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1. Prepaid Expense a. Supplies or Supplies Expense? i.
Example #1 - Assume IDM LTD. purchased $ 2100 worth of supplies to be used during Nov. Since these supplies were expected to be used during that accounting period, the cost was recorded as expense – i.e. no ‘prepaid’ supplies asset entry was created:
Nov 1 Supplies Expense 2 1 0 0 -
Cash
To record supplies purchased and used in Nov.
2 1 0 0 -
At Dec. 31, a physical count of inventory of supplies showed that $ 495 worth of supplies was still on hand (i.e. unused). This amount therefore should not be treated as expense.
The following adjusting entry is made:
Dec 31 Supplies
Supplies Expense
To adjust for supplies on hand at year end
4 9 5 -
4 9 5 - ii.
Example #2 - Assume on Jan 1, 98 IDM Ltd. Purchased $ 400 supplies and recorded them as assets.
Jan 1 Supplies
Cash
4 0 0 -
4 0 0 -
Purchased supplies
Then at the end of January it was found that $ 275 supplies were used up. Then the following adjusting entry should be made:
Jan 31 Supplies Expense
Supplies
To adjust for supplies used in the month of Jan.
2 7 5 -
2 7 5 - b. Prepaid Rent or Rent Expense?
On April 1, IDM LTD. paid $ 1500 for the rent expense for the month of April, May and June
Apr 1 Prepaid Rent 1 0 0 0 -
Rent Expense 5 0 0 -
Cash
To record rent expense for April (will be used in the current month) and Prepaid Rent for May and June
1 5 0 0 -

In order to agree with the Matching Principle, on May 30, another adjusting entry is required to reduced prepaid rent by the amount used up during the month of May.
May 30 Rent Expense
Prepaid Rent
5 0 0 -
5 0 0 -
To adjust prepaid rent account and record rent expense for the month of May
2. Unearned revenue (pg. 110 – 111)
Pioneer Advertising Agency received $ 1,200 on October 4 from R. Knoz for advertising service that will be completed by December 31.
Oct 4 Cash
Unearned Revenue
To record unearned revenue – services not completed until Dec. 31
1 2 0 0 -
1 2 0 0 -
Dec 31 Unearned Revenue
Service Revenue
To record revenue earned at Dec. 31
1 2 0 0 -
1 2 0 0 -
1.
Accrued revenues a.
In October, Pioneer Advertising Agency earned $200 in fees for advertising services that were not billed to clients until November.
Oct. 1 Accounts Receivable
Service Revenue
2 0 0 -
2 0 0 -
To record services on account – performed (earned) in Oct. but not billed to clients until Nov. b.
Interest Earned (pg. 113)
The formula for computing interest is:
Interest = Principal * Interest rate * No. of months
12 months
Interest = Principal * Interest rate * No. of days
365 days
E.g. IDM LTD. performed $ 500 worth or repairs for one customer, who signed a 2-month,
12%, interest-bearing note dated December 1.
Although the note is due on February 1 next year, at Dec. 31, we still have to accrue interest earned for Dec. 1 - Dec. 31, i.e. 1 month. Even though this sum of interest earned has not been recorded by the company.
Dec. 1 Note Receivable
Service Revenue
To record revenue for services completed but not paid until Feb. 1 as per the note receivable contract
5 0 0 -
5 0 0 -

