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http://en.wikipedia.org/wiki/Adjustingentries

In accounting/accountancy, adjusting entries are journal entries usually made at the end oI an
accounting period to allocate income and expenditure to the period in which they actually
occurred. The revenue recognition principle is the basis oI making adjusting entries that pertain
to unearned and accrued revenues under accrual-basis accounting. They are sometimes called
Balance Day adjustments because they are made on balance day.
Based on the matching principle oI accrual accounting, revenues and associated costs are
recognized in the same accounting period. However the actual cash may be received or paid at a
diIIerent time.
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http://www.answers.com/topic/adjusting-journal-entry


A. necessary entry at the end oI the reporting period to record unrecognized revenue and
expenses applicable to that period. It is required when a transaction is begun in one accounting
period and concluded in a later one. An adjusting entry always involves an income statement
account (revenue or expense) and a balance sheet account (asset or liability). The Iour basic
types oI adjusting entries relate to accrued expenses, accrued revenue, prepaid expenses, and
unearned revenue.

B. correcting entry required at the end oI the accounting period due to a mistake made in the
accounting records; also called correcting entry. For example, iI during the same year land was
charged instead oI travel expense, the correcting entry is to debit travel expense and credit land.
. journal entry posted to the accounting records at the end oI an accounting period to record a
transaction or event that was not properly posted during the accounting period Ior some reason.



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http://www.investorwords.com/113/adjustingentry.html

A bookkeeping entry made at the end oI an accounting period to assign income and expenses to a
diIIerent period. These entries are made under the accrual accounting systems in order to
correctly reIlect the timings oI income and expenditure. Some adjusting entries include accounts
receivable, accounts payable, depreciation and amortization.
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at is te adjusting entry for:

A review of te insurance policy indicates tat $18000 of te insurance already paid for
covers te following fiscal year
Best Answer
our question is somewhat conIused. It seems that you are stating that you have some type oI
insurance with a premium greater than $18,000 but that the entire premium has been expensed in
the current period. ou have discovered that $18,000 oI this premium has been improperly
expensed in the current period. Now you want to correct this so that the $18,000 is expensed in
the correct period. I'll answer your question this way.

II you haven't done so create an asset account called Prepaid Insurance. Credit the insurance
expense account where the $18,000 appears and Debit the Prepaid Insurance Account. The
$18,000 is no longer an expense in the current period.

When you get into the Iirst period where you want to start expensing the $18,000 you have a
choice. ou can expense it all at once or on a periodic (usually monthly basis). Usually, it is
done monthly. Suppose that the policy expiry date is September 30. Then you expense the
$18,000 over 9 months or $2,000 per month. Here you credit Prepaid Insurance by $2,000 and
debit Insurance Expense by $2,000 and do this until the asset is Iully expensed.
ter Answer
It is a pre paid expense, and you would divide it by 12 assuming the Iiscal year is 12 months (one
year) months oI expense. So every month you would debit the insurance account and credit the
prepaid account.

First you would debit the prepaid account and credit the bank. Both asset accounts
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http://www.theIreedictionary.com/adjustingentry
http://encyclopedia2.theIreedictionary.com/adjustingentry

(Russian, storno, Irom Italian storno, bookkeeping transIer), a bookkeeping procedure generally
intended to rectiIy an incorrect entry.
Only one kind oI adjusting entry is customarily usedthe reversing entry, a supplementary entry
in which the same absolute number is kept but the sign is reversed, in order to correct an error.
The incorrect entry is thus canceled. The numbers reversed are usually written in red ink so that
they will stand out; thus, reversing entries are sometimes known as red-ink entries. A partial
adjusting entry can also be used; here, the original error is not canceled but merely altered.
In making an adjusting entry, it is necessary that reIerence be made to the entries being corrected
or adjusted.
1. - an accounting entry made at the end oI an accounting period to allocate items between
accounting periods
2. - (Russian, storno, Irom Italian storno, bookkeeping transIer), a bookkeeping procedure
generally intended to rectiIy an incorrect entry.
Only one kind oI adjusting entry is customarily usedthe reversing entry, a supplementary entry
in which the same absolute number is kept but the sign is reversed, in order to correct an error.
The incorrect entry is thus canceled. The numbers reversed are usually written in red ink so that
they will stand out; thus, reversing entries are sometimes known as red-ink entries. A partial
adjusting entry can also be used; here, the original error is not canceled but merely altered.
In making an adjusting entry, it is necessary that reIerence be made to the entries being corrected
or adjusted.
. - an adjustment made to a company's Iinancial records at the end oI an accounting period to
assign revenues and expenses to the days on which the events justiIying them occurred or on
which the revenue was received, depending on the situation. For example, iI a company is paid
in advance Ior the purchase oI some good, an adjusting entry may recognize that revenue on the
day the good was delivered. Likewise, iI the company was paid aIter delivery, it may recognize
the revenue on the day it was paid. See also: Accrued Expenses, Accrued Revenue, Prepaid
Expenses, Unearned Revenue.

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http://www.audioenglish.net/dictionary/adjustingentry.htm

The noun AD1USTING ENTRY has 1 sense:
1. an accounting entry made at the end oI an accounting period to allocate items between
accounting periods

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http://wiki.answers.com/Q/Whatisanadjustingentry


Answer:
Journal entries recorded to update general ledger accounts at the end oI a Iiscal period.



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http://www.theIreedictionary.com/adjustingentry
Adjusting entries are usually made on the last day oI an accounting period (year, quarter, month)
so that the Iinancial statements reIlect the revenues that have been earned and the expenses that
were incurred during the accounting period.
Sometimes an adjusting entry is needed because:
1. revenue has been earned, but it has not yet been recorded.
2. an expense may have been incurred, but it hasn`t yet been recorded.
3. a company may have paid Ior six-months oI insurance coverage, but the accounting
period is only one month. (This means that Iive months oI insurance expense is prepaid
and should not be reported as an expense on the current income statement.)
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. a customer paid a company in advance oI receiving goods or services. Until the goods or
services are delivered, the amount is reported as a liability. AIter the goods or services
are delivered, an entry is needed to reduce the liability and to report the revenues.
A common characteristic oI an adjusting entry is that it will involve one income statement
account and one balance sheet account. (The purpose oI each adjusting entry is to get both the
income statement and the balance sheet to be accurate.)


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hLLp//wwwaccounLlngscholarcom/glossary/Ad[usLlngenLryhLml
A journal entry at the end oI an accounting period to bring an asset or liability account balance to
its proper amount while also updating the related expense or revenue account.
Some assets are used up during their liIetime and become expense.
The cost is allocated to expense over the span oI several accounting periods with adjusting
entries.
Adjusting entries are made at the end oI the accounting periods to make the Iinancial
statements accurate.
One oI the most common adjusting entries is Depreciation expense.

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http://business.yourdictionary.com/adjusting-entry
In accounting, an end-oI-period bookkeeping entry that assigns income and/or expenses to an
earlier period.

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http://www.small-business-dictionary.org/deIault.asp?termADJUSTINGENTR

ADJUSTING ENTR

An accounting entry to record an internal transaction on an account that is usually made at
the end oI an accounting period, such as an allocation or correction oI an error.


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http://ca.answers.yahoo.com/question/index?qid2010092612559AAlMbL1


iI you have Iinancial statement Ior month ended April 30... then can you adjust it Ior transaction
happened in May? I don't understand clearly. my text book never said when it is valid.

here is a situation.

The Iollowing situation require adjusting journal entry to prepare Iinancial statements as oI April
30, 2011. For this situation, present the adjusting entry and the entry that would be made to
record the payment oI the accrued liability during May 2011.

On Aprill 1, the company retained a lawyer at a Ilat monthly Iee oI $2500. This amount is
payable on the 12th oI the Iollowing month.
Additional Details
my answer i am guessing is
Apr 1. Lawyer expense 2500
Salaries payable 2500
May 12. Salaries payable 2500
Cash 2500
and oI course may 1 would have another 2500 being recorded on its own.
Best Answer - osen by Asker
The idea behind adjusting entries is to capture all sales and expenses in the period it happens
rather than when cash changes hands...it's to get the most accurate net proIit number possible.

So, you'd want to record in April's numbers retaining the lawyer. I don't know what you are
calling this account, but it might be something like attorney expenses. I'd debit attorney expenses
and credit accounts payable Ior 2,500. When I pay the bill in May, I'd debit accounts payable and
credit cash Ior $2,500.





I wouldn't use salaries payable. That's iI they are an employee oI your Iirm. Retaining a lawyer
means access to their services, but he's still part oI his own company.





























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http://www.ehow.com/how2309prepare-adjusting-entries.html


In accounting, adjusting entries are usually posted directly through the general ledger to update
or correct certain accounts. Commonly adjusting entries are made to record accumulated
depreciation, to record accrued expenses or receivables, to write oII bad debts, to make year end
adjustments and to correct prior posting errors Adjusting entries are usually posted to general
ledger accounts through a company's computerized accounting system. Preparing a manual list oI
adjusting entries prior to posting makes posting eIIicient and helps eliminate errors.
Instructions
1.!reparing Adjusting Entries in Accounting
o 1
Assemble all documents that pertain to the adjusting entries you plan to make.
This may include depreciation schedules Ior Iiguring accumulated depreciation,
amortization schedules Ior Iiguring accrued interest, documentation oI
noncollectable debts and documentation oI prior posting errors to be corrected.
No matter the type oI adjusting entries you plan to make to your accounts,
keeping complete supporting documentation Ior your records is essential.
o 2
Prepare a list oI the adjusting entries you intend to make. Include complete
account descriptions, general ledger account numbers and debit or credit amounts.
ou can group entries together according to account. For instance, iI you have
several entries to make to your Accumulated Depreciation account (this is a
contra-asset account on your balance sheet) you can group them together, listing
the entries to the appropriate expense accounts (these are income statement
accounts) separately as Iollows:Example:Transaction description-Record
accumulated depreciation Ior the month oI JulyAccount Number 517-001 Shop
Machinery Depreciation Expense 100.00 debitAccount Number 517-002 OIIice
Equipment Depreciation Expense 50.00 debitAccount Number 317-003
Accumulated Depreciation 150.00 creditOn your list, debits should be listed in a
column to the leIt and credits in a column to the right oI debits. This will enable
you to easily add the columns to be certain that the total debits agree with total
credits.
o 3
Add all the numbers in the debit column oI your adjusting entries list and record
the total at the bottom oI the column. Do likewise Ior the credit column. The
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totals should be the same. ou will also compare these to your computer
generated report when you check Ior data entry errors.
o 4
AIter keying your adjusting entries, print a report and check Ior errors. Remember
to careIully check account number as well as debit and credit amounts. When you
are certain your data is error Iree, post your adjusting entries to your general
ledger. Be sure to print complete posting reports Ior your records.



















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http://www.ehow.com/how8778310journalize-accrued-expense-not-payable.html


When expenses are accrued on a contingent or prudent basis, they may eventually end up as not
being payable. This accrual entry will then need reversing Irom the accounting system to reIlect
this. Understanding the double-entry requirements is crucial in removing the adjustments Irom
the system and thereIore ensuring that the correct amount oI expenses are shown in the business's
records. The
Journal entry to remove the accrued expenses is straightIorward to prepare and enter, whether
entered manually or through a system's accrual posting routine.

Instructions
1.Using te Accruals !osting Routine of te System
o 1
Log in to the accounting system. IdentiIy and make a note oI the original accrual
posting by viewing the accruals account and the associated expenses accounts.
o 2
Navigate to the accruals posting Iunction. Post an entry reversing the original
entry. This will debit accruals on the balance sheet and credit expenses on the
proIit and loss account. Save the posting.
o 3
Check the accruals and expenses accounts to ensure that the original expenses
accrual has been reversed correctly.
2.!repare a Manual 1ournal and Enter onto te System
o 1
Prepare a journal entry. List the total accrual amount to remove as a debit amount.
List the expenses amounts as credit values. For example:
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Debit: Accrued expenses x
Credit: Motor expenses y
Credit:Telephone expenses y
Narrative: Being the reversal oI accrued expenses.
(the sum oI x values must equal the sum oI y values).
o 2
Post the entries onto the system through the journal posting routine.
o 3
Check the accounts that you have posted to; to ensure that the accrual has been
Iully and accurately removed.
















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http://www.ehow.com/how773089adjust-entries-notes-payable.html


Notes payables are written promises between two parties. A note payable is created when one
party receives a loan Irom another party. The note is Ior a speciIied amount oI money, due on a
speciIied date and has a stated interest rate. Notes that are due within one year are considered
short-term, while notes that are due longer than that are considered long-term. Notes payables are
recorded on a company's books as a liability
Each month that a company has a notes payable, an adjusting entry is required to record accrued
interest expenses.
Instructions
1.
o 1
Understand the details oI the note. Assume a company borrowed $10,000 on June
1 and that it must be paid back in one year, plus interest that is at the rate oI eight
percent. Each month a portion oI the interest accrues and must be recorded as an
adjusting entry to keep the books up to date. The entry recorded when the note
was received is posted by debiting the Cash account Ior $10,000 and crediting the
Notes Payable account Ior $10,000.
o 2
Calculate the monthly interest. Using a simpliIied version to calculate interest, a
simple equation is used, which is I PRT. I represents the interest amount, P is
the principal, R is the interest rate and T is the amount oI time. When interest is
calculated per month, the time amount Ior one month must be divided by 12
(months). This equation listed represents the interest Ior the entire time oI the
note, which in this case is one year. To calculate the interest Ior this example, the
equation reads: I ($10,000) (0.08) (1/12). The answer is that the interest amount
per month is $66.67.
o 3
Record the adjusting entry each month. This is recorded by debiting Interest
Expense Ior $66.67 and Interest Payable Ior $66.67. This adjusting entry is
recorded at the end oI each month until the note is due.
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o
Record the payment oI the note. When June 1 oI the Iollowing year comes, the
note is paid oII as well as all oI the accrued interest payable. By then the amount
oI interest payable is $733.37 (11 months times $66.67). The last month oI
interest is recorded when the note is paid. The entry made is a debit to Interest
Expense Ior $66.67, a debit to Interest Payable Ior $733.37, a debit to Notes
Receivable Ior $10,000 and a credit to cash Ior the total payment oI $10,800.0.
























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http://www.ehow.com/how100831adjust-entries-trial-balance-notes-payable.html



At the end oI a reporting period, certain adjustments are oIten made to the trial balance Ior notes
payable. Frequently, payments Ior Iinanced equipment or vehicles include both interest and
principal. Thus, the total payments must be properly allocated to interest expense and the note
payable according to the amortization schedule.
Instructions
o 1
Inquire about the existing note-payable balance. It is important to know how the
existing balance was computed, so any adjustments that may be needed can be
classiIied accordingly. OIten, the whole note payment will be erroneously
accounted Ior as a reduction oI the note payable, without any interest expense
recorded.
o 2
Obtain or re-create the loan amortization schedule. To determine the appropriate
amount oI interest expense included in the payments, you must determine where
the company is on the payment schedule, and the terms oI the note. II no
amortization schedule can be located, it is reasonable to assume that the
amortization schedule began when the asset was originally acquired. However, iI
monthly payments changed, it may indicate that the note was subsequently
reIinanced, requiring additional calculations.
o 3
ReclassiIy payments to interest expense and note-payable principal. To adjust the
notes-payable balance to reIlect interest expense included in monthly payments,
debit the annual amount oI interest expense Irom the amortization schedule, and
credit note payable by the same amount. This will record the interest component
and increase the note-payable balance to tie in with the amortization schedule.
o 4
'eriIy that the adjusted trial balance agrees with the amortization schedule. AIter
making the adjusting entries to correct the original accounting treatment, veriIy
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that the adjusted trial balance matches the annual interest and note balance on the
amortization schedule. II these adjusted balances do not agree, you must review
the trial balance, journal entries and amortization schedule to reconcile the
accounts.





































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http://www.ehow.com/how815018reverse-adjust-accounting-entries.html



Journal entries are the tools accountants use to post transactions into a company's ledger. Two
types oI entries are reversing entries and adjusting entries. Reversing entries are common at the
end oI accounting periods. They remove entries originally posted to help balance a company's
ledger. These entries oIten aIIect payables or expense accounts. Adjusting entries record accruals
or deIerrals into a company's general ledger. These recognize transactions as they occur, even
though cash may not change hands as part oI the transaction.
Instructions
1.Reversing Entries
o 1
Review the original journal entry posted into the general ledger. Note which
account received the debit and which one received the credit.
o 2
Write the reversing entry opposite oI the original. For example, debit the account
previously credited and credit the account previously debited.
o 3
Post the entry into the general ledger. Enter the date, account numbers, dollar
amounts and a brieI description Ior the journal entry.
o 4
Double-check the entry aIter posting to ensure the original entry reversed in the
general ledger.
2.Adjusting Entries
o 1
Write a journal entry that debits an expense account Ior an accrual or a prepaid
asset Ior a deIerral. The credit will be a payable Ior an accrual and an asset Ior a
deIerral.
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o 2
Post the entry into the general ledger. Enter the date, account numbers, dollar
amounts and a brieI description Ior the journal entry.
o 3
Enter a reversing entry into the ledger once the company realizes the accrual or
deIerral. Reverse the accounts to debit and credit Iollowing the instructions Irom
Section 1 oI this article.
































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http://www.ehow.com/how667552adjust-entries-accumulated-depreciation.html



Depreciation is an accounting calculation that requires the use oI estimates. When calculating
depreciation, a company will estimate the useIul liIe oI the asset and its residual value. The
problem with estimates is as time goes by, they tend to change. When accounting estimates Ior
depreciation change, a company must adjust its depreciation journal entries.
Instructions
1
o Calculate the new depreciation rate using the revised estimates. For example, a
company originally depreciated an asset at $5,000 a month. AIter three years, the
asset is down to a book value oI $20,000. The company then revises its estimates
with only two years remaining on the asset and the asset's residual value is
$,000. The new depreciation under the straight-line method then would equal
$20,000 minus $,000, which equals $16,000. Then, $16,000 divided by two
years equals $8,000 a year.
o 2
Leave any prior journal entries alone. In the prior journal entries in the example,
each year the entry would be a debit to "Depreciation Expense" oI $3,000 and a
credit to "Accumulated Deprecation" oI $3,000.
o 3
Use the new rate Ior all Iurther depreciation entries. In the example, debit
"Depreciation Expense" by $5,000 and credit "Accumulated Depreciation" by
$5,000.






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http://www.ehow.com/how590093adjust-entry-record-depreciation.html


Depreciation is an accounting convention used to help bookkeepers to better match revenues
with expenses. While it is a non-cash expense---that is, there is no real cash outlay associated
with the transaction---it can reduce the amount oI net income and thereIore the amount oI your
tax liability which is a real cash outlay. There are several types oI depreciation methods, but they
all use the same methodology Ior recording adjustments.
Instructions
1
o 1
Determine the depreciation expense Ior the year. In this example, the depreciation
expense is $1,000.
o 2
Make a Credit to Depreciation Expense and a debit to Accumulated Depreciation
Ior $1,000. Accumulated depreciation is used instead oI the actual value oI the
asset on the books. This is called a contra-account.
o 3
Make a Credit to Depreciation Expense and Debit to Accumulated Depreciation
Ior ear 2. The Depreciation Expense stays the same; however, you are adding
another $1,000 to the Accumulated Depreciation. The total Ior accumulated
depreciation is $2,000 in ear 2.
o 4
Continue depreciating the asset until the Iull value oI the asset is transIerred to
Accumulated Depreciation.




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http://www.ehow.com/how875119record-adjusting-entries-balance-sheet.html



Companies pass adjusting entries at the end oI an accounting period to make adjustments to their
Iinancial statements. The adjustments are made in the general ledger as well as the respective
accounts oI the item that needs the adjustment. These entries are made to assign income or
expenses. The amount oI the entry is then deIerred to a diIIerent accounting period. Accounts
that need adjusting entries,
Instructions
O Collect all the Iinancial statements oI the company. Also collect all the relevant documents Ior
making the adjusting entries. Amongst others, these would include the company's depreciation
and amortization schedules. Further collect inIormation on the company's payables and
receivables. BeIore passing the adjusting entry, be prepared with all the supporting
documentation.
O 2
Look Ior discrepancies in each Iinancial statement. There could be several types oI errors such as
duplicate posting, omission oI entries and miscalculations. Prepare a trial balance, and compare it
with the company's Iinancial statements. This way, you would be able to determine the
inaccuracies in the statements.
O 3
Prepare a list oI all the required adjusting entries. Review all the accounts and then list out all the
needed entries. In the list include descriptions oI the accounts, the page numbers oI the accounts
in the general ledger, the amount oI the transact ion and whether the transaction is a debit or
credit.
For example, a company owns several assets, and it provides accumulated depreciation on each
oI those. The company may club all the accumulated depreciations entries together and
determine the total amount oI accumulated depreciation. The accumulated depreciation account
appears as a contra account on the balance sheet.


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O 4
Prepare an adjusted trial balance. Ensure the total on the credit column matches with the total
amount on the debit side. Post all the adjusting entries in the general ledger and each respective
account.



























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http://www.ehow.com/inIo1203072purpose-adjusting-entries-accounting.html


Understanding accrual accounting requires understanding adjusting entries. The purpose oI these
entries is to properly adjust the accounting statements Ior accrual-basis accounting. Adjusting
entries typically have an impact on the income statement and balance sheet. The cash Ilow
statement is typically not aIIected.
1.Accounting
o The American accounting system is based on the generally accepted accounting
principles (GAAP). The GAAP system is an accrual-based system, which means
that revenues are recognized when they are earned and expenses are recognized
when they are incurred. This creates a gap between cash and accrual accounting.
Because a cash transaction does not have to occur Ior revenue or expenses to be
recognized, this creates the need Ior adjusting entries.
Adjusting Entries
o Adjusting entries are made at the end oI the accounting period to allocate
revenues and expenditures to the right time periods. They are used very oIten, as
companies oIten have expenses and revenues that do not match up with the cash
inIlows and outlays. Examples oI accounts that oIten need adjusting entries are
prepaid assets and unearned revenue. However, other accounts also need to be
adjusted on a regular basis. Fixed assets that are subject to depreciation are
subject to adjusting entries even though no cash transactions occur.
!repaid Asset Example
o On Jan. 1, a company pays rent Ior the whole year oI $12,000, or $1,000 a month.
The only transaction on the books at the point is the cash outIlow oI $12,000 and
the prepaid rent asset oI $12,000, but there is nothing on the income statement. At
the end oI January, the company has to recognize $1,000 oI rent expense on its
income statement and lower prepaid rent asset by $1,000. No cash expense or
transaction occurs.
Unearned Revenue Example
o On Jan. 1, a company receives $1 million in cash Ior products and services to be
delivered in February. On Jan. 1, that is booked as $1 million in unearned revenue
and no revenue is recognized on the income statement. A cash Ilow oI $1 million
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occurs also. At the end oI February, aIter the obligation is satisIied, the company
has to recognize $1 million to revenue on its income statement and decrease $1
million oI unearned revenue. Revenue is recognized without there being a cash
outIlow.


























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http://www.ehow.com/how10053876adjust-close-entries-merchandiser.html


Merchandisers purchase and sell goods. Merchandising businesses perIorm adjusting entries at
the end oI the year to update their accounting records. They also perIorm closing entries to close
the books at the end oI the year and prepare them Ior beginning a new year. There are Iive main
types oI adjusting entries that merchandisers might use. These entries must be completed beIore
the closing process is done.
Instructions
1.Adjusting Entries
o 1
Complete adjusting entries Ior accrued revenues. Accrued revenues are entries to
record revenue earned, but that have not been paid. For a merchandising
company, this oIten means recording goods sold on account. For example, a
customer places $100 on account on the last day oI the year. To record this, debit
$100 to Accounts Receivable and credit $100 to Sales.
o 2
PerIorm entries to record unearned revenues. At the end oI the year, a
merchandiser must record any revenue received that has not yet been earned. For
example, a customer pays $500 Ior goods he will receive next year. Record this
entry by debiting $500 to cash and crediting $500 to Unearned Revenue.
o 3
Record any accrued expenses. Any bills a merchandiser receives Ior expenses that
occurred during the current year must be recorded as adjusting entries. For
example, assume the company hired a Iirm to perIorm computer maintenance
during the current year. The bill is not due until next year. Record this by debiting
the amount to Computer Expense and credit the amount to Accounts Payable.
o 4
Update all prepaid expenses. The most common prepaid expense is insurance.
Companies generally prepay insurance premiums and thereIore the amount must
be adjusted at the end oI the year. For example, iI the amount oI insurance used at
2

the end oI the year is $300, the company records a journal entry by debiting $300
to Insurance Expense and crediting $300 to Prepaid Insurance.
o 3
Record any additional adjusting entries. Merchandisers oIten update their
inventory accounts aIter taking a physical inventory count. To do this, the
merchandiser debits Cost oI Goods Sold and credits Inventory Ior the amount oI
diIIerence between the account balance and the actual inventory amount. The
merchandiser also records any depreciation expenses Ior the year.
2.losing Entries
o 1
Close revenues. Closing entries are conducted in a Iour-step process. A
merchandiser Iirst closes all revenues by debiting their Iull account balances and
crediting the Income Summary account.
o 2
Close expenses. The next step is to close expense accounts by debiting Income
Summary and crediting each expense account Ior its Iull balance.
o 3
Close the Income Summary account. II the Income Summary account has a credit
balance, it represents net income earned. II the balance is a debit, it represents a
net loss. Close this account by debiting or crediting the Iull balance to bring the
amount to zero. The other side oI this entry is either a debit or a credit (the
opposite oI what was done in the Income Summary account) to the owner's capital
account.
o 4
Close the drawing account. The last step in the closing process is closing the
owner's drawing account. To do this, debit the owner's equity account and credit
the owner's drawing account Ior the Iull balance in the account.





