Chapter 4
Tutoring Monk
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Adjusting Entries
Needed at the end of each accounting period to make certain that appropriate amounts of revenue and
expenses are reported in the company’s income statement.
Type of Adjusting Entries
Converting assets to expenses
The asset account created actually represents the deferral of an expense. Adjusting entry is made to
allocate a portion of the asset’s cost from the Balance Sheet to the income statement.
Converting liabilities to revenue
Liability account created represents the deferral ( or the postponement) of a revenue.
Adjusting entry is made to allocate a portion of the liability from the balance sheet to the income
statement to recognize the revenue earned during the period.
Accruing unpaid expenses
An expense may be incurred in the current accounting period even though no cash payment will occur
until a future period.
Accruing uncollected revenue
Revenue may be earned during the current period, even though the collection of cash will not occur
until a future period.
ADJUSTING ENTRIES ARE ALWAYS WHAT YOU USED OR WHAT YOU EARNED!!!
EVERY adjusting entry involves the recognition of either revenue or expenses.
Every adjusting entry affects both an income statement (revenue or expenses) and a balance sheet
account (asset or liability)
Depreciation means the systematic allocation of the cost of a depreciable asset to expense over the
asset’s useful life. The rationale for depreciation lies in the matching principle. Our goal is to offset a
reasonable portion of the asset’s cost against revenue in each period of the asset’s useful life.
Depreciation= cost of asset/ estimated useful life. Depreciation is a non-cash expense
Matching Principle- Revenues and expenses should be matched with the periods to which they apply,
regardless of when cash is paid.
Realization Principle- is that revenue should be recognized at the time goods are sold and services are
rendered.
Chapter 4
Tutoring Monk
TutoringMonk.com
Some Key rules for Adjusting Entries:
NO CASH IS INVOLVED!
You will never do the following for an adjusting entry question:
You will NEVER debit REVENUE
You will NEVER credit an EXPENSE
You will NEVER choose an ANSWER that has CASH in it!