Mastering Adjusting Entries
American Institute of
Professional Bookkeepers
© American Institute of Professional Bookkeepers, 2010
Mastering Adjusting Entries
Cash v. Accrual Basis
Cash basis
Accrual basis
 Revenues recognized
when cash is received
 Revenues recognized
when earned
 Expenses recognized
when cash is paid
 Expenses recognized
when incurred
Mastering Adjusting Entries
Cash v. Accrual Basis
In 2008, PubCo offers 2-year subscriptions to New
Magazine, for $20 (8 quarterly issues @ $2.50) and
collects $20,000.
Cost: $6 a year per subscriber, which is paid at the
time of publication.
PubCo takes out a 2-year loan for $10,000 at 10%
simple interest rate. Both interest and principal are
payable at the end of 2 years.
Mastering Adjusting Entries
Cash v. Accrual Basis
Revenue
Publishing
Expense
Interest
Expense
Profit
Cash basis
20X8
20X9
$20,000 $ -0 6,000
6,000
2,000
-0$14,000 ($8,000)
Accrual basis
20X8
20X9
$10,000 $10,000
6,000
6,000
1,000
$3,000
1,000
$3,000
Total profit for 2 years is the same under both methods: $6,000
But, the timing of those profits may be different.
Mastering Adjusting Entries
Cash v. Accrual Basis
Cash basis
Accrual basis
 Revenues recognized
when cash is received
 Revenues recognized
when earned
 Expenses recognized
when cash is paid
 Expenses recognized
when incurred
Earnings = cash received
– expenses paid.
Earnings = revenues earned
– expenses incurred
(When revenues are
earned or expenses
incurred is irrelevant.)
(When cash is received or
expenses paid is irrelevant.)
Mastering Adjusting Entries
Cash v. Accrual Basis
Cash basis
Accrual basis
 Revenues recognized
when cash is received
 Revenues recognized
when earned
 Expenses recognized
when cash is paid
 Expenses recognized
when incurred
Earnings
cash received
NOT= GAAP
– expenses paid.
Earnings = revenues earned
– expenses incurred
(When revenues are
earned or expenses
incurred is irrelevant.)
(When cash is received or
expenses paid is irrelevant.)
Mastering Adjusting Entries
Cash v. Accrual Basis
You are a caterer. The transactions you
are about to see occur in March.
What should you report as March
revenues and expenses under:
 cash basis accounting?
 accrual basis accounting?
Mastering Adjusting Entries
Cash v. Accrual BasisCash
Accrual
Prepay $2,400 rent for 4 months (includes
the current month).
$2,400 $ 600
Receive $300 cash for catering services.
$ 300 $ 300
Cater a luncheon and submit an invoice for
$1,200 that will be settled next month.
$
0 $1,200
Receive a $200 utility bill that you will pay
next month.
$
0 $ 200
Receive $1,000 from a customer for a
function catered last month.
$1,000 $
0
Receive a $500 deposit on a wedding you
will cater later in the year.
$ 500 $
0
Mastering Adjusting Entries
Adjusting Entries
Here are the principles of adjusting entries:
 Recognition of revenues and expenses is
unrelated to receipt or payment of cash.
 Cash may be received before or after the
service is performed (or goods are sold).
 Cash may be paid before or after the expense
is incurred.
 Adjusting entries are used when cash is
received or paid at a different time from when
the service is performed (or goods are sold) or
the expense is incurred.
Mastering Adjusting Entries
Adjusting Entries
In 2008, PubCo offers 2-year subscriptions to New
Magazine, for $20 (8 quarterly issues @ $2.50) and
collects $20,000.
Cash
20,000
o r Cash
20,000
Unearned Revenue 20,000
Revenue 20,000
But neither entry records the amount of revenue
earned in 20X8 on the accrual basis: $10,000.
How can this be corrected?
