Adjusting Entries
Practice As You Learn
Practice As You Learn
When making adjusting journal entries, follow these steps:
1st – Identify the accounts that will be affected in the situation and the type of account
2nd – Determine the balances now, before making adjustments
You are adjusting the current balance – do not record the original transaction
3rd – Determine what the account balance should be:
1) an asset account balance = what you really have now
2) a liability account balance = what is really owed now
3) a revenue account balance = what was earned this period only
4) an expense account balance = what was incurred this period only
4th – Make the adjusting journal entry that makes the account balance correct for this period:
Revenues = earned
Expenses = incurred this period
Assets = what you have
Liabilities = what you owe
The adjusting journal entry will make the revenue or expense correct and the asset or liability correct
General Rules to Follow:
When adjusting an asset account to get the balance to be what you really have – also use an expense account. Using an asset is an expense
When recording a liability account – also use an expense account
You owe because someone provided you a service you have not yet paid for
When recording a revenue account – also use a receivable account
You provided a goods/service and the customer also owes you
When adjusting the unearned revenue account – always use revenue with it
A company has just finished recording transactions for the period and must make
adjusting journal entries to get revenues to be what was earned for this period,
expenses to be what was incurred for this period, and assets and liabilities to be what
they have and owe at the end of the year. Make adjusting journal entries for the year on December 31st , given the following additional information:
1. The office supplies account had a balance of $1,450 on December 31st.
The company counted office supplies at the end of the year and determined that they
had $920 of office supplies on hand.
2. On September 1st , the company signed a six-month lease to rent office space.
The company paid for the entire 6 months for the amount of $12,000 on September 1st, and recorded the entire payment to prepaid rent.
3. On January 1st of last year, the company purchased a tractor for $100,000.
The tractor is expected to be used for 7 years.
4. On April 1st , the company purchased a 24-month liability insurance policy and paid $72,000 for the entire term of the policy. The payment was recorded to prepaid insurance.
5. On June 1st , the company loaned $60,000 to another company that needed cash. The other company agreed to repay the full amount in 2 years and pay interest of 8% annually each June 1st.
6. On March 1st , the company borrowed $250,000 from the bank to be repaid in 3
years. The bank is charging interest at a rate of 6% annually. Interest must be paid
every February 28th.
7. On August 1st, the company received payment from a customer in the amount of
$7,200 for services to be provided equally over the next 6 months. The service was
provided as agreed beginning on August 1st. The payment was recorded to unearned
revenue.
8. During the month of December the company provided services to a customer totaling $7,000 that the accounting department forgot to invoice them for.
Check Your Answer
Identify the accounts affected – office supplies, before adjustment has $1,450
When office supplies are used you record office supplies expense, which has a current balance = $0
What should the balance be?
Office supplies is an asset – the balance should be what you have
The balance should be $920
Current balance 1,450
Balance should be 920
Adjustment needed 530 reduce office supplies
Using up an asset is also an expense that must be recorded
Make the adjusting entry to get the balances correct
Office supplies expense $530
Office supplies $530
2. On September 1st, the company signed a six-month lease to rent office space. The company paid for the entire 6 months for the amount of $12,000 on September 1st and recorded the entire payment to prepaid rent.
Identify the accounts affected – prepaid rent – current balance is $12,000
Rent expense occurs when it is used up, current balance = $0
What should the balance be?
Paid $12,000 for 6 months = $2,000 per month.
On December 31st, there is 2 months left ($4,000) and 4 months ($8000) have been used up
| Prepaid that is a future benefit | ($4,000) | 2 months left = asset now |
| Adjustment to be made | $8,000 | used up = expense |
4 months of prepaid rent has been used up and must be decreased and recorded as rent expense
Make the adjusting entry to get the balances correct
Rent Expense $8,000
Prepaid Rent $8,000
3. On January 1st of last year, the company purchased a tractor for $100,000. The tractor is expected to be used for 7 years.
Identify the accounts affected – Using a long-term asset – “depreciation expense”
Accumulated Depreciation goes with this account
What should the balance be?
Cost $100,000 / 7-year life = $14,286 each year
Since this is not paid in cash, it has not yet been recorded
The asset must stay at cost and cannot be reduced, so we use the account “accumulated depreciation”
Make the adjusting entry to get the balances correct
Depreciation Expense $14,286
Accumulated Depreciation $14,286
4. On April 1st, the company purchased a 24-month liability insurance policy and paid $72,000 for the entire term of the policy. The payment was recorded to prepaid insurance.
Identify the accounts affected – Prepaid insurance & Insurance Expense
Current balances: $72,000 and $0
What should the balance be?
