introduction to adjust entries
TRANSCRIPT
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ADJUSTING ENTRIESBy Ben Reyes,
MBA
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QUESTION
Say that you are a business owner. When making a business decision
would you base it on your company’s financial information from the beginning
of the month, or financial information at the end of the month?
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Completed at the end of each period, adjusting entries are necessary to update financial information that involve the following:• revenues that have been earned • expenses that have been incurred
JUST LIKE IN LIFE,THINGS IN BUSINESS CHANGE.
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2 Types
TO DEFER OR TO ACCRUE?THAT IS THE QUESTION!
Deferrals
Accruals
4 KindsDeferred Expense
Deferred Revenue
Accrued Expense
Accrued Revenue
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• Deferrals– Adjust accounts that are already part of a
company’s accounting records• Deferred Revenues are income received but not yet earned• Deferred Expense are expenses paid but not yet incurred
• Accruals– Record revenues and expenses that are not yet in
a company’s accounting records• Accrued Revenues are income earned but not yet received• Accrued Expenses are expenses incurred but not yet paid
WHAT TYPE IS IT?
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QUESTION
Without you knowing, one of your employees uses up office supplies
to help his daughter with her science project. What will happen to the amount of office supplies?
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• Original entry:– Ex. $1,000 worth of supplies was purchased on March 1, 2017.
• Adjusting entry:– Ex. $300 worth of supplies was used:
SUPPLIESDEFERRED EXPENSE EXAMPLE
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Say that you have a service business in which you provide relationship advice to
couples.
Before meeting with Kim and Kanye, they pay your fee in advance. Should you wait to deposit the money into your
business account until you actually meet with them?
QUESTION
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• Original entry:– Ex. Advance payment of $5000 was received from Kim and
Kanye on March 4, 2017.
• Adjusting entry:– Ex. Provided relationship advice on March 31, 2017.
UNEARNED REVENUEDEFERRED REVENUE EXAMPLE
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QUESTION
Say that you have employees that work Monday through Friday.
Your scheduled payday is each Friday. The month ends on a
Wednesday, would you pay your employees that day?
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• Original entry:– None. There is no existing record for wages owed.
• Adjusting entry:– Ex. As of Wednesday May 31, 2017 $12,800 is owed
to employees.
SALARIES OWED TO EMPLOYEESACCRUED EXPENSE EXAMPLE
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QUESTION
Say that one of your customers cannot pay on time, should you just
let them pay whenever they want to?
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INTEREST NOT YET RECEIVED
ACCRUED REVENUE EXAMPLE• Original entry:
– None. There is no existing record for interest revenue.
• Adjusting entry:– Ex. Charged Charlie Brown, a customer, interest to pay later
for an invoice. Interest amount is $200 as of June 30, 2017.
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• Adjusting entries bring the amounts for accounts current
• Updates financial information • Either an expense account or revenue
account is adjusted• Adjusting entries affect both the balance
sheet and the income statement• Adheres to the Matching Principle
BIG PICTURE
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Material regarding adjusting entries:http://accountingexplained.com/financial/cycle/adjusting-entrieshttp://www.netmba.com/accounting/fin/process/adjusting/
A video on adjusting entries:https://www.youtube.com/watch?v=xtoTFSrv5Dc
Videos on deferrals:https://www.youtube.com/watch?v=C17Oc9JqG_Qhttps://www.youtube.com/watch?v=hPq1Mv2gIec Videos on accruals:https://www.youtube.com/watch?v=xXeoGlQOV1chttps://www.youtube.com/watch?v=ONkJXfvrAkc
RECOMMENDED ADDITIONAL RESOURCES