Mastering Adjusting Entries
Adjusting Entries
Adjusting entries apply the accrual method
to transactions when cash flows and
earnings (revenues less expenses) are not
simultaneous.
Cash flows AFTER
the revenue is earned
or expense is incurred
Cash flows BEFORE
the revenue is earned
or expense is incurred
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Revenues
earned, but
cash not
yet received
Expenses
incurred,
but not yet
paid
Cash flows BEFORE
the revenue is earned
or expense is incurred
Cash received,
but not yet
earned
Expenses paid,
but not yet
incurred
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Revenues
earned, but
cash not
yet received
Expenses
incurred,
but not yet
paid
Cash flows BEFORE
the revenue is earned
or expense is incurred
Cash received,
but not yet
earned
Expenses paid,
but not yet
incurred
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Revenues
earned, but
cash not
yet received
ComCo lends ZyCo $10,000 on July 1 and
will be repaid the $10,000 principal + $1,200
interest on June 30 of the following year.
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Revenues
earned, but
cash not
yet received
ComCo lends ZyCo $10,000 on July 1 and
will be repaid the $10,000 principal + $1,200
interest on June 30 of the following year.
ComCo earns revenue each month the loan is
not repaid. As of Dec. 31, it has earned 6
months’ interest. To compute: $1,200/12
months = $100 a month  6 months = $600
earned revenue
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Revenues
earned, but
cash not
yet received
ComCo lends ZyCo $10,000 on July 1 and
will be repaid the $10,000 principal + $1,200
interest on June 30 of the following year.
ComCo records an adjusting entry to show
that it earned $600 revenue:
Interest Receivable
Interest Revenue
600
600
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Thus, the adjusting entry to accrue revenue is:
Revenues
earned, but
cash not
yet received
____ Receivable
____ Revenue
In addition to interest, other common
accrued revenues include commissions,
royalties and rent.
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Thus, the adjusting entry to accrue revenue is:
Revenues
earned, but
cash not
yet received
____ Receivable
____ Revenue
This adjusting entry increases assets
. . . and increases revenues/net income.
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Thus, the adjusting entry to accrue revenue is:
Revenues
earned, but
cash not
yet received
____ Receivable
____ Revenue
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Thus, the adjusting entry to accrue revenue is:
Revenues
earned, but
cash not
yet received
____ Receivable
____ Revenue
Because this entry increases assets, if it is
omitted, assets will be UNDERSTATED.
Because the entry increases income, if it is
omitted, net income will be UNDERSTATED.
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Revenues
earned, but
cash not
yet received
Expenses
incurred,
but not yet
paid
Cash flows BEFORE
the revenue is earned
or expense is incurred
Cash received
but not yet
earned
Expenses paid
but not yet
incurred
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Expenses
incurred,
but not yet
paid
KTC pays its office staff $5,000 every 2 weeks.
The final payday for the year ended Oct. 31,
20X1, is Friday, Oct. 24. What adjustment is
needed on Oct. 31 (the company’s year end)?
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Expenses
incurred,
but not yet
paid
KTC pays its office staff $5,000 every 2 weeks.
The final payday for the year ended Oct. 31,
20X1, is Friday, Oct. 24. What adjustment is
needed on Oct. 31 (the company’s year end)?
24
26
27
28
29
30
25
31
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Expenses
incurred,
but not yet
paid
KTC pays its office staff $5,000 every 2 weeks.
The final payday for the year ended Oct. 31,
20X1, is Friday, Oct. 24. What adjustment is
needed on Oct. 31 (the company’s year end)?
24
26
27
28
29
30
25
31
For these days, labor
costs were incurred . . .
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Expenses
incurred,
but not yet
paid
KTC pays its office staff $5,000 every 2 weeks.
The final payday for the year ended Oct. 31,
20X1, is Friday, Oct. 24. What adjustment is
needed on Oct. 31 (the company’s year end)?
