Adjusting entries are recorded at
the end of an accounting period to adjust ledger accounts for any changes that
relate to the current accounting period but have not been recorded yet.
Most of the transactions which are
recorded via adjusting entries are not spontaneous but are spread over a period
of time. A common characteristic of all adjusting entries is that they involve
at least one revenue or expense account.
Not all journal entries recorded at the end of a period are adjusting entries. For
example, an entry to record a purchase on the last day of a period is not an
adjusting entry. The main purpose of adjusting entries is to match revenues and expenses to the current period which is a requirement of the matching principle of accounting.
Adjusting entries are of following
types:
Accruals
Accrual adjusting entries are used to record the accrual of revenue or expenses which should be matched to the current accounting period.
Examples: accrual of interest expense, depreciation expense, etc.
Accrual adjusting entries are used to record the accrual of revenue or expenses which should be matched to the current accounting period.
Examples: accrual of interest expense, depreciation expense, etc.
Prepayments
Adjusting entries for prepayments are recorded for adjustments to prepaid expenses and unearned revenue (i.e. revenue received in advance) so that the revenues and expense are matched with the respective accounting periods.
Examples: adjustments to prepaid insurance, office supplies, prepaid rent, etc.
Adjusting entries for prepayments are recorded for adjustments to prepaid expenses and unearned revenue (i.e. revenue received in advance) so that the revenues and expense are matched with the respective accounting periods.
Examples: adjustments to prepaid insurance, office supplies, prepaid rent, etc.
This example is a continuation of
the accounting cycle problem we have been working on. In the previous step we
prepared an unadjusted trial balance. Here we will pass adjusting entries.
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Relevant information for the
preparation of adjusting entries of Company A
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Office supplies having original
cost $4,320 were unused till the end of the period. Office supplies having
original cost of $22,800 are shown on unadjusted trial balance.
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Prepaid rent of $36,000 was paid
for the months January, February and March.
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The equipment costing $80,000 has
useful life of 5 years and its estimated salvage value is $14,000.
Depreciation is provided using the straight line depreciation method.
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The interest rate on $20,000 note
payable is 9%. Accrue the interest for one month.
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$3,000 worth of service has been
provided to the customer who paid advance amount of $4,000.
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Date
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Particulars
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Debit
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Credit
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Jan 31
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Supplies Expense
Office Supplies
Supplies
Expense = 22,800 − 4,320 = 18,480
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18,480
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18,480
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Jan 31
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Rent Expense
Prepaid Rent
Rent
Expense = 36,000 ÷ 3 = 12,000
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12,000
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12,000
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Jan 31
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Depreciation Expense
Accoumulated Depreciation
Depreciation
Expense = (80,000 − 14,000) ÷ (5 × 12) = 1,100
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1,100
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1,100
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Jan 31
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Interest Expense
Interest Payable
Interest
Expense = 20,000 × (9% ÷ 12) = 150
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150
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150
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Jan 31
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Unearned Revenue
Service Revenue
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3,000
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3,000
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