1. Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems
Accounting I BA 104
Chapter 6
Adjusting deferrals and accruals Accounts
Dr. Mohamed A. Hamada
Lecturer of Accounting Information Systems

2. Study Objectives Identify the major types of adjusting entries.
Prepare adjusting entries for deferrals.
Prepare adjusting entries for accruals.
Describe the nature and purpose of an adjusted trial balance.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

3. Main features of Adjustments
Adjusting entries are internal transactions—no new source document exists for the adjustment.
Adjusting entries are non-cash transactions—the Cash account will never be used in an adjusting entry.
Adjusting entries will always involve at least one income statement account and one balance sheet account.

4. Case 1 , pre-paid expenses
Journal Entry
Pre-paid expense (debit)
Cash (credit)
Adjusting Entry
Expense (debit) consumed amount in the period
Pre-paid expense (credit)

7. Case 2 “Unearned Revenues”
Receipt of cash that is recorded as a liability because the revenue has not been earned.
Cash Receipt
Revenue Recorded
BEFORE
Unearned revenues often occur in regard to:
rent
airline tickets
school tuition
magazine subscriptions
customer deposits

8. Adjusting Entries for “Unearned Revenues”
are items that have been initially recorded as liabilities but are expected to become revenues over time or through the normal operations of the business.
These are deposits by customers for work to be done in the future.
EX: Unearned rent

11. Unearned Revenues Example
On 1/10/98, the El-Ahram Gazette received $240 for a one-year subscription. The monthly subscription rate is $20.
GENERAL JOURNAL
Page: 1
Date
Description PR
Debit
Credit
Prepare the proper initial journal entry.

12. Unearned Revenues Example
On 1/10/98, the El-Ahram Gazette received $240 for a one-year subscription. The monthly subscription rate is $20.
GENERAL JOURNAL
Page: 1
Date
Description PR
Debit
Credit
1-Oct
Cash
240
Unearned Subscriptions
240
to record receipt of one-year
subscription payment

13. Unearned Revenues Example
The El-Ahram Gazette’s fiscal year-end is on 31/12/98 (three months later). Record the adjustment necessary at 31/12/98.
GENERAL JOURNAL
Page: 1
Date
Description PR
Debit
Credit
Prepare the proper adjusting journal entry.

14. Unearned Revenues Example
The El-Ahram Gazette’s fiscal year-end is on 31/12/98 (three months later). Record the adjustment necessary at 31/12/98.
GENERAL JOURNAL
Page: 1
Date
Description PR
Debit
Credit
31-Dec
Unearned Subscriptions 60
Subscription Revenue 60
to record recognition of three
months of subscription earned
$20 x
3 months = $60

15. Adjusting entries for Accruals
Second
Adjusting entries for Accruals

16. Adjusting Entries for Accruals
Made to record:
Revenues earned (Accrued Revenues)and OR
Expenses incurred (Accrued Expenses)
in the current accounting period that have not been recognized through daily entries.

17. Case 3 : Adjusting Entries for “Accrued Revenues”
Revenues earned but not yet received in cash or recorded.
Adjusting entry results in:
Revenue Recorded
Cash Receipt
BEFORE
Accrued revenues often occur in regard to:
rent
interest
services performed

18. Adjusting Entries for “Accrued Revenues”
An adjusting entry serves two purposes:
(1) It shows the receivable that exists, and
(2) It records the revenues earned.

19. Adjusting Entries for “Accrued Revenues”
Illustration: In October Pioneer Advertising Agency earned $200 for advertising services that had not been recorded.
Oct. 31
Accounts Receivable
200
Service Revenue
200
Illustration 3-14

20. Accrued Revenues Example
On 31/12/97, First Bank owes your company $100 of interest on your account. You will receive the interest on 10/1/98.
GENERAL JOURNAL
Page: 1
Date
Description PR
Debit
Credit
Prepare the proper adjusting journal entry.

