ACCT 1110 ~ Chapter 3

Adjusting Entries
Intro: The “Cash Basis of Accounting” is NOT acceptable for financial reporting purposes
because it doesn’t “match” revenues with expenses and the financial statements
would not be comparable. Therefore, we have to use the “Accrual Basis of
Accounting” which requires adjusting entries.
The revenue recognition principle requires revenues be recorded in the period they
were earned! The matching principle requires expenses be recorded in the period
they were incurred to be matched with the revenues recognized this period!
(Revenues when earned; expenses when incurred.)

HINT: NO adjusting entry ever debits or credits CASH!

A. Five Types of Adjusting Entries

1. Prepaid Expenses
a. Examples: prepaid insurance, prepaid rent, supplies, subscriptions, etc.; (a
payment now that covers more than one accounting period)
b. Amount of the asset used up this period & needs to be recorded as an
expense.
Expense + $used
Asset - $used

2. Depreciation
a. Similar to Prepaid Expenses, except for plant assets (equipment, machines,
buildings, etc.). Accumulated Depreciation is a contra-asset account.
b. Estimated (calculated) amount of the asset used up this period & needs to be
recorded as an expense.
Depreciation Expense + $calc
Accumulated Depreciation** $calc

3. Unearned Revenues
a. Example: received money for subscriptions, rent, insurance, etc., but we
haven’t earned the revenue, yet.
b. Amount of the revenue earned this period & needs to reduce the liability.
Unearned Revenue - $earned
Revenue + $earned

4. Accrued Expenses
a. Example: received a bill at the end of the period, but we haven’t paid it, yet.
b. Amount of the expense incurred this period.
Expense + $incurred
Payable + $incurred

5. Accrued Revenues
a. Example: sent a bill at the end of the period, but we haven’t received cash, yet.
b. Amount of the revenue earned this period.
Receivable + $earned
Revenue + $earned