Adjusting Entries 702h57

Deferrals Adjusting Entries Accruals Prepaid Expenses-Expenses paid in cash & recorded as Accrued Revenues-Revenues earned but NOT YET assets BEFORE they are used or consumed (rent). Prepaid RECEIVED in cash or recorded. (ie: rent, magazine expenses expire either with the age of time (ie: rent & subscriptions, & customer deposits for future service) landlord will have unearned rent revenue insurance) or through use & consumption (ie: supplies). Asset Expense Asset Revenue Unadjusted Credit Debit Debit Credit  Balance Adjusting Adjusting Adjusting Adjusting Entry (-) Entry (+) Entry (+) Entry (+) Unearned Revenues-Revenues received in cash & Accrued Expenses-Expenses incurred but NOT YET recorded as liabilities BEFORE they are earned. (tickets) PAID in cash or recorded.(Interest, rent, taxes, salaries) Liability Revenue Expense Liability Debit Unadjusted Credit Debit Credit Adjusting Balance Adjusting Adjusting Adjusting Entry (-) Entry (+) Entry (+) Entry (+) Prepaid Expense Examples [E – Expense; A- Asset] Supplies IE: ABC purchased supplies costing $25,000 Oct. 5. ABC therefore debited the asset Supplies. This shows a balance of $25,000 in the October 31 trial balance. An inventory count at the close of business on Oct. 31 reveals that $10,000 of supplies are still on hand. Thus, the cost of supplies used is $15,000 ($25,000 - $10,000). The Expense Supplies Expense is increases $15,000 & the Asset Supplies is decreased $15,000. Debits  expenses: debit Supplies Expense $15,000. Credits  assets: credit Supplies $15,000. Insurance IE: Oct. 4, ABC paid $6,000 for a 1-year fire insurance policy, beginning Oct. 1. ABC debited the cost of the to Prepaid Insurance at that time. This still shows a balance of $6,000 in the Oct. 31 trial balance. The asset Prepaid Insurance shows a balance of $5,500, which represents the unexpired cost for the remaining 11 months of coverage. At the same time, the balance in Insurance Expense equals the insurance cost that expired in Oct. The Expense Insurance Expense is increased $500, & the Asset Prepaid Insurance is decreased $500. Debits  expenses: debit Insurance Expense $500. Credits  assets: credit Prepaid Insurance $500. Depreciation IE: ABC Advertising estimates depreciation on its office equipment to be $4,800 a year (cost $50,000 Oct. 1 less salvage value $2,000 divided by useful life of 10 years), or $400/month. The balance in the accumulated depreciation will increase $400 each month. Therefore, after journalizing and posting the adjusting entry at Nov. 30, the balance will be $800. The Expense Depreciation Expense is increased $400, & the Contra Asset Accumulated DepreciationEquipment is increased $400. Debits increase expenses: debit Depreciation Expense $400. Credits increase contra assets: credit Accumulated Depreciation—Equipment $400. Unearned Revenue Example [E – Expense; A- Asset] IE: When Intel, receives payment for services to be provided in a future ing period, it credits an unearned revenue (a liability) to recognize the obligation that exists. It subsequently earns the revenues through rendering service to customer. Intel delays recognition of earned revenue until the adjustment process. Then Intel makes an adjusting entry to record the revenue that it earned and to show the liability that remains. IE: ABC Advertising received $12,000 on Oct. 2 from R. Knox for advertising services expected to be completed by Dec. 31. ABC credited the payment to Unearned Service Revenue. This shows a balance of $12,000 in the Oct. 31 trial balance. Analysis reveals that ABC earned $4,000 of these services in Oct. The adjusting entry for unearned revenues results in a debit (decrease) to a liability and a credit (increase) to a revenue . Liability Unearned Service Revenue shows a balance of $8,000, which represents the remaining services expected to be performed in the future. At the same time, Service Revenue shows total revenue earned in Oct of $4,000