Cost of $72,000 / 24 months = $3,000 per month
From April 1st to December 1st is 9 months used up
Using up an asset is an expense and an expense must be recorded:
9 months x $3,000 = $27,000 used up
Since no expense has been recorded yet, record the $27,000 used up as insurance expense
| Current prepaid balance | $72,000 | |
| Amount used up | ($27,000) | must be an expense |
| Asset balance left unused | $45,000 | must be ending balance |
Make the adjusting entry to get the balances correct
Record the asset used up and the expense from using the asset
Insurance Expense $27,000
Prepaid Insurance $27,000
5. On June 1st, the company loaned $60,000 to another company that needed cash. The other company agreed to repay the full amount in 2 years and pay interest of 8% annually each June 1st.
Identify the accounts affected – Interest Revenue ($0) & Interest Receivable ($0)
Loaning money and agreeing to receive interest requires interest revenue to be recorded when earned.
Do not record this to notes receivable, notes receivable represents the principle only
What should the balance be?
Principle x rate x time = $60,000 x .08 x 7/12 = $2,800
June 1 to December 31st is 7 months incurred this year
Nothing has been recorded yet
Nothing has been received yet, so they owe you for it all – “interest receivable”
Make the adjusting entry to get the balances correct
Interest Receivable $2,800
Interest Revenue $2,800
6. On March 1st, the company borrowed $250,000 from the bank to be repaid in 3 years. The bank is charging interest at a rate of 6% annually. Interest must be paid every February 28th.
Identify the accounts affected – Interest Expense & Interest Payable
Has not yet been recorded, not yet paid
Borrowing money and agreeing to pay interest requires interest expense to be recorded when incurred. Do not record to notes payable, this account represents the principle only
What should the balance be?
Principle x rate x time = $250,000 x .06 x 10/12 = $12,500
March 1st to December 31st is 10 months incurred this year
Nothing has been recorded yet
Make the adjusting entry to get the balances correct
Interest Expense $12,500
Interest Payable $12,500
7. On August 1st, the company received payment from a customer in the amount of $7,200 for services to be provided equally over the next 6 months. The service was provided as agreed beginning on August 1st. The payment was recorded to unearned revenue.
Identify the accounts affected –
Unearned Revenue current balance of $7,200
Rent Revenue – when it is earned, currently $0
What should the balance be?
$7,200 / 6 month = $1,200 per month
August 1st to December 31st is 5 months earned
5 months x $1,200 = $6,000 earned
$6,000 earned must be in the revenue account
Currently, there is 0 in the revenue account, so all earned must be recorded
If it is earned, it is not unearned anymore. Reduce the unearned account.
Make the adjusting entry to get the balance correct
Unearned Revenue $6,000
Service Revenue $6,000
8. During the month of December the company provided services to a customer totaling $7,000 that the accounting department forgot to invoice them for.
Identify the accounts affected –
Service Revenue, not yet recorded
Accounts receivable, not yet recorded
The company has provided a service so revenue must be recorded
The customer has not been billed so they have not paid yet either
What should be recorded? the amount of the services $7,000
Make the adjusting entry to get the balance correct
Accounts Receivable $7,000
Service Revenue $7,000
Given the following situations, make adjusting journal entries for the company for the year ended December 31st.
1) The “rent expense” account contains a balance of $6,000, representing payment made on October 1st this year for six months rent for a warehouse.
2) The company borrowed $50,000, at a 6% interest rate on August 1st. No interest was paid during this year.
3) The company received $12,000 on August 1st this year for the allowing a neighboring business to use its parking lot for one year and recorded it all to “rent revenue”.
4) Services provided to clients during December, in the amount of $3,000 were recorded as accounts receivable and revenue.
5) Supplies purchased during the year, recorded to the “supplies expense” account totaled $2,400. Supplies costing $1,500 remained on hand at year-end.
6) On March 1st, the company purchased an automobile for its salesman for $28,000. The automobile is expected to be used for 5 years.
7) Supplies purchased during the year, recorded to the “supplies expense” account totaled $2,400. Supplies costing $1,500 remained on hand at year-end. The beginning balance of the “supplies” account was $1,600. Supplied purchased during the year and recorded to the “supplies” account was $1,200.
8) Employees worked for the company and the company paid them $340,000 this year. At the end of the year, the company owed employees $10,950 for wages that had not yet been recorded.
9) The company expects that $12,400 related to sales this period will not be collected. Nothing has been recorded yet for this situation.
10) The company estimates that it will have to pay $23,000 for taxes. Nothing has been recorded yet for this situation.
Check Your Answer
1) The “rent expense” account contains a balance of $6,000, representing payment made on October 1st this year for six months rent for a warehouse.
Accounts effected:
Rent expense – use up the time for rent, current balance $6,000
Prepaid rent – paid ahead of time, current balance $0
Balance should be: Rent expense should only be the amount that has been used up
$6,000 / 6 months = $1,000 per month x 3 months used (Oct – Dec)
Rent expense should be $3,000. It is $6,000, so you must take away $3,000 to get it to $3,000. When you take back an expense, it is an asset, paid ahead of time, “prepaid rent”
You have paid ahead for 3 more months, prepaid = $3,000
Adjustment required:
Prepaid Rent $3,000
Rent Expense $3,000
Notice: You are reducing an expense which you only do when you have previously put too much expense into the account.
