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ADJUSTING ENTRIES

Accrual Basis: In the accrual basis of accounting revenues are recognized

(recorded) when earned, and expenses are recognized when incurred
regardless of whether cash been received or paid.

A lot of revenues and expenses are not recognized during the accounting
period as they occur. For these accounts we must adjust them at the end of the
accounting period in order to bring them up to date.

When dealing with the timing of revenue and expense recognition there are
two terms that must be understood, Accrued and Deferred.

1-Prepaid (Deferred) Expenses:

A. If not an asset like; (Insurance, Rent, Advertising ,Wages , Utility ,
Subscriptions ,…)

When payment is made in advance Journal When recognized (incurred) the

entry was; following adjustment is required
Prepaid Expense Dr Account Expense Dr
Cash Cr Prepaid Expense Cr
So we should credited from prepaid expense account and debited to account expense

B. If an asset :
- Current assets like Office Supplies
When payment is made Journal entry was; The portion used by the end of the
accounting period
Supplies Dr Supplies expense Dr
Cash Cr Supplies Cr
So we should credited from supply account and debited to Supplies expense
 2

-Long term (Fixed) assets like Machines , Equipments ,Automotives ,… that

are not fully used up in a single fiscal period

payment is made with purchasing prise The asset’s usefulness is partially

consumed during the period.
Fixed Asset Dr Depreciation Expense Dr
Cash Cr Accumulated Depreciation Cr
So we should credited to Accumulated Depreciation account(contra-asset) and
debited from Depreciation Expense

Annual Depreciation Expense = (cost of Fixed asset – estimated salvage value) /estimated useful life
Partial Depreciation Expense(less than one year = Annual Depreciation Expense ×used months/12

2-Unearned (Deferred) Revenues: Consulting fees ,Undelivered goods ,

Un Provided services ,…

When payment is made unearned revenue is When good is delivered or service is

considered as liability provided (Recognized)
Cash Dr unearned revenue Dr
unearned revenue Cr Service revenue Cr
So we should credited to revenue account and debited from unearned revenue

3-Accrued Revenues: Delivered goods , Provided services , interest from others

Revenues earned but not yet received in cash or To record Revenue/Assets earned
recorded. but cash not yet received
Account receivable Dr
Service revenue Cr
So we should credited to Service Revenue account and debited to Account
receivable

4-Accrued Expense/Liabilities: unpaid (utility ,wages ,rent , interest to others ,

…)

Expenses incurred but not yet paid in cash or To record Expenses incurred but
recoded, Or service received without paying cash not yet paid
cash. Account expense Dr
Account payable Cr
So we should credited to Account payable and debited to Account expense