lecture 4 adjustments

8/13/2019 Lecture 4 Adjustments

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ADJUSTMENTS

Step 4


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What is an Adjusting Entry?

Any entry to record unrecognized income or expensesfor the period is called an adjusting entry.


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Is it a Revenue or Expense for September ornot? ( A General Store)

1.

The Sales persons worked in August and received their salary inSeptember, Rs. 50, 000.

2. Sold goods during September Rs. 100, 000.

3. Received cash Rs.7, 000 from the customer, to whom goods were

sold in July.

4. Paid rent for the month of June & July, Rs.9, 000.

5. Paid electricity bill for the months of Aug & Sept, Rs.8, 000 and

Rs.7, 000 respectively.

6. Paid Rs.4, 000 as telephone bill for September.

7. Paid in Sept, Rs.10, 000 to an employee as advance salary forOctober.

CALCULATE THE REVENUE EXPENSES AND PROFIT/LOSSFOR THE MONTH OF SEPTEMBER


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TYPES OF ADJUSTING ENTRIES:

There are two categories of adjusting entries:

Deferral

Prepaid Expense

Unearned revenue

Office Supplies

Depreciation

Accrual

Accrued Expense Accrued Revenue


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IMPORTANT RULES FOR ADJUSTING

ENTRIES

When recording adjusting entries, remember two very importantrules:

First,cash is never involved in adjusting entries. Cash is alwaysrecorded when it is actually received or paid.

Second, adjusting entries always involve either a revenueaccount or an expense account.

An adjusting journal entry involves an incomestatement account (revenue or expense)

along with a balance sheet account (asset orliability),and typically relates to the accountsfor accrued expenses, accrued revenue, prepaidexpenses and unearned revenue.


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REVENUE

RECOGNIZATION CONCEPT: - Revenue is tobe recognized when services / goods are sold,no matter the cash has been received or not.

THREE TYPES OF REVENUE

1. Services / goods have not been sold, but cashhas been received by us in advance.

UNEARNED REVENUE --- A LiabilityCr Account


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Revenue

2. Services / goods have been sold by us and cashhas also been received at the same time.

A SIMPLE REVENUE requiring no

adjustments

3. Services / goods have been sold by us, but cash

has not been received by us.ACCRUED REVENUE --- An Asset

Dr Account


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EXPENSES

MATCHING CONCEPT: Services / Goodshave been provided to us / received by us.

THREE TYPES OF EXPENSES

1.Services / Goods have not been receivedby us, but cash has already been paid inadvance.

PREPAID EXPENSE --- An Asset

(Dr. Account)


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Expenses

2. Services / Goods received by us, and cashpaid at the same time.

A SIMPLE EXPENSE requiring no

adjustments

3. Services / Goods received by us, but cash

has not been paid by us.

ACCRUED EXPENSES --- A Liability

(Cr. Account)


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Adjusting Entries for Revenue

Type Adjusting Entry Nature of Ac Title

Unearned Revenue Unearned Revenue x xRevenue x x

LiabilityS. O. F. P.RevenueI / S

Accrued Revenue Accrued Revenueor

Revenue Receivable x xRevenue x x

Curr. AssetS. O. F. P.

RevenueI / S


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Question 1- Unearned & AccruedRevenue

XYZ BusinessBalances at December 31,

Unearned Salary Rs. 15, 000

Data for adjustments: -

a. Received advance salary of one month on

December 01.b. Salary earned but not received till Dec 31

amounting to Rs. 30, 000


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Question 2Unearned & AccruedRevenue

XYZ BusinessBalances at December 31,

Unearned Salary Rs. 15, 000


a. Received advance salary for three months on

December 01.b. Salary earned but not received till Dec 31

amounting to Rs. 30, 000


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Adjusting Entries for ExpensesType Adjusting Entry Nature of Acc Title

PrepaidExpenses

1. Expense x xPrepaid Expense x x

Expense I / SCurr. Asset S. O. F. P.

2. Supplies Expense x xSupplies x x Same as above

3. Depreciation Expense x xAllowance for Dep x x

Expense I / SContra Asset

S.O.F.P.(credit balance)

AccruedExpense

Expense x xAccrued Expense

orExpense Payable x x

Expense I / S

Curr. LiabilityS. O. F. P


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Question 1Prepaid Expense

Balances at December 31,

Prepaid Insurance Rs. 6, 000

Prepaid Rent Rs. 10, 000


a. On July 01, Insurance was paid for sixmonths.

b. Rent was paid on Dec 01 for two months.


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Question 2Prepaid Expense

Balances at December 31,

Prepaid Salary Rs. 36, 000

Prepaid Rent Rs. 15, 000


a. Salary was paid to an employee inadvance on November 01 for threemonths.

b. Rent was paid on Oct 01 for five months.


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Prepaid Expense(related to supplies)

Question 1Supplies Rs. 45, 000


Supplies were sufficient for three months.

Question 2

Supplies Rs. 20, 000Data for adjustments: -

Supplies on hand as at December 31, Rs. 5, 000.


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Prepaid Expense(related to fixed assets)

Question 1

Machine Rs. 50, 000

Estimated Useful life 10 years

Question 2

Furniture Rs. 15, 000Estimated useful life 3 years


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Accrued Expenses

Question 1: -

Salary for the month not paid Rs. 10, 000.

Question 2: -

Rent for the month not paid Rs. 8, 000.


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Question 4 / Page 11

a. The supplies account balance on Dec 31

is Rs. 1, 450. The supplies on hand on

Dec 31 are Rs. 695.

b. The unearned rent account balance on Dec 31

is Rs. 2, 700, representing the receipt of anadvance payment on Dec 01 of three months

rent from tenants.

c. Wages accrued but not paid at Dec 31 are

Rs. 3, 100.

d. Fees accrued but unbilled at Dec 31 are Rs. 7, 500.

e. Depreciation on office equipment for the year is Rs. 550

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