Financial accounting presentation for 4 chapter.

1. Financial Accounting
 ASAD TAHIR

2. ADJUSTING ENTRIES
 Adjusting entries are usually made on the last day of an accounting
period (year, quarter, month) so that the financial statements reflect
the revenues that have been earned and the expenses that were
incurred during the accounting period
WHY USE
At the end of the month the accountant needed to make an adjusting entry to
one of the accounts due to a reversal in a payment.

3. Adjusting Entries in Accounting –
Introduction
 Adjusting Entries are journal entries that are made at the end of the
accounting period, to adjust expenses and revenues to the accounting period
where they actually occurred. Generally speaking, they are adjustments
based on reality, not on a source document. This is in sharp contrast to
entries during the accounting period (such as utility bills or fees for services
rendered) that depend on source documents

4. Examples of Adjusting Entries
 By their nature, all adjusting entries will involve a pairing of either an asset
or liability account with a revenue or expense account. Here are some typical
examples of adjusting entries of each type mentioned above:

5. Types of Adjusting Entries
 Accrued revenues (also called accrued assets) are revenues already earned
but not yet paid or recorded.
 Unearned revenues (or deferred revenues) are revenues received in cash and
recorded as liabilities prior to being earned.
 Accrued expenses (also called accrued liabilities) are expenses already
incurred but not yet paid or recorded.
 Prepaid expenses (or deferred expenses) are expenses paid in cash and
recorded as assets prior to being used.
 Other adjusting entries include depreciation of fixed assets, allowances for
bad debts, and inventory adjustments.

6. Accrued revenues
(Accruing uncollected revenue)
 Say your company provided $1,600 worth of consulting services to the Bogus
Manufacturing Company over the past month, and today is the end of the
accounting period. The consulting hours will be billed and collected next
month, well past when you’ll be preparing a trial balance, financial
statements, closing entries, etc. In this case, you need an adjusting entry to
account for the unbilled services:

7. Example
ADJUSTING ENTRY DEBITS CREDITS
Accounts Receivable 1,600.00
Consulting Fees Earned 1,600.00

8. Unearned revenues
(liability into revenue)
 Bogus Manufacturing Company purchased an annual service contract from you
for $24,000, which they paid up front. If only three months of their contract
are within this accounting period, then that means nine months of the
contract’s revenues are unearned. In order to properly reflect reality, you
need an adjusting entry:

9. Example:
ADJUSTING ENTRY DEBITS CREDITS
Unearned Revenue 18,000.00
Revenue 18,000.00

10. Accrued Expenses
(Unpaid Expenses)
 If you pay weekly salaries and the accounting period ends mid-week, you have
accrued salary expenses that you haven’t yet paid. You’ll need an adjusting
entry to reflect the as-yet unpaid salaries

11. Example
ADJUSTING ENTRY DEBITS CREDITS
Salary Expense 7,200.40
Wages and Salaries
Payable
7,240.40

12. Prepaid expenses
(converting asset into liability)
 Let’s say you paid $3,000 for your property insurance six months ago, and you
still have six paid months remaining on the policy after this accounting
period. To accurately reflect the value and expense of the remaining policy,
you need an adjusting entry

13. Example
ADJUSTING ENTRY DEBITS CREDITS
Property & Casualty
Expense
1,500.00
Prepaid Insurance 1,500.00

14. EXAMPLE
 Nishaat Company acquired a six-month insurance coverage
for its properties on June 1, 2015 for a total of $12,000.
DR CR
June 1 Prepaid Insurance $12,000
Cash $12,000

15. Depreciation:
 Other adjusting entries — Your company purchased $1 million of
manufacturing equipment two years ago, and according to your
depreciation schedule it has depreciated by $350,500 this accounting
period. To ensure that your balance sheet doesn’t overstate the
equipment’s value, you need an adjusting entry

16. Example
ADJUSTING ENTRY DEBITS CREDITS
Depreciation Expense 350,500.00
Accumulated Depreciation
– Equipment
350,500.00

17. Depreciation formula:
 Depreciation = Cost of Asset / Estimate life of asset
 If a car price is 5000$ and its estimated life is 5 years then using formula:
 Depreciation = 5000 / 5 => 1000 per year depreciation

18. Thank you !