BBAW2103
Financial Accounting
Topic 4 Adjusting Entries
Before We Start….
• Let’s see the whole process of Accounting Cycle
Learning Objectives
• Describe the types of adjusting entries
• Prepare the Adjusted Trial Balance
Accrual Basis vs. Cash Basis
Accrual Basis Cash Basis
Revenues are recognized Revenues are recognized
when earned and expenses when cash is received and
are recognized when expenses recorded when
incurred. cash is paid.
Accrual vs Cash Basis
The Accounting Period
• Calendar year- reporting period of 12 months covering from 1
January to 31 December
• Fiscal year- reporting period consisting of any 12 consecutive
months, in which the starting month is not necessarily beginning
from 1 January. Eg. 1 April 2019 to 31 March 2019
Recognising Revenues and Expenses
We have delivered the
product to our customer,
so I think we should record
the revenue earned.
Summary Now that we have
of Expenses recognized the revenue,
Rent RM1,000 let’s see what expenses
Gasoline 500
Advertising 2,000
we incurred to
Salaries 3,000 generate that revenue.
Utilities 450
and . . . . ....
Adjusting Accounts
An adjusting entry is recorded to bring an asset or liability account
balance to its proper amount.
Framework for Adjustments
Adjustments
Paid (or received) cash before Paid (or received) cash after
expense (or revenue) recognized expense (or revenue) recognized
Prepaid Unearned Accrued Accrued
(Deferred) (Deferred) expense revenues
expenses* revenues
*including depreciation
Prepaid Insurance
On 1 December 2019, Scott Company paid RM12,000 to cover insurance
for December 2019 through May 2020. Scott recorded the
expenditure as Prepaid Insurance on 1 December. What adjustment is
required?
Dec. 31 Insurance Expense 2,000
Prepaid Insurance 2,000
To record first month's expired insurance
Prepaid Insurance 637 Insurance Expense 128
Dec. 1 12,000 Dec. 31 2,000 Dec. 31 2,000
Bal. 10,000
Supplies
During 2019, Scott Company purchase RM15,500 of supplies. Scott
recorded the expenditures as Supplies. At 31 December a count of the
supplies indicated RM2,655 on hand. What adjustment is required?
Dec. 31 Supplies Expense 12,845
Supplies 12,845
To record supplies used during 2019
Supplies 126 Supplies Expense 652
Bought 15,500 Dec. 31 12,845 Dec. 31 12,845
Bal. 2,655
Depreciation
Depreciation is the process of computing expense from allocating
the cost of plant and equipment over their expected useful
lives.
Straight-Line Asset Cost - Salvage Value
Depreciation =
Expense Useful Life
Depreciation
On 1 January 2019, Barton, Inc. purchased equipment for RM62,000
cash. The equipment has an estimated useful life of 5 years and
Barton expects to sell the equipment at the end of its life for RM2,000
cash.
Let’s record depreciation expense for the year ended 31 December
2019.
2019 RM62,000 - RM2,000
Depreciation = = RM12,000
Expense 5
Depreciation
On 1 January 2019, Barton, Inc. purchased equipment for RM62,000
cash. The equipment has an estimated useful life of 5 years and
Barton expects to sell the equipment at the end of its life for RM2,000
cash.
Let’s record depreciation expense for the year ended 31 December
2019.
Dec. 31 Depreciation Expense 12,000
Accumulated Depreciation - Equipment 12,000
To record equipment depreciation
Accumulated depreciation is
a contra asset account.
Depreciation
Dec. 31 Depreciation Expense 12,000
Accumulated Depreciation - Equipment 12,000
To record equipment depreciation
Equipment Depreciation Expense
1/1 62,000 31/12 12,000
Accumulated Depreciation
31/12 12,000
Depreciation
Barton, Inc.
Partial Balance Sheet
At 31 December 2019
Assets
Fixed Assets: RM
Equipment $ 62,000
Less: Acc Dep-Equipment (12,000) 50,000 Equipment is shown
net of accumulated
Current Assets: depreciation.
Cash $ -
Total Assets
Adjusting Unearned (Deferred) Revenues
On 1 October 2019, Ox University sold 1,000 season tickets to its 20
home basketball games for RM100 each. Ox University makes the
following entry:
Oct. 1 Cash 100,000
Unearned Revenue 100,000
Basketball revenue received in advance
Unearned Revenue
Oct. 1 100,000
Adjusting Unearned (Deferred) Revenues
On 31 December, Ox University has played 10 of its regular home
games, winning 2 and losing 8.
Dec. 31 Unearned Revenue 50,000
Basketball Revenue 50,000
To recognized 10-game basketball revenue
Unearned Revenue Basketball Revenue
Oct. 1 100,000 Dec. 31 50,000 Dec. 31 50,000
Bal. 50,000
Adjusting for Accrued Expenses
Barton, Inc. pays its employees every Friday. Year-end, 31/12/2019,
falls on a Wednesday. As of 31/12/2019, the employees have earned
salaries of RM47,250 for Monday through Wednesday of the week
ended 2/01/2020.
Last pay Next pay
date date
26/12/2019 2/01/2020
1/12/04 31/12/2019 Record adjusting
Year end journal entry.
Adjusting for Accrued Expenses
Barton, Inc. pays its employees every Friday. Year-end, 31/12/2019,
falls on a Wednesday. As of 31/12/2019 the employees have earned
salaries of RM47,250 for Monday through Wednesday of the week
ended 2/01/2020.
Dec. 31 Salaries Expense 47,250
Salaries Payable 47,250
To accrue 3-days' salary
Salaries Expense Salaries Payable
Other salaries Dec. 31 47,250
657,500
Dec. 31 47,250
Bal. 704,750
Adjusting for Accrued Revenues
Smith & Jones, CPAs, had RM31,200 of work completed but not yet
billed to clients. Let’s make the adjusting entry necessary on 31
December 2019, the end of the company’s fiscal year.
Dec. 31 Accounts Receivable 31,200
Service Revenue 31,200
To accrue revenue earned
Accounts Receivable Service Revenue
Other receivables Other revenues
1,325,268 6,589,500
Dec. 31 31,200 Dec. 31 31,200
Bal. 1,356,468 Bal . 6,620,700
Illustration
FastForward
Trial Balance
31 December 2019
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. -
Accounts payable 6,200
First, the initial
Salaries payable -
Unearned revenue 3,000 unadjusted amounts
Chuck Taylor, Capital 30,000 are added to the
Chuck Taylor, Withdrawals 600
Consulting revenue 5,800
worksheet.
Rental revenue 300
Depr. expense -
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300
Illustration
FastForward
Trial Balance
31 December 2019
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000
Next,
Accum. depr. - Equip. - c 375 FastForward’s
Accounts payable 6,200 adjustments
Salaries payable - e 210
are added.
Unearned revenue 3,000 d 250
Chuck Taylor, Capital 30,000
Chuck Taylor, Withdrawals 600
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals 45,300 45,300 3,785 3,785
Illustration
Finally, the totals FastForward
are determined. Trial Balance
31 December 2019
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned revenue 3,000 d 250 2,750
Chuck Taylor, Capital 30,000 - 30,000
Chuck Taylor, Withdrawals 600 600
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals 45,300 45,300 3,785 3,785 47,685 47,685
Thank You