24
26
27
28
29
30
25
31
but not paid by year end
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Expenses
incurred,
but not yet
paid
KTC pays its office staff $5,000 every 2 weeks.
The final payday for the year ended Oct. 31,
20X1, is Friday, Oct. 24. What adjustment is
needed on Oct. 31 (the company’s year end)?
KTC must record an adjusting entry
to recognize 1 week’s wage expense.
Wages Expense
Wages Payable
2,500
2,500
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Thus, the adjusting entry to accrue expenses is
Expenses
incurred,
but not yet
paid
____ Expense
____ Payable
In addition to wages, other common accrued
expenses include rent, commissions,
royalties, utilities, and interest.
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Thus, the adjusting entry to accrue expenses is
Expenses
incurred,
but not yet
paid
____ Expense
____ Payable
This adjusting entry increases expenses (and
therefore reduces net income)
. . . and increases liabilities.
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Thus, the adjusting entry to accrue expenses is
Expenses
incurred,
but not yet
paid
____ Expense
____ Payable
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Thus, the adjusting entry to accrue expenses is
Expenses
incurred,
but not yet
paid
____ Expense
____ Payable
Because this entry reduces net income, if it is
omitted, net income will be OVERSTATED.
Because this entry increases liabilities, if it is
omitted, liabilities will be UNDERSTATED.
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Revenues
earned, but
cash not yet
received
Expenses
incurred, but
not yet paid
Cash flows BEFORE
the revenue is earned
or expense is incurred
Cash received,
but not yet
earned
Expenses paid,
but not yet
incurred
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On March 1, StorageCo rents out a unit and
receives $900 for the first 3 months’ rent. The
Cash received, company has a year end of April 30.
but not yet
earned
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On March 1, StorageCo rents out a unit and
receives $900 for the first 3 months’ rent. The
Cash received, company has a year end of April 30.
The $900 payment received in advance can
but not yet
be recorded in two ways:
earned
Cash
Cash
900
900
Unearned Rent 900
Rent Revenue
900
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On March 1, StorageCo rents out a unit and
receives $900 for the first 3 months’ rent. The
Cash received, company has a year end of April 30.
The $900 payment received in advance can
but not yet
be recorded in two ways:
earned
Cash
Cash
900
900
Unearned Rent 900
Rent Revenue
900
3/1
4/30
5/31
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On March 1, StorageCo rents out a unit and
receives $900 for the first 3 months’ rent.
Cash received,
but not yet
Rent Revenue
earned
600
600
Unearned Rent
3/1
600
900
300
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On March 1, StorageCo rents out a unit and
receives $900 for the first 3 months’ rent.
Cash received,
but not yet
Rent Revenue
earned
600
Unearned Rent
3/1
Unearned Rent
600 Revenue
Rent
600
600
900
600300
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On March 1, StorageCo rents out a unit and
receives $900 for the first 3 months’ rent.
Cash received,
but not yet
Rent Revenue
earned
3/1
900
300
600
Unearned Rent
300
300
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On March 1, StorageCo rents out a unit and
receives $900 for the first 3 months’ rent.
Cash received,
but not yet
Rent Revenue
earned
3/1
900
300
Rent Revenue
600
Unearned
Rent
Unearned Rent
300
300
300300
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
How the AJE is made depends on how receipt of
the $900 payment was recorded. It could be:
Unearned ___ Rev.
___ Revenue
Cash received,
___ Revenue
Unearned ___ Rev.
but not yet
earned
This is the AJE if the
This is the AJE if the
cash was recorded as
cash was recorded as
revenue
unearned revenue
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
How the AJE is made depends on how receipt of
the $900 payment was recorded. It could be:
Unearned ___ Rev.
___ Revenue
Cash received,
___ Revenue
Unearned ___ Rev.
but not yet
earned
This AJE reduces
This AJE reduces
liabilities . . .
net income . . .
. . . and increases
net income
. . . and increases
liabilities
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
How the AJE is made depends on how receipt of
the $900 payment was recorded. It could be:
Unearned ___ Rev.
