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Adjusting Entries

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Adjusting Entries Accounting

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Adjusting Entries

  1. 1. Step 4 ADJUSTMENTS
  2. 2. What is an Adjusting Entry? Any entry to record unrecognized income or expenses for the period is called an adjusting entry.
  3. 3. Is it a Revenue or Expense for September or not? ( A General Store) 1. The Sales persons worked in August and received their salary in September, Rs. 50, 000. 2. Sold goods during September Rs. 100, 000. 3. Received cash Rs.7, 000 from the customer, to whom goods were sold in July. 4. Paid rent for the month of June & July, Rs.9, 000. 5. Paid electricity bill for the months of Aug & Sept, Rs.8, 000 and Rs.7, 000 respectively. 6. Paid Rs.4, 000 as telephone bill for September. 7. Paid in Sept, Rs.10, 000 to an employee as advance salary for October. CALCULATE THE REVENUE, EXPENSES AND PROFIT/LOSS FOR THE MONTH OF SEPTEMBER
  4. 4. TYPES OF ADJUSTING ENTRIES:      There are two categories of adjusting entries: Deferral – Prepaid Expense – Unearned revenue – Office Supplies – Depreciation Accrual Accrued Expense Accrued Revenue
  5. 5.    IMPORTANT RULES FOR ADJUSTING ENTRIES   When recording adjusting entries, remember two very important rules:  First, cash is never involved in adjusting entries. Cash is always recorded when it is actually received or paid. Second, adjusting entries always involve either a revenue account or an expense account. An adjusting journal entry involves an income statement account (revenue or expense) along with a balance sheet account (asset or liability) , and typically relates to the accounts for accrued expenses, accrued revenue, prepaid expenses and unearned revenue.
  6. 6. REVENUE  1. RECOGNIZATION CONCEPT: - Revenue is to be recognized when services / goods are sold, no matter the cash has been received or not. THREE TYPES OF REVENUE Services / goods have not been sold, but cash has been received by us in advance. UNEARNED REVENUE --- A Liability Cr Account
  7. 7. Revenue 2. Services / goods have been sold by us and cash has also been received at the same time. A SIMPLE REVENUE requiring no adjustments 3. Services / goods have been sold by us, but cash has not been received by us. ACCRUED REVENUE --- An Asset Dr Account
  8. 8. EXPENSES  MATCHING CONCEPT: Services / Goods have been provided to us / received by us. THREE TYPES OF EXPENSES 1.Services / Goods have not been received by us, but cash has already been paid in advance. PREPAID EXPENSE --- An Asset (Dr. Account)
  9. 9. Expenses 2. Services / Goods received by us, and cash paid at the same time. A SIMPLE EXPENSE requiring no adjustments 3. Services / Goods received by us, but cash has not been paid by us. ACCRUED EXPENSES --- A Liability (Cr. Account)
  10. 10. Adjusting Entries for Revenue Type Adjusting Entry Nature of Ac Title Unearned Revenue Unearned Revenue x x Revenue xx Liability – S. O. F. P. Revenue – I / S Accrued Revenue Accrued Revenue or Revenue Receivable x x Revenue xx Curr. Asset – S. O. F. P. Revenue – I / S
  11. 11. Question 1- Unearned & Accrued Revenue XYZ Business Balances at December 31, Unearned Salary Rs. 15, 000 Data for adjustments: Received advance salary of one month on December 01. b. Salary earned but not received till Dec 31 amounting to Rs. 30, 000 a.
  12. 12. Question 2 – Unearned & Accrued Revenue XYZ Business Balances at December 31, Unearned Salary Rs. 15, 000 Data for adjustments: Received advance salary for three months on December 01. b. Salary earned but not received till Dec 31 amounting to Rs. 30, 000 a.
  13. 13. Adjusting Entries for Expenses Type Prepaid Expenses Adjusting Entry 1. Expense xx Prepaid Expense 2. Supplies Expense Supplies xx Nature of Acc Title xx xx Expense I/S Curr. Asset S. O. F. P. Same as above 3. Depreciation Expense x x Allowance for Dep xx Accrued Expense Expense I/S Contra Asset S.O.F.P. (credit balance) Expense xx Accrued Expense Expense I/S
  14. 14. Question 1 – Prepaid Expense Balances at December 31, Prepaid Insurance Rs. 6, 000 Prepaid Rent Rs. 10, 000 Data for adjustments: a. On July 01, Insurance was paid for six months. b. Rent was paid on Dec 01 for two months.
  15. 15. Question 2 – Prepaid Expense Balances at December 31, Prepaid Salary Rs. 36, 000 Prepaid Rent Rs. 15, 000 Data for adjustments: a. Salary was paid to an employee in advance on November 01 for three months. b. Rent was paid on Oct 01 for five months.
  16. 16. Prepaid Expense (related to supplies) Question 1 Supplies Rs. 45, 000 Data for adjustments: Supplies were sufficient for three months. Question 2 Supplies Rs. 20, 000 Data for adjustments: Supplies on hand as at December 31, Rs. 5, 000.
  17. 17. Prepaid Expense (related to fixed assets) Question 1 Machine Rs. 50, 000 Estimated Useful life 10 years Question 2 Furniture Rs. 15, 000 Estimated useful life 3 years
  18. 18. Accrued Expenses Question 1: Salary for the month not paid Rs. 10, 000. Question 2: Rent for the month not paid Rs. 8, 000.
  19. 19. Question 4 / Page 11 a. The supplies account balance on Dec 31 is Rs. 1, 450. The supplies on hand on Dec 31 are Rs. 695. b. The unearned rent account balance on Dec 31 is Rs. 2, 700, representing the receipt of an advance payment on Dec 01 of three months’ rent from tenants. c. Wages accrued but not paid at Dec 31 are Rs. 3, 100. d. Fees accrued but unbilled at Dec 31 are Rs. 7, 500. e. Depreciation on office equipment for the year is Rs. 550

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