Chapter 3! The Adjusting Entry Unit 1 Test (cover chapter 1 to 4) will occur on Friday September 26!

Chapter 3! Chapter 3! The Adjusting EntryThe Adjusting Entry

Unit 1 Test (cover chapter 1 to 4) will occur on

Friday September 26!

Accrual Accounting means recording revenues and expenses when they happen, regardless of whether cash is received or paid.

Cash basis Accounting means recording transactions only when cash is received or paid.

In reality, nobody uses cash basis accounting any more.

Accrual AccouningAccrual Accouning

The Time Period Concept ensures that the Comparability objective in accounting is met.

This means that reporting period must be consistent such as one year, one month or one quarter

Some revenues and expenses occur continuously, and accrural accounting require accounting clerks to record them as they happen.

Accounting clerks make entries only when there is source document.

Financial Statement ComparabilityFinancial Statement Comparability

There are many different types of adjusting entries accountants make at the end of the fiscal period:Prepaid Expense Prepaid InsuranceAccrued RevenueSupplies adjustment (Accrued

Expense)Unearned RevenueLate-Arriving Purchase Invoice

(Accrued Expenses)

Adjusting EntryAdjusting Entry

Insurance premium is paid for assets (building, equipment or car) to protect against fire, theft etc….

We use : “Prepaid Insurance” (= asset) account is used to record

Journal Entry:PurchaseJuly 1Prepaid Insurance 2400

Bank 2400Paid for annual insurance premium

Prepaid InsurancePrepaid Insurance

Insurance premium is paid for assets (building, equipment or car) to protect against fire, theft etc….

Adjustment on Dec 31, 2013Insurance Expense 1200

Prepaid Insurance1200Adjusting Insurance premium

Prepaid InsurancePrepaid Insurance

Prepaid InsurancePrepaid Insurance

An expense is paid in advance to benefit more than one accounting period.

Any current asset costs will be used up in the near future.

Example: Prepaid Insurance, Licenses, Rent and Advertising

Oct 1 you paid $5000 for radio ads which will go on for 5 months.

Oct 1 Prepaid Advertising 5000 Bank 5000

Prepaid ExpensesPrepaid Expenses

Dec 31, you will make an adjusting entry:

Advertising Expense 3000Prepaid Advertising (asset)3000

Adjusting Entry for prepaid advertising

Prepaid ExpensesPrepaid Expenses

Some Revenues are earned but not yet received in cash or recorded at the statement date.

Accrued revenues may accumulate (or accrue) with the passage of time, as happens with interest revenue and rent revenue.

An adjusting entry is required for two purposes: to record the accurate revenue and to record increase in AR or NR.

Accrued RevenueAccrued Revenue

In October, Pioneer Advertising Agency earned $200 (they performed their service) in fees for adverting services that were not billed to clients until November.

Because these services have not been billed, they have not been recorded.

Accrued RevenueAccrued Revenue

The following adjusting entry is made on October 31:

Oct 31 AR 200Service Revenue 200

To accrue revenue earned but not billed

On November 10, Pioneer receives $200 cash for the services they performed in October.

Accrued RevenueAccrued Revenue

On November 10, Pioneer receives $200 cash for the services they performed in October: JE

Nov 10Cash 200

AR 200Received $200 from Oct revenue

Invoice#156

Accrued RevenueAccrued Revenue

BMO’s perspective: Park Accounting borrowed $50,000 at 5% interest on September 1, 2014 which is due August 31, 2015. What kind of JE is made on September 1, 2014?

Sept 1Loan Receivable $50,000

Bank $50,000

Accrued RevenueAccrued Revenue

Adjusting Entry that BMO has to make on December 31, 2014?

(5% * 50000 * 4 months / 12 months = 1667)

Dec 31, 2014Interest Receivable $1667

Interest Revenue $1667

Accrued RevenueAccrued Revenue

JE on August 31 2015?Aug 31Cash $52500

Loan Receivable $50000Interest Receiable $1667Interest Revenue $833

Accrued RevenueAccrued Revenue

Expenses incurred not yet paid or recorded but at the statement date are called “accrued expenses.”

Interest, Rent, Property Tax and salaries can be accrued expenses.

For example, Park Accounting would make a JE on September 1 2014

Sep 1Cash $50,000

Loan Payable $50,000

Accrued ExpenseAccrued Expense

For example, Park Accounting would make a JE on September 1 2014

Sep 1Cash $50,000

Loan Payable $50,000 On December 31, Park would make the

following Adjusting Entry:Dec 31

Interest Expense$1667Interest Payable $1667

Accrued ExpenseAccrued Expense

Park Accounting would make a JE on August 31, 2014, as they pay back the loan with interest .

Aug 31Interest Expense $833Loan Payable $50000Interest Payable $1667

Cash $52500

Accrued ExpenseAccrued Expense

P137 E3-2, E3-3 (except d, e and i), E3-6

P142 P3-4

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