___ Revenue
Cash received,
___ Revenue
Unearned ___ Rev.
but not yet
earned
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
How the AJE is made depends on how receipt of
the $900 payment was recorded. It could be:
Unearned ___ Rev.
Cash received,
___ Revenue
but not yet
earned
This AJE reduces
This entry increases
liabilities—without it,
net income—without it,
liabilities will be
net income will be
OVERSTATED
UNDERSTATED
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
How the AJE is made depends on how receipt of
the $900 payment was recorded. It could be:
___ Revenue
Cash received,
Unearned ___ Rev.
but not yet
earned
This AJE increases
This entry reduces net
liabilities; without it,
income—without it, net
liabilities will be
income will be
UNDERSTATED
OVERSTATED
Mastering Adjusting Entries
Adjusting Entries
Cash flows AFTER
the revenue is earned
or expense is incurred
Revenues
earned, but
cash not
received
Expenses
incurred,
but not paid
Cash flows BEFORE
the revenue is earned
or expense is incurred
Cash received,
but not yet
earned
Expenses
paid, but not
yet incurred
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On Sept. 1, NewCo, a calendar year company,
purchases a 1-year insurance policy for $600.
Expenses
paid, but not
yet incurred
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On Sept. 1, NewCo, a calendar year company,
purchases a 1-year insurance policy for $600.
The $600 paid on Sept. 1 can be recorded
Expenses
paid, but not in two ways:
yet incurred Prepaid Ins. 600
Insurance Exp. 600
Cash
600
Cash
600
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On Sept. 1, NewCo, a calendar year company,
purchases a 1-year insurance policy for $600.
The $600 paid on Sept. 1 can be recorded
Expenses
paid, but not in two ways:
yet incurred Prepaid Ins. 600
Insurance Exp. 600
Cash
600
Cash
600
9/1
12/31
8/31
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On Sept. 1, NewCo, a calendar year company,
purchases a 1-year insurance policy for $600.
Expenses
paid, but not
yet incurred
Insurance
Expense
200
200
9/1
Prepaid
Insurance
600
200
400
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On Sept. 1, NewCo, a calendar year company,
purchases a 1-year insurance policy for $600.
Expenses
paid, but not
yet incurred
Insurance
Expense
200
9/1
Prepaid
Insurance
600
200
Insurance Expense
200
200Prepaid Insurance 400 200
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On Sept. 1, NewCo, a calendar year company,
purchases a 1-year insurance policy for $600.
Expenses
paid, but not
yet incurred
9/1
Insurance
Expense
600
400
Prepaid
Insurance
400
200
400
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
On Sept. 1, NewCo, a calendar year company,
purchases a 1-year insurance policy for $600.
Expenses
paid, but not
yet incurred
9/1
Insurance
Expense
600
400
Prepaid
Insurance
400
Prepaid Insurance
400
200Insurance Expense 400 400
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
Expenses
paid, but not
yet incurred
How the AJE is made depends on how the
$600 payment was recorded. It could be:
____ Expense
Prepaid Exp.
Prepaid Exp.
____Expense
This is the AJE if the
payment was recorded
in a asset account
This is the AJE if the
payment was recorded
in an expense account
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
How the AJE is made depends on how the
$600 payment was recorded. It could be:
____ Expense
Prepaid Exp.
Prepaid Exp.
____Expense
Expenses
paid, but not
yet incurred This AJE reduces
net income . . .
This AJE increases
assets . . .
. . . and reduces
assets
. . . and increases
net income
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
Expenses
paid, but not
yet incurred
How the AJE is made depends on how the
$600 payment was recorded. It could be:
____ Expense
Prepaid Exp.
Prepaid Exp.
____Expense
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
How the AJE is made depends on how the
$600 payment was recorded. It could be:
____ Expense
Prepaid Exp.
