Accounting Adjustments

REVIEW Adjusting Entries Deferrals Previously recorded assets become expenses Previously recorded liabilities become revenues Accruals Assets and revenues not previously recorded Liabilities and expenses not previously recorded

Cash versus Accrual Accounting Cash basis accounting recognizes an accounting transaction at the point of cash inflow or outflow. This method of accounting does not require the adjustments. Accrual basis accounting recognizes expenses when they are incurred regardless of when payment is made, and recognizes revenue when it is earned regardless of when cash is received.

Prepaid Insurance/Insurance Expense

Depreciation Expense Depreciation Expense= (C-SV)/n C-cost SV- salvage value n- number of period of useful life Example: -Bank price is $3 500 000 -Useful life is 25 years -SV is $500 000

Depreciation Expense

Unearned Revenues A liability/revenue adjustment involving unearned revenues generally covers instances in which a client pays cash for future services.

Accrued Wages Payable Wages are paid periodically to employees, generally weekly, biweekly, or monthly; however, the pay period seldom ends—and employees are seldom paid—on the last day of the month, unless employees are paid on a monthly basis. Therefore, to record all wages for the month, wages must be accrued using an adjusting entry. The accrual recognizes both Wages Expense and the liability Accrued Wages Payable.

Accrued Utilities The FI must record additional liability/expense adjustments at the end of the month, since the motel has not yet received invoices for utility services it has used, such as telephone, electricity, and water.

Accrual Adjustments Illustrated

Accrued Assets Accrued assets are assets that exist at the end of the accounting period but have not yet been recognized. These assets reflect the right to receive future cash payments, and the corresponding revenue recognizes earnings. Examples of accrued assets include unbilled services and accrued interest receivable. The following example will illustrate the recording of accrued interest receivable for the FI.

Accrued Assets

T-account Don Carson forms Carson Catering on December 1, 20X1, and invests $5,000 of his personal funds in the business:

T-account 2. On December 5, Carson Catering pays $500 for advertising in the local paper. The accounts affected are as follows:

T-account 3. In anticipation of catering events, Carson Catering purchases a van on December 8, 20X1, costing $15,000. A down payment of $3,000 is made, and the remainder ($12,000) is financed through Big Motors Acceptance Corporation (BMAC).

T-account 4. On December 12, 20X1, Carson Catering purchases food costing $200 to be served at a party for M.J. Jolly.

T-account 5. On December 13, 20X1, Carson Catering purchases $300 of operating supplies on account from Supplies, Inc. These supplies will be used for several catered events over the next few months.

T-account 6. On December 13, Carson Catering caters the party for M.J. Jolly and receives payment of $800.

T-account 7. On December 19, 20X1, Carson Catering purchases food for a party to be catered for Mary Chris Smith. This transaction is the same as Transaction 4. Food Expense is increased by (debited for) $300, and Cash is decreased by (credited for) $300.

T-account 8. On December 20, 20X1, Carson Catering caters the party for Mary Smith for $1,000. She pays $300, and Carson agrees to allow Mary two weeks to pay the remainder due of $700.

T-account 9. On December 22, 20X1, Carson Catering purchases $25 of gasoline for its van.

T-account 10. On December 28, 20X1, Carson Catering pays $400 to part–time employees who assisted with the two catered events.

T-account 11. On December 28, 20X1, Carson Catering pays Supplies, Inc., the $300 due.

T-account 12. On December 28, 20X1, Don Carson withdraws $200 from Carson Catering for his personal use. The Cash and Drawing accounts are affected as follows

Trial Balance

Open the following T–accounts: Supplies; Prepaid Insurance; Food and Beverage Inventory; Accumulated Depreciation, Equipment; Accumulated Depreciation, Building; Salaries Payable; Cost of Food and Beverage Sales; Salaries Expense; Depreciation Expense, Equipment; Depreciation Expense, Building; Supplies Expense; Insurance Expense. 2. Prepare and post adjusting journal entries based on the following information. a. The physical count of the food and beverage inventory at December 31, 20X3, is $1,650. b. Insurance expired during the year, $500. c. Estimated depreciation of equipment for the year, $1,500. d. Estimated depreciation of the building for the year, $2,500. e. Salaries earned by workers between December 28 (payday) and December 31, $200. f. Physical count of supplies at December 31, 20X3, $1,100.