Chapter 3!
The Adjusting Entry
Unit 1 Test (cover chapter 1 to 4) will occur on Friday
September 26!
Accrual Accouning
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Accrual Accounting means recording
revenues and expenses when they happen,
regardless of whether cash is received or
paid.
Cash basis Accounting means recording
transactions only when cash is received or
paid.
In reality, nobody uses cash basis
accounting any more.
Financial Statement Comparability
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The Time Period Concept ensures that the
Comparability objective in accounting is
met.
This means that reporting period must be
consistent such as one year, one month or
one quarter
Some revenues and expenses occur
continuously, and accrural accounting
require accounting clerks to record them as
they happen.
Accounting clerks make entries only when
there is source document.
Adjusting Entry
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There are many different types of adjusting
entries accountants make at the end of the
fiscal period:
Prepaid Expense
Prepaid Insurance
Accrued Revenue
Supplies adjustment (Accrued Expense)
Unearned Revenue
Late-Arriving Purchase Invoice (Accrued
Expenses)
Prepaid Insurance
Insurance premium is paid for assets
(building, equipment or car) to protect
against fire, theft etc….
 We use : “Prepaid Insurance” (= asset)
account is used to record
 Journal Entry:
Purchase
July 1Prepaid Insurance 2400
Bank
2400
Paid for annual insurance premium
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Prepaid Insurance
Insurance premium is paid for assets
(building, equipment or car) to protect
against fire, theft etc….
Adjustment on Dec 31, 2013
Insurance Expense1200
Prepaid Insurance 1200
Adjusting Insurance premium
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Prepaid Insurance
Prepaid Expenses
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An expense is paid in advance to benefit
more than one accounting period.
Any current asset costs will be used up in the
near future.
Example: Prepaid Insurance, Licenses, Rent
and Advertising
Oct 1 you paid $5000 for radio ads which will
go on for 5 months.
Oct 1 Prepaid Advertising 5000
Bank
5000
Prepaid Expenses
Dec 31, you will make an adjusting entry:
Advertising Expense
3000
Prepaid Advertising (asset) 3000
Adjusting Entry for prepaid advertising
Accrued Revenue
Some Revenues are earned but not
yet received in cash or recorded at
the statement date.
 Accrued revenues may accumulate
(or accrue) with the passage of time,
as happens with interest revenue and
rent revenue.
 An adjusting entry is required for two
purposes: to record the accurate
revenue and to record increase in AR
or NR.
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Accrued Revenue
In October, Pioneer Advertising
Agency earned $200 (they performed
their service) in fees for adverting
services that were not billed to clients
until November.
 Because these services have not been
billed, they have not been recorded.
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Accrued Revenue
The following adjusting entry is made
on October 31:
Oct 31 AR
200
Service Revenue 200
To accrue revenue earned but not billed
 On November 10, Pioneer receives
$200 cash for the services they
performed in October.
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Accrued Revenue
On November 10, Pioneer receives
$200 cash for the services they
performed in October: JE
Nov 10
Cash
200
AR
200
Received $200 from Oct revenue
Invoice#156
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Accrued Revenue
BMO’s perspective: Park Accounting
borrowed $50,000 at 5% interest on
September 1, 2014 which is due August
31, 2015. What kind of JE is made on
September 1, 2014?
Sept 1
Loan Receivable $50,000
Bank
$50,000
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Accrued Revenue
Adjusting Entry that BMO has to make on
December 31, 2014?
 (5% * 50000 * 4 months / 12 months = 1667)
Dec 31, 2014
Interest Receivable $1667
Interest Revenue
$1667
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Accrued Revenue
JE on August 31 2015?
Aug 31
Cash
$52500
Loan Receivable
Interest Receiable
Interest Revenue
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$50000
$1667
$833
Accrued Expense
Expenses incurred not yet paid or
recorded but at the statement date
are called “accrued expenses.”
 Interest, Rent, Property Tax and salaries
can be accrued expenses.
 For example, Park Accounting would
make a JE on September 1 2014
Sep 1
Cash
$50,000
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Loan Payable
$50,000
Accrued Expense
For example, Park Accounting would make
a JE on September 1 2014
Sep 1
Cash
$50,000
Loan Payable
$50,000
 On December 31, Park would make the
following Adjusting Entry:
Dec 31
Interest Expense $1667
Interest Payable
$1667
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Accrued Expense
Park Accounting would make a JE on
August 31, 2014, as they pay back the
loan with interest .
Aug 31
Interest Expense $833
Loan Payable
$50000
Interest Payable $1667
Cash
$52500
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Classwork / Homework
P137 E3-2, E3-3 (except d, e and i), E3-6
P142 P3-4