1. 8.1 Adjustment Entries

2. 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

3. 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

4. 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.

5. 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.

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

7. 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

8. 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

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

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

11. 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

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

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

14. 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

15. Adjusting Entry Adjusting Entry: Telephone Expense 45.00
Truck Expense
Misc. Expense
Accounts Payable

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

17. Example of Prepayment
Insurance- Cassidy Cartage buys a 1 year insurance policy , on August 1st for $816.00
Entry:
Aug Prepaid Insurance
Bank
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 Insurance Expense
Prepaid Insurance
To record adjustment for insurance used

18. 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

19. 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
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

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