21. Accrued Assets/Revenues Example
On 31/12/97, First Bank owes your company $100 of interest on your account. You will receive the interest on 10/1/98.
GENERAL JOURNAL
Page: 1
Date
Description PR
Debit
Credit
31-Dec
Interest Receivable
100
Interest Revenue
100
to record interest earned but
not yet received

22. Adjusting Entries for “Accrued Expenses”
Expenses incurred but not yet paid in cash or recorded.
Adjusting entry results in:
Expense Recorded
Cash Payment
BEFORE
Accrued expenses often occur in regard to:
rent
interest
taxes
salaries

23. Adjusting Entries for “Accrued Expenses”
An adjusting entry serves two purposes:
(1) It records the obligations, and
(2) It recognizes the expenses.

24. Accrued Liabilities/Expenses Example
At 31/12/97, your company owes $400 of interest to Big Corp. You will not actually pay the interest until 10/1/98.
GENERAL JOURNAL
Page: 1
Date
Description PR
Debit
Credit
Prepare the proper adjusting journal entry.

25. Accrued Liabilities/Expenses Example
At 12/31/97, your company owes $400 of interest to Big Corp. You will not actually pay the interest until 1/10/98.
GENERAL JOURNAL
Page: 1
Date
Description PR
Debit
Credit
31-Dec
Interest Expense
400
Interest Payable
400
to recognize interest owed to
Big Corporation

26. Adjusting Entries for “Accrued Expenses”
Illustration: Pioneer Advertising Agency signed a three-month note payable in the amount of $5,000 on October 1. The note requires Pioneer to pay interest at an annual rate of 12%.
Oct. 31
Interest expense 50
Interest payable 50
Illustration 3-18

27. Accounting cycle , The Adjusted Trial Balance
After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance).
After adjusted trial balance is prepared, this should be Followed by preparing the financial statements .

28. The Adjusted Trial Balance

29. Review Question The Adjusted Trial Balance
Which of the following statements is incorrect concerning the adjusted trial balance?
An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
The adjusted trial balance provides the primary basis for the preparation of financial statements.
The adjusted trial balance lists the account balances segregated by assets and liabilities.
The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.

30. Adjusting Journal Entries Question
On 10/1/98, BeeBee Inc. pays $3,600 for a 12-month insurance policy. What kind of transaction would this be called?
a. Accrued Liability
b. Prepaid Expense
c. Accounting Estimate
d. Unearned Revenue

31. Adjusting Journal Entries Question
On 10/1/98, BeeBee Inc. pays $3,600 for a 12-month insurance policy. What kind of transaction would this be called?
a. Accrued Liability
b Prepaid Expense
c. Accounting Estimate
d Unearned Revenue

32. Adjusting Journal Entries Question
The last day of 1998 is on a Thursday. CeeCee Inc. will pay its employees on Friday. What kind of adjusting entry is required?
a. Accrued Liability
b. Accrued Asset
c. Accounting Estimate
d. Unearned Revenue

33. Adjusting Journal Entries Question
The last day of 1998 is on a Thursday. CeeCee Inc. will pay its employees on Friday. What kind of adjusting entry is required?
a. Accrued Liability
b. Accrued Asset
c. Accounting Estimate
d. Unearned Revenue

34. Preparing Financial Statements
Financial Statements are prepared directly from the Adjusted Trial Balance.
Balance Sheet
Income Statement
Owner’s Equity Statement

35. Preparing Financial Statements
Illustration 3-25 Preparation of the income
statement and owner’s
equity statement from the
adjusted trial balance

36. Preparing Financial Statements
Illustration 3-26

37. Example : The ledger of Ale, Inc
Example : The ledger of Ale, Inc. on March 31, 2010, includes the following selected accounts before adjusting entries.
An analysis of the accounts shows the following:
1. Insurance expires at the rate of $300 per month.
2. Supplies on hand total $900.
3. The office equipment depreciates $500 per month.
4. 2/5 of the unearned revenue was earned in March.
Prepare the adjusting entries for the month of March.

39. End of this chapter Very thanks