8.1 ADJUSTMENT ENTRIES
What are adjusting entries?
 It is when the account data is being
brought up-to-date at statement time
(also referred to as “making the
adjustments”)
 In most cases, an adjusting entry assigns
amounts of revenue or expense to the
appropriate accounting period before
finalizing the books for the fiscal period
Why do we need to make
adjustments?
 When Preparing financial statements the
accountant must make sure:
a) All accounts are brought up to date by
completing adjusting entries
b) All late transactions are taken into account
c) All calculations have been made correctly
d) All accounting principles and standards have
been followed
Accrual Accounting
 Accrue means to grow or accumulate over
time
 Accrual Accounting means attempting to
record revenues and expenses when they
happen, regardless of whether cash is
received or paid.
Adjusting entry
 Is a journal entry that assigns an
amount of revenue or expense to the
appropriate accounting period; at the
same time , it is an entry that brings a
balance sheet account to its true
value.
Adjustments
 What kind of adjustments are
there?
 Supplies
 Prepaid Expenses
 Late Payments
 Unearned Revenue
1. Supplies
Are you going to go create a source document,
and record a journal entry every time
somebody goes to the supply room and takes
a 10¢ pencil??
No, that would be silly and extremely wasteful
of time
Supplies
 Supplies account is one of those
accounts that is allowed to become
inexact between statement dates
 Therefore, supplies are recorded at
purchase cost and requires an
adjustment at the end of each
accounting period
Example: Supplies
 An organization started this year with
$1480.90 of supplies. An inventory count on
December 31st reveals that $954.90 was used
up.
Supplies
1480.90
526
954.90
Supplies Expense
Adjusting
entry used
up
954.90
954.90
Adjusting Entry Recording on
General Journal
Adjusting Entry:
Supplies Expense
Supplies
954.90
954.90
* Don’t need
explanations
necessarily on
adjustments, but for
other entries we do
2. Late Payments/ Invoices
 Late payments or invoices happens when goods/
services are bought or expenses incurred (happen
at the end of the year) at the end of the year, they
must be recorded in fiscal period they apply to
MATCHING PRINCIPLE
 Matching principle states that each expense item
related to revenue earned must be recorded in the
same accounting period as the revenue it helped to
earn
Examples of late payment
 Telephone Bill
 Truck Repairs
 Miscellaneous expense
 And many more
Late-arriving invoices
pertaining to the 20-3
fiscal period were
 Telephone bill
 Truck Repairs
 Misc. Expense
Total
$ 45.00
496.00
85.00
626.00
T-Accounts
Telephone Expense
Truck Expense
45.00
496.00
45.00
496.00
Misc. Expense
Accounts Payable
85.00
626.00
85.00
626.00
Adjusting Entry
Adjusting Entry:
Telephone Expense
Truck Expense
Misc. Expense
Accounts Payable
45.00
496.00
85.00
626.00
3. Prepayments
 When something is paid in
advance, but benefits extend post
fiscal period
 Examples?
 Licenses
 Rent
 Insurance
Example of Prepayment
 Insurance- Cassidy Cartage buys a 1 year
insurance policy , on August 1st for $816.00
Entry:
Aug. 1 Prepaid Insurance
Bank
Jan. 1
816.00
816.00
Aug. 1
816.00
Cost / Term X Months Used
816/ 12 mons X 5 = $340
5 Months
Dec. 31
12 Months
Adjusting Entry:
Dec. 31 Insurance Expense 340.00
Prepaid Insurance
340.00
To record adjustment for insurance used
Unearned Revenue
 There will be times when you will want to
adjust revenue
 Example:
 Payment in advance, company would have
deposited a cheque for $5000 in December 20-3 for
work performed in January of 20-4 (Debit Bank,
Credit Fees Earned)
 Must remove from Fees Earned account otherwise
recording this deposit as revenue would violate the
revenue recognition principle
Adjusting Entry
 Company had not yet provided a service to
earn any portion of the $5 000.
Fees Earned
5000.00
5000.00
Unearned Revenue
0
5000.00
 Debit of $5000 to Fees Earned cancels the effect of
the original entry. Unearned Revenue is a LIABILITY
ACCOUNT . Customer has a claim on those funds
until the company provides the promised services
Let’s Try it
 Exercise #1 & 2 p. 276-277 (t),
p. 222-224 (w)
 If finish complete Review
Questions #5-22 p. 276 (t)
 Complete Ex. 3, 4, 6 p. 277-278
(t), p. 225-228 (w)