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The value oI inventory, or stock, on hand at the end oI a Iinancial period directly aIIects the
gross and net income oI a merchandising or manuIacturing company. Inventory is a component
oI the cost oI goods sold calculation, and the closing inventory Iigure also appears in the balance
sheet under current assets. The company's accountants arrange Ior physical stock counts to take
place on a regular basis and adjust the inventory quantity and value to the actual amounts held
Instructions
1
o 1
Credit the inventory expense account with the current balance and debit a
temporary income summary account with the same amount.
o 2
Multiply the quantity held oI each stock item by its original cost or its current net
market value, using the lower oI the two Iigures to calculate the value oI
inventory Irom the physical stock count.
o 3
Debit the inventory asset account and credit the income summary account with
the new value to post the value oI closing inventory to the balance sheet. The
income summary account shows the movement oI stock during the year and the
asset appears on the balance sheet.
o 4
Post the opening inventory at the beginning oI the next Iinancial period. Credit the
inventory asset account with the current balance and debit the inventory expense
account.

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II your business holds inventory, the value oI the inventory at the end oI the accounting period
has a direct eIIect on the gross proIit or loss Ior the period. The value oI closing inventory
reduces the cost oI sales. Other things being equal, an increase in inventory value during the
previous period creates an increase in proIits. A decrease results in losses. Establish inventory
value at the period end aIter completing a Iull physical count, also called a stock check.
Instructions
1
o 1
Calculate the value oI closing inventory by multiplying the physical stock count
by the cost oI each item and totalling the value oI all items.
o 2
Open an income summary account, also known as a trading account, in the
general ledger. Debit the sales account and credit the income summary account
with the balance on the sales account. Credit opening stock, purchases and direct
expenses. Then debit the income summary account with the balances on those
accounts.
o 3
Debit the income summary account and credit the inventory asset account with
the value oI the opening inventory. This leaves a nil balance on the inventory
asset account.
o 4
Debit the inventory asset account and credit the income summary account with
the value oI closing inventory. This places the closing inventory value on the
inventory asset account as the opening inventory oI the new period. II closing
inventory is higher than opening inventory, the eIIect oI the two adjusting entries
will be a net credit on the income summary account. II the inventory value has
decreased over the period, the eIIect will be a net debit on the income summary
account.
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Inventory accounting typically requires accountants to make various detailed journal entries. The
entries required Ior the inventory accounting process depend on the inventory system a company
uses. The perpetual system requires entries throughout the account period; a periodic system,
however, only requires entry at month's end. Regardless oI the method used, accountants may
need to adjust inventory journal entries to correct general ledger accounts. Accountants can make
corrections when they discover the error or during the month-end close process, whichever
works best Ior their accounting system.
Instructions
1
o 1
Review the original journal entry once the error becomes present. The journal
entry should have documents to back up the entry posted into the general ledger.
o 2
Determine how to correct the error. This may involve reversing the entry to
correct dollar-amount errors, moving an amount to the correct account or clearing
out an account by moving inventory cost to the cost oI goods sold.
o 3
Enter the correct journal entry. Make a copy oI the original journal entry
documents and keep it with the new entry.
o 4
Post the new journal entry into the general ledger. Enter a debit and a credit into
the proper oIIsetting accounts.
o 3
Review the posted entry to ensure the accounts and dollar amounts are correct.
Finish posting the entry and place the inIormation Ior the entry with the monthly
accounting documents.
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AccounLlng [ournal enLrles record all buslness LransacLlon LhaL a company engages ln 1hls process ls
especlally lmporLanL when keeplng Lrack of sales on credlL When you advance a cusLomer credlL for a
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ad[usLlng [ournal enLrles Lo keep Lrack of how much Lhe cusLomer owes Lhe company aL all Llmes
Instructions
Tings You'll Need
O ales records
O 9aymenL records
1
o 1
Place the date oI the adjusting entry into the general journal at the beginning oI
the Iirst line oI the entry.
o 2
Account Ior the credit transaction by listing the credit account name under the
title section oI the journal next to the date. For example, a $5,000 credit sale to
customer John Smith would be listed as, "Accounts Receivable -- John Smith."
Place the amount oI the transaction, 5,000 in the debit column oI the line.
o 3
Account Ior the addition in sales Ior the company on the next line oI the ledger.
Indent slightly in the title area and list "Sales" to add Iunds to the sales account.
Place the amount oI the credit sale in the credit column Ior the line.
o 4
Adjust the journal when a customer pays on his credit account on the date oI the
payment. Place the date on a new journal line, Iollowed by "Cash" in the title
section. Put the amount that the customer pays in the debit column indicating an
addition to the company's cash account. II John Smith pays the Iull $5,000 oI his
32

credit account, the entry would read, "Cash" with "5,000" listed in the debit
column.
o 3
Continue the adjustment Ior the credit payment on the next line. Indent the line
slightly, and then place the customer account name in the title section, Iollowed
by the amount paid in the credit column. John Smith's $5,000 payment would read
as "Accounts Receivable-John Smith," with "5,000" in the credit column to show
that John Smith's receivables account is $5,000 smaller.



















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A notes receivables account is an account set up to record a loan given to a customer with
deIined terms oI repayment. It is considered more Iormal than invoicing a customer and giving
them 30 to 60 days to pay the invoice, Ior example. Make adjusting entries in the General
Journal. In a journal entry, one or more accounts are debited and one or more accounts are
credited an amount equal to the debit. Receivables accounts increase with a debit and decrease
with a credit. Revenue accounts increase with a credit and decrease with a debit. Accountants or
CPAs oIten make adjusting entries at the end oI the Iiscal year or quarter.
Instructions
1
o 1
Open the General Journal. BeIore you record your adjusting entry, decide whether
you want to increase or decrease the amount oI money in Notes Receivables.
o 2
Enter the adjustment amount in the debit (leIt) column attributed to the balance
sheet account, Notes Receivables to increase Notes Receivables. Enter the
adjustment amount in the credit (right) column attributed to Notes Receivables to
decrease Notes Receivables. Each adjusting transaction has an account to oIIset
the entry. The account you use to oIIset Notes Receivables is dependent upon the
reason Ior the adjusting entry. II the adjusting entry is because the loan recipient
has deIaulted on the loan and you wish to move the Iunds to Accounts Receivables, credit
the Accounts Receivables account by entering the adjusting amount in the credit (right)
column and attributing the line to Accounts Receivables. II you are not sure which
account to use to oIIset Notes Receivables, speak to your accountant or CPA.
o 3
Enter the adjustment amount in the debit (leIt) column attributed to the balance
sheet account, Interest Receivables to increase Interest Receivables. Enter the
adjustment amount in the credit (right) column attributed to Interest Receivables
to decrease Interest Receivables. To record interest at the end oI the Iiscal year,
increase the balance sheet account, Interest Receivables with a debit and increase
the revenue account, Interest Income with a credit. II you are not sure which
account to use to oIIset Interest Receivables, speak to your accountant or CPA.
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When a company has an account receivable that appears to be uncollectable despite multiple
attempts to collect on the debt, it oIten writes the debt oII, incurring it as an expense and
reducing the accounts receivable total. When this occurs, the company records the event as a
journal entry in its general journal, making an adjustment with the entry that shows the added
bad debt expense and the loss in receivables.
Instructions
1
o 1
Determine the amount oI the expense or income not yet earned, received, incurred
or paid. Note the amount oI the entry Ior each account and make a notation Ior
each explaining the situation.
o 2
Create a separate entry to debit and credit each expense or income account
aIIected. A debit represents an increase in assets or expenses; a credit represents
an increase in liability, equity or revenue.
o 3
Increase or debit expenses that have been incurred but not yet recorded. Credit the
source account Ior the expense. For example, debit the supplies expense account
Ior the amount oI supplies used during the period and credit the supplies
inventory to account Ior the decrease in supplies on hand.
o 4
Increase or debit unearned revenue accounts and credit earned revenue accounts
to record prepaid revenue that has been earned at the close oI the period.
Example: When a customer pays Ior work in advance, debit the unearned service
revenue account and credit the service revenue Ior the portion oI work completed
but not recorded Ior the Iiscal period. This will decrease the prepaid revenue
balance and increase the revenue Ior the period.
33

o 3
Debit expense accounts and credit payable accounts Ior any expenses incurred but
not paid at the end oI the Iiscal period. For example, debit the wages expense
account and credit the wages payable account Ior wages earned by your
employees but not paid during the Iiscal period.
o 6
Debit accounts receivable and credit earned revenue accounts to recognize
outstanding amounts owed by customers Ior work perIormed during the Iiscal
period. For example, debit accounts receivable and credit the repair service
revenue to recognize services rendered but not paid at the end oI the Iiscal period.




















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Calculating your company's net proIit and adjusting the general ledger Ior the closing inventory
are necessary steps in the accounting cycle to prevent internal accounting errors that could carry
into the next Iiscal year. When closing your accounting books, check the Iinal book numbers
against the actual inventory and cash on hand at your company. II the balances are not equal,
trace any errors back to the balance sheet or re-examine your invoices.
Instructions
1.Net !rofit
o 1
Add all oI your revenue Ior the Iiscal period by examining your receipts and
invoices. Revenue is the total amount you receive Ior selling products or services.
For example, iI you sell computers Ior $300 each, and you sold 100 computers Ior
the year, $30,000 is your total revenue.
o 2
Calculate your cost oI goods sold Ior the Iiscal period. The cost oI goods sold is
the amount you spend to produce or buy each inventory item. For example, iI you
sell 100 T-shirts that cost $5 a piece at wholesale, your cost oI goods sold is $500.
o 3
Total all oI your company's operating expenses. Operating expenses include every
expense you incur to conduct business. For example, employee wages, the rent Ior
your building and your energy bill are operating expenses.
o 4
Subtract your cost oI goods sold and total operating expenses Irom your
company's total revenue Ior the Iiscal period. The result is your proIit beIore
taxes. our company's net proIit is calculated aIter subtracting taxes, which vary
3

each Iiscal year. II you are a sole proprietor, multiply your income beIore taxes by
0.35 and subtract that amount Irom the income beIore taxes. This is a rough
estimate oI your net proIit.
2.losing Inventory
o 1
Create a "Trial Balance" t-chart Ior your inventory account and write your starting
inventory amount in the "Debits" column. The "Trial Balance" t-chart is generally
written in a general accounting ledger.
o 2
Add all oI the inventory invoices and receipts Ior your company Ior the Iiscal
year. Create an "Adjustments" t-chart and add this amount to the "Debits" side oI
the chart. Write the amount Irom the "Debit" side oI the inventory trial balance t-
chart into the "Credit" side oI the "Adjustments" t-chart.
o 3
Create an "Adjusted Trial Balance" t-chart and enter the "Debit" amount Irom the
"Adjustments" t-chart into the "Debit" side oI the "Adjusted Trial Balance" t-
chart. This entry shows the positive inventory that Ilowed into your business.
o 4
Enter the "Debit" amount Irom your "Adjusted Trial Balance" t-chart into the
"Debit" column oI the "Balance Sheet" t-chart Ior your inventory account.
o 3
Write the beginning inventory amount Ior your company in the "Debit" column oI
your "Income Summary" section in the general journal. In the "Ending Inventory"
row oI your "Income Summary" section, enter the amount Irom the "Debit"
column oI your inventory balance sheet into the "Credit" column. This entry
accounts Ior the money spent on acquiring additional inventory.





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A company can report purchases and net purchases on its income statement to show the costs it
paid to buy inventory during an accounting period. The purchases line item on the income
statement is the total invoice cost the company's suppliers billed Ior the inventory, and net
purchases is the amount the company paid excluding returns and discounts. ou can calculate
net purchases using items provided on the income statement to determine how much a company
paid Ior inventory. This amount reduces a company's gross proIit and net proIit, which are two
diIIerent levels oI proIitability on the income statement.
Instructions
1
o 1
Find the amounts oI the line items called "purchases" and "Ireight-in" on a
company's income statement. The Ireight-in line item represents the shipping
costs to have its inventory delivered. For example, assume the company's
purchases are $100,000 and its Ireight-in costs are $20,000.
o 2
Add the company's Ireight-in costs to its purchases. For example, add $20,000 in Ireight-
in costs to $100,000 in purchases, which equals $120,000.
o 3
Find the amounts oI the line items called "purchase discounts" and "purchase returns and
allowances" on the income statement. A supplier provides a purchase discount when a
company pays its invoice within a certain time period. Purchase returns and allowances
occur when a company returns merchandise to a supplier. For example, assume the
company has $5,000 in purchase discounts and $10,000 in purchase returns and
allowances Ior the accounting period.
o 4
Subtract the company's purchase discounts and purchase returns and allowances Irom
your Step 2 result to calculate net purchases Ior the accounting period. For example,
subtract $5,000 in purchase discounts and $10,000 in purchase returns and allowances
Irom $120,000. This equals $105,000 in net purchases Ior the accounting period.
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A balance sheet includes line item entries Ior what a company owns listed under assets. What the
company owes it lists under liabilities. It is important to reIlect inventory balances accurately on
the balance sheet, as inventory is a part oI a company's assets and represents the potential Ior
revenue when sold. How an accounting department adjusts Ior inventory reported on the balance
sheet is dependent on the inventory method used.
Instructions
o 1
Use the Iirst-in-Iirst-out or FIFO method oI calculating inventory. This means the
inventory ending balance entry on the balance sheet will be the newest, most
valuable inventory on hand. In the inventory account, adjust inventory by
crediting the account Ior inventory sold in the period based on the oldest item in
inventory. Debit the inventory account Ior new inventory production in the period
at the current inventory value. Add these amounts together to obtain the ending
balance, and transIer this as a line item entry to the balance sheet. Add this entry
Ior the period under "Assets." Using this method also results in higher income and
lower cost oI goods sold Ior the period on the income statement. The inventory
value using the FIFO method results in an inventory with a current up-to-date
value.
o 2
Calculate the inventory balance by using the last-in-Iirst-out or LIFO method oI
inventory calculation. In the inventory account, the newest inventory sells Iirst,
resulting in lower income and higher cost oI goods sold on the income statement.
Adjust the inventory account by debiting the account as inventory sells Ior the
period with the most current inventory value. Credit the inventory account with
new inventory at the most current inventory value as created and put into
inventory Ior the period. Take the balance between these adjustments or the
ending balance Ior the inventory account, and add it to the balance sheet under
"Assets." The inventory balance using the LIFO method represents inventory with
a much older and lower value.

40

o 3
Average the cost oI inventory to calculate the ending balance amount to add to the
balance sheet. Using the weighted average cost method, average the inventory
value across all inventory Ior a speciIic period. Debit and credit the inventory
account with the average cost Ior the period, as sales occur and inventory is
produced, and use the ending balance on the balance sheet under "Assets."




















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Calculating your company's net proIit and adjusting the general ledger Ior the closing inventory
are necessary steps in the accounting cycle to prevent internal accounting errors that could carry
into the next Iiscal year. When closing your accounting books, check the Iinal book numbers
against the actual inventory and cash on hand at your company. II the balances are not equal,
trace any errors back to the balance sheet or re-examine your invoices.
Instructions
1.Net !rofit
o 1
Add all oI your revenue Ior the Iiscal period by examining your receipts and
invoices. Revenue is the total amount you receive Ior selling products or services.
For example, iI you sell computers Ior $300 each, and you sold 100 computers Ior
the year, $30,000 is your total revenue.
o 2
Calculate your cost oI goods sold Ior the Iiscal period. The cost oI goods sold is
the amount you spend to produce or buy each inventory item. For example, iI you
sell 100 T-shirts that cost $5 a piece at wholesale, your cost oI goods sold is $500.
o 3
Total all oI your company's operating expenses. Operating expenses include every
expense you incur to conduct business. For example, employee wages, the rent Ior
your building and your energy bill are operating expenses.
o 4
Subtract your cost oI goods sold and total operating expenses Irom your
company's total revenue Ior the Iiscal period. The result is your proIit beIore
taxes. our company's net proIit is calculated aIter subtracting taxes, which vary
42

each Iiscal year. II you are a sole proprietor, multiply your income beIore taxes by
0.35 and subtract that amount Irom the income beIore taxes. This is a rough
estimate oI your net proIit.
2.losing Inventory
o 1
Create a "Trial Balance" t-chart Ior your inventory account and write your starting
inventory amount in the "Debits" column. The "Trial Balance" t-chart is generally
written in a general accounting ledger.
o 2
Add all oI the inventory invoices and receipts Ior your company Ior the Iiscal
year. Create an "Adjustments" t-chart and add this amount to the "Debits" side oI
the chart. Write the amount Irom the "Debit" side oI the inventory trial balance t-
chart into the "Credit" side oI the "Adjustments" t-chart.
o 3
Create an "Adjusted Trial Balance" t-chart and enter the "Debit" amount Irom the
"Adjustments" t-chart into the "Debit" side oI the "Adjusted Trial Balance" t-
chart. This entry shows the positive inventory that Ilowed into your business.
o 4
Enter the "Debit" amount Irom your "Adjusted Trial Balance" t-chart into the
"Debit" column oI the "Balance Sheet" t-chart Ior your inventory account.
o 3
Write the beginning inventory amount Ior your company in the "Debit" column oI
your "Income Summary" section in the general journal. In the "Ending Inventory"
row oI your "Income Summary" section, enter the amount Irom the "Debit"
column oI your inventory balance sheet into the "Credit" column. This entry
accounts Ior the money spent on acquiring additional inventory.






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Companies must record oIIice salaries in the period when employees earn the salary. This does
not necessarily correspond with when a company actually pays oIIice salaries to employees. For
instance, a company that closes its books on Dec. 31 must record an adjustment in the general
journal to recognize six days oI oIIice salary expense, even though the company`s next pay day
is not until Jan. 7. When oIIice salaries accrue, it increases the company`s liabilities because it
creates an obligation to pay salaries to employees.
Step 1
Calculate the amount oI unpaid oIIice salaries. Multiply the amount oI daily oIIice salary
expense by the number oI days. Let`s assume a company pays $2,500 per day in oIIice salaries
and the company must recognize unpaid oIIice salary Ior Iive days. In this instance, the company
has a total unpaid oIIice salary expense oI $12,500.
Step 2
Record the date oI the transaction in the general journal. Enter the exact day and month oI the
entry.
Step
Debit oIIice salaries expense Ior the applicable amount. For instance, iI a company has unpaid
oIIice salaries oI $12,500, the company must debit oIIice salaries expense Ior $12,500. Debiting
oIIice salaries expense increases the amount in the company`s salaries expense account.
Step 4
Write a credit Ior oIIice salaries payable Ior the applicable amount. The credit to oIIice salaries
payable must equal the debit to oIIice salaries expense because credits must always equal debits.
For example, a company that debits oIIice salaries expense Ior $12,500 must credit oIIice
salaries payable Ior $12,500. This entry increases a company`s oIIice salaries obligation because
liabilities increase when a liability account is credited.

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An inventory balance remains unchanged in a periodic inventory system. The accounting Ior
inventory purchases is through a separate purchases account. There is no inventory adjustment
Ior sales transactions in a periodic system. At year-end, a company does a physical inventory
count, which requires adjusting journal entries to the inventory account in the current assets
section oI its balance sheet. The journal contains a chronological record oI a company's
transactions.
Step 1
Credit the purchases account by the amount oI purchases during a period. The balance in the
purchases account aIter this journal entry is zero.
Step 2
Debit or credit the inventory account to reIlect the physical inventory count. II the physical count
is higher than the beginning balance, debit the inventory account by the diIIerence between the
ending and beginning balances. II the physical count is less than the starting balance, credit the
inventory account.
Step
Debit the cost oI goods sold, which is equal to the beginning inventory plus purchases minus the
ending inventory. For example, iI the beginning inventory is $100, purchases during a period are
$500, and the physical inventory count at the end oI a period is $200. Then credit purchases by
$500 to zero-out the account debit inventory by $100 ($200 - $100) and debit cost oI goods sold
by $00 ($100 $500 - $200).
Tips & arnings
O Companies usually do a physical count only once a year because it is a time-consuming
and expensive process. However, they may need to know the ending inventory at the end
oI a month or a quarter to prepare Iinancial statements or to Iile an insurance claim Ior
inventory damages because oI Iire or some other catastrophe.
O In the perpetual inventory system, the inventory account reIlects the purchases and sales
as they occur. ThereIore, there is no need Ior adjusting entries at year-end.
43

O Debits increase asset and expense accounts and decrease revenue, liability and
shareholders' equity accounts. Credits decrease asset and expense accounts and increase
revenue, liability and shareholders' equity accounts.

















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Adjusting an entry to correct a physical count oI inventory is a common activity because the
inventory account does usually not agree with the physical inventory. Retail stores take physical
inventory oI all oI the goods they have Ior sale at least once a year, according to AccountMate.
Physical counts are completed to make sure the merchandise is equivalent to the amount that was
ordered Irom the wholesalers or manuIacturers and the store is making a proIit. Lost inventory is
called inventory shrinkage, which can happen when items are, Ior example, stolen, spoiled or
damaged, or when computer systems do not count the items correctly.
Step 1
Adjusting an entry to correct a physical count oI inventory depends upon the method a retailer
uses to keep track oI its inventory. Retailers that use a periodic method, meaning they adjust the
inventory account based upon the balance at the end oI the year beIore, use the physical
inventory to determine how much is being sold, according to the website Middle City. On the
income statement physical inventory is entered by item in one column with the description oI the
item or SKU (stock-keeping unit code) in another column. Put the estimated quantity Irom the
prior year in the current quantity column and the physical amount in the new quantity column.
Calculate the diIIerence in the quantity diIIerence column.
Step 2
Accounting Ior a correct physical count oI inventory using a perpetual system records purchases
and when a sale is made through barcodes, which are automatically calculated into a computer.
Due to the Irequency at which the sales are updated, the physical inventory and estimated
inventory should be much closer in number using this system compared to the periodic method,
according to Middle City. 'alues between the diIIerence oI physical inventory and estimated
inventory will usually never be the same. On the balance sheet the inventory balance must be
adjusted to agree with both the year-end physical count and merchandise value.
Step
Put the estimated quantity Irom inventory in the current quantity column and the physical
amount in the new quantity column. Calculate the diIIerence between the columns. Add the cost
oI the quantity oI missing items. Subtract that number Irom the value oI the estimated inventory
and you will get an adjustment Ior the inventory equal to the physical inventory value.
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Sales tax is required by law in most U.S. states. As oI 2011, only Iive states do not impose sales
taxes. Issue sales tax payments quarterly, posting your sales tax liability to the Sales Tax Payable
balance sheet account. The concept behind the adjustments is to record sales tax income as a
payable amount and a reduction in cash, and prevent it Irom posting as revenue.
Step 1
Create an entry to recognize the total amount oI the sale including the cost oI the item and the
tax. Post the total amount oI the sale as a debit to the "Cash" account iI you receive payment up
Iront, or as a debit to "Accounts Receivable" iI it is purchased on account.
Step 2
Post the cost oI the item as a credit to the "Revenue" account and the sales tax amount as a credit
to the "Sales Tax Payable" account.
Step
Create an adjusting entry when you Iile your sales tax return with the balance due payment. Post
a credit to the "Sales Tax Payable" account in the amount oI the balance due. Post a debit to the
"Cash" account to reIlect the payment issued. 'eriIy that the "Sales Tax Payable" account has a
zero balance when the entry posts.





