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

Any Question???