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Adjusting entries 2
The document discusses key accounting principles such as revenue recognition, matching principle, and adjusting entries. It defines different types of adjusting entries including prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. Examples are provided for journal entries to record accrued revenues and expenses. The summary identifies the major concepts covered in the document which are the different types of adjusting entries and how to prepare adjusting entries for accruals.
Adjusting entries 2
- 1. Accounting Principles Adjusting Entries: Accruals
- 2. REVENUE RECOGNITION PRINCIPLE The revenue recognition principle dictates that revenue be recognized in the accounting period in which it is earned. In a service business, revenue is considered to be earned at the time the service is performed.
- 3. THE MATCHING PRINCIPLE The practice of expense recognition is referred to as the matching principle. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues). Revenues expenses earned are offset incurred in this month against.... earning the revenue
- 4. STUDY OBJECTIVE Identify themajor types of adjusting entries. Identify the major types of adjusting entries.
- 5. ADJUSTING ENTRIES Adjusting entriesare required each time financial statements are prepared. Adjusting entries can be classified as 1 prepayments (prepaid expenses or unearned revenues) OR 2 accruals (accrued revenues or accrued expenses)
- 6. TYPES OF ADJUSTING ENTRIES Prepayments 1 Prepaid Expenses — Expenses paid in cash and recorded as assets before they are used or consumed 2 Unearned Revenues — cash received and recorded as liabilities before revenue is earned
- 7. TYPES OF ADJUSTING ENTRIES Accruals 1 Accrued Revenues — Revenues earned but not yet received in cash or recorded 2 Accrued Expenses — Expenses incurred but not yet paid in cash or recorded
- 8. ILLUSTRATION 3-3 TRIAL BALANCE The Trial Balance is the starting place for adjusting entries.
- 9. STUDY OBJECTIVE Prepare adjustingentries for accruals. Prepare adjusting entries for accruals.
- 10. ACCRUALS The second categoryof adjusting entries is accruals. Adjusting entries for accruals are required to record revenues earned and expenses incurred in the current period. The adjusting entry for accruals will increase both a balance sheet and an income statement account.
- 11. ILLUSTRATION 3-10 ADJUSTING ENTRIES FOR ACCRUALS Adjusting Entries Accrued Revenues Asset Revenue Debit Credit Adjusting Adjusting Entry (+) Entry (+) Accrued Expenses Expense Liability Debit Credit Adjusting Adjusting Entry (+) Entry (+)
- 12. ACCRUED REVENUES Accrued revenuesmay accumulate with the passing of time or through services performed but not billed or collected. An asset-revenue account relationship exists with accrued revenues. Prior to adjustment, assets and revenues are understated. The adjusting entry requires a debit to an asset account and a credit to a revenue account.
- 13. ADJUSTING ENTRIES FORACCRUALS ACCRUED REVENUES ADJUSTMENT ADJUSTMENT October 31, the agency earned $200 for advertising services that were not billed to clients before October 31. JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING
- 14. ACCRUED EXPENSES Accrued expensesare expenses incurred but not paid yet. A liability-expense account relationship exists Prior to adjustment, liabilities and expenses are understated The Adjusting Entry results in a debit to an expense account and a credit to a liability account
- 15. ADJUSTING ENTRIES FORACCRUALS ACCRUED INTEREST ADJUSTMENT ADJUSTMENT October 31, the portion of the interest to be accrued on a 3-month note payable is calculated to be $50. JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING
- 16. ADJUSTING ENTRIES FORACCRUALS ACCRUED SALARIES ADJUSTMENT ADJUSTMENT October 31, accrued salaries are calculated to be $1,200. JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING
- 17. ILLUSTRATION 3-16 SUMMARY OF ADJUSTING ENTRIES 1 Prepaid Assets and Assets overstated Dr. Dr. Expenses expenses expenses Expenses understated Cr. Cr. Assets 2 Unearned Liabilities and Liabilities overstated Dr. Liabilities Dr. revenues revenues Revenues understated Cr. Revenues Cr. 3 Accrued Assets and Assets understated Dr. Assets Dr. revenues revenues Revenues understated Cr.Cr. Revenues 4 Accrued Expenses and Expenses understated Dr. Expenses Dr. expenses liabilities Liabilities understated Cr. Liabilities Cr.
- 18. Effects of theAdjusting Entries Make end-of- Journalize year Post entries to Prepare trial transactions. adjustments. the ledger balance. accounts. Let’s look at JJ’s Lawn Care Let’s look at JJ’s Lawn Care Services’ adjusted trial balance. Services’ adjusted trial balance. Prepare adjusted trial balance.