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ou make adjusting entries in your accounting records at the end oI an accounting period to
account Ior revenues and expenses that you have earned or incurred but not yet recorded.
Adjusting entries bring your records current so that you can prepare your Iinancial statements
and calculate your net income or net loss Ior the period. our net income or net loss equals your
total revenues minus your total expenses Ior an accounting period. II your revenues are greater
than expenses, you have net income. II revenues are less than expenses, you have a net loss.
Step 1
IdentiIy each account in your general ledger that has a debit balance, such as assets, expenses
and dividends, aIter you have made adjusting entries to your records. IdentiIy each account that
has a credit balance, such as equity accounts, liabilities and revenues.
Step 2
Write each debit balance in the leIt column oI your adjusted trial balance, which is a listing oI
your accounts used to prepare Iinancial statements. Write each credit balance in the right column
oI your adjusted trial balance.
Step
Calculate the sum oI the amounts in the debit column and the sum oI the amounts in the credit
column. 'eriIy that the sum oI the debit column equals the sum oI the credit column to ensure
that the debits and credits in your records balance. II they are unequal, check your general ledger
accounts Ior errors.
Step 4
Sum the revenue account balances in the credit column oI your adjusted trial balance to
determine total revenue Ior the period. For example, iI your product revenue account balance is
$10,000 and your service revenue account balance is $5,000, add $10,000 and $5,000 to get
$15,000 in total revenue.
Step 5
4

Sum the expense account balances in the debit column oI your adjusted trial balance to
determine total expenses during the period. In this example, iI you have $,000 in salaries
expense, $1,000 in administrative expense, $2,000 in utilities expense and $3,000 in advertising
expense, add these amounts to get $10,000 in total expenses.
Step 6
Subtract total expenses Irom total revenue to determine your net income or net loss. II your result
is positive, you have net income. II it is negative, you have a net loss. In this example, subtract
$10,000 in total expenses Irom $15,000 in total revenue to get $5,000 in net income.


















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The payroll liabilities account in your general ledger is a holding place Ior payments due in the
near Iuture but not yet issued. One example oI these expenses is your payroll taxes. II you Iile
payroll taxes monthly or quarterly, you need to post the amounts to your liability account,
accounting Ior the expenses properly. Understanding how to adjust the payroll liability account is
essential to accurate ledger reports.
Increase Liabilities
Step 1
Select the option to post a general journal entry Irom the "Company" menu. Input the current
date and assign a number to the entry.
Step 2
Debit the payroll liability account Ior the amount oI the adjustment.
Step
Credit the payroll expense account that you are adjusting. II you are adjusting the taxes payable,
credit that ledger account.
Step 4
Process the entry. File the documentation that supports the entry Ior audit purposes.
Reduce Liabilities
Step 1
Create a general journal entry Irom the Company menu. Enter the current date and assign a
journal entry number.
Step 2
31

Credit the payroll liability account Ior the amount oI the reduction. This entry is typically
processed when your liability payments are processed.
Step
Debit the cash account Ior the equal amount. II you credit the liability account Ior $5,000, debit
your cash account Ior $5,000.
Step 4
Post the entry. File the paperwork that supports the adjustment Ior audit purposes.

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In the accounting process, there may be economic events that do not immediately trigger the
recording oI the transaction. These are addressed via adjusting entries, which serve to match
expenses to revenues in the accounting period in which they occur. There are two general classes
oI adjustments:
O Accruals - revenues or expenses that have accrued but have not yet been recorded. An
example oI an accrual is interest revenue that has been earned in one period even though
the actual cash payment will not be received until early in the next period. An adjusting
entry is made to recognize the revenue in the period in which it was earned.
O Deferrals - revenues or expenses that have been recorded but need to be deIerred to a
later date. An example oI a deIerral is an insurance premium that was paid at the end oI
one accounting period Ior insurance coverage in the next period. A deIerred entry is made
to show the insurance expense in the period in which the insurance coverage is in eIIect.

How to Make Adjusting Entries
Like regular transactions, adjusting entries are recorded as journal entries. The Iollowing
illustrates adjustments Ior accrued and deIerred items.

Accrued Items
As an example oI an accrued item, consider the accrual oI interest revenue. The journal entry
would be similar to the Iollowing:

Adjusting Entry for Interest Accrual
Date Accounts Debit redit
mm/dd Interest Receivable xxxx.xx
3

Interest Revenue xxxx.xx

The date oI the above entry would be at the end oI the period in which the interest was earned.
The adjusting entry is needed because the interest was accrued during that period but is not
payable until sometime in the next period. The adjusting entry is posted to the general ledger in
the same manner as other journal entries.
In the next period when the cash is actually received, one makes the Iollowing journal entry:

1ournal Entry for Interest Received
Date Accounts Debit redit
mm/dd Cash xxxx.xx
Interest Receivable xxxx.xx


DeIerred Items
For deIerrals, a journal entry already has been made in asset or liability accounts and an
adjusting entry is needed to move the balances to expense or revenue accounts in the next
accounting period. Consider the case in which the Iirm prepays insurance premiums in one
period Ior insurance coverage in the next period. The journal entry made at the time oI payment
would be similar to the Iollowing:

1ournal Entry for !repaid Insurance
Date Accounts Debit redit
mm/dd Prepaid Insurance xxxx.xx
Cash xxxx.xx

3

In the next period when the insurance coverage is in eIIect, one makes the Iollowing adjusting
entry:

Adjusting Entry for !repaid Insurance
Date Accounts Debit redit
mm/dd Insurance Expense xxxx.xx
Prepaid Insurance xxxx.xx

For a single deIerred item, there may be several adjusting entries over subsequent accounting
periods as the expense or revenue Ior the item is recognized over time.













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Most adjusting entries could be classiIied this way:

!repayments (DeIerral - cash paid or
received beIore consumption)
Accrual - cash paid or received aIter
consumption
Expenses
Prepaid expenses: Ior expenses paid in
cash and recorded as assets beIore they
are used
Accrued expenses: Ior expenses incurred
but not yet paid in cash or recorded
Revenues
Unearned revenue: Ior revenues received
in cash and recorded as liabilities beIore
they are earned
Accrued revenues: Ior revenues earned but
not yet recorded or received in cash
!repayments
Adjusting entries Ior prepayments are necessary to account Ior cash that has been received prior
to delivery oI goods or completion oI services. When this cash is paid, it is Iirst recorded in a
prepaid expense asset account; the account is to be expensed either with the passage oI time (e.g.
rent, insurance) or through use and consumption (e.g. supplies).
A company receiving the cash Ior beneIits yet to be delivered will have to record the amount in
an unearned revenue liability account. Then, an adjusting entry to recognize the revenue is used
as necessary.

Example
Assume a magazine publishing company charges an annual subscription Iee oI 12. The cash is
paid up-Iront at the start oI the subscription. The income, based on sales basis method, is
recognized upon delivery. ThereIore the initial reporting oI the receipt oI annual subscription Iee
is indicated as:
Debit , Credit
----------------
Cash 12 ,
Unearned Revenue , 12
,
The adjusting entry reporting each month aIter the delivery is:
60

Debit , Credit
----------------
Unearned Revenue 1 ,
Revenue , 1
,
The unearned revenue aIter the Iirst month is thereIore 11 and revenue reported in the income
statement is 1.
Accruals
Accrued revenues are revenues that have been recognized (that is, services have been perIormed
or goods have been delivered), but their cash payment have not yet been recorded or received.
When the revenue is recognized, it is recorded as a receivable.
Accrued expenses have not yet been paid Ior, so they are recorded in a payable account.
Expenses Ior interest, taxes, rent, and salaries are commonly accrued Ior reporting purposes.
Estimates
A third classiIication oI adjusting entry occurs where the exact amount oI an expense cannot
easily be determined. The depreciation oI Iixed assets, Ior example, is an expense which has to
be estimated.
The entry Ior bad debt expense can also be classiIied as an estimate.
Inventory
In a periodic inventory system, an adjusting entry is used to determine the cost oI goods sold
expense. This entry is not necessary Ior a company using perpetual inventory.








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End oI Period Adjusting Entries
BeIore end-oI-period Iinancial reports are prepared, adjustments to prepaid and accrued
accounts are made. This process helps provide a true indication oI where the company stands
Iinancially and it matches income and expenses to the period they eIIect. There are several types
oI accounts that require adjustments:
O !repaid Expenses - items or services that are paid Ior up-Iront. They are classiIied as
assets when purchased.
O Unearned Revenues - revenues received beIore they are earned. They are classiIied as
liabilities when cash is received.
O Accrued Revenues - revenues that have been earned but cash has not yet been received
and no transaction has been recorded.
O Accrued Expenses - expenses that have been incurred but not paid Ior yet and no
transaction has been recorded.
Each oI these adjustment types is described below along with examples and sample journal
entries.
!repaid Expenses
When an expense is prepaid (Ior example - prepayment oI a 6-month insurance policy Ior
$1,200) an asset is created. Think oI it this way; the company is due something oI value - the
insurance coverage Ior a 6-month period in the Iuture. To simply expense the $1,200 at the time
cash is spent would inaccurately allocate the Iull amount to that period. Instead, accountants
create a Prepaid Insurance account and subtract Irom it, each month, the amount that should be
allocated to it ($1,200 6 $200). The Iirst example entry below journalizes the prepayment oI
the 6-month policy; the second is the adjusting entry Ior the end oI the Iirst month.
General 1ournal !age: 1
Date Account Titles/Explanation Ref Debit redit
20XX
Jan
1 Prepaid insurance
Cash
Paid insurance in advance
1200.00
1200.00
31 Insurance expense
Prepaid insurance
1o record insurance expense.
200.00


200.00
AIter posting these transactions, the Prepaid Insurance account will have a balance oI $1,000. At
the end oI each oI the next 5 months an adjustment similar to the one above would be made.
62

AIter the June 30th entry, the Prepaid Insurance account would have a zero balance and
Insurance Expense would have a $1,200 balance.
Unearned Revenues
When revenue is received in advance (Ior example, receipt oI a 6-month cleaning service Iee oI
$600 up-Iront) a liability is created -- the company owes something oI value (cleaning services)
to another. II the $600 were posted directly to revenue on the date it was received, it would
incorrectly allocate the entire revenue to one month rather than spread it over 6 months, when it
is actually earned. The example entries below record receipt oI the Iee (which creates the
liability) and the adjustment at the end oI the Iirst month to record the revenue earned during
January ($600 6 $100).
General 1ournal !age: 1
Date Account Titles/Explanation Ref Debit redit
20XX
Jan
1 Cash
Unearned revenue
#eceived revenue in advance
600.00
600.00
31 Unearned revenue
Service revenue
1o record revenue for services completed
100.00


100.00
At the end oI each oI the next 5 months, an adjustment similar to the one above would be made.
AIter the June 30th entry, the revenue collected in advance would be correctly allocated to each
oI the months it was earned.
Accrued Revenues
When revenue has been earned but cash has not yet been received, accountants make an accrual
adjusting entry. II an advertising company charges $1,500 Ior a month's services payable at the
end oI 30 days and begins working in the middle oI the month (i.e. Jan. 15 - Feb. 15), an entry
must be made at the end oI January to record the revenue earned during the period ($1,500 2
$750) as Iollows:
General 1ournal !age: 1
Date Account Titles/Explanation Ref Debit redit
20XX
Jan
31 Accounts receivable
Service revenue
Paid insurance in advance
750.00
750.00
In February, when the customer makes payment oI $1,500, Cash is debited $1,500, Accounts
Receivable is credited $750 and Service Revenue is credited $750.
Accrued Expenses
63

Expenses are oIten incurred in one month or period and paid Ior in another. Examples include
interest, rent, and salaries. Consider an employee who is paid $2,00 on February 5th Ior the
work he/she completed in January. In order to reIlect the expense in the correct month, an
adjustment must be made at the end January.
General 1ournal !age: 1
Date Account Titles/Explanation Ref Debit redit
20XX
Jan
31 Salary expense
Salary payable
1o accrue salary expense
200.00
200.00
On February 5th, when the employee is paid, Salary Payable is debited $2,00 and Cash is
credited $2,00.






















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Basics of 1ournal Entries

at is an adjusting journal entry?

Adjusting journal entry is a journal entry prepared to adjust account balances.
The only way oI changing account balances is to make journal entries.
Account balances cannot be changed without journal entries.
II current account balances do not represent correct amounts, journal entries are needed to change current
balances to the correct balances.
--~ Journal entries prepared with this purpose are adjusting journal entries.

y do companies need adjusting journal entries?

Current account balances may not represent correct balances due to Iollowing reasons:
a. Company made mistakes in preparing journal entries in the past.
b. Accounting records are not updated to reIlect new transactions or amount changes in previous transactions.

Adjusting journal entries are usually prepared at the end oI an accounting period to update account balances to
reIlect correct balances as oI the balance sheet date (the date at the end oI an accounting period).
The timing diIIerences in recognizing revenues and expenses between accrual basis and cash basis accounting
are Irequently corrected by adjusting journal entries.

Tree steps of preparing adjusting journal entries

Step 1: IdentiIy the original journal entries that have been made during the period.
Step 2: IdentiIy the correct account balances.
Step 3: Analyze the diIIerences between correct and current balances and prepare journal entries to adjust such
diIIerences.

63

Example 1

Company A sold its products at the price oI $1,000 Ior cash. However, this transaction was recorded as $100
sales. What is the adjusting journal entry to correct this mistake?
Step 1 IdentiIy the original journal entries that have been made during the
period.
Debit Credit
Cash 100
Sales 100
Step 2 IdentiIy the correct account balances.
Cash 1,000 (Debit Balance)
Sales 1,000 (Credit Balance)
Step 3 Analyze the diIIerences between correct and current balances and prepare
journal entries to adjust such diIIerences.
Accounts Correct Current Correct - Current
Cash 1,000 100 900
Sales 1,000 100 900

To adjust these diIIerences, Iollowing adjusting journal entry is needed.
Debit Credit
Cash 900
Sales 900

66

Example 2

On December 1, 2009 Company A signed an insurance contract and paid $3,000 cash as insurance premium Ior
three months. Company recorded $3,000 as prepaid insurance on December 1, 2009. Prepare adjusting journal
entries at December 31, 2009.


Step 1 IdentiIy the original journal entries that have been made during the
period.
Debit Credit
Prepaid insurance 3,000
Cash 3,000
Step 2 IdentiIy the correct account balances.
On December 31, 2009, $1,000 insurance premium should be recognized as an expense Ior December.
Insurance expense 1,000 (Debit Balance)
Prepaid insurance 2,000 (Debit Balance)
Insurance expense Ior 2009 $3,000 x 1/3 $1,000
Step 3 Analyze the diIIerences between correct and current balances and prepare
journal entries to adjust such diIIerences.
Accounts Correct Current Correct - Current
Insurance expense 1,000 0 1,000
Prepaid insurance 2,000 3,000 (1,000)

To adjust these diIIerences, Iollowing adjusting journal entry is needed.
6

Debit Credit
Insurance expense 1,000
Prepaid insurance 1,000

Credit side oI prepaid insurance (an asset account) represents a decrease.




































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1he question is asking that one quarter of the unearned revenue was still unearned. I know
the entry for that, the journal entry but I was wondering how I would calculate the amount.
On the 1rial Balance it says unearned revenue of 2,28. So if it's one quarter unearned, would
it be
57? 228 x 1/4 ?

Answers:

A. That's the correct dollar amount - just make sure you understand what that dollar amount
represents. It states that is how much is still unearned. That means that is the amount that will
be earned in the Iuture and should remain in the unearned revenue account. The adjusting entry
itselI would be Ior the diIIerence, the amount that has now been earned.

B. Thank you. eah I was just curious about the answer. I had Iew other questions as well.
Actually someone gave me a textbook Ior accounting and I'm going to start school in September
and I was having hard time with a Iew questions. I was wondering iI you can help me out with
the Iollowing so then I would be able to know how to do the rest. Thank you.

1) how would you record the Iollowing adjusting entries?

A. During the next Iiscal year, $5,00 oI the mortgage payable is to be paid
- on the trial balance it says mortgage payable with 105,00 (credit side)

2) In this question, it is asking me to do an analysis oI each error that shows (1) the incorrect
entry, (2) the correct entry, and (3) the correcting entry. HI was wodnering iI you can help me
with one, since there are 10 oI them listed here. One would be:

... The Iirst salary payment made in March was Ior $2,000, which included $75 oI salaries
payable on February 28. The payment was recorded as a debit to Salaries Expense oI $2,000 and
a credit to cash oI $2,000. ( No reversing entries were made on March 1)







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Adjusting entries are made so that the Iinancial statements reIlect the accrual basis oI accounting.
(The accrual basis oI accounting requires that revenues be reported on the income statement
when they are earned, and expenses are reported on the income statement when they best match
the revenues or expire. When the cash is received or paid is not relevant Ior reporting revenues
and expenses.) Adjusting entries are oIten classiIied as accruals, deIerrals, and other.

n accrual adfusting entry can involve revenues or expenses. A service company that has earned
Iees, but has not yet recorded the transaction, will accrue revenue. This is done by entering an
accrual adjusting entry such as a debit to the asset Accounts Receivable and a credit to Service
Revenues. An adjusting entry to accrue expense is needed when a company has received a
service or goods Irom a vendor, but the expense and the liability are not yet recorded. Gas,
electricity, water, telephone, wages, interest, and repairs are examples oI expenses that will likely
need an accrual adjusting entry. The accrual adjusting entry Ior these items will include a debit to
an expense and a credit to a liability account.

A deferral type adfusting entry for revenues is necessary when a company has received money
Irom a customer beIore it has been earned. The money received will be recorded in the Cash
account at the time it is received, but the amount that has not yet been earned must be reported as
a liability such as Unearned Fees, Unearned Revenues, or Customer Deposits. As the unearned
amount is earned, an adjusting entry will debit the liability account and will credit a revenue
account such as Service Revenues.

A deferral type adfusting entry for expenses is necessary iI a payment overlaps accounting
periods. For example, iI a company prepays a six-month insurance premium and the company
issues monthly Iinancial statements, then a deIerral adjusting entry will be necessary. The
purpose oI a deIerral type adjusting entry Ior this situation is (1) to report Insurance Expense Ior
the insurance cost that has expired during the accounting period, and (2) to report the amount oI
insurance cost that has not yet expired and will be reported on the balance sheet as the asset
Prepaid Insurance.

Examples oI other adfusting entries include depreciation and the allowance Ior doubtIul
accounts. The adjusting entry Ior depreciation is a debit to Depreciation Expense and a credit to
Accumulated Depreciation. The adjusting entry Ior doubtIul accounts will usually be a debit to
Bad Debts Expense and a credit to Allowance Ior DoubtIul Accounts.

ou might have noticed that each oI the adjusting entries involved one balance sheet account and
one income statement account.
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urnalEntries/popupjournaladjentry.html


Adjusted journal entries are entered by accountants to make aIter-the-Iact changes to speciIic
accounts. Accountants make adjustments Ior a variety oI reasons, including booking depreciation
or amortization, reallocating accruals and reversing accruals oI prepaid income or expenses;
adjusting Sales Tax Payable Ior interest, penalties, or discounts; and entering bank or credit card
Iees or interest.
The Adjusting Entry checkbox indicates whether an entry is an adjustment. ou can view a
summary oI the adjusted entries (by account) in the Adjusted Trial Balance report. Or, you can
view a list oI all adjusting journal entries in the Adjusting Journal Entries report.
By deIault, this checkbox is selected Ior new transactions.
By deIault, this checkbox is not selected Ior new transactions.
Note: All general journal entries written by QuickBooks Fixed Asset Manager (QBFAM) will
have the Adjusting Entry checkbox marked by deIault.
Note: Existing transactions Irom updated company Iiles will not have the Adjusting Entries
checkbox selected by deIault. Similarly, transactions made in QuickBooks Pro and Premier will
not have this checkbox selected by deIault, unless the transaction was already marked as an
adjusted entry in Premier Accountant Edition or higher.









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Absolutely. The adjusting entry amounts must be included on the income statement in order to
report all revenues earned and all expenses incurred during the accounting period indicated on
the income statement. The adjusting entry amounts must also be included in the amounts
reported on the balance sheet as oI the end oI the accounting period.
In the Iollowing accounting period, the accrual-type adjusting entries will usually be reversed.
They are reversed or removed because the actual invoices or other documents containing the
accrued revenues or expenses will be arriving and will be entered into the accounting records by
the bookkeeper or the accounts payable clerk.




























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http://bizIinance.about.com/od/bookkeepingessentials/a/AdjustingEntries.htm


Adjusting entries are made in your accounting journals at the end oI an accounting period.
Adjusting entries are made aIter a trial balance is prepared. The purpose oI adjusting entries is to
adjust revenues and expenses to the accounting period in which they actually occurred. AIter
adjusting entries are made in the accounting journals, they are posted to the general ledger in the
same way as any other accounting journal entry.
When you record your accounting journal transactions during a month, Ior example, they are
recorded in real time. II you are using an accrual accounting system, that means that the money
did not necessarily change hands at that time. The purpose oI adjusting entries is to show when
the money actually changed hands and to convert your real time entries
to entries that reIlect your accrual accounting system.
Types of Adjusting Entries
There are Iive types oI adjusting entries:
1. Accrued revenues
2. Accrued expenses
3. Unearned revenues
. Prepaid Expenses
5. Depreciation
Accrued Revenues
II you perIorm a service Ior a customer in one month, but don't bill the customer until the next
month, you would make an adjusting entry showing the revenue in the month you perIormed the
service. ou would debit accounts receivable and credit service revenue.
Accrued Expenses
A good example oI accrued expenses is wages paid to employees. When a business Iirm owes
wages to employees at the end oI an accounting period, they make an adjusting entry by debiting
(increasing) wages expense and crediting (decreasing) wages payable.
Unearned Revenues
3

Unearned revenues reIer to payments Ior goods to be delivered in the Iuture or services to be
perIormed. II you place an order Ior an item Irom a company on the Internet in February and that
item does not arrive (and you don't pay Ior it) until March, the company Irom which you placed
the order would record the cost oI that item as unearned revenue. During the month which you
made the purchase, the company would make an adjusting entry debiting unearned revenue and
crediting revenue.
!repaid Expenses
Prepaid expenses is a very descriptive title. Prepaid expenses are assets that are paid Ior and
gradually get used up during the accounting period. A common example oI prepaid expenses is
oIIice supplies. A company buys and pays Ior oIIice supplies. Gradually, during the accounting
period, the oIIice supplies are used up. As they are used up, they become an expense. During the
month when the oIIice supplies are used, an adjusting entry is
made to debit oIIice supply expense and credit prepaid oIIice supplies.
Depreciation
Depreciation is the process oI allocating the cost oI an asset, such as a building or a piece oI
equipment, over the serviceable or economic liIe oI the asset. Adjusting entries are a little
diIIerent Ior depreciation. Business owners have to take accumulated depreciation into account.
Accumulated depreciation is just what it says -
the accumulated depreciation oI a company's assets over the liIe oI the company.
The accumulated depreciation account on the balance sheet is called a contra-asset account and it
is used to record depreciation expense. Increases are recorded as credits in contra-asset accounts.
When an asset is purchased, it depreciates by some amount every month. For that month, an
adjusting entry is made to debit depreciation expense - equipment and credit accumulated
depreciation by the same amount.
!repare te Adjusted Trial Balance
AIter you make your adjusted entries, you post your adjusted entries to your general ledger
accounts. Prepare the adjusted trial balance. The process is just like preparing the trial balance
except the adjusted entries are used. ou correct any errors that you Iound.




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Sometimes transactions take place in one period but impact another. Other times, you know a
transaction will be Iinalized in the Iuture, but at least some part oI it has ties to the current
period. These two situations are the main reason Ior adjusting entries, which are entries that
account Ior transactions that occur in one period but aIIect another. ou have to record these out-
oI-time entries as you get ready to close one accounting cycle to make sure they have been
included in the right period.
The two main types oI adjusting entries are deIerrals and accruals. These are mostly used in
accrual basis accounting systems, but some entries can apply to people who use the
cash basis as well; depreciation is the most common example. Accrual entries are used to record
transactions that haven't actually happened yet, at least on the money side (these will be
explained in more detail in the next section). DeIerral entries are pretty much the opposite: they
record expenses that you paid in advance but haven't incurred until now, or revenues that you've
been paid Ior already but haven't yet earned.
DeIerral entries are sort oI like postponed transactions; the money part has already happened, but
the income statement impact was put oII until later. Remember those two balance sheet accounts,
prepaid expenses and unearned revenues? Here is where these two accounts make a
transIormation Irom balance sheet to income statement. Prepaid expenses turn into current
expenses, and unearned revenues turn into current revenues.
Insurance expense is a perIect example oI a prepaid expense. ou probably paid your business
insurance premium in one lump at the beginning oI the year, but that coverage isn't just Ior the
month you sent the check; it's Ior the whole year. When you paid the bill, you made an entry in
the prepaid insurance account. Now you have used up part oI that premium, and you have to
make an adjusting entry to reIlect that. Depreciation is another major Iorm oI expense deIerral,
and it is recorded as part oI the adjusting entries.
The Ilip side oI prepaid expense is unearned revenue, meaning that a customer has paid you Ior
something you didn't do yet. Any time a customer gives you a down payment, a deposit, an
advance, or a retainer, they all hit the same unearned revenue account. When you got that
advance money, you recorded a liability on your books; what you owed was goods or services
instead oI money. Now, when you have completed the work or delivered the product, that
revenue has been earned. An adjusting entry is called Ior to show that.

