Impact of Adjusting Entries
Spencer Barr, Amy Collmeyer, Xi Dai,
Kevin Steitz, Kathryn Young
Introduction
• Definition of adjusting entry
– Deferral
– Accrual
• Concepts
– Revenue Recognition Principle
– Matching Principle
• Impact of adjusting entry
• Assignment
Part A
1. On December 1, 2011, Johnson received a $45,000 payment
for services to be rendered equally over a four-month
period. Service revenue was credited.
Date
12/31/1
1
Account Name
Cash
Debit
Credit
$45,00
0
Service Revenue
$45,00
0
(To record cash for services provided)
Service Revenue
$33,75
0
Assets
= Liabilities
Unearned
Revenue + Stockholders’ Equity
(0)
(-)
(+)
(To record revenue for future services)
$33,75
0
Part A cont.
2. On December 31, 2011, the company paid a local radio
station $16,000 for 40 radio ads that were to be aired, 20 per
month, throughout January and February of 2012. Prepaid
advertising was debited.
Assets = Liabilities + Stockholders’ Equity
(0)
(0)
(0)
*No adjusting journal entry!*
But…
Date
12/31/1
1
Account Name
Advertising Expense
Prepaid Advertising
(Paid cash for
Debit
Credit
$8,00
0
$8,00
0
Part A cont.
3. Employee salaries for the month of
December 2011 totaling $8,400 will be paid
on January 5, 2012.
Date
12/31/1
1
Account Name
Debit
Salaries Expense
Credit
$8,40
0
Salaries Payable
$8,40
0
(To record accrued
Assets
= Liabilities + Stockholders’ Equity
salaries)
(0)
(+)
(-)
Part A cont.
4. On September 31, 2011, Johnson Corp.
borrowed $60,000 from a local bank. A note
was signed with principal and 6% interest to
be paid on September 1, 2012.
Date
12/31/1
1
Account Name
Interest Expense
Debit Credit
$900
Interest Payable
(To record interest on notes
Assets
+ Liabilities + Stockholders’ Equity
payable)
(0)
(+)
(-)
$900
Part A cont.
5. On December 31, 2011, it was determined
that $8,000 of the recorded accounts
receivable would prove to be uncollectible.
Date
12/31/1
1
Account Name
Bad Debts Expense
Debit
$8,00
0
Allowance for Doubtful Accounts
(To record estimate of uncollectible
Credit
Assets = Liabilities + Stockholders’ Equity
accounts)
(-)
(0)
(-)
$8,00
0
Part B
1. Total assets on December 31, 2011
Total Assets
Overstated
5) 12/31/11
12/31/11
Understated
Adj.
8000
Bal. 8000
Part B cont.
2. Total liabilities on December 31, 2011
Total Liabilities
Overstated
1) 12/31/11
Understated
Adj. 11,250 3) 12/31/11
4) 12/31/11
12/31/11
Bal. 1,950
Adj. 8,400
Adj.
900
Part B cont.
3. Net income for 2011
Net Income
Overstated
Understated
3) 12/31/11
Adj. 8,400 1) 12/31/11
4) 12/31/11
Adj.
5) 12/31/11
Adj. 8,000
12/31/11
Bal. 6,050
900
Adj. 11,250
Part B cont.
4. Total retained earnings on December 31,
2011
Total Retained Earnings
Overstated
Understated
3) 12/31/11
Adj. 8,400 1) 12/31/11
4) 12/31/11
Adj.
5) 12/31/11
Adj. 8,000
12/31/11
Bal. 6,050
900
Adj. 11,250
Part B cont.
5. Total stockholders’ equity on December 31,
2011
Total Stockholders’ Equity
Overstated
Understated
3) 12/31/11
Adj. 8,400 1) 12/31/11
4) 12/31/11
Adj.
5) 12/31/11
Adj. 8,000
12/31/11
Bal. 6,050
900
Adj. 11,250
Conclusion