting Entries
Rent
Airline tickets
Cash Receipt Revenue RecordedBEFORE
Magazine subscriptions
Customer deposits
Unearned revenues often occur in regard to:
Unearned Revenues
Illustration: Pioneer Advertising received
$1,200 on October 2 from R. Knox for
advertising services expected to be completed
by December 31
Service Revenue 400
Unearned Service Revenue 400Oct. 31
Unearned Revenues
Adjusting Entries
(Adjusting service revenue ($1,200/3))
Accruals
Asset
Debit Adjusting Entry (+)
Accrued RevenuesRevenue
Credit Adjusting Entry (+)
Accrued ExpensesExpense
Debit Adjusting Entry (+)
Liability
Credit Adjusting Entry (+)
ADJUSTING ENTRIES FOR ACCRUALS
Rent
Interest
Services
Accrued revenues often occur in regard to:
BEFORE Cash ReceiptRevenue Recorded
Accrued Revenues
Illustration: In October Pioneer
Advertising performed services worth
$200 that were not billed to clients on or
before October 31.
200
Service Revenue 200
Accounts Receivable
Oct. 31
Accrued Revenues
Adjusting Entries
(Adjusting service revenue $200)
Rent
Interest
Taxes
Salaries
Accrued expenses often occur in regard to:
BEFORE Cash PaymentExpense Recorded
Accrued Expenses
Illustration: Pioneer Advertising signed a three-month
note payable in the amount of $5,000 on October 1. The
note requires Pioneer to pay interest at an annual rate of
12%.
Interest payable 50
Interest expense 50Oct. 31
Accrued Interest
Adjusting Entries
(Adjusting interest ($5,000*.12)/12)
ADJUSTED TRIAL BALANCE
• Adjusted Trial Balance – prepared after all adjusting entries have
been journalized and posted
– purpose is to prove equality of the total debit and credit balances in the ledger after adjustments have been made
Owner’s Equity
Statement
Financial Statements are prepared directly from the Adjusted Trial Balance.
Financial Statements are prepared directly from the Adjusted Trial Balance.
Income Statement
Balance Sheet
Financial Statements
LO 4
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