3

Adjusting for Your Deferred Expenses
Two kinds oI asset accounts are involved in the deIerral adjusting entries:prepaid expenses and
Iixed assets. These are assets that are used up over time; these entries show just how much was
used up during this period.
First, the prepaid expense account. In this example, your company paid a $1,200 premium in
January to your insurance company Ior the whole year's worth oI business coverage. That works
out to $100 per month throughout the year ($1,200 divided by 12 months). This is what the
adjusting entry looks like:
Marc 1, 2006
Insurance Expense
To recognize one month oI insurance expense.
$100.00


Prepaid Insurance

$100.00
The adjusting entry Ior depreciation looks somewhat similar, but it has one big diIIerence.
Instead oI posting a credit to the Iixed-asset account, you use that contra account Ior accumulated
depreciation instead. In this example, your company has one Iixed asset that you bought Ior
$6,000 and depreciate over Iive years (sixty months) using the straight-line method. our
monthly depreciation expense would be $100 ($6,000 over sixty months).
This is what that entry looks like:
Marc 1, 2006
Depreciation Expense
To record monthly depreciation.
$100.00


Accumulated Depreciation

$100.00
Deferred Revenue Adjustment
DeIerred revenue is a good kind to have: your company gains the positive cash Ilow Irom the
customer's advance payment but doesn't have to record any taxable revenue at that time.
Adjustments come when you begin earning that money, by delivering goods or services. When
that happens you shiIt all or part oI your liability account to your revenue account.
6

For this example, suppose a client paid you a $3,000 retainer to be used Ior legal Iees. In this
period, you perIormed three hours oI legal work Ior him at your standard rate oI $250 per hour,
or a total oI $750. Here's what the adjusting entry would look like:
Marc 1, 2006
Unearned Revenue
To recognize legal Iees earned in March 2006.
$750.00


Revenue

$750.00
Don't Forget Inventory
At the end the accounting period, you also need to adjust the inventory you have recorded on the
books to match the inventory you actually have. This includes the inventory you have Ior resale
(even iI it isn't in Iinished Iorm yet), but it may also include some other kinds oI inventory. For
example, iI you keep a large amount oI oIIice supplies on hand, you may have chosen to record
that initially as an asset. When that's the case, at the end oI the period you have to make an
adjusting entry Ior the part that you've used up during the period.
As Ior merchandise inventory, you can't prepare an income statement without knowing how
much inventory you have now (that's called your ending inventory). That's why you need to do
the count and adjust the general ledger balance. Even iI you use a perpetual inventory system,
you may still need to adjust inventory to account Ior broken or spoiled items. At the end oI the
period, your inventory balance the number that will show up on your Iinancial statements
should reIlect usable inventory only.
The journal entry here will look just like a prepaid expense entry. For regular inventory, you
would debit cost oI goods sold and credit your inventory asset account. For other kinds oI
inventory, such as oIIice supplies, you would debit supplies expense and credit the oIIice
supplies asset account.






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Entry.htm


Note the Iollowing when creating an adjusting journal entry:
O Adjusting journal entries cannot be posted to calculated map numbers.
O In a locked down Iile, only Iederal tax adjustments can be posted or modiIied.
To create an adjusting journal entry:
1. On the Account menu, select Adjusting 1ournal Entries.
2. Enter a unique journal entry number. Click New Entry to create a new reIerence number
that is an increment Irom the previous one entered. The journal entry number can be
alphanumeric and up to 7 characters long.
3. Enter the date oI the journal entry. The date deIaults to the end oI the current active
period. However, Ior multiple period processing, the date can also be Ior a prior or Iuture
period. II the period date is Ior a prior period then only the year to date and not the
current period Iinancial statement is aIIected. II the period date is Ior a Iuture period, the
current Iinancial statement is not aIIected. When moving to this Iuture period, these
entries are properly recorded.
. Select the type oI journal entry.
5. Select the type oI account the entry is to post to. Only entries marked Financial post to
normal accounting records. All other types can be used to adjust balances or to add
inIormation to the accounts Ior display, reclassiIication or inIormation purposes only.

For example, iI a client Iile had a set oI Iinancial statements that had to be presented
based on both local country GAAP and IAS GAAP rules, diIIering reporting
requirements might mean that inIormation had to be classiIied in two distinct ways.
Entries could be booked to separate groupings and reports could be generated Irom those
groupings - without having to Iormally adjust the trial balance. Calculations update based
on the entries made but the working trial balance itselI is not updated. However, any
calculations using the Map or group calculations do reIlect the adjustments.
Note
O ou can post an adjustment to a map or group, but tax amounts are always posted
directly to the tax account, rather than to a map or group number. When including tax
amounts in any other entry posted to anything other than Iinancial accounts, the Working
Trial Balance will be out oI balance by the tax amount.


1. Enter a description oI the journal entry. The description area is scrollable and can be as
detailed as necessary. In the Iield, text wraps automatically and each line oI the Iield can
be up to 0 characters long. Press TRLENTER to begin a New Line. The complete
description is printed in the adjusting journal document.
2. II applicable, click ustomize to add any additional options to the adjusting journal
entry.
3. Select the account number Irom the chart oI accounts. When working in a consolidated
Iile, only accounts that pertain to the current entity selected display. To create a new
Iinancial account "on the Ily", click New and complete the inIormation Ior the new
account, then click .

When the account number is entered, the account description automatically appears. To
enter an extended description Ior the adjusting entry, click . Map numbers that have
extended descriptions appear as . When an extended description is entered, that
description appears instead oI the account name in all adjusting journal entries automatic
documents except Ior the general ledger document.

Note account properties can also be modiIied Irom this screen as you work by clicking
!roperties.
. Enter an amount. A debit amount should be typed with Iull decimals iI necessary. A
credit amount can be preceded or Iollowed by a - (minus) sign and should be typed with
Iull decimals iI necessary.
Tip:
O Large numbers may not display properly due to their length. To correct the display
problem do one oI the Iollowing:
On the Tools menu, select ptions, then click Documents. Select the Display Whole
Numbers check box; or
On the Tools menu, select Font Settings and change your display Iont to a narrower Iont.
5. To make the entry a recurring or reversing entry, select the correct radio button. To
modiIy the pattern oI recurrence, click Advanced and select the appropriate options.










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Adjusting entries are made in your accounting journals at the end oI an accounting period.
Adjusting entries are made aIter a trial balance is prepared. The purpose oI adjusting entries is to
adjust revenues and expenses to the accounting period in which they actually occurred. AIter
adjusting entries are made in the accounting journals, they are posted to the general ledger in the
same way as any other accounting journal entry.
When you record your accounting journal transactions during a month, Ior example, they are
recorded in real time. II you are using an accrual accounting system, that means that the money
did not necessarily change hands at that time. The purpose oI adjusting entries is to show when
the money actually changed hands and to convert your real time entries to entries that reIlect
your accrual accounting system.
Types of Adjusting Entries
There are Iive types oI adjusting entries:
1. Accrued revenues
2. Accrued expenses
3. Unearned revenues
. Prepaid Expenses
5. Depreciation
Accrued Revenues
II you perIorm a service Ior a customer in one month, but don't bill the customer until the next
month, you would make an adjusting entry showing the revenue in the month you perIormed the
service. ou would debit accounts receivable and credit service revenue.
Accrued Expenses
A good example oI accrued expenses is wages paid to employees. When a business Iirm owes
wages to employees at the end oI an accounting period, they make an adjusting entry by debiting
(increasing) wages expense and crediting (decreasing) wages payable.

0

Unearned Revenues
Unearned revenues reIer to payments Ior goods to be delivered in the Iuture or services to be
perIormed. II you place an order Ior an item Irom a company on the Internet in February and that
item does not arrive (and you don't pay Ior it) until March, the company Irom which you placed
the order would record the cost oI that item as unearned revenue. During the month which you
made the purchase, the company would make an adjusting entry debiting unearned revenue and
crediting revenue.
!repaid Expenses
Prepaid expenses is a very descriptive title. Prepaid expenses are assets that are paid Ior and
gradually get used up during the accounting period. A common example oI prepaid expenses is
oIIice supplies. A company buys and pays Ior oIIice supplies. Gradually, during the accounting
period, the oIIice supplies are used up. As they are used up, they become an expense. During the
month when the oIIice supplies are used, an adjusting entry is made to debit oIIice supply
expense and credit prepaid oIIice supplies.
Depreciation
Depreciation is the process oI allocating the cost oI an asset, such as a building or a piece oI
equipment, over the serviceable or economic liIe oI the asset. Adjusting entries are a little
diIIerent Ior depreciation. Business owners have to take accumulated depreciation into account.
Accumulated depreciation is just what it says - the accumulated depreciation oI a company's
assets over the liIe oI the company.
The accumulated depreciation account on the balance sheet is called a contra-asset account and it
is used to record depreciation expense. Increases are recorded as credits in contra-asset accounts.
When an asset is purchased, it depreciates by some amount every month. For that month, an
adjusting entry is made to debit depreciation expense - equipment and credit accumulated
depreciation by the same amount.
!repare te Adjusted Trial Balance
AIter you make your adjusted entries, you post your adjusted entries to your general ledger
accounts. Prepare the adjusted trial balance. The process is just like preparing the trial balance
except the adjusted entries are used. ou correct any errors that you Iound.





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We illustrate the common adjusting entries with the use oI T-accounts in the Explanation oI the
Topic Adjusting Entries available Ior your reading at no cost on AccountingCoach.com.
Part 1 Introduction to Adjusting Entries
!art 2 Adjusting Entries - Asset Accounts
!art Adjusting Entries - Liability Accounts
!art 4 Accruals & DeIerrals, Avoiding Adjusting Entries

!art 1 Introduction to Adjusting Entries
Adjusting entries are accounting journal entries that convert a company's accounting records to
the accrual basis of accounting. An adjusting journal entry is typically made just prior to
issuing a company's financial statements.
To demonstrate the need Ior an accounting adjusting entry let's assume that a company borrowed
money Irom its bank on December 1, 2010 and that the company's accounting period ends on
December 31. The bank loan speciIies that the Iirst interest payment on the loan will be due on
March 1, 2011. This means that the company's accounting records as oI December 31 do not
contain any payment to the bank Ior the interest the company incurred Irom December 1
through December 31. (OI course the loan is costing the company interest expense every day, but
the actual payment Ior the interest will not occur until March 1.) For the company's December
income statement to accurately report the company's proIitability, it must include all oI the
company's December expensesnot just the expenses that were paid. Similarly, Ior the
company's balance seet on December 31 to be accurate, it must report a liability Ior the
interest owed as oI the balance sheet date. An adjusting entry is needed so that December's
interest expense is included on December's income statement and the interest due as oI
December 31 is included on the December 31 balance sheet. The adjusting entry will debit
Interest Expense and credit Interest !ayable Ior the amount oI interest Irom December 1 to
December 31.
Another situation requiring an adjusting journal entry arises when an amount has already been
recorded in the company's accounting records, but the amount is Ior more than the current
accounting period. To illustrate let's assume that on December 1, 2010 the company paid its
insurance agent $2,00 Ior insurance protection during the period oI December 1, 2010 through
May 31, 2011. The $2,00 transaction was recorded in the accounting records on December 1,
but the amount represents six months oI coverage and expense. By December 31, one month oI
2

the insurance coverage and cost have been used up or expired. Hence the income statement Ior
December should report just one month oI insurance cost oI $00 ($2,00 divided by 6 months)
in the account Insurance Expense. The balance sheet dated December 31 should report the cost
oI Iive months oI the insurance coverage that has not yet been used up. (The cost not used up is
reIerred to as the asset !repaid Insurance. The cost that is used up is reIerred to as the expired
cost Insurance Expense.) This means that the balance sheet dated December 31 should report
Iive months oI insurance cost or $2,000 ($00 per month times 5 months) in the asset account
Prepaid Insurance. Since it is unlikely that the $2,00 transaction on December 1 was recorded
this way, an adjusting entry will be needed at December 31, 2010 to get the income statement
and balance sheet to report this accurately.
The two examples oI adjusting entries have Iocused on expenses, but adjusting entries also
involve revenues. This will be discussed later when we prepare adjusting journal entries.
For now we want to highlight some important points.
There are two scenarios where adjusting journal entries are needed beIore the Iinancial
statements are issued:
Nothing has been entered in the accounting records Ior certain expenses or revenues, but
those expenses and/or revenues did occur and must be included in the current period's
income statement and balance sheet.
Something has already been entered in the accounting records, but the amount needs to
be divided up between two or more accounting periods.
Adjusting entries almost always involve a
balance sheet account (Interest Payable, Prepaid Insurance, Accounts Receivable, etc.)
and an
income statement account (Interest Expense, Insurance Expense, Service Revenues, etc.)
!art 2 Adjusting Entries - Asset Accounts
Adjusting entries assure that both the balance sheet and the income statement are up-to-date on
the accrual basis of accounting. A reasonable way to begin the process is by reviewing the
amount or balance shown in each oI the balance sheet accounts. We will use the Iollowing
preliminary balance sheet, which reports the account balances prior to any adjusting entries:

arce| De||very Serv|ce
Pre/iminory 8o/once 5heetbefore odjustinq entries
December 31 2010
3

Assets

L|ab|||t|es

Cash $ 100

Notes ayab|e $ 3000
Accounts kece|vab|e 4600

Accounts ayab|e 2300
Supp||es 1100

Wages ayab|e 1200
repa|d Insurance 1300

Unearned kevenues 1300
Lqu|pment 23000

1oLal LlablllLles 10000
Accumu|ated Deprec|at|on (300)


Cwners Lqu|ty





Mary Sm|th Cap|ta| 16300

1ota| Assets $26300

1ota| L|ab|||t|es Cwners Lqu|ty $26300

Let's begin with the asset accounts:

Cash 51800
The Cash account has a preliminary balance oI $1,800the amount in the general ledger.
BeIore issuing the balance sheet, one must ask, "Is $1,800 the true amount oI cash? Does it agree
to the amount computed on the bank reconciliation?" The accountant Iound that $1,800 was
indeed the true balance. (II the preliminary balance in Cash does not agree to the bank
reconciliation, entries are usually needed. For example, iI the bank statement included a service
charge and a check printing chargeand they were not yet entered into the company's
accounting recordsthose amounts must be entered into the Cash account. See the major topic
Bank Reconciliation Ior a thorough discussion and illustration oI the likely journal entries.)

Accounts kece|vab|e 54600
To determine iI the balance in this account is accurate the accountant might review the detailed
listing oI customers who have not paid their invoices Ior goods or services. (This is oIten
reIerred to as the amount oI open or unpaid sales invoices and is oIten Iound in the accounts
receivable subsidiary ledger.) When those open invoices are sorted according to the date oI the
sale, the company can tell how old the receivables are. Such a report is reIerred to as an aging of
4

accounts receivable. Let's assume the review indicates that the preliminary balance in Accounts
Receivable oI $,600 is accurate as Iar as the amounts that have been billed and not yet paid.
However, under the accrual basis oI accounting, the balance sheet must report all the amounts
the company has an absolute right to receivenot just the amounts that have been billed on a
sales invoice. Similarly, the income statement should report all revenues that have been
earnednot just the revenues that have been billed. AIter Iurther review, it is learned that
$3,000 oI work has been perIormed (and thereIore has been earned) as oI December 31 but won't
be billed until January 10. Because this $3,000 was earned in December, it must be entered and
reported on the Iinancial statements Ior December. An adjusting entry dated December 31 is
prepared in order to get this inIormation onto the December Iinancial statements.
To assist you in understanding adjusting journal entries, double entry, and debits and credits,
each example oI an adjusting entry will be illustrated with a T-account.
Here is the process we will Iollow:
1. Draw two T-accounts. (Every journal entry involves at least two accounts. One account
to be debited and one account to be credited.)
2. Indicate the account titles on each oI the T-accounts. (Remember that almost always one
oI the accounts is a balance seet account and one will be an income statement
account. In a smaller Iont size we will indicate the type oI account next to the account
title and we will also indicate some tips about debits and credits within the T-accounts.)
3. Enter the preliminary balance in each oI the T-accounts.
. Determine what the ending balance ought to be Ior the balance sheet account.
5. Make an adjustment so that the ending amount in the balance sheet account is correct.
6. Enter the same adjustment amount into the related income statement account.
7. Write the adjusting journal entry.
Let's Iollow that process here:

Accounts kece|vab|e (balance sheeL accounL)
Bebit
lncreoses on osset
CreJit
Becreoses on osset
9rellmlnary alance 4600


ADIUS1ING LN1k 3000


CorrecL alance 600



3

Serv|ce kevenues (lncome sLaLemenL accounL)
Bebit
Becreoses Revenues
CreJit
lncreoses Revenues

60234

9rellmlnary alance

3000

ADIUS1ING LN1k

63234

CorrecL alance

The adjusting entry Ior Accounts Receivable in general journal Iormat is:

Date Account Name Deb|t Cred|t
Dec 31 2010 Accounts kece|vab|e 3000


Serv|ce kevenues

3000
Notice that the ending balance in the asset Accounts Receivable is now $7,600the correct
amount that the company has a right to receive. The income statement account balance has been
increased by the $3,000 adjustment amount, because this $3,000 was also earned in the
accounting period but had not yet been entered into the Service Revenues account. The balance
in Service Revenues will increase during the year as the account is credited whenever a sales
invoice is prepared. The balance in Accounts Receivable also increases iI the sale was on credit
(as opposed to a cash sale). However, Accounts Receivable will decrease whenever a customer
pays some oI the amount owed to the company. ThereIore the balance in Accounts Receivable
might be approximately the amount oI one month's sales, iI the company allows customers to
pay their invoices in 30 days.
At the end oI the accounting year, the ending balances in the balance sheet accounts (assets and
liabilities) will carry Iorward to the next accounting year. The ending balances in the income
statement accounts (revenues and expenses) are closed aIter the year's Iinancial statements are
prepared and these accounts will start the next accounting period with zero balances.

A||owance for Doubtfu| Accounts 50

(lLs common Lo llsL accounLs wlLh $0 balances on balance sheeLs)
6

Although the Allowance Ior DoubtIul Accounts does not appear on the preliminary balance
sheet, experienced accountants realize that it is likely that some oI the accounts receivable might
not be collected. (This could occur because some customers will have unIoreseen hardships,
some customers might be dishonest, etc.) II some oI the $,600 owed to the company will not be
collected, the company's balance sheet should report less than $,600 oI accounts receivable.
However, rather than reducing the balance in Accounts Receivable by means oI a credit amount,
the credit amount will be reported in Allowance Ior DoubtIul Accounts. (The combination oI the
debit balance in Accounts Receivable and the credit balance in Allowance Ior DoubtIul Accounts
is reIerred to as the net realizable value.)

Let's assume that a review oI the accounts receivables indicates that approximately $600 oI the
receivables will not be collectible. This means that the balance in Allowance Ior DoubtIul
Accounts should be reported as a $600 credit balance instead oI the preliminary balance oI $0.
The two accounts involved will be the balance sheet account Allowance Ior DoubtIul Accounts
and the income statement account Bad Debts Expense.

A||owance for Doubtfu| Accounts (balance sheeL accounL)
Bebit
Becreoses o contro osset
CreJit
lncreoses o contro osset

0

9rellmlnary alance

600

ADIUS1ING LN1k

600

CorrecL alance

8ad Debts Lxpense (lncome sLaLemenL accounL)
Bebit
lncreoses on expense
CreJit
Becreoses on expense
9rellmlnary alance 0


ADIUS1ING LN1k 600


CorrecL alance 600






The adjusting journal entry Ior Allowance Ior DoubtIul Accounts is:

Date Account Name Deb|t Cred|t
Dec 31 2010 8ad Debts Lxpense 600


A||owance for Doubtfu| Accounts

600
It is possible Ior one or both oI the accounts to have preliminary balances. However, the balances
are likely to be diIIerent Irom one another. Because Allowance Ior DoubtIul Accounts is a
balance sheet account, its ending balance will carry Iorward to the next accounting year. Because
Bad Debts Expense is an income statement account, its balance will not carry Iorward to the next
year. Bad Debts Expense will start the next accounting year with a zero balance.

Supp||es 51100
The Supplies account has a preliminary balance oI $1,100. However, a count oI the supplies
actually on hand indicates that the true amount oI supplies is $725. This means that the
preliminary balance is too high by $375 ($1,100 minus $725). A credit oI $375 will need to be
entered into the asset account in order to reduce the balance Irom $1,100 to $725. The related
income statement account is Supplies Expense.

Supp||es (balance sheeL accounL)
Bebit
lncreoses on osset
CreJit
Becreoses on osset
9rellmlnary alance 1100



37S

ADIUS1ING LN1k
CorrecL alance 23





Supp||es Lxpense (lncome sLaLemenL accounL)
Bebit
lncreoses on expense
CreJit
Becreoses on expense
9rellmlnary alance 1600


ADIUS1ING LN1k 37S


CorrecL alance 13



The adjusting entry Ior Supplies in general journal Iormat is:

Date Account Name Deb|t Cred|t
Dec 31 2010 Supp||es Lxpense 37S


Supp||es

37S

Notice that the ending balance in the asset Supplies is now $725the correct amount oI supplies
that the company actually has on hand. The income statement account Supplies Expense has
been increased by the $375 adjusting entry. It is assumed that the decrease in the supplies on
hand means that the supplies have been used during the current accounting period. The balance
in Supplies Expense will increase during the year as the account is debited. Supplies Expense
will start the next accounting year with a zero balance. The balance in the asset Supplies at the
end oI the accounting year will carry over to the next accounting year.

repa|d Insurance 51S00
The $1,500 balance in the asset account Prepaid Insurance is the preliminary balance. The
correct balance needs to be determined. The correct amount is the amount that has been paid by
the company Ior insurance coverage that will expire aIter the balance sheet date. II a review oI
the payments Ior insurance shows that $600 oI the insurance payments is Ior insurance that will
expire aIter the balance sheet date, then the balance in Prepaid Insurance should be $600. All
other amounts should be charged to Insurance Expense.




repa|d Insurance (balance sheeL accounL)
Bebit
lncreoses on osset
CreJit
Becreoses on osset
9rellmlnary alance 1300



00

ADIUS1ING LN1k
CorrecL alance 600



Insurance Lxpense (lncome sLaLemenL accounL)
Bebit
lncreose on expense
CreJit
Becreoses on expense
9rellmlnary alance 1000


ADIUS1ING LN1k 00


CorrecL alance 100



The adjusting journal entry Ior Prepaid Insurance is:

Date Account Name Deb|t Cred|t
Dec 31 2010 Insurance Lxpense 00


repa|d Insurance

00

Note that the ending balance in the asset Prepaid Insurance is now $600the correct amount oI
insurance that has been paid in advance. The income statement account Insurance Expense has
been increased by the $900 adjusting entry. It is assumed that the decrease in the amount prepaid
was the amount being used or expiring during the current accounting period. The balance in
0

Insurance Expense starts with a zero balance each year and increases during the year as the
account is debited. The balance at the end oI the accounting year in the asset Prepaid Insurance
will carry over to the next accounting year.



Lqu|pment 52S000
Equipment is a long-term asset that will not last indeIinitely. The cost oI equipment is recorded
in the account Equipment. The $25,000 balance in Equipment is accurate, so no entry is needed
in this account. As an asset account, the debit balance oI $25,000 will carry over to the next
accounting year.

Accumu|ated Deprec|at|on Lqu|pment 57S00
Accumulated Depreciation - Equipment is a contra asset account and its preliminary balance oI
$7,500 is the amount oI depreciation actually entered into the account since the Equipment was
acquired. The correct balance should be the cumulative amount oI depreciation Irom the time
that the equipment was acquired through the date oI the balance sheet. A review indicates that as
oI December 31 the accumulated amount oI depreciation should be $9,000. ThereIore the
account Accumulated Depreciation - Equipment will need to have an ending balance oI $9,000.
This will require an additional $1,500 credit to this account. The income statement account that
is pertinent to this adjusting entry and which will be debited Ior $1,500 is Depreciation Expense -
Equipment.

