FINANCIAL
ACCOUNTING
Lecture Week 10
Adjusting Entries
Ayesha Ashraf
Lecturer Department of Business Administration
University of Sahiwal
Recap of Last Week
• Discussed how to:
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use the ledger accounts,
debit and credit entries,
double entry accounting,
the equality of debits and credits,
recording transactions in ledger accounts
Learning Objectives
• To understand the concept of:
 The importance of adjusted entries
 How to pass adjusted entries
 Adjusted trial balance
Adjusting Process
• The balances of the accounts are normally the amounts reported in trial
balances, however some accounts require updating for the following
reasons:
• Some expenses are not recorded daily. For example, the daily use of
supplies would require many entries with small amounts.
• Some revenues and expenses are incurred as time passes rather than as
separate transactions. For example, rent received in advance (unearned
rent).
• Some revenues and expenses may be unrecorded. For example, a
company may have provided services to customers that it has not billed.
Types of Adjusting Entries
•
•
•
•
•
Accrued Revenue
Accrued Expenses
Unearned Revenue
Prepaid Expense
Depreciation
Accrued Revenue/Income
Revenues earned but not yet received in cash or recorded.
• Recognition
– Accrued/outstanding/ receivable /not yet received
• If you perform a service for a customer in one month but don't bill the
customer until the next month, you would make an adjusting entry
showing the revenue in the month you performed the service.
Date
Description
Debit
MM DD, YY
Account Receivable
$ XXXX
Service Revenue
Credit
XXXX
Accrued Expenses(still payable)
Expenses incurred but not yet paid in cash or recorded.
• Recognition
– Accrued/outstanding/ payable /not yet paid
• A good example of accrued expenses is wages paid to employees.
Date
Description
$ Debit
MM, DD, YY
Wages Expense
XXXX
Wages Payable/Accrued Exp.
$ Credit
XXXX
Unearned Revenue( in advance income)
• Revenues received in cash and recorded as liabilities before they are
earned.
• Recognition
– Outstanding/ receivable /not yet received
• If you are supposed to perform a services from a company in March and
you receive pay for it in Feb.
Date
Description
$ Debit
MM DD, YY
Unearned Revenue
XXXX
Revenue
$ Credit
XXXX
Prepaid Expense
• Expenses paid in cash and recorded as assets before they are used or
consumed.
• Prepaid expenses is a descriptive title. Prepaid expenses are assets that
are paid for and gradually get used up during the accounting period.
• A common example of prepaid expenses is office supplies. Gradually,
during the accounting period, the office supplies are used up. As they are
used up, they become an expense.
Date
Description
$ Debit
MM DD, YY
Office Supplies Expense
XXXX
Prepaid Office Supplies
$Credit
XXXX
Depreciation
Depreciation is the process of allocating the cost of an asset, such as
a building over the serviceable or economic life of the asset.
The accumulated depreciation account on the balance sheet is called a
contra-asset account, and it is used to record depreciation expense.
When an asset is purchased, it depreciates by some amount every
month. For that month, an adjusting entry should be made as
Date
Description
$ Debit $ Credit
MM DD, YY
Depreciation Expense-Assets involve
XXXX
Accumulated Depreciation- Asset involve
XXXX
Summary of Adjusting Entries
Type of adjustment
A/c relationship
A/c before adjustment
Adjusting entries
Prepaid Expenses
Assets and Expense
Assets overstated
Exp. understated
Dr. Expenses
Cr. Assets
Unearned Revenues
Liabilities and Revenue Liabilities overstated
Revenue understated
Dr. Liabilities
Cr. Revenue
Accrued Revenues
Assets and Revenue
Dr. Assets
Cr. Revenue
Accrued Expenses
Expense and Liabilities Expense understated
Liabilities understated
Dr. Expense
Cr. Liabilities
Depreciation
Expense and Contra
Assets
Dr. Expense
Cr. Contra Assets
Assets understated
Revenue understated
Expense understated
Contra Assets overstated
Reference
• For further reading see the books:
• Larson, K. D., Kalagnanam, S. S., & Jensen, T. (2005).
Fundamental accounting principles. Toronto: McGraw-Hill
Ryerson.
• Meigs, R. F., & Meigs, W. B. (1993). Accounting, the basis for
business decisions. New York: McGraw-Hill.
• Warren, Carl S., et al. (2016). Financial Managerial Accounting
Query
• In case of any query contact me at: ayesha@uosahiwal.edu.pk
• You can also ask questions via Google Classroom
Thank you