An accrued expense on the books of 1 company is an accrued revenue to another company. IE: The $2,000 accrual of service revenue by ABC is an accrued expense to the client that received the svc. Accrued Revenue Example [E – Expense; A- Asset] IE: In Oct., ABC earned $2,000 for services that it did not bill to clients before Oct. 31. ABC therefore did not yet record these services. A company accrues revenues w/ the ing of time, IE: interest revenue & rent revenue or from unbilled or uncollected services that a company performed, as in the case of commissions and fees An adjusting entry for accrued revenues results in a debit (increase) to an asset & a credit (increase) to a revenue . The asset s Receivable is increased $2,000, & the revenue Service Revenue is increased $2,000. Debits  assets: debit s Receivable $2,000. Credits  revenues: credit Service Revenue $2,000. Accrued Expense Example [E – Expense; A- Asset] Adjustments for accrued expenses record the obligations that exist at the balance sheet date & recognize the expenses that apply to the current ing period. The adjusting entry for accrued expenses results in a debit (increase) to an expense and a credit (increase) to a liability . Accrued Interest IE: ABC signed a 3-month note payable in the amount of $50,000 on Oct. 1. The note requires interest at an annual rate of 12%. 3 factors determine the amount of the interest accumulation: (1) the face value of the note; (2) the interest rate, which is always expressed as an annual rate; and (3) the length of time the note is outstanding. The total interest due on ABC’s $50,000 note at its due date 3 months’ hence is $1,500 ($50,000 * 12% * 3/12), or $500 for 1 month. Face Value of Note * Annual Interest Rate * Time in of 1 Year = Interest $50,000 * 12% * = $500 Interest Expense shows the interest charges applicable to Oct. Interest Payable shows the amount of interest owed at the statement date. ABC will not pay this amount until the note comes due at the end of 3 months. Why does ABC use the Interest Payable instead of crediting Notes Payable? By recording interest payable separately, ABC discloses the 2 types of obligations (interest & principal) in the s and statements. The adjusting entry for accrued expenses results in a debit (increase) to an expense and a credit (increase) to a liability . The expense Interest Expense is increased $500, & the liability Interest Payable is increased $500. Debits expenses: debit Interest Expense $500. Credits liabilities: credit Interest Payable $500. Accrued salaries & wages [S&W – Salaries & Wages] IE: Start of pay period is Oct. 1. ABC last paid S&W on Oct. 26 (Friday; Payday). It will not pay S&W again until Nov. 23(Friday, Payday). However in the calendar, 3 working days remain in Oct. (Oct. 29–31; Mon, Tues, Wed; Adjustment Period). At Oct. 31 (Wed), the S&W for these days represent an accrued expense & a related liability to ABC. The employees receive total S&W of $10,000 for a 5-day workweek, or $2,000/day. Thus, accrued S&W at Oct 31 are $6,000 ($2,000 * 3). After this adjustment, the balance in S&W Expense of $46,000 (23 days * $2,000) is the actual S&W Expense for Oct. The balance in S&W Payable of $6,000 is the amount of the liability for S&W owed as of Oct 31. ABC pays S&W every 4 weeks. Consequently, the next payday is Nov. 23, when it will again pay total S&W of $40,000. The payment consists of $6,000 of S&W payable at Oct. 31 plus $34,000 of S&W expense for Nov. (17 working days in the November calendar * $2,000). ABC makes the following entry: Nov. 23 Salaries and Wages Payable 6,000 Salaries and Wages Expense 34,000 Cash (To record November 23 payroll)

40,000

The expense S&W Expense is increased $6,000, & the liability S&W Payable is decreased $6,000. Debits expenses: debit S&W Expense $6,000. Credits liabilities: credit S&W Payable $6,000. Bad Debts IE: Assume based on past experience, ABC estimates a bad debt expense for the month of $1,600. A company often expresses bad debts as a % of the revenue on for the period. Or by adjusting the Allowance for Doubtful s to a certain % of the trade s receivable & trade notes receivable at the end of period. The expense Bad Debt Expense is increased $1,600, and the contra asset Allowance for Doubtful s is increased $1,600. Debits increase expenses: debit Bad Debt Expense $1,600. Credits increase contra assets: credit Allowance for Doubtful s $1,600.