Expenses
paid, but not
It also reduces
yet incurred This AJE increases
expenses—without it, net assets—without it,
income will be
assets will be
OVERSTATED
OVERSTATED
Mastering Adjusting Entries
Adjusting Entries
Cash flows BEFORE
the revenue is earned
or expense is incurred
How the AJE is made depends on how the
$600 payment was recorded. It could be:
Prepaid Exp.
____Expense
Expenses
paid, but not
yet incurred This entry increases
assets—without it,
assets will be
UNDERSTATED
It also reduces expenses
—without it, net income
will be UNDERSTATED
Mastering Adjusting Entries
Basic Adjustments--Summary
Type of
Adj.
AJE
Financial Statement Effect if AJE not Made
Accrued Expense
Liability
Expense
Expenses are understated and net income is overstated.
Liabilities are understated.
Accrued Asset
Revenue Revenue
Assets are understated.
Revenues and net income are understated.
Prepaid Expense
Expense
Asset
Asset
Expense
Expenses are understated and net income is overstated.
Assets are overstated.
Deferred Liability
Revenue Revenue
Revenue
Liability
Liabilities are overstated.
Revenues and net income are understated.
Assets are understated.
Expenses are overstated and net income is understated.
Revenues and net income are overstated.
Liabilities are understated.
Mastering Adjusting Entries
Adjusting Entries
In addition to the AJEs needed for routine
accruals and deferrals, there are other endof-period adjusting entries, including:
 depreciation expense
 bad debt expense
Mastering Adjusting Entries
Depreciation Expense
The AJE to recognize depreciation for the
period is:
Depreciation Expense
xxx
Accumulated Depreciation
xxx
This entry increases expenses. It also reduces
assets because the year-end balance in
Accumulated Depreciation is subtracted from
the related asset account to arrive at that
asset’s net book value.
Mastering Adjusting Entries
Depreciation Expense
Straight-line depreciation expense is
calculated as follows:
Cost - Residual value
Estimated useful life
(in years)
= Annual depreciation expense
Mastering Adjusting Entries
Depreciation Expense
PatCo purchases for its business equipment that costs
25,000 PatCo estimates that the equipment will have
$25,000.
a useful life of 6 years and, at the end of its life will
1,000
have a residual value of $1,000.
Residual
Cost
value
Annual depreciation
=
expense
Estimated
$4,000
useful life
Each year, Patco will make the following adjusting entry:
Depreciation Expense
4,000
Accumulated Depreciation
4,000
Mastering Adjusting Entries
Depreciation Expense
Each year, the balance in Accumulated Depreciation
increases as follows:
Accumulated
Equipment
Depreciation
25,000
4,000 Yr 1
4,000 Yr 2
4,000 Yr 3
12,000
At the end of Year 3, PatCo will report on its balance sheet:
Equipment - At Cost
Less: Accumulated Depreciation
Equipment (net)
25,000
12,000
13,000
Mastering Adjusting Entries
Bad Debt Expense
The matching principle requires an attempt to
match costs with the revenues that the costs
helped produce.
One application of the matching principle is
bad debt.
The matching principle requires companies to
estimate bad debt (a cost), then match the
bad debt to its related noncash sales (revenue).
Mastering Adjusting Entries
Bad Debt Expense
The entry to record bad debt expense is:
Bad Debt Expense
Allowance For Doubtful Accounts
xxx
xxx
This entry reduces income and reduces assets
(the credit to Allowance For Doubtful Accounts is
subtracted from Accounts Receivable).
The difference between the ending balances in
Accounts Receivable and Allowance For Doubtful
Accounts is the net realizable value.
Accounts Receivable
Less: Allowance For Doubtful Accts
Net Realizable Value
35,000
4,200
30,800
Mastering Adjusting Entries
Estimating Bad Debt Expense
Bad debt for book purposes can be
estimated in either of two ways:
1. as a percentage of credit sales; or
2. as the percentage of accounts receivable that
the company estimates it will not be able to
collect.
