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: a) All accounts are brought up to date by completing adjusting entries b) All late transactions are taken into account c) All calculations have been made correctly d) All GAAPs have been followed

Where do we record adjusting entries?  Adjusting entries are: 1. Recorded on the worksheet (8 column) under the ADJUSTMENTS column 2. Then extend and balance the worksheet 3. Adjusting entries are journalized and posted to the ledger with closing entries

Adjustments  What kind of adjustments are there?  Supplies  Late Payments  Insurance

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  An organization started this year with $ of supplies. An inventory count on December 31 st reveals that $ was used up. Supplies Adjusting entry used up Adjusting Entry: Supplies Expense Supplies * Don’t need explanations necessarily on adjustments, but for other entries we do

Cassidy Cartage Work Sheet Year Ended December 31, 2011 AccountsTrial BalanceAdjustmentsIncome StatementBalance Sheet DRCRDRCRDRCRDRCR Bank Accounts Receivable Supplies *ENDING* Prepaid Insurance Furniture & Equipment Automotive Equipment Accounts Payable HST Payable HST Recoverable Bank Loan P. Marshall, Capital P. Marshall, Drawings Cartage Revenue Bank Charges Expense Light & Heat Expense Miscellaneous Expense Rent Expense Telephone Expense Truck Expense Wages Expense Supplies Expense

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 Payments  Telephone Bill  Truck Repairs  Miscellaneous expense  And many more Adjusting Entry: Telephone Expense Truck Expense Misc. Expense Accounts Payable

Cassidy Cartage Work Sheet Year Ended December 31, 2011 AccountsTrial BalanceAdjustmentsIncome StatementBalance Sheet DRCRDRCRDRCRDRCR Bank Accounts Receivable Supplies ENDING* Prepaid Insurance Furniture & Equipment Automotive Equipment Accounts Payable * HST Payable HST Recoverable Bank Loan P. Marshall, Capital P. Marshall, Drawings Cartage Revenue Bank Charges Expense Light & Heat Expense Miscellaneous Expense * Rent Expense Telephone Expense * Truck Expense * Wages Expense Supplies Expense

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 1 st for $ Entry: Aug. 1 Prepaid Insurance Bank Jan. 1Aug. 1Dec Months 5 Months Cost / Term X Months Used 816/ 12 mons X 5 = $340 Adjusting Entry: Dec. 31 Insurance Expense Prepaid Insurance To record adjustment for insurance used

Cassidy Cartage Work Sheet Year Ended December 31, 2011 AccountsTrial BalanceAdjustmentsIncome StatementBalance Sheet DRCRDRCRDRCRDRCR Bank Accounts Receivable Supplies ENDING* Prepaid Insurance * Furniture & Equipment Automotive Equipment Accounts Payable HST Payable HST Recoverable Bank Loan P. Marshall, Capital P. Marshall, Drawings Cartage Revenue Bank Charges Expense Light & Heat Expense Miscellaneous Expense * Rent Expense Telephone Expense * Truck Expense * Wages Expense Supplies Expense Insurance Expense Net Income

Cassidy Cartage Work Sheet Year Ended December 31, 2011 AccountsTrial BalanceAdjustmentsIncome StatementBalance Sheet DRCRDRCRDRCRDRCR Bank Accounts Receivable Supplies ENDING* Prepaid Insurance * Furniture & Equipment Automotive Equipment Accounts Payable HST Payable HST Recoverable Bank Loan P. Marshall, Capital P. Marshall, Drawings Cartage Revenue Bank Charges Expense Light & Heat Expense Miscellaneous Expense * Rent Expense Telephone Expense * Truck Expense * Wages Expense Supplies Expense Insurance Expense Net Income

Let’s Try it  Exercise #1 p. 308 (t), p. 219 (w)  Calculate the blank figures for supplies & Prepaid Insurance  Exercise #2 p. 308 (t), p. 219 (w)  Prepare the adjusting entries according to the information