Dec. 31 Interest Receivable
Interest Revenue
To record (accrue) interest owing & earned on note receivable as of Dec. 31
Calculations:
I = $500 * (0.12) * 1/12
= $5
Feb 1 Cash
5 -
5 1 0 -
5 -
Note Receivable
Interest Receivable (from Dec.)
Interest Revenue (from Jan.)
To record note paid in full and interest charged on
5 0 0 -
5 -
5 - note for the months of Dec. and Jan.
Note to Student:
 Feb. 1 st , note receivable and the interest owing is paid in full by the customer.
 Entry will include an additional month of interest (Jan.) that would be shown as interest revenue (assume that an ‘Interest Receivable’ accrual was not created at
month end on Jan. 31).
 If ‘Interest Receivable’ accrual (i.e. DR Interest Receivable $5, CR Interest Revenue
$5) was made at month end Jan. 31 then on Feb. 1 there would not be a credit to
Interest Revenue and the Interest Receivable would would be $10 CR
 Also, assume that no additional interest charge is made for the one day in Feb.
– i.e. the balance is paid in full before the end of the day Feb. 1 when interest would be calculated.
 Note – comments in blue are not part of the official journal entry – just FYI
E.g. IDM LTD. performed $ 500 worth or repairs for one customer, who signed a 60-day,
12%, interest-bearing note dated December 16.
Although the note is due on February 14 next year, at Dec. 31, we still have to accrue interest earned for Dec. 16 - Dec. 31, i.e. 16 days. Even though this sum of interest earned has not been recorded by the company.
Calculations:
I = $500 * (0.12) * 16/365
= $2.63
Dec 16 Note Receivable
To record (accrue) interest owing & earned on note receivable from Dec. 16 to Dec. 31
5 0 0 -
Service Revenue
To record revenue for services completed but not paid until Feb. 14 as per the note receivable contract
Dec 31 Interest Receivable
Interest Revenue
2 63
5 0 0 -
2 63

On Feb. 14 the customer pays off the balance owing in full – including the interest owing.
If we assume that no other entries were made since Dec. 31 – then we would also need to calculate interest for 45 days – i.e. the month of Jan. (31 days) and also Feb. 1 - 14 (14 days – assume interest charged for Feb. 14 for this case).
Calculations:
Interest for 45 days – Jan. 1 to Feb. 14 (inclusive)
I = $500 * (0.12) * 45/365
= $7.40
Total Interest Earned = $2.63 (Dec.) + $7.40 (Jan – Feb. 14)
= $10.03
Note – comments in blue are not part of the official journal entry – just FYI
Feb 14 Cash
Note Receivable
Interest Receivable
Interest Revenue
(from Dec.)
(from Jan. 1 to Feb. 14)
5 1 0 03
5 0 0 -
2 63
7 40
To record note paid in full and interest charged on note from Dec. 14 to Feb. 14
2.
Accrued Expenses (pg. 114) a.
Accrued Salaries
IDM Ltd. pays its employees bi-weekly for $ 500 every two-weeks (10 work days). In Dec.,
IDM LTD. paid its staff twice but the last day was Friday, Dec. 26. The next payroll will be two weeks later on Friday, January 9.
In this way, IDM Ltd. has to record the salary expense for Dec. 29, 30 and 31 as follow:
The total salary expense for these three days should be $150  3 days x $50 per day
The following adjusting entry should be made:
Dec 31 Salary Expense
Salaries Payable
To record accrued salaries for Dec. 29, 30, 31
1 5 0 -
1 5 0 - b. Accrued Interest Owing (pg. 113)
IDM LTD. had incurred $ 5,000 bank loan in the purchase of a truck in Nov. 1. The interest rate was 12% per annum. Although interest accrues daily on this bank loan, no interest has yet been paid at the end of the accounting period
At Dec. 31, interest has accrued for 2 months to Dec. 31, but this interest expense has not been recorded by the company. The interest expense accrued at December 31 is computed as followed:
Interest = $5000 x (0.12) x (2/12) = $100
The original loan and adjusting entry should be made:

Nov 1 Cash
Loan Payable
To record loan for purchase of company truck
5 0 0 0 -
5 0 0 0 -
Dec 31 Interest Expense
Interest Payable
1 0 0 -
1 0 0 -
To record interest owing (but unpaid) at year end
Oct 31 Amortization Expense 8 3 33
Accumulated Amortization
To record accumulated amortization for Oct.
8 3 33