Mastering Adjusting Entries
Estimating Bad Debt Expense
1. As a percentage of credit sales. A firm estimates
the percentage of credit sales it will not collect and
each year takes that amount as bad debt expense.
Driscoll Co. estimates that each year 2% of
its credit sales will be uncollectible. Credit
200,000
sales for 20X8 are $200,000.

= 4,000
The adjusting entry to record bad debt
expense for 20X8 is:
Bad Debt Expense
Allowance For Doubtful Accounts
4,000
4,000
Mastering Adjusting Entries
Estimating Bad Debt Expense
1. As a percentage of credit sales. A firm estimates
the percentage of credit sales it will not collect and
each year takes that amount as bad debt expense.
Note that when using the percentage of credit
sales method, the balance in Allowance For
Doubtful Accounts is irrelevant to the AJE.
Mastering Adjusting Entries
Estimating Bad Debt Expense
2. As a percentage of A/R estimated to be
uncollectible. At year-end, the balance in Allowance
account is adjusted to reflect the percentage of
accounts receivable estimated to be uncollectible.
Potage’s A/R has a year-end balance of $20,000.
20,000
It estimates that 3% of this amount will be
uncollectible. The Allowance For Doubtful
Accounts currently has a $400
400 credit balance.

= 600
So, the Allowance account
must be adjusted to end
600 credit balance.
with a $600
Allowance For
Doubtful Accounts
current
balance
Mastering Adjusting Entries
Estimating Bad Debt Expense
2. As a percentage of A/R estimated to be
uncollectible. At year-end, the balance in Allowance
account is adjusted to reflect the percentage of
accounts receivable estimated to be uncollectible.
Potage’s A/R has a year-end balance of $20,000.
It estimates that 3% of this amount will be
uncollectible. The Allowance For Doubtful
Accounts currently has a $400 credit balance.
Bad Debt Exp. 200
Allowance
200
Allowance For
Doubtful Accounts
400
200 adjustment
600
Mastering Adjusting Entries
Estimating Bad Debt Expense
2. As a percentage of A/R estimated to be
uncollectible. At year-end, the balance in Allowance
account is adjusted to reflect the percentage of
accounts receivable estimated to be uncollectible.
Allowance For
Doubtful Accounts
x,xxx
x,xxx
x,xxx
(based on
calculation)
Mastering Adjusting Entries
Estimating Bad Debt Expense
StoreCo’s Accounts Receivable currently has a
balance of $50,000. Its Allowance account has a
$3,000 debit balance. StoreCo estimates that 5%
of accounts receivable will be uncollectible.
Bad Debt
Expense
5,500
5,500
Allowance For
Doubtful Accounts
3,000
5,500
2,500
($50,000  5%)
5,500
Bad Debt Expense
5,500
Allowance For Doubtful Accounts
Mastering Adjusting Entries
Estimating Bad Debt Expense
StoreCo’s Accounts Receivable currently has a
balance of $50,000. Its Allowance account has a
$3,000 debit balance. StoreCo estimates that 5%
of accounts receivable will be uncollectible.
Allowance For
Doubtful Accounts
3,000
2,500
Mastering Adjusting Entries
Estimating Bad Debt Expense
Once a customer’s account is deemed
uncollectible, it is taken off the books:
Allowance For Doubtful Accounts
Accounts Receivable
xxx
xxx
This entry has no effect on total assets because it
reduces Accounts Receivable and its offsetting
Allowance account by the same amount.
Mastering Adjusting Entries
Tips on Adjusting Journal Entries
Every AJE must include at least:
 one income statement account (revenue or
expense) and
 one balance sheet account (asset or liability)
Never cash!
Mastering Adjusting Entries
The Chart of Accounts
Companies generally number GL accounts.
