8.1 Adjustment Entries

What are adjusting entries? It is when the account data is being brought up-to-date at statement time (also referred to as “making the adjustments”) In most cases, an adjusting entry assigns amounts of revenue or expense to the appropriate accounting period before finalizing the books for the fiscal period

Why do we need to make adjustments? When Preparing financial statements the accountant must make sure: All accounts are brought up to date by completing adjusting entries All late transactions are taken into account All calculations have been made correctly All accounting principles and standards have been followed

Accrual Accounting Accrue means to grow or accumulate over time Accrual Accounting means attempting to record revenues and expenses when they happen, regardless of whether cash is received or paid.

Adjusting entry Is a journal entry that assigns an amount of revenue or expense to the appropriate accounting period; at the same time , it is an entry that brings a balance sheet account to its true value.

What kind of adjustments are there? Supplies Prepaid Expenses Late Payments Unearned Revenue

1. Supplies Are you going to go create a source document, and record a journal entry every time somebody goes to the supply room and takes a 10¢ pencil?? No, that would be silly and extremely wasteful of time

Supplies Supplies account is one of those accounts that is allowed to become inexact between statement dates Therefore, supplies are recorded at purchase cost and requires an adjustment at the end of each accounting period

Example: Supplies Supplies Expense Supplies An organization started this year with $1480.90 of supplies. An inventory count on December 31st reveals that $954.90 was used up. Supplies Expense Supplies Adjusting entry used up 954.90 1480.90 954.90 954.90 526

Adjusting Entry Recording on General Journal Supplies Expense 954.90 Supplies 954.90 * Don’t need explanations necessarily on adjustments, but for other entries we do

2. Late Payments/ Invoices Late payments or invoices happens when goods/ services are bought or expenses incurred (happen at the end of the year) at the end of the year, they must be recorded in fiscal period they apply to MATCHING PRINCIPLE Matching principle states that each expense item related to revenue earned must be recorded in the same accounting period as the revenue it helped to earn

Examples of late payment Telephone Bill Truck Repairs Miscellaneous expense And many more

Late-arriving invoices pertaining to the 20-3 fiscal period were Telephone bill $ 45.00 Truck Repairs 496.00 Misc. Expense 85.00 Total 626.00

T-Accounts Telephone Expense Truck Expense Misc. Expense 45.00 496.00 45.00 496.00 Misc. Expense Accounts Payable 85.00 626.00 85.00 626.00

Adjusting Entry Adjusting Entry: Telephone Expense 45.00 Truck Expense 496.00 Misc. Expense 85.00 Accounts Payable 626.00

3. Prepayments When something is paid in advance, but benefits extend post fiscal period Examples? Licenses Rent Insurance

Example of Prepayment Insurance- Cassidy Cartage buys a 1 year insurance policy , on August 1st for $816.00 Entry: Aug. 1 Prepaid Insurance 816.00 Bank 816.00 Jan. 1 Aug. 1 Dec. 31 5 Months 816.00 12 Months Cost / Term X Months Used 816/ 12 mons X 5 = $340 Adjusting Entry: Dec. 31 Insurance Expense 340.00 Prepaid Insurance 340.00 To record adjustment for insurance used

Unearned Revenue There will be times when you will want to adjust revenue Example: Payment in advance, company would have deposited a cheque for $5000 in December 20-3 for work performed in January of 20-4 (Debit Bank, Credit Fees Earned) Must remove from Fees Earned account otherwise recording this deposit as revenue would violate the revenue recognition principle

Adjusting Entry Unearned Revenue Fees Earned Company had not yet provided a service to earn any portion of the $5 000. Fees Earned Unearned Revenue 5000.00 5000.00 5000.00 Debit of $5000 to Fees Earned cancels the effect of the original entry. Unearned Revenue is a LIABILITY ACCOUNT . Customer has a claim on those funds until the company provides the promised services

Exercise #1 & 2 p. 276-277 (t), p. 222-224 (w) Let’s Try it Exercise #1 & 2 p. 276-277 (t), p. 222-224 (w) If finish complete Review Questions #5-22 p. 276 (t)