How To Properly Adjust Your
Books – Accrual Basis
1.
2.
3.
4.
5.
What is An Adjusting Entry?
Why Do We Adjust?
How Do We Adjust – Theory?
Road Map – The Martinelli
Apple Juice Tree Approach!
Examples
1
What Is An Adjusting Entry?
1.
2.
3.
Looks Just Like A Regular Entry,
But It Has Special Qualities!
Based on GAAP
Based on Accounting
Assumptions and Constraints
2
What Does An Adjusting Entry
Look Like?
1. Last day of
reporting period
Date
12/31/08 Supplies Exp
2. 1 account is
debited with a debit
amount
450
Supplies
450
3. 1 account is
credited wit a credit
amount
3
Accounting Theory Concepts
1.
2.
3.
4.
Assumptions
Information Qualities
Principles
Constraints
4
Information Qualities
1.
2.
3.
Reliable Info – Verifiable
Relevant Info – To Decision
Timely
5
The 5 Basic Accounting
Assumptions
1.
2.
3.
4.
5.
Ethics Assumption
Economic Entity Assumption
Monetary Assumption
Going Concern Assumption
Time Period Assumption
6
Why Do We Prepare Adjusting
Entries?
1.
2.
3.
Better Reporting of Results and
Operations
Better Reporting of Financial
Position
Cash Basis Versus Accrual Basis
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How Do We Prepare Adjusting
Entries?
1.
2.
3.
GAAP
Revenue Recognition
Expense Recognition
8
Constraints
1.
2.
3.
4.
5.
Materiality
Conservatism
Comparability
Consistency
Cost - Benefit
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What Happens If We Do Not
Prepare Adjusting Entries?
1.
2.
3.
4.
5.
Understate Revenues / Expenses
Period Income Not Up-to-date
Overstate Liabilities / Assets
Financial Position Not Up-to-date
Owners Equity Also Not Up-to-date
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How Do You Prepare An
Adjusting Entry?
1.
2.
3.
Must know how costs flow
through the system
Refer to source documents
used to prepare cash
transaction entries related
Is it logical? Makes sense.
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How About A Shortcut?



No Way!
No Magic Formula Here – Sorry!
Lets Use The Martinelli Apple Juice Tree
Approach!
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5 Traits of All Adjusting Entries
1.
2.
3.
4.
5.
Adjusting Entry Initiated by End of
Reporting Period
Adjusting Entry Dated the Last Day of the
Reporting Period
1 Balance Sheet Account and 1 Income
Statement Account
Cash Account Not Used in Adjusting
Entry
Adjusting Entry Related to a Cash
Transaction Dated Before or After the
Date of the Adjusting Entry
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2 Major Categories of Adjusting
Entries
Deferrals
1.
2.
3.
Cash Transaction Occurs
Before
Income Statement Account
Increases While Balance
Sheet Account Decreases
2 Sub-groups of Deferrals
Deferred Assets / Deferred
Expenses
Or
Deferred Liabilities / Deferred
Revenues
Accruals
1.
2.
3.
Cash Transaction Occurs
After
Both Accounts - Income
Statement & Balance Sheet
Increase
2 Sub-groups of Accruals
Accrued Assets / Accrued
Revenues
Or
Accrued Expenses / Accrued
Liabilities
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Examples - Major Categories of
Adjusting Entries
Deferrals
1.
2.
3.
Supplies – Supplies Exp
Prepaid Ins. – Ins. Exp
Unearned Revenue – Earned
Revenue
Accruals
1.
2.
3.
A/R – Service Revenue
Wages Exp – Wages Pay
Interest Exp – Interest Pay
Text: Prepaid Assets
Text: Un-Earned Revenues
Text: Accrued Assets
Text: Accrued Liabilities
Deferred Assets / Deferred
Expenses
Or
Deferred Liabilities / Deferred
Revenues
Accrued Assets / Accrued
Revenues
Or
Accrued Expenses / Accrued
Liabilities
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One Other Category of
Adjustments – Estimating
Estimating
Adjustment - Debit
1.
Depreciation Expense – Equip.
Estimating
Adjustment - Credit
1.
Accumulated Depreciation
– Equip.
Contra Asset Account – Opposite
normal balance to an asset
On the Balance Sheet: Book Value
A = Equipment
B = Less: Accumulated Depr. –
Equip
C = Book Value: A Minus B = C
On the Income Statement:
Depreciation Exp.
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How To Properly Adjust Your
Books – Conclusion
1.
2.
3.
You Now Know How To Adjust
And Why – Better Information
No Magic Pill Thru Death Valley
But There is A Way Out – The
Martinelli Apple Juice Tree
Approach! An Escape Out!
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