adjusting journal entries(1)

8/13/2019 Adjusting Journal Entries(1)

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Adjusting Journal Entries


All adjusting entries (other than error corrections) will always involve at least one account on the

balance sheet and at least one account on the income statement.

I. Deferral Adjustments

A deferral involves a past exchange of cash that has initially been recorded on the balance sheet rather

than on the income statement. The name deferral comes about because the recording on the income

statement is deferred (postponed) to a later time.

A. Deferred Expenses

A deferred expense is initially recorded on the balance sheet as an asset than being immediately

expensed. An adjusting entry becomes necessary as the asset is consumed and becomes an expense.

1. Illustration for a short-term asset

> Past exchange of cash

Asset XXX

Cash XXX

> Adjusting entry necessary as the asset is consumed

Expense XXX (Income statement)

Asset XXX (Balance sheet)

Example:

The supplies account currently shows a $300 balance. A count of the supplies determines that only

$250 remains.

Supplies Expense 50

Supplies 50

2. Illustration for a long-term asset

The adjusting entry for long-term assets differs in that instead ofreducing the asset directly, a

contra account is used that is subtracted from the asset on the balance sheet.


Asset XXX

Cash XXX

> Adjusting entry necessary as the asset is consumed

Depreciation Expense XXX (Income statement)

Accumulated Depreciation XXX (Balance sheet)


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Example:

Current year depreciation is $2,500.

Depreciation Expense 2,500

Accumulated Depreciation 2,500

Note: Accumulated depreciation is a contra account that is subtracted from the asset on the balance

sheet. It has a normal credit balance.

B. Deferred Revenues

A revenue cannot be recorded until the income has been earned. Cash received in advance of income

realization should be initially recorded in a liability account such as "Unearned Revenue". An adjusting

entry later becomes necessary as the revenue is earned. The liability should be reduced and the revenue

recorded.


Cash XXXUnearned Revenue XXX

> Adjusting entry necessary as revenue is earned

Unearned Revenue XXX (Balance sheet)

Revenue XXX (Income statement)

Example: Adams CPA previously received $500 for bookkeeping services

in advance of providing the services. Adams has now earned $300 of the money.

Unearned Revenue 300Revenue 300

II. Accrual Adjustments

An accrual involves a future exchange of cash that must be recorded on the income statement before

cash is exchanged.

A. Accrued Expenses

> Adjusting entry

Expense XXX (Income statement)

Liability XXX (Balance sheet)

> Future exchange of cash

Liability XXX

Cash XXX

Example: Interest accrued on a loan at the end of the month is $550

Interest Expense 550


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Interest Payable 550

B. Accrued Revenues

> Adjusting entry

Receivable XXX (Balance sheet)

Revenue XXX (Income statement)

> Future exchange of cash

Cash XXX

Receivable XXX

Example:

Performed $400 of services for a customer on account.

Accounts Receivable 400Revenue 400

adjusting journal entries(1)

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