8.1 ADJUSTMENT ENTRIES

What are adjusting entries? It is when the account data is

being brought up-to-date at statement time (also referred to as “making the adjustments”)

In most cases, an adjusting entry assigns amounts of revenue or expense to the appropriate accounting period before finalizing the books for the fiscal period

Why do we need to make adjustments?

When Preparing financial statements the accountant must make sure:a) All accounts are brought up to date

by completing adjusting entriesb) All late transactions are taken into

accountc) All calculations have been made

correctlyd) All accounting principles and

standards have been followed

Accrual Accounting

Accrue means to grow or accumulate over time

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

Adjusting entry

Is a journal entry that assigns an amount of revenue or expense to the appropriate accounting period; at the same time , it is an entry that brings a balance sheet account to its true value.

Adjustments

What kind of adjustments are there? Supplies Prepaid Expenses Late Payments Unearned Revenue

1. Supplies

Are you going to go create a source document, and record a journal entry every time somebody goes to the supply room and takes a 10¢ pencil??

No, that would be silly and extremely wasteful of time

Supplies

Supplies account is one of those accounts that is allowed to become inexact between statement dates

Therefore, supplies are recorded at purchase cost and requires an adjustment at the end of each accounting period

Example: Supplies

An organization started this year with $1480.90 of supplies. An inventory count on December 31st reveals that $954.90 was used up.

Supplies1480.9

0 954.90

526

Adjusting entry used up

Supplies Expense954.90

954.90

Adjusting Entry Recording on General Journal

Adjusting Entry:Supplies Expense 954.90 Supplies 954.90

* Don’t need explanations necessarily on adjustments, but for other entries we do

2. Late Payments/ Invoices Late payments or invoices happens when

goods/ services are bought or expenses incurred (happen at the end of the year) at the end of the year, they must be recorded in fiscal period they apply to MATCHING PRINCIPLE

Matching principle states that each expense item related to revenue earned must be recorded in the same accounting period as the revenue it helped to earn

Examples of late payment

Telephone Bill Truck Repairs Miscellaneous expense And many more

Late-arriving invoices pertaining to the 20-3 fiscal period were

Telephone bill $ 45.00 Truck Repairs 496.00 Misc. Expense 85.00 Total 626.00

T-AccountsTruck Expense

496.00

496.00

Misc. Expense

85.00

85.00

Telephone Expense

Accounts Payable 626.00

626.00

45.00

45.00

Adjusting Entry

Adjusting Entry:Telephone Expense 45.00Truck Expense 496.00Misc. Expense 85.00 Accounts Payable

626.00

3. Prepayments

When something is paid in advance, but benefits extend post fiscal period Examples?LicensesRentInsurance

Example of Prepayment

Insurance- Cassidy Cartage buys a 1 year insurance policy , on August 1st for $816.00Entry:

Aug. 1 Prepaid Insurance 816.00

Bank 816.00

Jan. 1 Aug. 1

Dec. 31

816.00

12 Months

5 Months

Cost / Term X Months Used816/ 12 mons X 5 = $340

Adjusting Entry:Dec. 31 Insurance Expense 340.00

Prepaid Insurance 340.00To record adjustment for insurance used

Unearned Revenue There will be times when you will

want to adjust revenue Example:

Payment in advance, company would have deposited a cheque for $5000 in December 20-3 for work performed in January of 20-4 (Debit Bank, Credit Fees Earned)

Must remove from Fees Earned account otherwise recording this deposit as revenue would violate the revenue recognition principle

Adjusting Entry Company had not yet provided a

service to earn any portion of the $5 000. Fees Earned

5000.00

Unearned Revenue05000.0

05000.00

Debit of $5000 to Fees Earned cancels the effect of the original entry. Unearned Revenue is a LIABILITY ACCOUNT . Customer has a claim on those funds until the company provides the promised services

Let’s Try it

Exercise #1 & 2 p. 276-277 (t), p. 222-224 (w)

If finish complete Review Questions #5-22 p. 276 (t)