Each category of accounts is given a series
of numbers. For example:
Assets
Liabilities
Owners Equity
Revenue
Expense
100
200
300
400
500
– 199
– 299
– 399
– 499
- 599
Mastering Adjusting Entries
Normal Balances
All accounts have a normal balance  e.g., for
A/R a debit balance is normal.
The normal balance is the side (debit or
credit) on which an increase is recorded.
For example, to increase Cash, you debit it,
so Cash normally has a debit balance. To
increase Revenue, you credit it, so Revenue
normally has a credit balance.
Mastering Adjusting Entries
Normal Balances
Assets
Owners’
Equity
Liabilities
increases
increases
increases
normal
balance
normal
balance
normal
balance
Revenues
Expenses
increases
increases
normal
balance
normal
balance
Mastering Adjusting Entries
Normal Balances: Exercise
Account Normal bal.
type
Debit Credit
Account
Cash
Asset
DR
Asset
DR
Accounts Receivable
Asset
DR
Inventory
Prepaid Rent
Asset
DR
Asset
CR
Accumulated Depreciation
Liability
CR
Accounts Payable
Unearned Revenue
Liability
CR
Equipment
Asset
DR
Cost of Goods Sold
Expense
DR
Expense
DR
Rent Expense
Sales Revenue
Revenue
CR
Owner, Capital
O/E
CR
Allowance For Doubtful Accounts Asset
CR
Asset
DR
Land
Building
Adjusting Entries
AssetMastering DR
The Worksheet
Trial balance
Accounts
Dr
Cr
The first step in the trial balance is the
unadjusted trial balance.
Under Accounts, list each account title.
Under Trial balance, enter that account’s
balance in the appropriate column.
Mastering Adjusting Entries
The Worksheet
Trial balance
Accounts
Dr
Cr
Adjustments
Dr
Cr
Under Adjustments enter any end-ofperiod adjustment to the account—an
accrual, deferral or other adjustment.
Mastering Adjusting Entries
Trial balance
Accounts
Dr
Cr
Adjustments
Dr
Cr
Adjusted TB
Dr
Cr
Under Adjusted trial Balance, enter the
adjusted account balance (i.e., including
any accrual, deferral or other adjustment).
Mastering Adjusting Entries
Funkytime
Worksheet
For the year ended July 31, 2009
Trial balance
Account Title
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Bert Weems, Capital
Bert Weems, Drawing
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
Debit
3,000
2,200
2,000
2,400
18,000
1,800
3,000
4,275
2,600
800
985
440
Credit
Adjustments
Debit
minus
1,900
300
24,000
Credit
1,600
Adjusted
trial balance
Debit
Credit
400
The first step it is the
unadjusted trial balance
15,300
plus
41,500 41,500
1,600
2,400
Example: Supplies Expense
must be adjusted to show that
only $400 worth of supplies
are on hand at Mastering
year Adjusting
end. Entries
Funkytime
Worksheet
For the year ended July 31, 2009
Trial balance
Account Title
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Bret Weems, Capital
Bret Weems, Drawing
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
Debit
3,000
2,200
2,000
2,400
18,000
1,800
3,000
4,275
2,600
800
985
440
Adjustments
Credit
Debit
minus
Credit
1,600
400
Adjusted
trial balance
Debit
Credit
400
2,000
1,900
300
24,000
15,300
plus
1,600
2,400
400
840
Example: The 12- month insurance
was purchased onMastering
JuneAdjusting
1. Entries
41,500policy
41,500
Funkytime
Worksheet
For the year ended July 31, 2009
Trial balance
Account Title
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Bret Weems, Capital
Bret Weems, Drawing
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
Debit
3,000
2,200
2,000
2,400
18,000
1,800
3,000
4,275
2,600
800
985
440
Credit
Adjustments
Debit
Credit
1,600
400
Adjusted
trial balance
Debit
Credit
400
2,000
1,900
300
24,000
15,300
1,600
2,400
400
840
When all the adjustments are entered in the Adjustments columns,
the new balances are entered in the Adjusted trial balance columns
Mastering Adjusting Entries
Funkytime
Worksheet
For the year ended July 31, 2009
Trial balance
Account Title
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Bret Weems, Capital
Bret Weems, Drawing
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
Wages Payable
Rent Revenue
Depreciation Exp.
