Learning Objectives
LO4
Differentiate between the different types of adjusting journal
entries and understand their purposes.
LO5
Analyze transactions and economic events, record them using
journal entries, post entries to T-accounts, and prepare and use
the trial balance to prepare financial statements.
LO6
Explain the purpose of journal entries and describe how to
prepare them.
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LO4
Transactional vs. Adjusting entries
 Transactional-triggered by exchanges with
another entity.
 Adjusting-entries to accrual accounting system
not triggered by exchanges with outside entity.
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LO4
Adjusting Entries
• Recorded at end of accounting period.
• Four types of adjusting entries:
▫
▫
▫
▫
Deferred/prepaid expense
Deferred revenue
Accrued expense/liability
Accrued revenue/asset
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LO4
Tips on Adjusting Entries
• Required because revenues and expenses can
be recognized at times other than cash
exchange
• Associated with transactional entry
• Only required in preparing statements
• One balance sheet account and one income
statement account
• Never involve cash
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LO4
Prepaid Expense
• Assets that benefit more than one accounting
period
• Future benefits consumed as time passes
• Example: insurance policies
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LO4
Deferred Revenue
• Payments received in advance
• No revenue recognized on receipt of cash
• Revenue recognized on supply of goods or
services
• Unearned revenue – the liability recorded
when cash is received before is revenue
recognized
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LO4
Accrued Expense
• Liability recognized before invoice received
• Economic event is consuming the goods or
services
• Transferred to accounts payable or paid when
invoice received
• Example: accrued wages payable
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LO4
Accrued Revenue
• Revenue recognized before cash received or
invoice issued
▫ Interest revenue
▫ Project revenues
• Revenue earned but no exchange with another
entity
• Example: interest or royalty revenues
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LO4,6
Closing Entries
• Balance sheet accounts are permanent
accounts
• Income statement accounts are temporary
accounts
• Closing entries “close” temporary accounts
• Occurs at end of accounting period
• Balance transferred to retained earnings or
owners’ equity
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