Accumu|ated Deprec|at|on Lqu|pment (balance sheeL accL)
Bebit
Becreoses o contro osset
CreJit
lncreoses o contro osset

300

9rellmlnary alance

1S00

ADIUS1ING LN1k

000

CorrecL alance


1

Deprec|at|on Lxpense Lqu|pment (lncome sLaLemenL accL)
Bebit
lncreoses on expense
CreJit
Becreoses on expense
9rellmlnary alance 0


ADIUS1ING LN1k 1S00


CorrecL alance 1300



The adjusting entry Ior Accumulated Depreciation in general journal Iormat is:

Date Account Name Deb|t Cred|t
Dec 31 2010 Deprec|at|on Lxpense Lqu|pment 1S00


Accumu|ated Deprec|at|on Lqu|pment

1S00

The ending balance in the contra asset account Accumulated Depreciation - Equipment at the end
oI the accounting year will carry Iorward to the next accounting year. The ending balance in
Depreciation Expense - Equipment will be closed at the end oI the current accounting period and
this account will begin the next accounting year with a balance oI $0.
!art Adjusting Entries - Liability Accounts
Adjusting Entries - Liability Accounts

Notes ayab|e 5S000
Notes Payable is a liability account that reports the amount oI principal owed as oI the balance
sheet date. (Any interest incurred but not yet paid as oI the balance sheet date is reported in a
separate liability account Interest Payable.) The accountant has veriIied that the amount oI
principal actually owed is the same as the amount appearing on the preliminary balance sheet.
ThereIore, no entry is needed Ior this account.
2


Interest ayab|e 50 (lLs common Lo llsL accounLs wlLh $0 balances on balance sheeLs)
Interest Payable is a liability account that reports the amount oI interest the company owes as oI
the balance sheet date. Accountants realize that iI a company has a balance in Notes Payable, the
company should be reporting some amount in Interest Expense and in Interest Payable. The
reason is that each day that the company owes money it is incurring interest expense and an
obligation to pay the interest. Unless the interest is paid up to date, the company will always owe
some interest to the lender.
Let's assume that the company borrowed the $5,000 on December 1 and agrees to make the Iirst
interest payment on March 1. II the loan speciIies an annual interest rate oI 6, the loan will cost
the company interest oI $300 per year or $25 per month. On March 1 the company will be
required to pay $75 oI interest. On the December income statement the company must report one
month oI interest expense oI $25. On the December 31 balance sheet the company must report
that it owes $25 as oI December 31 Ior interest.

Interest ayab|e (balance sheeL accounL)
Bebit
Becreoses o liobility
CreJit
lncreoses o liobility

0

9rellmlnary alance

2S

ADIUS1ING LN1k

23

CorrecL alance

Interest Lxpense (lncome sLaLemenL accounL)
Bebit
lncreoses on expense
CreJit
Becreoses on expense
9rellmlnary alance 0


ADIUS1ING LN1k 2S


CorrecL alance 23



3

The adjusting journal entry Ior Interest Payable is:

Date Account Name Deb|t Cred|t
Dec 31 2010 Interest Lxpense 2S


Interest ayab|e

2S

It is unusual that the amount shown Ior each oI these accounts is the same. In the Iuture months
the amounts will be diIIerent. Interest Expense will be closed automatically at the end oI each
accounting year and will start the next accounting year with a $0 balance.
Accounts ayab|e 52S00 (lL ls common noL Lo llsL accounLs wlLh $0 balances on balance sheeLs)
Accounts Payable is a liability account that reports the amounts owed to suppliers or vendors as
oI the balance sheet date. Amounts are routinely entered into this account aIter a company has
received and veriIied all oI the Iollowing: (1) an invoice Irom the supplier, (2) goods or services
have been received, and (3) compared the amounts to the company's purcase order. A review
oI the details conIirms that this account's balance oI $2,500 is accurate as Iar as invoices received
Irom vendors.
However, under the accrual basis oI accounting the balance sheet must report all the amounts
owed by the companynot just the amounts that have been entered into the accounting system
Irom vendor invoices. Similarly, the income statement must report all expenses that have been
incurrednot merely the expenses that have been entered Irom a vendor's invoice. To illustrate
this, assume that a company had $1,000 oI plumbing repairs done in late December, but the
company has not yet received an invoice Irom the plumber. The company will have to make an
adjusting entry to record the expense and the liability on the December Iinancial statements. The
adjusting entry will involve the Iollowing accounts:

Accounts ayab|e (balance sheeL accounL)
Bebit
Becreoses o liobility
CreJit
lncreoses o liobility

2300

9rellmlnary alance
4


1000

ADIUS1ING LN1k

3300

CorrecL alance

kepa|rs Ma|ntenance Lxpense (lncome sLaLemenL accL)
Bebit
lncreoses on expense
CreJit
Becreoses on expense
9rellmlnary alance 0


ADIUS1ING LN1k 1000


CorrecL alance 0



The adjusting entry Ior Accounts Payable in general journal Iormat is:

Date Account Name Deb|t Cred|t
Dec 31 2010 kepa|rs Ma|ntenance Lxpense 1000


Accounts ayab|e

1000

The balance in the liability account Accounts Payable at the end oI the year will carry Iorward to
the next accounting year. The balance in Repairs & Maintenance Expense at the end oI the
accounting year will be closed and the next accounting year will begin with $0.

Wages ayab|e 51200
Wages Payable is a liability account that reports the amounts owed to employees as oI the
balance sheet date. Amounts are routinely entered into this account when the company's payroll
records are processed. A review oI the details conIirms that this account's balance oI $1,200 is
accurate as Iar as the payrolls that have been processed.

3

However, under the accrual basis oI accounting the balance sheet must report all oI the payroll
amounts owed by the companynot just the amounts that have been processed. Similarly, the
income statement must report all oI the payroll expenses that have been incurrednot merely the
expenses Irom the routine payroll processing. For example, assume that December 30 is a
Sunday and the Iirst day oI the payroll period. The wages earned by the employees on December
30-31 will be included in the payroll processing Ior the week oI December 30 through January 5.
However, the December income statement and the December 31 balance sheet need to include
the wages Ior December 30-31, but not the wages Ior January 1-5. II the wages Ior December 30-
31 amount to $300, the Iollowing adjusting entry is required as oI December 31:

Wages ayab|e (balance sheeL accounL)
Bebit
Becreoses o liobility
CreJit
lncreoses o liobility

1200

9rellmlnary alance

300

ADIUS1ING LN1k

1300

CorrecL alance

Wages Lxpense (lncome sLaLemenL accounL)
Bebit
lncreoses on expense
CreJit
Becreoses on expense
9rellmlnary alance 13120


ADIUS1ING LN1k 300


CorrecL alance 13420



The adjusting journal entry Ior Wages Payable is:

Date Account Name Deb|t Cred|t
6

Dec 31 2010 Wages Lxpense 300


Wages ayab|e

300

The $1,500 balance in Wages Payable is the true amount not yet paid to employees Ior their
work through December 31. The $13,20 oI Wages Expense is the total oI the wages used by the
company through December 31. The Wages Payable amount will be carried Iorward to the next
accounting year. The Wages Expense amount will be zeroed out so that the next accounting year
begins with a $0 balance.

Unearned kevenues 51300
Unearned Revenues is a liability account that reports the amounts received by a company but
have not yet been earned by the company. For example, iI a company required a customer with a
poor credit rating to pay $1,300 beIore beginning any work, the company increases its asset Cash
by $1,300 and it should increase its liability Unearned Revenues by $1,300.

As the company does the work, it will reduce the Unearned Revenues account balance and
increase its Service Revenues account balance by the amount earned (work perIormed). A review
oI the balance in Unearned Revenues reveals that the company did indeed receive $1,300 Irom a
customer earlier in December. However, during the month the company provided the customer
with $800 oI services. ThereIore, at December 31 the amount oI services due to the customer is
$500.
Let's visualize this situation with the Iollowing T-accounts:

Unearned kevenues (balance sheeL accounL)
Bebit
Becreoses o liobility
CreJit
lncreoses o liobility

1300

9rellmlnary alance
ADIUS1ING LN1k 800



300

CorrecL alance



Serv|ce kevenues (lncome sLaLemenL accounL)
Bebit
Becreoses revenues
CreJit
lncreoses revenues

63234

9rellmlnary alance

800

ADIUS1ING LN1k

64034

CorrecL alance

The adjusting entry Ior Unearned Revenues in general journal Iormat is:

Date Account Name Deb|t Cred|t
Dec 31 2010 Unearned kevenues 800


Serv|ce kevenues

800

Since Unearned Revenues is a balance sheet account, its balance at the end oI the accounting
year will carry over to the next accounting year. On the other hand Service Revenues is an
income statement account and its balance will be closed when the current year is over. Revenues
and expenses always start the next accounting year with $0.

art 4 Accrua|s Deferra|s Avo|d|ng Ad[ust|ng Lntr|es
Accruals & Deferrals
Adjusting entries are oIten sorted into two groups: accruals and deferrals.
Accruals
Accruals (or accrual-type adjusting entries) involve both expenses and revenues and are
associated with the Iirst scenario mentioned in the introduction to this topic:


noLhlng has been enLered ln Lhe accounLlng records for cerLaln expenses and/or revenues buL
Lhose expenses and/or revenues dld occur and musL be lncluded ln Lhe currenL perlods lncome
sLaLemenL and balance sheeL
Accrual of Expenses
An accountant might say, "We need to accrue the interest expense on the bank loan." That
statement is made because nothing had been recorded in the accounts Ior interest expense, but
the company did indeed incur interest expense during the accounting period. Further, the
company has a liability or obligation Ior the unpaid interest up to the end oI the accounting
period. What the accountant is saying is that an accrual-type adjusting journal entry needs to be
recorded.

The accountant might also say, "We need to accrue Ior the wages earned by the employees on
Sunday, December 30, and Monday, December 31." This means that an accrual-type adjusting
entry is needed because the company incurred wages expenses on December 30-31 but nothing
will be entered routinely into the accounting records by the end oI the accounting period on
December 31.
A third example is the accrual oI utilities expense. Utilities provide the service (gas, electric,
telephone) and then bill Ior the service they provided based on some type oI metering. As a result
the company will incur the utility expense beIore it receives a bill and beIore the accounting
period ends. Hence, an accrual-type adjusting journal entry must be made in order to properly
report the correct amount oI utilities expenses on the current period's income statement and the
correct amount oI liabilities on the balance sheet.
Accrual of Revenues
Accountants also use the term "accrual" or state that they must "accrue" when discussing
revenues that Iit the Iirst scenario. For example, an accountant might say, "We need to accrue Ior
the interest the company has earned on its certiIicate oI deposit." In that situation the company
probably did not receive any interest nor did the company record any amounts in its accounts,
but the company did indeed earn interest revenue during the accounting period. Further the
company has the right to the interest earned and will need to list that as an asset on its balance
sheet.
Similarly, the accountant might say, "We need to prepare an accrual-type adjusting entry Ior the
revenues we earned by providing services on December 31, even though they will not be billed
until January."
Deferrals
DeIerrals or deIerral-type adjusting entries can pertain to both expenses and revenues and reIer to
the second scenario mentioned in the introduction to this topic:


omeLhlng has already been enLered ln Lhe accounLlng records buL Lhe amounL needs Lo be
dlvlded up beLween Lwo or more accounLlng perlods
Deferral of Expenses
An accountant might say, "We need to deIer some oI the insurance expense." That statement is
made because the company may have paid on December 1 the entire bill Ior the insurance
coverage Ior the six-month period oI December 1 through May 31. However, as oI December 31
only one month oI the insurance is used up. Hence the cost oI the remaining Iive months is
deIerred to the balance sheet account !repaid Insurance until it is moved to Insurance
Expense during the months oI January through May. II the company prepares monthly Iinancial
statements, a deIerral-type adjusting entry may be needed each month in order to move one-sixth
oI the six-month cost Irom the asset account Prepaid Insurance to the income statement account
Insurance Expense.
The accountant might also say, "We need to deIer some oI the cost oI supplies." This deIerral is
necessary because some oI the supplies purchased were not used or consumed during the
accounting period. An adjusting entry will be necessary to deIer to the balance sheet the cost oI
the supplies not used, and to have only the cost oI supplies actually used being reported on the
income statement. The costs oI the supplies not yet used are reported in the balance sheet
account Supplies and the cost oI the supplies used during the accounting period are reported in
the income statement account Supplies Expense.
Deferral of Revenues
DeIerrals also involve revenues. For example iI a company receives $600 on December 1 in
exchange Ior providing a monthly service Irom December 1 through May 31, the accountant
should "deIer" $500 oI the amount to a liability account Unearned Revenues and allow $100 to
be recorded as December service revenues. The $500 in Unearned Revenues will be deIerred
until January through May when it will be moved with a deIerral-type adjusting entry Irom
Unearned Revenues to Service Revenues at a rate oI $100 per month.
Avoiding Adjusting Entries
II you want to minimize the number oI adjusting journal entries, you could arrange Ior each
period's expenses to be paid in the period in which they occur. For example, you could ask your
bank to charge your company's checking account at the end oI each month with the current
month's interest on your company's loan Irom the bank. Under this arrangement December's
interest expense will be paid in December, January's interest expense will be paid in January, etc.
ou simply record the interest payment and avoid the need Ior an adjusting entry. Similarly,
your insurance company might automatically charge your company's checking account each
month Ior the insurance expense that applies to just that one month.
Additional InIormation and Resources
100

Because the material covered here is considered an introduction to this topic, many complexities
have been omitted. ou should always consult with an accounting proIessional Ior assistance
with your own speciIic circumstances.




























101

~. ~.,,~, -~-
. ~.... -,...
http://accountinginIo.com/study/je/aje/index.htm

Adjusting entries are recorded at the end oI an accounting period to adjust ledger accounts Ior
any changes that relate to the current accounting period but have not been recorded yet.
Most oI the transactions which are recorded via adjusting entries are not spontaneous but are
spread over a period oI time. We cannot assign a speciIic date to those entries. A common
characteristic oI all adjusting entries is that they involve at least one revenue or expense account.
Not all entries recorded at the end oI a period are adjusting entries. The main purpose oI
adjusting entries is to match revenues and expenses to the current period which is a requirement
oI the matching principle oI accounting.
Adjusting entries are oI Iollowing types:
O Accruals
Accrual Adjusting Entries are used to record the accrual oI revenue or expenses which
should be matched to the current accounting period. Examples: Accrual oI Interest
Expense, Interest Revenue, Depreciation Expense, etc.
O !repayments
Adjusting Entries Ior prepayments are recorded Ior adjustments to prepaid expenses and
prepaid revenue (i.e. revenue received in advance) so that the revenues and expense are
matched with the respective accounting periods. Examples: Adjustments to Prepaid
Insurance, OIIice Supplies, Prepaid Rent, etc.
Examples
We will now make adjusting entries Ior Example ompany, Inc at the end oI its Iirst month oI
business operations.
Adjustment of Supplies
The physical count oI OIIice Supplies revealed that OIIice Supplies with original cost oI $32
are leIt. Since the diIIerence is equal to the amount oI supplies consumed, we will debit oIIice
expense account and credit oIIice supplies Ior $1,328 (1,760 32).
DR CR
Supplies Expense 1,328
102

Jffice Supplies 1,328
Accrual of Rent Expense
The prepaid rent oI $3,600 was paid Ior the months: January, February and March. Since rent
expense Ior the month oI January is accrued, we have to record an adjusting entry:
DR CR
Rent Expense 1,200
Prepaid Rent 1,200
Depreciation Expense
The equipment costing $8,000 has useIul liIe oI 5 years. Estimated salvage value is $1,00.
ThereIore the depreciation expense Ior the month oI January is $110 ( ( ( 8,000 1,00) / 5 ) /
12 ).
DR CR
Depreciation Expense 110
Accumulated Depreciation 110
Accrual of Interest Expense on Note !ayable
The Note Payable oI $2,000 was held Ior one month and it the interest rate is 12. The interest
expense accrued is $20 ( 2,000 12 1/12 ).
DR CR
Interest Expense 20
Interest Payable 20
Revenue Received in Advance
$300 oI the unearned revenue is earned.
DR CR
Unearned Revenue 300
Service Revenue 300
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accounting/


Adjusting Entries in Accounting - Introduction
Adjusting Entries are journal entries that are made at the end oI the accounting period, to adjust
expenses and revenues to the accounting period where they actually occurred. Generally
speaking, they are adjustments based on reality, not on a source document. This is in sharp
contrast to entries during the accounting period (such as utility bills or Iees Ior services rendered)
that depend on source documents.
Preparing adjusting entries is a key step in the ongoing accounting cycle, coming right aIter
you`ve completed preparing a trial balance.
Types of Adjusting Entries
There are Iive basic types oI adjusting entries:
O Accrued revenues (also called accrued assets) are revenues already earned but not yet
paid or recorded.
O Unearned revenues (or deIerred revenues) are revenues received in cash and recorded as
liabilities prior to being earned.
O Accrued expenses (also called accrued liabilities) are expenses already incurred but not
yet paid or recorded.
O !repaid expenses (or deIerred expenses) are expenses paid in cash and recorded as
assets prior to being used.
O Other adjusting entries include depreciation oI Iixed assets, allowances Ior bad debts,
and inventory adjustments.
Examples of Adjusting Entries
By their nature, all adjusting entries will involve a pairing oI either an asset or liability account
with a revenue or expense account. Here are some typical examples oI adjusting entries oI each
type mentioned above:
O Accrued revenues Say your company provided $1,600 worth oI consulting services to
the Bogus ManuIacturing Company over the past month, and today is the end oI the
accounting period. The consulting hours will be billed and collected next month, well
past when you`ll be preparing a trial balance, Iinancial statements, closing entries, etc. In
this case, you need an adjusting entry to account Ior the unbilled services:
104

Adjusting Entry Debits redits
Accounts Receivable 1,600.00

Consulting Fees Earned

1,600.00
O Unearned revenues Bogus ManuIacturing Company purchased an annual service
contract Irom you Ior $2,000, which they paid up Iront. II only three months oI their
contract are within this accounting period, then that means nine months oI the contract`s
revenues are unearned. In order to properly reIlect reality, you need an adjusting entry:
Adjusting Entry Debits redits
Unearned Revenue 18,000.00

Revenue

18,000.00
O Accrued expenses II you pay weekly salaries and the accounting period ends mid-
week, you have accrued salary expenses that you haven`t yet paid. ou`ll need an
adjusting entry to reIlect the as-yet unpaid salaries:
Adjusting Entry Debits redits
Salary Expense 7,200.0

Wages and Salaries Payable

7,20.0
O Prepaid expenses Let`s say you paid $3,000 Ior your property insurance six months
ago, and you still have six paid months remaining on the policy aIter this accounting
period. To accurately reIlect the value and expense oI the remaining policy, you need an
adjusting entry:
Adjusting Entry Debits redits
Property & Casualty Expense 1,500.00

Prepaid Insurance

1,500.00
103

O Other adjusting entries our company purchased $1 million oI manuIacturing
equipment two years ago, and according to your depreciation schedule it has depreciated
by $350,500 this accounting period. To ensure that your balance sheet doesn`t overstate
the equipment`s value, you need an adjusting entry:
Adjusting Entry Debits redits
Depreciation Expense 350,500.00

Accumulated Depreciation
Equipment

350,500.00















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End oI Period Adjusting Entries
BeIore end-oI-period Iinancial reports are prepared, adjustments to prepaid and accrued
accounts are made. This process helps provide a true indication oI where the company stands
Iinancially and it matches income and expenses to the period they eIIect. There are several
types oI accounts that require adjustments:
O!repaid Expenses - items or services that are paid Ior up-Iront. They are classiIied as
assets when purchased.
OUnearned Revenues - revenues received beIore they are earned. They are classiIied as
liabilities when cash is received.
OAccrued Revenues - revenues that have been earned but cash has not yet been received
and no transaction has been recorded.
OAccrued Expenses - expenses that have been incurred but not paid Ior yet and no
transaction has been recorded.
Each oI these adjustment types is described below along with examples and sample journal
entries.
!repaid Expenses
When an expense is prepaid (Ior example - prepayment oI a 6-month insurance policy Ior
$1,200) an asset is created. Think oI it this way; the company is due something oI value - the
insurance coverage Ior a 6-month period in the Iuture. To simply expense the $1,200 at the
time cash is spent would inaccurately allocate the Iull amount to that period. Instead,
accountants create a Prepaid Insurance account and subtract Irom it, each month, the amount
that should be allocated to it ($1,200 6 $200). The Iirst example entry below journalizes
the prepayment oI the 6-month policy; the second is the adjusting entry Ior the end oI the Iirst
month.
General 1ournal !age: 1
Date Account Titles/Explanation Ref Debit redit
20XX
Jan
1 Prepaid insurance
Cash
Paid insurance in advance
1200.00
1200.00
31 Insurance expense
Prepaid insurance
200.00


200.00
10

1o record insurance expense.
AIter posting these transactions, the Prepaid Insurance account will have a balance oI $1,000.
At the end oI each oI the next 5 months an adjustment similar to the one above would be
made. AIter the June 30th entry, the Prepaid Insurance account would have a zero balance and
Insurance Expense would have a $1,200 balance.
Unearned Revenues
When revenue is received in advance (Ior example, receipt oI a 6-month cleaning service Iee
oI $600 up-Iront) a liability is created -- the company owes something oI value (cleaning
services) to another. II the $600 were posted directly to revenue on the date it was received, it
would incorrectly allocate the entire revenue to one month rather than spread it over 6
months, when it is actually earned. The example entries below record receipt oI the Iee
(which creates the liability) and the adjustment at the end oI the Iirst month to record the
revenue earned during January ($600 6 $100).
General 1ournal !age: 1
Date Account Titles/Explanation Ref Debit redit
20XX
Jan
1 Cash
Unearned revenue
#eceived revenue in advance
600.00
600.00
31 Unearned revenue
Service revenue
1o record revenue for services completed
100.00


100.00
At the end oI each oI the next 5 months, an adjustment similar to the one above would be
made. AIter the June 30th entry, the revenue collected in advance would be correctly
allocated to each oI the months it was earned.
Accrued Revenues
When revenue has been earned but cash has not yet been received, accountants make an
accrual adjusting entry. II an advertising company charges $1,500 Ior a month's services
payable at the end oI 30 days and begins working in the middle oI the month (i.e. Jan. 15 -
Feb. 15), an entry must be made at the end oI January to record the revenue earned during the
period ($1,500 2 $750) as Iollows:
General 1ournal !age: 1
Date Account Titles/Explanation Ref Debit redit
20XX
Jan
31 Accounts receivable
Service revenue
Paid insurance in advance
750.00
750.00
In February, when the customer makes payment oI $1,500, Cash is debited $1,500, Accounts
Receivable is credited $750 and Service Revenue is credited $750.
10

Accrued Expenses
Expenses are oIten incurred in one month or period and paid Ior in another. Examples
include interest, rent, and salaries. Consider an employee who is paid $2,00 on February 5th
Ior the work he/she completed in January. In order to reIlect the expense in the correct month,
an adjustment must be made at the end January.
General 1ournal !age: 1
Date Account Titles/Explanation Ref Debit redit
20XX
Jan
31 Salary expense
Salary payable
1o accrue salary expense
200.00
200.00
On February 5th, when the employee is paid, Salary Payable is debited $2,00 and Cash is
credited $2,00.












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NTE: For multiple-choice and true/false questions, simply place your cursor over what you
think is the correct answer. (There is no need to click the answer.) For fill-in-the-blank questions
place your cursor over the *********.

Having difficulty wit tis topic?
Learn more about this topic by reading our Explanation or Visual Tutorial. We also have
rosswords and Q&A Ior this topic.


Use te following information to answer questions 1 - 6:
A company borrowed $100,000 on December 1, 2010 by signing a six-month note that speciIies
interest at an annual percentage rate (APR) oI 12. No interest or principal payment is due until
the note matures on May 31, 2011. The company prepares Iinancial statements at the end oI each
calendar month. The Iollowing questions pertain to the adjusting entry that should be entered in
the company's records.

