Adjusting entries are required at the end of each accounting period to account for transactions that affect more than one period. This includes prepaid expenses that are recorded as assets and amortized over multiple periods, accrued expenses that are recorded as liabilities, unearned revenue that is initially recorded as a liability and recognized over multiple periods, and accrued revenue that is initially recorded as an asset. Examples of adjusting entries provided include entries to allocate prepaid rent over a year, recognize accrued salaries, and record accrued commission revenue.

1. ADJUSTING ENTRIES
Muhammad Adeel Zaman

2. Accounting Period & Financial Statements
 For the purpose of measuring net income and preparing
financial statements, the life of a business is divided into
accounting periods of equal length.
 Because accounting periods are equal in length, we can
compare of the income of the current period with the
prior periods to see if operating results are improving or
declining.

3. Transaction affecting more than One
Accounting Period
 Dividing the life of a business into relatively short
accounting periods requires the use of adjusting entries
at the end of each accounting period.
 Those transaction which affect the revenues and
expenses of more than one accounting period requires
adjusting entries.

4. Related terminologies
Expenses:
1. Prepaid Expenditures
2. Out-standing Expenses/ Accrued expenses
Revenues:
1. Pre-received Revenue
2. Out-standing Revenue/ Accrued revenue

5. Prepaid Expenses
That expenses which is paid but the benefits are not yet acquired
from such expenditures.
They are assets of the business and recorded in the balance
sheet.
At the end of each accounting period such expenditures need
adjusting entries.
For example,
1. Prepaid salaries
2. Prepaid rent
3. Prepaid commission etc

6. Out-standing Expenses
Those expenses that occurred but not yet paid
We have to pay such expenses and hence these are the liabilities
for the business and to be recorded in Balance Sheet. Out-
standing expenses also called Accrued expenses.
Such expenses required adjusting entries at the end of
Accounting Period.
For example:
1. Out-standing salaries
2. Out-standing rent of the building etc

7. Pre-received Revenue
That revenue which we received in advance, means prior to the
supply of good or services provided.
Such revenues are liabilities for the business until goods are
provided or services rendered. Therefore we have to record such
revenue in our balance sheet’s liability side.
Pre-received revenues also required some adjustment at the end
of accounting period.
Examples are:
1. Pre-received sales’ amount
2. Pre-received commission’s amount etc

8. Out-standing revenue/ Accrued
revenue
That revenue which we have already earned but still we haven’t
received.
Such revenue is our asset just like Account Receivable and we
have to mention it on assets side in balance sheet.
Such revenues requires adjustment at the end of accounting
period.
Examples are:
1. Out-standing commission
2. Out-standing sales amount etc

9. Types of Adjusting Entries
1. Entries to apportion recorded cost
(for pre-paid expenses)
2. Entries to apportion un-earned revenue
(for pre-received revenues)
3. Entries to record un-recorded expenses
(for out-standing expenses)
4. Entries to record un-recorded revenues
(for out-standing revenues)

10. Entries to apportion recorded cost
(for pre-paid expenses)
On August 1st 2009:
Rent is paid to the owner of the building $ 12,000.
The journal entry would on 1st August:
Date Description Dr. Cr.
Aug
1st
Prepaid rent
Cash
(Rent paid for one year)
$ 12,000
$ 12,000

11. Entries to apportion recorded cost
(for pre-paid expenses)
On August 31st 2009:
An adjusting entry is required to apportion the pre-paid expense.
Rent paid for one year (means 12 months)….$ 12,000
Per month rent: $12,000/12 = $ 1,000.
Rent for August…… $ 1,000
Date Description Dr. Cr.
August
31st
Rent Expenses
Prepaid rent
(adjusting the pre-paid rent)
$ 1,000
$ 1,000

12. Entries to apportion un-earned revenue
(for pre-received revenues)
On 1st March 2009:
Commission received $ 24,000 for providing guidance for one year.
The journal entry would me made on 1st March.
Date Description Dr. Cr.
March
1st
Cash
Un-earned commission
(commission received in advance)
$ 24,000
$ 24,000

13. Entries to apportion un-earned revenue
(for pre-received revenues)
On 31st March 2009:
An adjusting entry is required to adjust the apportion the un-earned
revenue.
Commission received on march 1st $ 24,000 for one year (means
12 months)
Per month commission: $24,000/12 = $2,000
Commission of March, 2009…………$2,000
Date Description Dr. Cr.
March
31st
Un-earned commission
Commission earned
(adjusting commission account)
$ 2,000
$ 2,000

14. Entries to record un-recorded expenses
(for out-standing expenses)
This is 31st March 2009 but salaries is to be paid to employees on
every 4th date of next month as per company’s policy. Salaries of
employees is amounting $ 1600 for the month.
4th of next month means salaries are to be paid on April 4th 2009.
An adjusting entry is required to record such un-paid salaries.
Date Description Dr. Cr.
March
31st
Salaries expenses
Salary payable
(adjusting entry for out-standing salaries)
$ 1600
$ 1600

15. Entries to record un-recorded revenues
(for out-standing revenues)
This is 31st August 2009. We have provided services to our
customers but the commission is not yet received from them.
Commission amount is $ 2,560.
An adjusting entry is required to record such out-standing revenue
of the commission earned.
Date Description Dr. Cr.
Aug
31st
Commission Receivable
Commission earned
(adjusting entry for out-standing salaries)
$ 2,560
$ 2,560