Accumulated Depr.
Debit
3,000
2,200
2,000
2,400
18,000
1,800
3,000
4,275
2,600
800
985
440
Credit
1,900
300
24,000
15,300
Adjustments
Debit
Credit
Debit
3,000
2,200
1,600
400
400
2,000
18,000
1,800
120
3,000
375
1,600
400
100
41,500 41,500
Adjusted
trial balance
2,595
375
120
4,650
2,600
2,400
985
840
100
Credit
1,900
180
24,000
15,300
375
120
100
100
2,595 Mastering
41,975
41,975
Adjusting
Entries
Funkytime
Worksheet
For the year ended July 31, 2009
Mastering Adjusting Entries
Funkytime
Worksheet
For the year ended July 31, 2009
Adjusted
trial balance
Account Title
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Bret Weems, Capital
Bret Weems, Drawing
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
Wages Payable
Rent Revenue
Depreciation Exp.
Accumulated Depr.
Debit
3,000
2,200
400
2,000
18,000
1,800
3,000
4,650
2,600
2,400
985
840
100
41,975
Credit
1,900
180
24,000
15,300
Income
statement
Debit
Credit
Balance
sheet
Debit
Credit
The revenue and expense
balances are extended
from the Adjusted trial
balance columns to the
Income statement
columns, and . . .
375
120
100
41,975
Mastering Adjusting Entries
Funkytime
Worksheet
For the year ended July 31, 2009
Adjusted
trial balance
Account Title
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Bret Weems, Capital
Bret Weems, Drawing
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
Wages Payable
Rent Revenue
Depreciation Exp.
Accumulated Depr.
Debit
3,000
2,200
400
2,000
18,000
1,800
3,000
4,650
2,600
2,400
985
840
100
41,975
Credit
1,900
180
24,000
15,300
Income
statement
Debit
Credit
Balance
sheet
Debit
Credit
The asset, liability and
owner’s equity balances
are extended from the
Adjusted trial balance
to the Balance sheet
columns.
375
120
100
41,975
Mastering Adjusting Entries
Funkytime
Worksheet
For the year ended July 31, 2009
Adjusted
trial balance
Account Title
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Bret Weems, Capital
Bret Weems, Drawing
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
Wages Payable
Rent Revenue
Depreciation Exp.
Accumulated Depr.
Debit
3,000
2,200
400
2,000
18,000
1,800
3,000
4,650
2,600
2,400
985
840
100
41,975
Credit
Income
statement
Debit
Balance
sheet
Credit
3,000
2,200
400
2,000
18,000
1,800
1,900
180
24,000
15,300
375
120
100
41,975
Debit
4,650
2,600
2,400
985
840
100
11,575
15,300
120
3,000
Credit
1,900
180
24,000
375
100
15,420 Mastering
30,400
26,555
Adjusting
Entries
Funkytime
Worksheet
For the year ended July 31, 2009
Adjusted
trial balance
Account Title
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
Wages Payable
Rent Revenue
Depreciation Exp.
Accumulated Depr.
Debit
4,650
2,600
2,400
985
840
100
41,975
Credit
15,300
375
120
100
41,975
Income
statement
Debit
4,650
2,600
2,400
985
840
100
11,575
3,845
15,420
Balance
sheet
Credit
Debit
Credit
15,300
375
120
15,420
30,400
15,420
30,400
100
26,555
3,845
30,400
As a check, net income is added The
to difference between the
Income statement Debit and
the Income statement Debit column
and Balance sheet Credit column.Credit columns is net income.
Mastering Adjusting Entries