1. What date should be used to record the December adjusting entry? Answer
2. How many accounts are involved in the adjusting entry? Answer
3. What is the name of te account that will be debited? Answer
. What is the name of te account that will be credited? Answer
5. What is the amount oI the debit and the credit? Answer
6.
What would be the effect on the Iinancial statements if te company fails to make
te adjusting entry on December 31, 2010?
Answer
110




Use te following information to answer questions 7 - 12:
A bank lent $100,000 to a customer on December 1, 2010 that required the customer to pay an
annual percentage rate (APR) oI 12 on the amount oI the loan. The loan is due in six months
and no payment oI interest or principal is to be made until the note is due on May 31, 2011. The
bank prepares monthly Iinancial statements at the end oI each calendar month. The Iollowing
questions pertain to the adjusting entry tat te bank will be making Ior its accounting
records.
7. What date should be used to record the December adjusting entry? Answer
8. How many accounts are involved in the adjusting entry? Answer
9. What is the name of te account that should be debited? Answer
10. What is the name of te account that should be credited? Answer
11. What is the amount oI the debit and the credit? Answer
12.
What would be the effect on the Iinancial statements iI the company fails to make
te adjusting entry on December 31, 2010?
Answer
Use te following information to answer questions 1 - 18:
On December 1, 2010 your company paid its insurance agent $2,00 Ior the annual insurance
premium covering the period oI December 1, 2010 through November 30, 2011. The $2,00
payment was recorded on December 1 with a debit to the current asset !repaid Insurance and a
credit to the current asset as. our company prepares monthly Iinancial statements at the end
oI each calendar month. The Iollowing questions pertain to the adjusting entry that will be
written by the company.
13. What date should be used to record the December adjusting entry? Answer
1. How many accounts are involved in the adjusting entry? Answer
15. What is the name of te account that will be debited? Answer
16. What is the name of te account that will be credited? Answer
17. What is the amount oI the debit and the credit? Answer
111

18.
What would be the effect on the Iinancial statements if te company fails to make
te adjusting entry on December 31, 2010?
Answer



Use te following information to answer questions 19 - 24:
On December 1, 2010 your company paid its insurance agent $2,00 Ior the annual insurance
premium covering the period oI December 1, 2010 through November 30, 2011. The $2,00
payment was recorded on December 1 with a debit to the income statement account Insurance
Expense and a credit to the current asset Cash. our company prepares monthly Iinancial
statements at the end oI each calendar month. The Iollowing questions pertain to the adjusting
entry that will be written by the company.
19. What date should be used to record the December adjusting entry? Answer
20. How many accounts are involved in the adjusting entry? Answer
21. What is the name of te account that will be debited? Answer
22. What is the name of te account that will be credited? Answer
23. What is the amount oI the debit and the credit? Answer
2.
What would be the effect on the Iinancial statements if te company fails to make
te adjusting entry on December 31, 2010?
Answer



Use te following information to answer questions 25 - 0: On December 1, 2010 X
Insurance Co. received $2,00 Irom your company Ior the annual insurance premium covering
the period oI December 1, 2010 through November 30, 2011. X Insurance Co. recorded the
$2,00 receipt as oI December 1 with a debit to the current asset Cash and a credit to the current
liability Unearned Revenues. X Insurance Co. prepares monthly Iinancial statements at the
end oI each calendar month. The Iollowing questions pertain to the adjusting entry that will be
written by the XYZ Insurance o.
25. What date should be used to record the December adjusting entry? Answer
25. How many accounts are involved in the adjusting entry? Answer
112

27. What is the name of te account that will be debited? Answer
28. What is the name of te account that will be credited? Answer
29. What is the amount oI the debit and the credit? Answer
30.
What would be the effect on the Iinancial statements if te company fails to make
te adjusting entry on December 31, 2010?
Answer



Use te following information to answer questions 1 - 6: On December 1, 2010 your
company began operations. On December 3 it purchased $1,500 oI supplies and recorded the
transaction with a debit to the current asset Supplies and a credit to the current liability
Accounts !ayable. our company prepares monthly Iinancial statements at the end oI each
calendar month. At the end oI the day on December 31, 2010 your company estimated that $700
oI the supplies were still on hand in the supply room. The Iollowing questions pertain to the
adjusting entry that should be entered by your company.
31. What date should be used to record the December adjusting entry? Answer
32. How many accounts are involved in the adjusting entry? Answer
33. What is the name of te account that will be debited? Answer
3. What is the name of te account that will be credited? Answer
35. What is the amount oI the debit and the credit? Answer
36.
What would be the effect on the Iinancial statements if te company fails to make
te adjusting entry on December 31, 2010?
Answer


Use te following information to answer questions 7 - 42:
On December 1, 2010 your company began operations. On December it purchased $1,500 oI
supplies and recorded the transaction with a debit to the income statement account Supplies
Expense and a credit to the current liability Accounts Payable. our company prepares monthly
Iinancial statements at the end oI each calendar month. At the end oI the day on December 31,
2010 your company estimated that $700 oI the supplies were still on hand in the supply room.
The Iollowing questions pertain to the adjusting entry that should be entered by your company.
113

37. What date should be used to record the December adjusting entry? Answer
38. How many accounts are involved in the adjusting entry? Answer
39. What is the name of te account that will be debited? Answer
0. What is the name of te account that will be credited? Answer
1. What is the amount oI the debit and the credit? Answer
2.
What would be the effect on the Iinancial statements if te company fails to
make te adjusting entry on December 31, 2010?
Answer

3.
A common characteristic oI an adjusting entry is that it involves a balance sheet account and
an *********** ************** account.
.
Adjusting entries are usually dated the last day oI the accounting period and they convert
accounts Irom the cash basis oI accounting to the ************* basis oI accounting.
5.
Company S received money in advance oI providing services to Company P. The money
received beIore it is earned is an increase to Company S's asset account Cash. The amount
unearned should also be reported as
another asset a liability revenues
6.
It is acceptable that some adjusting entries contain estimated
amounts.
True False
7. Adjusting entries are oIten categorized into two groups: ************* and deIerrals.
8.
An adjusting entry to record interest expense incurred by a company but not
yet included in its accounting records is categorized as a(n)
Accrual DeIerral
9.
An adjusting entry to adjust the amounts already recorded in the asset
account Supplies and in the income statement account Supplies Expense is
categorized as a(n)
Accrual DeIerral
50.
A law Iirm has received $10,000 Ior services to be perIormed in the Iuture.
In which category would you put the entry to adjust the accounts involved
(Service Revenues and Unearned Revenues)?
Accrual DeIerra

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Q1: Supplies on and on september 0 were 1850

Answer:
1 - ou need to take your supplies account balance minus your actual onhand balance, then your
adjusting entry will be:
Debit Supplies Expense Ior the amount calculated above
Credit Supplies Ior the amount calculated above

Q2: ic types of adjusting entries in accounting are natural opposites?

Answer:
Prepaids and accruals.
Q: Wby are Ad|usting Entries Necessary in Accounting

Answer:
Adjusting entries are necessary in accounting because there are times when prices Iluctuate.
Some Iactors in the accounting system can be variable, causing numbers to change all the time!
Adjusting entries allows Ior these changes without major miscalculations.

Q4: Te prepaid insurance account ad a balance of $5600 at te beginning of te year.
Te account was debited for $1800 for premiums on policies purcased during te year.
1ournalize te adjusting entry required at te end of te year for eac situation.

(a) te amount of unexpired insurance applicable to future periods is $680

(b) te amount of insurance expired during te year is $720


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Answer:
1 - lnsurance 120
prepald lnsurance 120


lnsurance exp 2040
prepald lns 2040

2 9repald lnsurance !an 1 $3600
9urchases $100
1oLal $400

Cnly $320 lefL

1herefore 400320 360 used up

ur lnsurance Lxpense 360
Cr 9repald lnsurance 360


Q5: ffice supplies as a balance of $2400. An inventory at Dec 1 sows $1700 of supplies
on and. How do I adjust tis in order to close for te financial statements?

Answer:
First you will have to calculate the diIIerence between what your account balance is and your
actual balance.

our journal entry will be:
Debit OIIice Supplies Expense Ior the amount above
Credit OIIice Supplies Ior the amount above

This journal entry will bring your account balance into agreement with your actual inventory
balance.


eck out some similar questions!

Q1:
Adjusting Entries and losing Entries 0 Answers ]
116

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Q2:
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Adjusting entries: ow to journalize a specific adjusting entry 1 Answer ]
How would I journalize this adjusting entry? Invoices representing $1,000 oI services perIormed
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Q5:
Advantages and disadvantages of automated systems for adjusting adjusting entries 5
Answers ]
Adjusting entries is something I have always done manually, is there any advanage to using an
automated accounting system?

Q6:
Iourna||ze and Ad[ust|ng S Answers
11

I need journal entries and adjustments Ior these transactions Journalize : Tim Duncan, the owner,
invests $0,000 cash. Prepaid $12,000 cash Ior twelve months' rent Ior oIIice space. Made...

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Ad[ust|ng Lntr|es 1 Answer
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Prepare a journal entry to issue a 60-day, 10 note to the bank Ior that amount. What would be
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Q8:
A1 hotography ad[ust|ng entr|es 1 Answer
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(reIer...

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Trial balance Dec 31 Account debit credit Cash ...


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What are the diIIerent Adjusting Entries?: Adjusting entries are classiIied as either deIerrals
or accruals. Each class has two subcategories: Prepaid Expenses, Unearned Revenues, Accrued
Revenues and Accrued Expenses.

What accounting assumptions necessitate the use oI adjusting entries?: Some events are not
recorded daily because it is not eIIicient to do so. Some costs are not recorded during the
accounting period because they expire with the passage oI time rather than as a result oI daily
transactions and some items may be unrecorded all oI these are under the constraint oI the time
period assumption.

What accounts are subject to adjusting journal entries?: Almost all accounts are subject to
adjusted journal entries. Some examples are Accounts receivable, Unearned Revenue, Salary
Expense, Prepaid Insurance and depreciation expense. The question in most cases is whether
the account should be adjusted.

What are the advantages and disadvantages oI using automated accounting systems to do
adjusting entries?: Some oI the advantages are speed, Encryption Ior security, Posting to the
general ledger can be automated. Some oI the disadvantages are data can be lost due to
hardware issues, computer related crime is on the increase and inIormation can be stolen,
computer inIormation can get corrupted due to inIormational errors.

What are your thoughts on making adjusting entries; are they really needed or is this just extra
work by accountants?: Adjusting entries are absolutely necessary. II we did not use adjusted
entries we would have to wait till a business ceased to determine iI it was actually proIitable or
not.




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Both beginning and ending inventory amounts are crucial Iigures that aIIect a number oI other
Iinancial metrics. To make sure these values are as accurate as possible, adjusting entries Ior
closing inventory may be needed.
Last Days of te Accounting !eriod
Mellany Baring, the accountant oI Febros Trading Company, one oI the biggest trading
companies in Farlandville City, is busy with the Iinal details oI the Iinancial reports that are to be
submitted to the board oI directors Ior additional inIormation. The adjusting entries Ior accruals
and deIerrals are already submitted by the accounting staII so it is time to work on the closing
entries and on the post-closing trial balance. Miss Baring understands that her work as an
accountant does not end aIter the preparation oI the Iinancial statements. While the inIormation
relative to the perIormance or results oI business operations and Iinancial conditions are already
relayed to the owner and other potential users, she still has to make a compliance oI an
accounting requirement - the 'closing oI the books oI accounts' - signalling the end oI an
accounting period and the preparation oI the "post-closing trial balance." Her job is to ensure the
arithmetical accuracy and correctness oI the balances oI accounts aIter the closing entry work has
been done and to Iacilitate the preparation oI the next accounting period. The closing oI books oI
accounts at the end oI the calendar year is also a governmental requirement Ior income tax and
renewal oI business taxes and permits purposes. We will take a look at her adjusting entries Ior
closing inventory.

Let Us Gaze into Some !revious Topics in Basic Accounting
BeIore deIining the adjusting entry Ior closing inventory , let us be reminded about some topics
we have learned in basic accounting.
Transactions are recorded by using the assigned account titles Ior Income Statement and Balance
Sheet. The accounts in the Income Statement are called nominal accounts closed at the end oI the
accounting period. In large-scale business Iirms, however, adjusting and closing entries are
prepared at the end oI each month. Sometimes, adjusting entries are prepared on a monthly basis
120

while closing entries are done at the end oI the year. The Balance Sheet is composed oI real
accounts which are held open until such time that the business is closed.
By closing, this means that a nominal account which has an open balance will be reduced to
"zero" balance.
at is te bjective of losing te Nominal Accounts and
How Do e lose Tem?
The inventory account comes in two Iorms: Beginning and Ending inventory. The beginning
inventory Iigure is the amount oI goods that were leIt unsold during the previous accounting
period. This amount is added to the amount oI purchases during the current accounting period in
order to know the amount oI goods available or open Ior sale to the public. The ending inventory
Iigure, on the other hand, is the amount oI goods leIt during the current period, counted
physically by authorized personnel.
It is the beginning inventory that is closed at the end oI the current year. In oter words, te
effect of closing te beginning inventory along wit te oter nominal accounts and te
setting up of te ending inventory is te establisment of te gross margin for te period.
Let us look at the selected Iigures oI the Febros Trading Company:
Sales $270,000
Sales Discounts $,000
Sales Returns and Allowances $3,000
Purchase Discount $12,000
Purchase Returns and Discount $3,000
Merchandise Inventory, beginning $180,000
Purchases $268,000
Freight In $1,000
As per physical count, the merchandise inventory end has a total oI $253,000
As a guide Ior closing the Iigures above, let us remember that the individual account has two
sides - leIt and right. LeIt side is oIten called DEBIT and the right side is oIten called CREDIT.
Closing the accounts means bringing the account balances to ERO.
The Iollowing accounts have normal debit balances:
121

Sales Discounts $,000
Sales Returns and Allowances $3,000
Merchandise Inventory, beginning $180,000
Purchases $268,000
Freight In $1,000
Operating Expenses $69,660
And the Iollowing accounts have normal credit balances:
Sales $270,000
Purchase Discount $12,000
Purchase Returns and Discount $3,000

To close te revenue accounts:
Sales, Sales Returns & Allowances, and Sales Discount:
To close Sales is placing the amount oI $270,000 at its leIt side. The Sales Discounts oI $,000
and Sales Returns and Allowances oI $3,000 are placed at their respective right sides. The
closing oI these accounts results in the setting-up oI the Income and Expense Summary placed at
its leIt side with a corresponding amount oI $263,000 computed as: $270,000 minus $,000 and
$3,000.
Adjusting Entries for losing Inventory
To continue with the adjusting entries Ior closing inventory, the next accounts to be closed are
the accounts that compose the Cost oI Sales: Purchases, Purchase Discounts, Purchase Returns &
Allowances and Freight in.
The stated amounts oI Purchases and Freight In with debits, or placed at their respective leIt
sides, are placed at their respective right sides to bring these amounts to zero. The amounts oI the
Purchase Discounts and Purchase Returns & Allowances with credits, or placed at their
respective right sides, are placed on their respective leIt sides to bring their amounts also to zero.
As an additional step, the amount oI the inventory counted physically at the end oI the period
totaling $253,000 is also placed at its leIt side. The result oI these series oI steps is the creation
oI the Income and Expense Summary amounting to $181,000. To clariIy the corresponding
computations, together this time with the amounts, they are computed as: Merchandise
122

Beginning, $180,000; added to Purchases, $268,000; and Freight In, $1,000. So $180,000 plus
$268,000 plus $1,000 equals $9,000. Merchandise Inventory, End, $253,000; Purchase
Discounts, $12,000; and Purchase Returns & Allowances oI $3,000 are deducted Irom $9,000,
which will give us an amount oI $181,000, representing the Income and Expense Summary
account.
To compute the net proIit and closing this amount to the owner's capital account, let us now
Iocus on the Income and Expense Summary account. Based on the above discussion, we already
have placed $181,000 and $263,000 at the Income and Expense Summary account's leIt side and
right side, respectively. We will now place the amount oI the operating expenses, $69,660, at the
leIt side to compute how much is the ending balance. The amount oI $12,30 is obtained by
deducting $181,000 and $69,660 Irom $263,000. The amount oI $12,30 is the net proIit oI the
company, which is closed to the owner's capital account. II the capital has an existing balance oI
$897,00, its updated amount will now be $909,70, because iI there is a net proIit, the capital
account is increased.
Summary and onclusion: at is te Effect of losing te
Inventory Account at te End of te Accounting !eriod?
The ultimate goal in preparing the income statement and balance sheet at the end oI the
accounting period is to know the results oI operations Ior that period and the Iinancial standing
oI the company. In obtaining the net proIit at the end oI the period, the setting up oI adjusted
balances is not enough. The accountant must close the nominal accounts or the income statement
accounts to establish the Iollowing: Ending Inventory, which is Iorwarded to the balance sheet;
Net ProIit Ior the period; and the updated owner's capital account.
Te closing of te inventory account is essential in te computation of te net profit.








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From:Renalyn
2nd year accountancy student po aku. .
naguguluhan pu kc aku sa adjusting pa pinaghahalu halu na yung mga notes pati interest then me
mga given dates na hindi speciIic kng months ba o days lang ikukumpyut. .i2 pu. .
the notes payable worth 30,000 is a 90-12 note acquired on November 30, 2009. No interest
has been recorded. .
ska po may possibility ba na sa isang comprehensive problem is merong dalawang accounts
payable sa Adjusting Entry? ?
me adjustment pu ba sa gantu. .
the co. ends december 31, 2009. . the 1000 oI insurance expense is applicable to the Iirst
qqqquarter oI 2010? ?
pasensya na pokung maraming tanung ang galing nyu po kc mag explain n mga thought na
kailangan ng mga nagvivisit ng blog nyu eE. .
GODBLESS po! ! thamks in advance. .
Tatandaan nyo lang palagi, ang nagccause ng adjusting entries ay ang 'Accrual Basis oI
Accounting. Diba sa accrual basis oI accounting, dito yung inirerecognize ang income pag na-
earn at expense pag na-incur. Always keep this in mind. Kaya naman kailangan mag-adjust kasi
minsan, hindi nai-uupdate ang records ng kumpanya para mareIlect ang tamang balanse ng mga
accounts iI we will Iollow the accrual basis oI accounting
n Interest Accruals and Note !ayables:
the notes payable worth 30,000 is a 90-12 note acquired on November 30, 2009. No
interest has been recorded. .`
Sa school, tatandaan mo, pag months ang ibinigay na description (e.g. 2-month note; 5-month
note), pag nagcompute ka ng interest, use 12 months. Pag days ang binigay (e.g. 30-day note; 5-
day note; 60-day note) use 360 or 365 days (usually sinasabi ito pero pag walang sinabi, it`s saIe
124

to use 365 days). Pag naman years, edi use years. Pag exact date ang binigay, at nasa alanganing
date (e.g. note dated October 17) use 365 days.
Tandaan nyo palagi, ang RATE na ibinibigay sa inyo ay Annual Percentage Rate. Otherwise,
sasabihin yan kung pang-monthly rate, quarterly rate or semi-annual rate yan. Pero pag walang
sinabi, annual rate yan.
To answer your question. Since ang kumpanya nirecord lang nya nung na-acquire yung note
(kasi talaga sa totoong buhay ina-update mo lang ang mga bagay-bagay during end oI month or
end oI the year, or pag kinailangan, hindi inaaraw-araw ang pag-uupdate nitong mga to kaya
kelangan ng so-called 'adjusting entries), kailangan mo irecognize yung interest na kinita nya
during the time na hawak mo yung note which is Irom November 30, 2009 to the Balance Sheet
date (which is usually Dec. 31) since sabi 90-day ito, we will use 'days as a means oI
computing the interest:
so.
30,000 * 12 * 31 / 365 305.75
So, the company must accrue 305.75 na interest income Ior this particular note. Kung
maitatanong nyo, bakit '31/365 ang allocation ko? Kasi sabi ko nga, yung 9 pag one year na
rate yun. So, kukunin mo lang yung part ng year na yun kung saan hawak mo yung note at
kumita ka which is 31 days oI the 365 days oI the year.
ska po may possibility ba na sa isang comprehensive problem is merong dalawang accounts
payable sa dfusting Entry? ?`
ou`re talking about 'Notes Payable, diba. Oo, hija, especially sa auditing problems. Minsan
tatlo, apat, lima. Marami. Sa totoong buhay maraming notes payable ang meron ang kumpanya
even as much as how many debtors meron ang kumpanya. Pero, makukuha mo yan pag
nagpractice ka nang nagpractice.
the co. ends december 31, 2009. . the 1000 of insurance expense is applicable to the first
qqqquarter of 2010? ?`
Meron. The Iact na sinabi na hindi 1,000 ay para sa Iirst quarter ng 2010, evidence yun na may
adjusting entry kang kelangang gawin. PERO, depende ang magiging adjusting entry mo sa
initial entry mo (or yung entrada mo nung na-accquire mo yung insurance). Pero ulit, according
sa wording ng problem mo, ang ginamit nya ay Expense Method kasi ang sabi 1000 of te
insurance expense ipinahihiwatig nito na nirecord nya as expense yung buong insurance. So be
careIul sa wording ng problem at intindihin ang kinikwento ng problem.
Since ang initial entry mo ay expense method (lahat ng insurance ay nirecord mo as Insurance
expense), ganito ang magiging adj entry mo:
(dr) Prepaid Insurance 1,000
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(cr) Insurance Expense 1,000
Bakit ganyan? Kasi Overstated ang EXPENSE mo eh, kasi nga nirecord mo lahat nung simula as
an expense. Eh hindi pa naman expense yung 1000 diba, next quarter pa yun magiging expense.
Kaya babawasan mo yung expense mo by crediting it Ior an amount equal dun sa applicable pa
next quarter.
Assuming naman kunyari, ang initial entry mo ay using Asset method (ang insurance mo ay
ipinasok mo sa Prepaid Insurance nung na-acquire mo yung insurance) ganito magiging adj entry
mo:
(dr) Insurance Expense xxx
(cr) Prepaid insurance xxx
Bakit 'xxx, kasi hindi natin alam kung magkano ang buong insurance sa problem na ito. Ang
alam lang natin dapat ang ending balance ng Prepaid Insurance mo ay 1000. Sa entry na ito,
importanteng malaman nyo na ina-update natin ang balance ng Prepaid Insurance by recognizing
part oI it as an expense Ior the year and leaving those applicable Ior next year.














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http://www.accountingtools.com/adjusting-entries

dfusting entries are journal entries that are used at the end oI an accounting period to adjust the
balances in various general ledger accounts to more closely align the reported results and
Iinancial position oI a business to meet the requirements oI an accounting Iramework, such as
GAAP or IFRS. This generally involves the matching oI revenues to expenses under the
matching principle, and so impacts reported revenue and expense levels.
The use oI adjusting entries is a key part oI the period closing processing, as noted in the
accounting cycle, where you convert a preliminary trial balance into a Iinal trial balance.
An adjusting entry can used Ior any type oI accounting transaction; here are some oI the more
common ones:
O To record depreciation and amortization Ior the period
O To record an allowance Ior doubtIul accounts
O To record a reserve Ior obsolete inventory
O To record a reserve Ior sales returns
O To record a warranty reserve
O To record any accrued revenue
O To record previously billed but unearned revenue as a liability
O To record any accrued expenses
O To record any previously paid but unused expenditures as prepaid expenses
O To adjust cash balances Ior any reconciling items noted in the bank reconciliation
As shown in the preceding list, adjusting entries are most commonly oI three types, which are:
O ccruals. To record a revenue or expense that has not yet been recorded through a
standard accounting transaction.
O eferrals. To deIer a revenue or expense that has been recorded, but which has not yet
been earned or used.
O Estimates. To estimate the amount oI a reserve, such as the allowance Ior doubtIul
accounts or the inventory obsolescence reserve.
When you record an accrual, deIerral, or estimate journal entry, it usually impacts an asset or
liability account. For example, iI you accrue an expense, this also increases a liability account.
Or, iI you deIer revenue recognition to a later period, this also increases a liability account. Thus,
adjusting entries impact the balance sheet, not just the income statement.
12

Since adjusting entries so Irequently involve accruals and deIerrals, it is customary to set up
these entries as reversing entries. This means that the computer system automatically creates an
exactly opposite journal entry at the beginning oI the next accounting period. By doing so, the
eIIect oI an adjusting entry is eliminated when viewed over two accounting periods.
A company usually has a standard set oI potential adjusting entries, Ior which it should evaluate
the need at the end oI every accounting period. ou should have a list oI these entries in the
standard closing checklist. Also, consider constructing a journal entry template Ior each adjusting
entry in the accounting soItware, so there is no need to reconstruct them every month.
Adjusting Entry Examples
Depreciation: Arnold Corporation records the $12,000 oI depreciation associated with its Iixed
assets during the month. The entry is:
ueblL CredlL
uepreclaLlon expense 12000
AccumulaLed depreclaLlon 12000

Allowance Ior bad debts: Arnold Corporation adds $5,000 to its allowance Ior doubtIul accounts.
The entry is:
ueblL CredlL
ad debLs expense 3000
Allowance for doubLful accounLs 3000

Accrued revenue: Arnold Corporation accrues $50,000 oI earned but unbilled revenue. The entry
is:
ueblL CredlL
AccounLs recelvable accrued 30000
12

ales 30000

Billed but unearned revenue: Arnold Corporation bills a customer Ior $10,000, but has not yet
earned the revenue, so it creates an adjusting entry to record the billed amount as a liability. The
entry is:
ueblL CredlL
ales 10000
unearned sales (llablllLy) 10000

Accrued expenses: A supplier is late in sending Arnold Corporation a materials-related invoice
Ior $22,000, so the company accrues the expense. The entry is:
ueblL CredlL
CosL of goods sold (expense) 22000
Accrued expenses (llablllLy) 22000

Prepaid assets: Arnold Corporation pays $30,000 toward the next month's rent. The company
records this as a prepaid expense. The entry is:
ueblL CredlL
9repald expenses (asseL) 30000
8enL expense 30000


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BeIore Iinancial statements are prepared, additional journal entries, called adjusting entries, are
made to ensure that the company's Iinancial records adhere to the revenue recognition and
matching principles. Adjusting entries are necessary because a single transaction may aIIect
revenues or expenses in more than one accounting period and also because all transactions have
not necessarily been documented during the period.

