Accounts Requiring Adjustment Example Exercise 3-1 Four basic types of accounts require adjusting entries and include: Prepaid Expenses Unearned Revenues Accrued Expenses Accrued Revenues Accounts Requiring Adjustment Many accounts in the general ledger are recorded without change in the financial statements. However, some accounts require updating and are recorded as “adjusting entries” for the following reasons: first, some expense that have been prepaid [CLICK] are not recorded as the asset is used or expires. For example, the daily use of supplies would require many entries with small amounts. Secondly, cash may be received before the service is performed, [CLICK] such as rent received in advance. A portion of the prepayment is earned as each day passes, but to make a daily entry to reflect this would be burdensome. Some debts accrue [CLICK] as time passes that need to be recorded on the books to show the expenses and liabilities related to them. A company may have provided services for which cash has not yet been received (CLICK] nor recorded as revenue by the end of the accounting period. To properly reflect the correct revenues and expenses, periodic adjusting entries are required.

Accounts Requiring Adjustment Example Exercise 3-1 Accounts Requiring Adjustment Adjusting entries always affect at least one income statement account and at least one balance sheet account.

Accounts Requiring Adjustment Example Exercise 3-1 Accounts Requiring Adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. Cash - No Answer “yes” or ‘no” each of the following account as to whether or not they normally require an adjusting entry. The first one is Cash. [CLICK] [DELAY 3 SECONDS THEN CLICK TO REVEAL THE ANSWER] Cash is never changed with an adjusting entry.

Accounts Requiring Adjustment Example Exercise 3-1 Accounts Requiring Adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. Cash Prepaid Rent - Yes [DELAY, THEN CLICK] Yes, prepaid expenses are for the payment of future expenses and can be recorded as an asset when cash is paid. Prepaid expenses become expenses as time passes or the asset is used. For example, assume rent is paid in advance for the next three months for $2,400. At the end of the accounting period the books must reflect how much of the prepaid has been used by making an adjusting entry of $800 for each month that has passed since the rent was paid. In this example, assume one month has passed when the adjusting entry is made. The entry must reflect that one month, or $800, is no longer an asset. An expense account, Rent Expense, is debited for $800 and an asset account, Prepaid Rent, is credited for $800.

Accounts Requiring Adjustment Example Exercise 3-1 Accounts Requiring Adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. Cash Prepaid Rent Wages Expense [DELAY, THE CLICK] Accrued expenses represent expenses that have been incurred but not yet recorded. Assume that wages are paid each Friday for wages incurred during the past week. The end of the year falls on a Wednesday this year. Thus, wages expense has been incurred for the current period for three days, or Monday through Wednesday but have not been recorded. An expense account, Wages Expense, is debited and a liability, Wages Payable is credited for three days of wages. - Yes

Accounts Requiring Adjustment Example Exercise 3-1 Accounts Requiring Adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. Cash Prepaid Rent Wages Expense Office Equipment [DELAY, THEN CLICK] No, Office Equipment does not require an adjusting entry. However, as we will later see, a contra asset, Accumulated Depreciation, will require an adjusting entry. - No

Accounts Requiring Adjustment Example Exercise 3-1 Accounts Requiring Adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. Cash Prepaid Rent Wages Expense Office Equipment Accounts Receivable [DELAY, THEN CLICK] Yes, accrued revenues represent revenues that have been earned. Since cash is not yet received, the asset account, Accounts Receivable is debited for the amount of revenue earned and a revenue account is credited. - Yes

Accounts Requiring Adjustment Example Exercise 3-1 Accounts Requiring Adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry. Cash Prepaid Rent Wages Expense Office Equipment Accounts Receivable Unearned Rent [DELAY, THEN CLICK] Yes, Unearned Rent represents cash that has been received but not earned. Rent normally is received in advance from the tenant. Often a liability is established upon the cash receipt which shows that the owner of the property has an obligation to provide space to the tenant. At the end of the accounting period, if some of the rent has been earned, an adjusting entry is needed to reduce the liability and to record the earned rent revenue. - Yes

Example Exercise 3-1 For Practice: PE 3-1A, PE 3-1B Refer to Practice Exercise PE 3-1A and PE 3-1B for accounts requiring adjustment. For Practice: PE 3-1A, PE 3-1B