Adjusting Entries
Quick Study Sheet
Introduction to Accounting
Adjusting Entries
Quick Study Sheet
Adjustments must be made when the following occurs:
For Expenses: Get the expense to be what is incurred this period only
Payment is made for a service before it is provided to the company
This creates a prepaid expense (asset) that must be reduced and an expense recorded as the asset is used up
Payment is made for a service after it is provided to the company
A liability and an expense must be recorded since no entry has been recorded since no cash has been paid yet.
No Adjustment is required when payment is made in the same time period of the service
For Revenues: Get the revenue to be what is earned this period only
The company is paid for a service or goods that have not yet been provided
This creates an unearned revenue that must be reduced when earned
The company is paid for a service or goods after the service or goods is provided
This creates a revenue as it is earned and a receivable. No adjustment is required when the goods/service is provided and the company is paid
Adjusting Journal Entries:
Made at the end of the period after all cash transactions have been recorded
Are made to get the account balances correct, which means:
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
Common accounts that are used for adjusting journal entries that go together:
| Insurance expense | — | Prepaid insurance |
| Rent expense | — | Prepaid rent |
| Supplies expense | — | Supplies |
| Salaries expense | — | Salaries payable |
| Interest expense | — | Interest payable |
| Tax expense | — | Tax payable |
| Bad debt expense | — | Allowance for uncollectible accounts |
| Depreciation expense | — | Accumulated depreciation |
| Interest revenue | — | Interest receivable |
| Sales | — | Accounts Receivable |
| Fee revenue | — | Accounts Receivable |
| Rent revenue | — | Rent receivable |
| Unearned revenue | — | Revenue |
Do:
1) Use an expense with an asset (prepaid/inventory) or a liability (payable)
2) Use a revenue with a receivable or unearned revenue
3) calculate how much was earned or how much has been incurred during the year for revenues and expenses:
Total $ / # months = revenue or expense each month
Principle x % x (# months / 12) = interest expense or revenue
Total cost / useful life = depreciation expense per year
Do Not:
1) Use cash in an adjusting journal entry
2) Use an expense and revenue in the same adjusting journal entry
3) Use revenue and a “payable” in the same adjusting journal entry
4) Use an expense with a “receivable” in the same adjusting journal entry