Each adjusting entry usually aIIects one income statement account (a revenue or expense
account) and one balance sheet account (an asset or liability account). For example, suppose a
company has a $1,000 debit balance in its supplies account at the end oI a month, but a count oI
supplies on hand Iinds only $300 oI them remaining. Since supplies worth $700 have been used
up, the supplies account requires a $700 adjustment so assets are not overstated, and the supplies
expense account requires a $700 adjustment so expenses are not understated.
Adjustments Iall into one oI Iive categories: accrued revenues, accrued expenses, unearned
revenues, prepaid expenses, and depreciation.










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Sales tax is required by law in most U.S. states. As oI 2011, only Iive states do not impose sales
taxes. Issue sales tax payments quarterly, posting your sales tax liability to the Sales Tax Payable
balance sheet account. The concept behind the adjustments is to record sales tax income as a
payable amount and a reduction in cash, and prevent it Irom posting as revenue.
Step 1
Create an entry to recognize the total amount oI the sale including the cost oI the item and the
tax. Post the total amount oI the sale as a debit to the "Cash" account iI you receive payment up
Iront, or as a debit to "Accounts Receivable" iI it is purchased on account.
Step 2
Post the cost oI the item as a credit to the "Revenue" account and the sales tax amount as a credit
to the "Sales Tax Payable" account.
Step
Create an adjusting entry when you Iile your sales tax return with the balance due payment. Post
a credit to the "Sales Tax Payable" account in the amount oI the balance due. Post a debit to the
"Cash" account to reIlect the payment issued. 'eriIy that the "Sales Tax Payable" account has a
zero balance when the entry posts.








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Adjusting entry transactions, commonly known as journal entries, are used to adjust account
balances and Iix any accounting issues. Show examples

Warning: II you have no experience creating adjusting entries or are at all unsure about
them, please ask your accountant or Iinancial adviser Ior help. By adjusting certain
accounts (particularly protected accounts, like Cost oI Goods Sold), using the adjusting
entry Iorm instead oI account speciIic Iorms (like the inventory adjustment Iorm), the
account balances will be updated but reporting may be compromised. Example
To add an adjusting transaction:
1. Open the General Journal. Show me how
2. In the sidebar, click Record Adjusting Transaction.

3. (Optional) Enter a reIerence number Ior the entry.
The number appears in the transaction/entry description and is helpIul when trying to locate a
speciIic transaction/entry.
. In the Account Iield, choose the account Ior the Iirst distribution amount.
5. In the Debit Iield, iI you are debiting the account selected, enter the amount in the Debit
column.
132

6. In the Credit Iield, iI you are crediting the account selected, enter the amount in the
Credit column.
WorkingPoint displays running totals at the bottom oI each column as you enter credit and debit
amounts.
7. (Optional) In the Contact Iield, enter the customer name, vendor, or other name
associated with the amount.
8. (Optional) In the Notes Iield Ior an entry, add a note Ior the particular entry to explain the
adjustment. (ou can add a memo Ior the entire transaction in the Transaction Memo
Iield.)
9. Continue selecting accounts to debit and credit until the transaction diIIerence total
reaches a zero balance (the total in the Debit column equals the total in the Credit
column). Click Add Line iI you need to use more accounts.
10.(Optional) In the Transaction memo Iield, add a memo Ior the entire transaction.
11.Click Save Transaction.
II the Save Transaction button is not active, make sure that:
3. All entered debits and credits have an account selected
o At least one debit and one credit have been entered
o Debits and credits are balanced

Note: The transaction diIIerence must have a zero balance (the total in the
Debit column equals the total in the Credit column). ou can't save the
entry until the credits and debits are equal.






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http://www.brainmass.com/homework-help/business/accounting-business-analysis-Iinancial-
reporting/25929/e

Topic:
Business/Accounting/Business Analysis/Financial Reporting
This homework question:
Multiple choice questions on basic accounting subjects
Section - I - Multiple Choice (20 points)

Circle the one best answer.

1. The primary accounting standard-setting body in the United States is the:
a. Securities and Exchange Commission.
b. Internal Revenue Service.
c. Financial Accounting Standards Board.
d. Corporate Board oI Directors.

2. An increase in a revenue:
a. decreases net income.
b. decreases assets.
c. increases liabilities.
d. increases stockholders' equity.

3. A corporation with total stockholders' equity oI $75,000 paid a $12,000 business debt. As a
result oI this transaction, total stockholders' equity:
a. did not change.
b. increased by $12,000.
c. decreased by $12,000.
d. increased to $75,000.

. The leIt side oI an account is always:
a. the debit side.
b. the credit side.
c. the balance oI that account.
d. carried Iorward to the next accounting period.

134

5. Posting is the process oI:
a. preparing a chart oI accounts.
b. adding a column oI Iigures.
c. transIerring journal entries to ledger accounts.
d. recording entries in a journal.

6. The purpose oI recording depreciation on productive assets is to:
a. reIlect the decline in the market value oI the assets each period.
b. reduce income when the company has an exceptionally proIitable year.
c. be in conIormity with the revenue recognition principle.
d. allocate the original cost oI a productive asset to expense over its useIul liIe.

7. Tawdry Company debited Prepaid Insurance Ior $600 on May 1, 2010, Ior a one-year Iire
insurance policy. II the company prepares monthly Iinancial statements, Iailure to make an
adjusting entry on May 31, Ior the amount oI insurance that has expired would cause:
a. assets to be overstated by $600 and expenses to be understated by $600.
b. expenses to be overstated by $50 and assets to be understated by $50.
c. assets to be overstated by $50 and expenses to be understated by $50.
d. expenses to be overstated by $600 and assets to be understated by $600.

8. Which one oI the Iollowing accounts is not closed at the end oI an accounting period?
a. Retained Earnings account
b. Dividends account
c. Service Revenue account
d. Insurance Expense account
9. The revenue recognition principle dictates that revenue should be recognized in the accounting
period in which it is
a. collected.
b. earned.
c. earned and collected.
d. most likely to be collected.

10. Gross proIit is calculated by
a. subtracting total expenses Irom total revenues.
b. subtracting cost oI goods sold Irom net sales.
c. subtracting the ending inventory Irom cost oI goods sold.
d. adding cost oI goods sold to net sales.


Section - II - Matching (12 points)

Match the items below by entering the appropriate letter in the space.

1. Partnership

2. Liquidity
133


3. Liabilities

. Revenue recognition principle

5. Ledger

6. Matching principle

7. Unearned revenues

8. Materiality

9. Income summary

10. Intangible assets

11. Going concern assumption

12. Sales discounts


Section 3 - III - Adjusting Entries (15 points)

The Iollowing inIormation Ior 'alance Company is available on June 30, 2010, the end oI a
monthly accounting period. ou are to prepare the necessary adjusting journal entries Ior the
ance Company Ior the month oI June Ior each situation given. Appropriate adjusting entries had
been recorded in previous months. ou may omit journal entry explanations.

1. 'alance Company purchased a 2-year insurance policy on April 1, 2010, and debited Prepaid
Insurance Ior $3,600.

2. On April 1, 2010, a tenant in an apartment building owned by the 'alance Company paid
$,500, which represents three months' rent in advance. The amount received was credited to the
Unearned Rent account.

3. On June 1, 2010, the balance in the OIIice Supplies account was $130. During June, oIIice
supplies costing $750 were purchased. A physical count oI oIIice supplies at June 30 revealed
that there was $150 still on hand.
. On March 31, 2010, the 'alance Company purchased a delivery van Ior $30,000. It is
estimated that the annual depreciation will be $7,500.

5. 'alance Company has two oIIice employees who earn $100 and $125 per day, respectively.
They are paid each Friday Ior a Iive-day work week that begins each Monday. June 30 is a
Wednesday in 2010.

136


Section - I' - Journal Entries (12 points)

The Octet Company uses the allowance method to account Ior uncollectible accounts. Prepare
the appropriate journal entries to record the Iollowing transactions during 2010. ou may omit
journal entry explanations.

May 20 The account oI Jose Lhastro Ior $950 was deemed to be uncollectible and is written oII
as a bad debt.


Aug. 1 Received a check Ior $700 Irom Jose Lhastro whose account had previously been
written oII as uncollectible.


Dec. 31 Use the Iollowing inIormation Ior year-end adjusting entry:

The balances oI Accounts Receivable and Allowance Ior DoubtIul Accounts at year end are
$175,000 and $900, respectively. Both have debit balances. It is estimated that bad debts will be
3 oI accounts receivable.

Section - ' - Journal Entries (12 points)

Prepare the necessary general journal entries Ior the month oI September Ior the Quilter
Company Ior each situation given below. Quilter uses a perpetual inventory system.

Oct. 5 Paid cash oI $1,000 Ior operating expenses that were incurred and properly recorded in
the previous period.


8 Purchased merchandise Ior $16,000 on account September 1. Credit terms: 2/10, n/30.


10 Paid Ireight bill oI $335 Ior merchandise purchased on September 8.


15 Paid Ior merchandise purchased on September 9. The company takes all discounts to which it
is entitled.


20 Sold merchandise Ior $13,000 to Myra Dame on account on September 12. The cost oI the
merchandise sold was $7,800. Credit terms: 2/10, n/30.


25 Issued a credit memo to Myra Dame Ior $800 Ior merchandise returned by him Irom the sale
on September 20. The cost oI the merchandise returned was $80.
13


Section 6 - 'I - Multiple-Step Income Statement (15 points)

Below is a partial listing oI the adjusted account balances oI the Hydell Department Store at
year-end on December 31, 2010.

Accounts Receivable $ 18,000
Cost oI Goods Sold 255,000
Selling Expenses (includes depreciation) 35,000
Interest Expense 2,000
Accumulated Depreciation-Building 10,000
Sales Discounts 32,000
Merchandise Inventory ,000
Administrative Expenses (includes depreciation) 17,000
Sales 360,000
Accounts Payable 15,000
Interest Revenue 700

Instructions
Using whatever data you believe appropriate, prepare a multiple-step income statement Ior the
Hydell Department Store Ior the year ended December 31, 2010.


Section - 'II - Notes Receivable (1 points)

Instructions
Prepare journal entries to record the Iollowing events:

July 1 Whisard Company accepted a 6, 3-month, $7,000 note dated June 1 Irom Noble
Company Ior balance due.


July 31 Whisard accrued interest on the above note Ior the month oI June.


Oct. 1 Collected Noble Company note in Iull. Assume interest was correctly accrued on June 30,
July 31 and August 31.


Oct. 1 Assume instead, that the note is dishonored and that no interest has been accrued. Noble
Company is expected to eventually pay the amount owed.


Extra Credit: Worth 1 point each.

1. All oI the Iollowing are sections oI a cash budget except
13

a. cash disbursements.
b. cash receipts.
c. Iinancing.
d. operating.

2. The principles oI internal control do not include:
a. establishment oI responsibility.
b. documentation procedures.
c. management responsibility.
d. independent internal veriIication.

3. An error in the physical count oI goods on hand at the end oI the current period resulted in a
$2,500 overstatement oI the ending inventory. The eIIect oI this error in the current period is to
a. overstate cost oI goods sold.
b. understate cost oI goods available Ior sale.
c. understate gross proIit.
d. overstate net income.
.
Attachments to Iurther explain the question:(this is not the answer)
O Accounting questions.doc
Answer Summary
The problem deals multiple accounting topics: adjusting entries, posting, multiple step income
statement, etc.

The problem also includes multiple choice questions.
Preparing an income statement - Coyote, Inc. - Please provide some assistant with the attached
problem. I am not sure oI the correct steps and how the numbers relate to the statement. **See
attachment!**
Emphasis oI the single step income statement - The single-step income statement emphasizes A.
extraordinary items and accounting changes more than these are emphasized in the multiple-step
income statement. B. total revenues and total expens ...
Financial Statements: Income Statement - Problem 1 The income statement in which the total oI
all expenses is deducted Irom the total oI all revenues is termed: A. Multiple-step Iorm B.
Single-step Iorm C. Account Iorm D. Report Ior ...
Multiple Step Income Statement Ior Company B - Use the appropriate inIormation Irom the data
below to prepare a multiple step income statement Ior Company B Ior the year ended Dec
31,2002. Assume an income tax rate oI 30. Cost oI goods Sold 8 ...
13

Advantages and disadvantages: multiple-step vs single-step income statement? - What are some
advantages and disadvantages that a multiple-step income statement has verses a single-step
statement? How might managers use a multi-step income statement in decision making?
Partin Company: Prepare multiple-step income statement, compute proIit margin ratio - The
Iollowing inIormation is available Ior Partin Company: Sales $598,000 Sales Returns and
Allowances 20,000 Cost oI Goods Sold 398,000 Selling Expense 69,000 Administrativ ...
Financial accounting e- - E- (Multiple Step and single-step) P. Briede Company
($000omited) Administrate expense OIIicers' salaries 900 Depreciated oI oIIice Iurniture and
equipment 3960 Cos ...
Financial Accounting - Problem 2-7 The Iollowing income statement items, arranged in
alphabetical order, are taken Irom the records oI Shaw Corporation Ior the year ended December
31, 2008. Advertising expense $1,500 Com ...
Accounting multiple choice - Accounting multiple choice
Accounting multiple choice - Accounting multiple choice
Accounting Multiple choice - 20 Multiple choice questions Ior Accounting 300- Principles oI
Accounting. One question ask to prepare an income statement, reatained earnings statement, and
balance sheet using the adjusted trial bal ...
Gross proIit minus its operating expenses - A company's gross proIit minus its operating
expenses is: a. working capital. b. operating cash Ilows. c. net operating cash Ilows. d. operating
income. e. net income. ...
Prepare and analyze a multiple-step income statement Ior Coyote, Inc. - A). Prepare a multiple-
step income statement Ior Coyote, Inc. Irom the Iollowing single-step statement. Net sales
$1,833,000 Interest income 13,000 ...
Prepare a multiple step Income Statement Ior Company B - Use the appropriate inIormation Irom
the data below to prepare a multiple step income statement Ior Company B Ior the year ended
Dec 31, 2002. Assume a income tax rate oI 30 Cost oI goods Sold 8, ...
Income Statement order, accounting cycle, balance sheet accounts - An income statement should
list expenses in what order? a) descending order by amount b) in order oI importance to the
company's primary mission. c) alphabetical order. d) ascending order ...
Multiple-step income statement - Complete Problem 3.10. Use the multisteptemplate.xls to
prepare a multiple-step income statement. Then write a 200- to 300-word summary discussing
the implications oI proIitability and net income oI ...
140

Please ignore Eros and treat numbers and amounts as iI they were dollars - Les Fleurs, a boutique
in Paris, France, had the Iollowing accounts in its accounting records at December 31, 20X2
(amounts in Euros, denoted as "E")
Future income oI a corporation - Which oI the Iollowing items would be the most important in
attempting to estimate the Iuture income oI a corporation? a. Net income b. Income Irom
continuing operations c. Gross ma ...
Another multiple choice - See attached.
Financial accounting: Strengths and weaknesses oI mulit-step or single step income statement -
Two accountants Ior the Iirm oI Allen and Wright are arguing about the merits oI presenting an
income statement in a multiple-step versus a single a single-step Iormat. The discussion involves
the Iol ...
Multiple-step income statement - I'm trying to get the net income on this problem. I was a little
conIused about what to plug into the multiple step income statement. Like where does the
inventory go? Could you look over my answers a ...
Les Fleurs: Compute sales revenue, cost oI goods sold, gross proIit, net income - See attached
Iile Ior table. Les Fleurs, a boutique in Paris, France, had the Iollowing accounts in its accounting
records at December 31, 20X2 (amounts in Euros, denoted as "E")
Multiple-step and Single-step Income Statement - (Multiple-step and Single-step) Two
accountants Ior the Iirm oI Elwes and Wright are arguing about the merits oI presenting and
income statement in a multiple-step versus a single-step Iormat. The dis ...
Partin Company: Prepare a multi-step income statements and compute 2 ratios. - The Iollowing
inIormation is available Ior Partin Company: Sales $598,000 Sales Returns and Allowances
20,000 Cost oI Goods Sold 398,000 Selling Expense 69,000 ...
Multiple-step income statement - Pele Company - Please see attachment. In its income statement
Ior the year ended December 31, 2008, Pele Company reported the Iollowing condensed data.
Administrative expenses $37,800 Selling expenses $92 ...



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Adjusting entries are recorded usually aIter transactions, which occurred during a particular
month, were journalized and posted Irom general journal to general ledger, certain accounting
data and Iacts are still not accounted Ior. This is done at the end oI each period recording
accounting adjusted entries, when such data is Iully available and all Iacts are known.
Usually period end adjusting entries are related to the Iollowing accounting data and Iacts:
1. alculation and accounting for depreciation of fixed assets
Usually when Iixed assets are acquired, the company intends to use in the activities them Ior the
period longer that one year. ThereIore the cost value oI these assets is included into the balance
sheet oI the company. As the assets are being used, their value decreases and such decrease must
be included into the expenses. Each item oI the Iixed asset has useIul liIe during which the asset
can be used, thereIore cost value oI the asset must be included into the expenses in equal parts
during that useIul liIe. For example: the company on June 1, 2007 acquires Iurniture, which has
useIul liIe oI years. Cost value oI the Iurniture is 800$. During June only the Iollowing
general journal entry would be done: D Furniture 800$ C Cash or Accounts payable (iI not paid
by cash) 800$ At the end oI June it is necessary to account Ior the depreciation oI Iurniture.
Monthly depreciation amount is calculated as Iollows: 800$/ years1200$ - annual
depreciation amount. 1200$/12 months100$ - monthly depreciation amount. To account Ior
depreciation the Iollowing general journal adjusting entry is made: D Expenses 100$ C
Accumulated depreciation (Iurniture) 100$ Please not that Ior depreciation purposes separate
account is used, i.e. Iurniture cost value is not directly decreased, but is accounted Ior in the
contrary account accumulated depreciation, which balance is always on credit side thus
decreasing the value oI the assets. Posting this transaction into general ledger can be depicted by
posting into T accounts:



2. Estimation of current assets (stationery, office supplies) consumed and
accounting for consumption
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Usually during a current period (Ior example - month) the company in its activities consumes
certain stationery and oIIice supplies. At the end oI period cost value oI such items consumed is
estimated and included into the expenses, decreasing value oI stationery or oIIice supplies.
Example: assume that during a particular month the company consumed oIIice supplies, cost
value oI which is 500$. The Iollowing general journal entry is done: D Expenses 500$ C OIIice
supplies 500$ Posting this transaction into general ledger can be depicted by posting into T
accounts (please note that T accounts include only this particular transaction, without
inIormation on the opening balances and other transactions posted into the accounts):



. Estimation of prepaid expenses (insurance, subscription) amount used during
te period
In case the company pays Ior certain expenses in advance, i.e. usually insurance and subscription
is paid in advance, the amounts paid are accounted Ior as assets and at the end oI the period only
actual amount oI expenses incurred is included into the expenses. For example: on June 1 the
company paid in advance Ior insurance, amount 3000$, insurance period is 6 months. General
journal entry to account Ior prepaid insurance was as Iollows: D Prepaid expenses 3000$ C Cash
3000$ At the end oI June it is necessary to estimate actual amount oI insurance expenses
incurred, i.e. 1 month passed and 1/6 oI the insurance amount (3000/6500$) to be included into
the expenses. General journal entry is: D Expenses 500$ C Prepaid expenses 500$ Posting this
transaction into general ledger can be depicted by posting into T accounts (please note that T
accounts include only this particular transaction, without inIormation on the opening balances
and other transactions posted into the accounts):



4. Accounting for additional expenses incurred for te period
Usually at the end oI month not all the invoices Ior particular long-term services are received, i.e.
Ior telecommunication services, utilities, and these invoices are received within Iirst days oI the
next month. However as the amount oI such expenses is know, it must be accrued (accounted
Ior) in that particular period in order to Iollow the matching principle. For example, invoice Ior
143

utilities services provided in June, was received on 3rd oI July, value oI services is 320$. To
account Ior this transaction the Iollowing general journal entry to be made: D Expenses 320$ C
Accrued expenses 320$ Posting this transaction into general ledger can be depicted by posting
into T accounts (please note that T accounts include only this particular transaction, without
inIormation on the opening balances and other transactions posted into the accounts):



5. Accounting for additional income earned for te period
Also at the end oI period certain income can be earned, but not yet invoices issued. Such income
must be included into the income oI that period in which they were earned. For example: in June
the company provided services Ior 120$, however the invoice was issued only in the beginning
oI July. To account Ior this income, the Iollowing general journal entry to be made: D Accrued
income (assets) 120$ C Income (owners` equity) 120$ Accrued income is accounted under assets
side, as aIter the invoice will be issued the company will have a right to claim cash Irom the
customers. Posting this transaction into general ledger can be depicted by posting into T accounts
(please note that T accounts include only this particular transaction, without inIormation on the
opening balances and other transactions posted into the accounts):









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Adjusting entries are made at the end oI the accounting period (but prior to preparing the
Iinancial statements) in order Ior a company`s accounting records and Iinancial statements to be
up-to-date on the accrual basis oI accounting. For example, each day the company incurs wages
expense but the payroll involving workers` wages Ior the last days oI the month won`t be entered
in the accounting records until aIter the accounting period ends. Similarly, the company uses
electricity each day but receives only one bill per month, perhaps on the 20th day oI the month.
The electricity expense Ior the last 10-15 days oI the month must get into the accounting records
iI the Iinancial statements are to show all oI the expenses and the amounts owed Ior the current
accounting period. Other adjusting entries involve amounts that the company paid prior to
amounts becoming expenses. For examples, the company probably paid its insurance premiums
Ior a six month period prior to the start oI the six month period. The company may have deIerred
the expense by recording the amount in the asset account Prepaid Insurance. During the
accounting period some oI those premiums expired (were used up) and need to appear as
expense in the current accounting period and the asset balance reduced.
losing entries are dated as oI the last day oI the accounting period, but they are entered into the
accounts after the Iinancial statements are prepared. For the most part, closing entries involve the
income statement accounts. The closing entries set the balances oI all oI the revenue accounts
and the expense accounts to zero. This means that the revenue and expense accounts will start
the new year with nothing in the accountsallowing the company to easily report the new year
revenues and expenses. The net amount oI all oI the balances Irom the revenue and expense
accounts at the end oI the year will end up in retained earnings (Ior corporations) or owner`s
equity (Ior sole proprietorships). Thanks to accounting soItware, the closing entries are quite
eIIortless.




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Exporting ad|usting entries
1. On the File menu, select Export, and then Adjustments.
2. In the SoItware box, select the package being exported to.
3. In the Export File box, enter the path to the directory where the export Iiles are to be
placed. Click Browse to locate the directory manually.
. II you are exporting data Ior a consolidated company, do the Iollowing:
1. To export the inIormation about a single entity, select Entity Specific Export.
2. To export any associated sub entities along with the entity, select Include Sub Entities.
Note that you will be exporting a consolidated total oI the parent company and all its
subsidiaries.
5. To include reclassiIying adjustments in the export, select Export Reclassifying Entries.
6. To include eliminating adjustments in the export, select Export Eliminating Entries.
7. For M..O.B., select the date Iormat used in your version oI M..O.B. Ior the export.
The deIault export Iormat is MMDD.
8. For QuickBooks: II you imported a QuickBooks Iile with the Import Account Name
into Extended Description check box selected, you must select the Use Extended
Description for Account Name check box when exporting adjusting entries.

With this check box selected, the account (including sub account) names that were
imported Irom QuickBooks are exported back to QuickBooks.