2) The company borrowed $50,000, at a 6% interest rate on August 1st. No interest was paid during this year.
Accounts effected: Interest expense for using the money and interest payable since you owe since nothing has been paid yet
Balance should be: Principle x rate x time (time is Aug – Dec = 5 months)
$50,000 x .06 x 5/12 = $1,250
Adjustment required:
Interest Expense $1,250
Interest Payable $1,250
3) The company received $12,000 on August 1st this year for allowing a neighboring business to use its parking lot for one year and recorded it all to “rent revenue”.
Accounts effected:
Rent revenue – current balance of $12,000
Unearned rent revenue – if not yet earned, currently $0
It can’t be a receivable since the company has paid
Balance should be:
$12,000 / 12 months = $1,000 per month is earned
5 months have been earned (Aug – Dec) = $5,000 earned
The account says $12,000, so you must take $7,000 back out of revenue since it has not been earned – (7 months of next year)
Adjustment required:
Rent Revenue $7,000
Unearned Revenue $7,000
Notice: You are reducing a revenue which you can only do when you have previously recorded too much revenue and have to take some back.
4) Services provided to clients during December, in the amount of $3,000 were recorded as accounts receivable and revenue.
Accounts effected: Receivable and accounts receivable
Balance should be: $3,000 because that is what was provide
Adjustment required: The amount provided has been recorded – therefore no adjustment is required.
5) Supplies purchased during the year, recorded to the “supplies expense” account totaled $2,400. Supplies costing $1,500 remained on hand at year-end
Accounts effected:
Supplies expense – for supplies used, current balance $2,400
Supplies for what is left – current balance = $0
Balance should be: Supplies is the asset account, and you have $1,500, so the supplies account should have a balance of $1,500.
There is no information on what has been used up, so you do not know what the balance in supplies expense should be
“Supplies” is now $0 and needs to be $1,500 so you must add $1,500
Adjustment required:
Supplies $1,500
Supplies expense $1,500
Notice: You put too much in the expense account and have not used that much, so you must take some of the expense back
6) On March 1st, the company purchased an automobile for its salesman for $28,000. The automobile is expected to be used for 5 years.
Accounts effected:
Depreciation expense – used a long-term asset
Accumulated depreciation – used to show the reduction of asset
Balance should be:
$28,000 / 5 years = $5,600 each year for expense x 10/12 = $4,667
Adjustment required:
Depreciation expense $4,667
Accumulated depreciation $4,667
7) Supplies purchased during the year, recorded to the “supplies expense” account totaled $2,400. Supplies costing $1,500 remained on hand at year-end. The beginning balance of the “supplies” account was $1,600. Supplied purchased during the year and recorded to the “supplies” account was $1,200.
Accounts effected:
Supplies, asset, what you have, current balance $2,800
(Beginning $1,600 + purchases added $1,200 = $2,800)
Supplies expense – amount used, current balance of $2,400
Balance should be: The supplies account should be what you have on hand now, $1,500. You do not know the total used because it is not given to you.
| Current supplies balance is | $2,800 |
| Supplies you have on hand | ($1,500) |
| Adjust to reduce the account | $1,300 |
If you do not have it on hand, you have used it up, and it is also a supplies expense – add to the expense account also
Adjustment required:
Supplies expense $1,300
Supplies $1,300
8) Employees worked for the company and the company paid them $340,000 this year.
At the end of the year, the company owed employees $10,950 for wages that had not yet been recorded.
Accounts effected:
Wages expense, current balance – $340,000 since this was paid
Wages payable, not yet recorded, so the balance is $0
Wages payable should be what has not been paid and is owed which is $10,950
Record what you owe and add to the expense because you were provided a service that has not been recorded
Adjustment required:
Wage expense $10,950
Wage payable $10,950
9) The company expects that $12,400 related to sales this period will not be collected. Nothing has been recorded yet for this situation.
Accounts effected:
Bad debt expense, current balance = $0
Allowance for uncollectible accounts, current balance unknown
Balance should be: The bad debt expense for the period should be the amount not expected to be collected for this period, $12,400. Since nothing has been recorded – record the full amount.
Adjustment required:
Bad debt expense $12,400
Allowance for uncollectible accounts $12,400
10) The company estimates that it will have to pay $23,000 for taxes. Nothing has been recorded yet for this situation.
Accounts effected:
Tax payable, current balance is $0, not yet recorded
Tax expense, current balance is $0, not yet recorded
Balance should be:
Taxes payable should be what is owed, $23,000
Tax expense is also this amount since this is the value of the service that was provided and you owe.
Adjustment required:
Tax expense $23,000
Tax payable $23,000