Types of Adjusting Entries
Deferred
expense
Accrued
asset
Chapter 4, Slide #1
ALL RECOGNIZE
REVENUE OR
EXPENSES
BEFORE OR
AFTER CASH IS
EXCHANGED
Accrued
liability
Deferred
revenue
LO5
Accruals (deferred expenses)
Cash paid before expense is incurred
 Examples:
• Prepaid rent
• Prepaid insurance
• Office supplies
• Property and equipment
 Costs are initially recorded as assets and allocated to
expenses in future periods
Chapter 4, Slide #2
Accrual Example
Prepay rent on office space for one year on September 1
Initial journal entry:
9/1
Prepaid Rent
2,400
Cash
2,400
Monthly adjusting journal entry:
9/30 Rent Expense
200
Prepaid Rent
200
($2,400 annual × 1/12 = $200 per month for 12
months)
Chapter 4, Slide #3
Unearned (Deferred) Revenue
Cash received before revenue is earned
 Examples:
• Insurance collected in advance
• Subscriptions collected in advance
• Gift certificates
 Receipts are initially recorded as liabilities
(unearned or refundable receipts) and recorded as
revenues in future periods when earned
Chapter 4, Slide #4
Deferred Revenue Example
Received $2,400 for an insurance policy in advance
on September 1
Initial journal entry:
9/1 Cash
2,400
Insurance Collected in Advance
2,400
Monthly adjusting journal entry:
9/30 Insurance Collected in Advance
Insurance Revenue
200
($2,400 annual × 1/12 = $200 per month for 12
months)
Chapter 4, Slide #5
200
Accrued Liability
Expense incurred before cash is paid
 Examples:
• Payroll
• Taxes
• Interest
 Record expense (and corresponding liability) in
period incurred; pay for it in a future period
 No cash flow on recording, only when paid
Chapter 4, Slide #6
Accrued Liability Example #1
Pay biweekly wages of $28,000
At end of month, between pay periods:
Wages Expense
4,000
Wages Payable
4,000
Next payday:
Wages Payable
Wages Expense
Cash
28,000
Chapter 4, Slide #7
4,000
24,000
Accrued Liability Example #2
On March 1, assume a 9%, 90-day, $20,000 loan is
taken out with a bank
Initial journal entry:
3/1 Cash
20,000
Note Payable
20,000
Monthly adjusting journal entry:
3/31 Interest Expense
150
Interest Payable
150
($20,000 principal × 9% × 3/12 = $450 for 3
months or $450/3 = $150 per month)
Chapter 4, Slide #8
Accrued Asset
Revenue earned before cash is received
 Examples:
Revenue
• Rent
• Interest
 Record revenue (and corresponding
receivable) in period earned; receive payment
in a future period
Chapter 4, Slide #9
Accrued Asset Example
Rent payment of $2,500 due within first 10 days of
month
First day of the month:
Rent Receivable
Rent Revenue
2,500
Upon receipt of cash:
Cash
Rent Receivable
2,500
Chapter 4, Slide #10
2,500
2,500
Steps in the Accounting Cycle
1. Collect and
analyze info
7. Close the
accounts
2. Journalize
transactions
6. Record and
post adjusting
entries
5. Prepare
financial
statements
Chapter 4, Slide #11
3. Post
transactions to
general ledger
4. Prepare
work sheet
LO6