II this check box is cleared and the extended descriptions exist, then errors may result in
exporting the IIF Iile.
9. For QuickBooks: Select Export Federal and State Tax Entries iI necessary.
10.Click to process the export.
Export Iiles created:
Exact exactadj.txt
cwmyob.txt
Pastel Partner caseweg.csv
QuickBooks cwquickbb.iiI
Sage Line 50 (version
9)
cwsage.csv
Simply cwsimply.txt
'enice cwvenice.txt
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y is tere a need for adjusting entries on accounting?
Answer:
Adjusting entries are made at the end oI the accounting period. Adjustments are necessary,
because as a result oI the passing oI time, some assets and liabilities are no longer 'up to date'.
Also, it can be needed to include new assets and liabilities on the balance sheet.

Examples oI adjustments:
- reducing asset: depreciation on Iixed assets
- reducing liability: some oI the customers that paid up Iront (unearned revenues) have received
their products (reduction oI unearned revenues)
- increasing asset: the Iirm recognizes work in progress
- increasing liability: the Iirm recognizes the obligation to pay holiday money in the next period
(Ior work perIormed in the current period)

Also bringing the Iinancial statements "up to date" means it is necessary to bring the income
statement and balance sheet in line with the accruals basis oI accounting. Typically the books oI
accounts carry expenses that are yet to be incurred and should be excluded Irom the income
statement or revenue that is yet to be earned such as prepayments that should also be excluded
Irom the income statement.
Similarly adjustments are also necessary to bring items such as inventory in line with physical
stock counts typically held at year end.

Q2: Adjusted Trial Balance and losing Entries?

Answer:
Adjusted trial balance and closing entries are perIormed regularly as part oI the accounting cycle
oI a company. In order to get to the adjusted trial balance, you Iirst have to prepare the trial
14

balance. This ensures that debits equal credits. Discrepancies have to be corrected. Adjusting
entries are made to record acrruals and deIerrals. These totals will then be posted to the ledger.


















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An adfusted trial balance is an unadjusted trial balance to which adjusting entries have been
made, both to correct errors in the initial version oI the trial balance and to add journal entries
that will bring the entity's Iinancial statements into compliance with an accounting Iramework,
such as Generally Accepted Accounting Principles or International Financial Reporting
Standards.
Once all adjustments have been made, the adjusted trial balance is essentially a summary-balance
listing oI all the accounts in the general ledger - it does not show any detail transactions that
comprise the ending balances in any accounts. Also, the adjusting entries are shown in a separate
column, but in aggregate Ior each account; thus, it may be diIIicult to discern which speciIic
journal entries impact each account.
The adjusted trial balance is not part oI the Iinancial statements - rather, it is an internal report
that has two purposes:
O 1o verlfy LhaL Lhe LoLal of Lhe deblL balances ln all accounLs equals Lhe LoLal of all credlL balances
ln all accounLs
O 1o be used Lo consLrucL flnanclal sLaLemenLs
The second application oI the adjusted trial balance has Iallen into disuse, since computerized
accounting systems automatically construct Iinancial statements. However, it is the source
document iI you are manually compiling Iinancial statements.
Example of an Adjusted Trial Balance
The Iollowing report shows an adjusted trial balance, where the initial, unadjusted balance Ior all
accounts is located in the second column Irom the leIt, various adjusting entries are noted in the
third column Irom the leIt, and the combined, net balance in each account is stated in the Iar right
column.


AB International
Trial Balance
1uly 1, 20XX
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unad[usLed
1rlal alance
Ad[usLlng
LnLrles
Ad[usLed
1rlal alance
Cash $60000 $60000
AccounLs recelvable 10000 30000 230000
lnvenLory 300000 300000
llxed asseLs (neL) 210000 210000
AccounLs payable (0000) (0000)
Accrued llablllLles (30000) $(23000) (3000)
noLes payable (420000) (420000)
LqulLy (330000) (330000)
8evenue (400000) (30000) (430000)
CosL of goods sold 20000 20000
alarles 200000 23000 223000
9ayroll Laxes 20000 20000
8enL 33000 33000
CLher expenses 13000 13000
1oLal $0 $0 $0

The adjusting entries in the example are Ior the accrual oI $25,000 in salaries that were unpaid as
oI the end oI July, as well as Ior $50,000 oI earned but unbilled sales.
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On a work sheet, the beginning inventory balance in the trial balance columns combines with the
two inventory adjustments to produce the ending inventory balance in the adjusted trial balance
columns. This balance carries across to the work sheet's balance sheet columns.


Income summary, which appears on the work sheet whenever adjusting entries are used to
update inventory, is always placed at the bottom oI the work sheet's list oI accounts. The two
adjustments to income summary receive special treatment on the work sheet. Instead oI
combining the adjustments and placing the result in one oI the adjusted trial balance columns,
both adjustments are transIerred to the adjusted trial balance columns and then to the income
statement columns. Income summary's debit entry on the work sheet is used to report the
beginning inventory balance on the income statement, and income summary's credit entry is used
to report the ending inventory balance on the income statement. Each oI these amounts is needed
to calculate cost oI goods sold.

Although merchandising and service companies use the same Iour closing entries, merchandising
companies usually have more temporary accounts to close. The additional accounts include sales,
sales returns and allowances, sales discounts, purchases, purchases returns and allowances,
purchases discounts, and Ireight-in. Consider Music World's Iour closing entries.
1. Close all income statement accounts with credit balances to the income summary
account. The entry shown below assumes the inventory account was updated with
adjusting entries and, thereIore, does not include it.
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2. Accountants who choose to update the inventory account during the closing process
instead oI with adjusting entries include the ending inventory balance with this Iirst
closing entry.

3. Close all income statement accounts with debit balances to the income summary account.
The entry shown below assumes the inventory account was updated with adjusting entries
and, thereIore, does not include it.
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. II the inventory account is updated during the closing entry process, this closing entry
includes a credit equal to the beginning inventory balance ($37,000), which increases the
debit to income summary by a corresponding amount (to $1,068,500).
5. At this point, income summary has the same balance whether adjusting or closing entries
are used to update inventory. II adjusting entries are used, Iour separate entries contribute
to the income summary account's balance.

6. II closing entries are used to update inventory, the Iirst two closing entries establish the
income summary account's balance.

7. The income summary account now has a balance equal to the company's net income or
net loss.
8. Close income summary to the owner's capital account.
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9. Close the owner's drawing account to the owner's capital account. Assume the owner's
drawing account has a $0,000 balance.















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Under GAAP, or the generally accepted accounting principles, Iinancial statements must be
prepared on an accrual basis. This allows users oI the Iinancial reports to see a clear picture oI a
company`s resources, income, liabilities, and expenses that occurred in the time period that the
statements are Ior. To meet the revenue recognition principle and the matching principle, a
company needs to make adjusting entries to account Ior transactions that have not Iully
transpired. Two types oI adjusting entries are made: prepayments and accruals.
*Adjusting entries Ior prepayments
Prepayments consist oI items where cash has been disbursed or received beIore used, consumed,
expired, or earned. It is oIten not cost eIIective to record these items on a daily basis, so
adjusting entries are made at the end oI the period recognize or expense the actual amount used
within the period. Common prepayments include inventory, insurance, and rent. Other assets that
require an adjusting entry under the prepayments are Iixed assets that depreciate over time.
-When supplies are purchased, the transaction is recorded as asset, such as OIIice Supplies with a
debit entry, and Cash is reduced with a credit entry. At the end oI the period, the supplies
remaining are counted and the actual expense is Iigured. Then, that expense is recorded at the
end oI the month as OIIice Supplies Expense, reducing the asset account OIIice Supplies with a
credit entry, and increasing the expense account OIIice Supplies Expense with a debit entry.
-II a company purchases an insurance policy Ior the year and prepays the entire cost oI the
policy, it is recorded as an asset. The Prepaid Insurance account would record a debit entry,
increasing the account, while Cash would be credited, decreasing the account. As costs expire,
Insurance Expense would be debited, and Prepaid Insurance would be credited in the month the
expense was Ior.
-Depreciation is used to assign the cost oI plant, property or equipment that is recorded as an
asset. For example, iI a new computer system is purchased, the OIIice Computers account would
be debited. Cash or liability accounts would be credited to record the purchase. Sine the
computers are used to generate revenue in Iuture periods, the expense oI the computers over
those time periods is spread over their useIul lives. The depreciation amount is recorded as a
credit in a contra-account to the asset account Accrued Depreciation-OIIice Computers, and a
debit in an expense account, Depreciation Expense. This allows Ior several layers oI
133

transparency to be seen: the original cost oI the computer equipment, the amount oI depreciation
that has expired, and the amount oI depreciation expense recorded.
*Adjusting entries Ior accruals
When a company has revenues that are earned but no cash has been received yet, or expenses
that have been incurred, but they haven`t paid, these are considered accruals. At the end oI the
accounting period and adjusting entry needs to be made to assign these items to the correct time
period. .
-Accrued Revenues can include items such as unrecorded Interest Income, Commissions, Rent
Revenues, and Fees. For instance, an adjusting entry Ior unbilled Rent Revenue Ior February is
recorded as a debit to Accounts Receivable to show it is owed, and a credit to Rent Revenue
because it was earned in that month.
-Accrued Expenses are expenses that have not been paid, and can represent items such as Interest
Expense, Utilities Expense, and Taxes. In the case oI Interest Expense, the interest owed accrues
each month. However, the bill does not arrive until the tenth oI the Iollowing month. An
adjusting entry is made to record the item by debiting the Interest Expense account, and crediting
the Interest Payable account.
-Accrued Salaries & Wages are a common item to need an adjusting entry. For instance, a
company that pays their salary employees weekly will run into pay periods that cross over
diIIerent accounting periods. The employees may have two work days in oI March: the 29th and
30th, and three work days in April: the 1st, 2nd and 3rd. The work Ior the days in March is not
paid until the 6th oI April and represents accrued wages expense. II they are paid $100 per day,
the accrued expense Ior March would be $200. The Salaries Expense account Ior March would
be debited $200 and the Salaries Payable would be credited Ior $200. This allows the company
to accurately reIlect the salaries expenses Ior the prior month.
Adjusting entries are needed to present accurate Iinancial data Ior prepayments and accruals to
be in accordance with GAAP. Adjusting entries have an eIIect on both the Balance Sheet and the
Income Statements and keep in line with the revenue recognition principle and the matching
principle





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Adjusting entries are an essential part oI accrual based accounting. Adjusting entries are made so
records can be accurate and reIlect the true balances on a given Iinancial accounting period.
There are two categories Ior adjusting entries and these are known as prepayments and accruals.
Here is a basic rundown oI what prepayments and accruals are and how they are necessary to
make adjusting entries:
*Prepayments
Prepayments are prepaid expenses and unearned revenues that have occurred in the accounting
period. One is classiIied as an asset the other a liability.
~Prepaid expenses
A prepaid expense is an expenditure that is already paid Ior and recorded as an asset. It is owned
by the
organization, but hasn't yet been used.
An example oI prepaid expenses is insurance policies. Money is paid upIront in exchange Ior
several months to a year oI coverage. Since the dates the coverage provides Ior has not occurred
yet, this means the insurance policy theoretically hasn't been used. As time passes on the policy,
eventually it will deplete and will cease to being an asset once the insurance policy's time Irame
Ior coverage expires.
~Unearned Revenues
Unearned revenues are monies that are received but the organization still has to provide the
service or deliver the product to complete their end oI the transaction. This is classiIied as a
liability because there is still an obligation to be met even though money has been collected.
An example oI unearned revenue would be a company that takes prepayment Ior a service. Say
an oil company requires upIront payment in order to guarantee a customer to lock in a lower
price Ior winter Iuel, and they purchase 1,000 gallons oI Iuel. The customer has paid Ior both the
oil and the delivery, but the Iuel and delivery has not yet taken place, thus it is unearned even
though money has exchanged hands.
13

This kind oI accounting event would be recorded in an accounted worded along the lines oI
"unearned revenue" and each month a portion oI it would Ilip over to earned income aIter each
delivery is made. For instance iI the company makes a $300 delivery, than this amount would
turn into earned income and be adjusted accordingly at the end oI each accounting period.
*Accruals
Accruals are categorized as accrued revenues and expenses. When money has been earned but
not yet recorded in the same accounting time Irame or expenses have been made, but the bill to
pay these has not yet been reconciled, then the company still has a Iinancial obligation, or an
accrued expense.
For example iI you take your car to a mechanic and they allow you to be billed instead oI paid on
delivery oI services, this is revenue that has been earned, but the money has not yet been
received. An accrued expense Ior a company would be items such as taxes, salaries or interest.
For instance, employees have worked the hours to earn the pay, but since they are only paid on
the last day oI each month, the salary expense is considered accrued until payday occurs.
Prepayments and accruals are necessary accounting adjusting entries in accrual accounting.
Without making these adjustments, than an organization's Iinancial records would not be
accurate and it would be diIIicult to assess certain Iinancial aspects oI the company during any
given Iinancial period.












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This article explores examples oI why, when, and how accountants prepare period ending
adjusting entries.
Every business deIines its accounting cycle in terms oI periods oI time. In any one deIined
period all transactions aIIecting a business` accounts must be recorded. Generally accepted
accounting principles (GAAP) require accountants to use the accrual method oI accounting. This
method requires accounting records to reIlect revenues and expenses in the time period they are
incurred even iI receipts or disbursements oI cash have been or will be ecorded in another time
period.
Adjusting entries usually aIIect both an income statement and a balance sheet account. They are
divided into two speciIic areas: deIerrals and accruals.
O DeIerrals include prepaid expenses and unearned revenues which are deIerred to another
accounting period.
O Accruals include expenses or revenues which are incurred or received as cash in another
accounting period but must be recorded in the present accounting period.
In the Iollowing examples assume the accounting period ends on December 31, 2010.
How to Make Adjusting Entries for !repaid Expenses (deferred expense)
Example: Assume that over the course oI a year $,000 oI oIIice supplies have been purchased
(oIIice supplies have been debited Ior $,000 and cash credited $,000). At the end oI the year
only $500 oI oIIice supplies remain, or $3,500 oI oIIice supplies have been used (expensed).
O The adjusting entry to record the use oI oIIice supplies would be a debit oI $3,500 to
oIIice supplies expense and a credit oI $3,500 to oIIice supplies.
O The income statement reIlects the expense while the 'asset' section oI the balance sheet
shows the corrected balance oI assets.
Making Adjustments for Unearned Revenue (deferred revenue)
Example: Assume a company rents a piece oI machinery on December 1st to a client, charging
$3,000 Ior a three month rental period. Since the $3,000 is not yet earned at the time oI the
transaction, cash is debited Ior $3,000 and unearned revenue (a liability account) is credited Ior
$3,000.
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As oI December 31, $1,000 oI the unearned revenue is earned ($3,000 divided by three months)
and must be recorded as earned revenue in an adjusting entry.
O The adjusting entry would debit unearned revenue $1,000 and credit rental revenue Ior
$1,000.
O The income statement will now reIlect the additional revenue while the balance sheet will
give an accurate balance oI the liability account (unearned revenue credits oI $3,000 and
now a debit oI $1,000 showing a new balance oI $2,000 in the unearned revenue
account).
Te Adjustment !rocess for Accrued Expenses: ages
OIten, employees perIorm their work during one
OIten, employees perIorm their work during one accounting period but aren`t paid until the
Iollowing accounting period. An adjusting entry must be made at the end oI the accounting
period to reIlect wage expenses that have accrued but not yet paid in an accounting period.
Example: Employees are paid a total oI $600 per day. The last pay date was December 28, 2010,
and the next pay date is January 11, 2011. On December 31, 2010, an adjusting entry must be
made to show the amount oI wage expense that has accrued Ior the last three days oI December.
O The adjusting entry would be a debit to wage expense Ior $1,800 and a credit to wages
payable Ior $1,800 ($600 times three days).
O The income statement will now reIlect this added $1,800 oI expenses, and the balance
sheet will show the correct balance Ior the total liabilities by including the $1,800 in the
wages payable liabilities account.
How to Make te Adjusting Entries for Accrued Revenues
There are situations where revenue is not recorded until cash is received Ior the service that has
been perIormed.
Example: a bookkeeper charges $50 per hour to clients Ior services perIormed. Clients are billed
on the 10th oI each month. Assume that as oI December 31, 2010, the bookkeeper has spent 20
hours working on a client`s account. The bookkeeper will not receive the $1,000 earned ($50
times 20 hours) until January 15, 2011; however, since the $1,000 was earned in 2010, it must be
recorded as revenue Ior that accounting period.
O The adjusting entry on December 31, 2010, would be a debit to rent revenue receivable
(asset) Ior $1,000 and a credit to rent revenue Ior $1,000.
O The income statement Ior the year 2010 will reIlect an accurate revenue total, and the
balance sheet will also reIlect an accurate asset total.
The accrual method oI accounting dictates that revenues and expenses must be recorded during
the accounting period in which each occurs. As a part oI generally accepted accounting
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principles (GAAP), the concept oI matching revenues with the accounting period in which they
are earned and expenses with the time period in which they are incurred is necessary.
To be in compliance with the above, accountants must make adjusting entries to the prepaid
expense, unearned revenue, accrued expense, and accrued revenue accounts at the end oI an
accounting period. These entries will aIIect both an income statement (expense or revenue)
account and a balance sheet (asset or liability) account guaranteeing the most accurate balances
on end-oI-period Iinancial statements.




















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There are diIIerent kinds oI adjusting entries. Just to give you an example, diIIerent types oI
adjusting entries

1) Adjusting entries given by the auditor aIter the completion oI audit
2) Adjusting entries to correct the mistakes Iound during the audit.
3) Incorrect calculation oI current and deIerred taxes and mistakes in bonuses.

It is hard to prepare Ior any one type. ou just have to use the logic.












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In the Iuel oil example given in the Prepaid Expense section, the $900 payment to the Iuel oil
dealer in January requires a credit to Cash and a debit to Fuel Oil Inventory. During February,
March, and April, no outside record calls your attention to the need Ior the entries debiting Fuel
Oil Expense and crediting Fuel Oil Inventory.

Many entries required to apply the accrual principle are easy to overlook iI you do not set up
procedures Ior them. Accounts recognizes this possibility and provides Ior a series oI entries,
made at the end oI the month, to enter the eIIect oI accruals. These entries are called adjusting
entries. They adjust the accounts so the amounts reported as expenses and revenues Ior the
period reIlect the actual decreases and increases in equity during the period and so the balance
sheet amounts reIlect the current Iinancial condition (subject to the shortcuts discussed earlier).

Some oI these entries are "standard"; that is, iI the entity purchases a one-year insurance policy
Ior $1,200, there is an expense oI $100 Ior the insurance protection provided in each oI the next
12 months. Once you enter this Iact, the program makes this monthly entry automatically.
Automatic journal entries ensure that the entry is not overlooked, which can happen in a manual
system. Anonymous







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Adjusting entries are made when preparing accounts at the end oI a Iinancial period. These
entries are only required where the company is using the accrual basis. The entries rectiIy the
problem that not all changes to a companies assets and liabilities have a clearly recorded event
during the accounting period.
Accrual vs. as
There are two main methods Ior recording and accounting Ior Iinancial transactions. The cash
method simply lists events when money changes hands, such as paying Ior a purchase or
receiving revenue Ior a sale. The accrual method lists events as soon as the Iinancial obligation
arises, even iI the money doesn't change hands until later, Ior example when buying on credit.
While smaller businesses may use cash basis, larger Iirms are oIten required to use accrual basis
by tax or accounting regulations.
Adjusting !rocess
During an accounting period, a business keeps a record oI all its transactions. At the end oI this
period, it totals these transactions to produce an income statement and then calculate the changes
to the assets and liabilities listed on its balance sheet. However, the business may have acquired
assets or liabilities that are either not reIlected in the records oI transactions or are not accurately
reIlected. The business makes a series oI accounting entries to put this right.
Examples
A prominent example oI adjusting entries is that made to the accounts receivable and accounts
payable. This means the money the company is owed by customers and owes to suppliers. The
adjusting entries process here involves looking through records to Iind any purchases or supplies
that have taken place, but where the invoice Ior payments has not yet been received or issued.
Another example is with prepayment, such as Ior insurance or rent. II the company has paid a
Ilat amount to cover a period oI time but this extends into the next accounting period, adjusting
entries are needed. This involves working out what proportion oI the payment covered the
current period; the rest oI the payment can't be classed as an expense yet, meaning total expenses
on the income statement must be reduced appropriately. A less-obvious example comes where a
customer has paid in advance Ior a service or product the business has not yet provided. An
adjusting entry is needed to reIlect the Iact that the company owes goods or services to the value
oI the payment, and thus the amount must be listed as a liability on the balance sheet.
164

Double Entry
In nearly every case, the adjusting entry will mean two matching changes. One will be to the
balance sheet and one to the income statement, with one increasing and the other decreasing.





















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Accounting Ior your small business must be very clear. In the event oI a audit, an auditor needs
to be able to Iollow transactions clearly to understand them. This is why accountants make
adjusting entries and error corrections separately. In Iact, the standard practice is to never make
these two types oI entries at the same time. Understanding the diIIerences will help you keep
your books in order.
Adjusting Entries
Adjusting entries are necessary Ior items such as salaries, past-due expenses, income-tax
expenses, interest income and unbilled revenue. This type oI entry adjusts the ledger to reIlect
when the expense or income is received versus when it was incurred. For example, assume that
your business' salaries are incurred throughout the month, but not paid until the Iirst oI the next
month. At the beginning oI the next month, the salary amount paid would be entered, then
credited to the previous month. This is an adjustment, not an error.
Error orrections
Make corrections Ior mistakes in math, misplaced decimals and negative amounts that should
have been positive, and vice verse. These mistakes leave your debits out oI balance with your
credits, and must be corrected Ior the two columns to match. ou can't make corrections just to
make the debits match the credits mathematically. ou have to be able to support the corrections
with documentation or reasonable explanations. ou can make corrections Ior inadvertently
omitted entries as well.
Minimizing Adjusting Entries
ou can make Iewer adjusting entries by paying your expenses in the month they are incurred.
This will prevent having to go into the next month and adjusting the payment to reIlect the
correct month. ou will still have to adjust items such as late payments that come in long aIter
the month they should be credited to. ou will also minimize adjusting entries iI you balance
166

your books monthly. This will catch adjustments close to the month where they are needed. An
annual balancing requires many more adjustments because the need Ior them tends to go
unnoticed.
as Accounts
Do not make adjusting entries in cash accounts. ou should make adjustments to cash when
reconciling bank statements. This allows Ior clear documentation, such as the bank statement, to
justiIy the change in the cash accounting. ou can make error-correction entries in cash
accounts. These should be careIully documented, and reasons Ior the cash correction should be
made clear. Cash is an area auditors watch closely.














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Adjusting entries are made when preparing accounts at the end oI a Iinancial period. These
entries are only required where the company is using the accrual basis. The entries rectiIy the
problem that not all changes to a companies assets and liabilities have a clearly recorded event
during the accounting period.
Accrual vs. as
There are two main methods Ior recording and accounting Ior Iinancial transactions. The cash
method simply lists events when money changes hands, such as paying Ior a purchase or
receiving revenue Ior a sale. The accrual method lists events as soon as the Iinancial obligation
arises, even iI the money doesn't change hands until later, Ior example when buying on credit.
While smaller businesses may use cash basis, larger Iirms are oIten required to use accrual basis
by tax or accounting regulations.
Adjusting !rocess
During an accounting period, a business keeps a record oI all its transactions. At the end oI this
period, it totals these transactions to produce an income statement and then calculate the changes
to the assets and liabilities listed on its balance sheet. However, the business may have acquired
assets or liabilities that are either not reIlected in the records oI transactions or are not accurately
reIlected. The business makes a series oI accounting entries to put this right.
Examples
A prominent example oI adjusting entries is that made to the accounts receivable and accounts
payable. This means the money the company is owed by customers and owes to suppliers. The
adjusting entries process here involves looking through records to Iind any purchases or supplies
that have taken place, but where the invoice Ior payments has not yet been received or issued.
Another example is with prepayment, such as Ior insurance or rent. II the company has paid a
Ilat amount to cover a period oI time but this extends into the next accounting period, adjusting
entries are needed. This involves working out what proportion oI the payment covered the
current period; the rest oI the payment can't be classed as an expense yet, meaning total expenses
on the income statement must be reduced appropriately. A less-obvious example comes where a
customer has paid in advance Ior a service or product the business has not yet provided. An
adjusting entry is needed to reIlect the Iact that the company owes goods or services to the value
oI the payment, and thus the amount must be listed as a liability on the balance sheet.
16

Double Entry
In nearly every case, the adjusting entry will mean two matching changes. One will be to the
balance sheet and one to the income statement, with one increasing and the other decreasing.