CHAPTER 7 –
Adjusting journal entries
Bellringer:
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Have you ever paid for something in advance?
What was it?
You buy a car worth $36,000 and you drive the
car off the lot. You change your mind and try to
give the car back. Is it still worth $36,000?
Have you ever borrowed money from anyone?
Did they loan the money for free?
Have you ever loaned someone money? Was it
for free?
Has anyone paid you in advance for something?
What you already know:
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Source Documents - evidence of
accounting events.
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Record in the general journal in
chronological order.
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Post the effect of these events in the
General Ledger Accounts.
What you will know:
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Enduring Understanding: Not all
accounting events arise from source
documents.
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Essential questions: What are adjusting
journal entries and how do they impact
the financial statements?
Objectives – SWBAT:
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Compare and contrast general journal
entries from adjusting journal entries.
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Identify four types of adjusting journal
entries and describe their impact on the
accounting equation.
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Demonstrate how to make and post
adjusting journal entries.
What you already know:
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Source Documents - evidence of accounting
events.
Record in the general journal in chronological
order.
Post the effect of these events in the General
Ledger Accounts.
This process continues throughout accounting
cycle (time between financial statements).
BUT…. Are all accounting events supported by
source documents????
NO!
What are adjusting journal entries?
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An internal entry made to adjust accounts
for internal accounting events.
Prior to preparing Financial Statements
Before these are done – prepare a trial
balance.
No source documents available
Purpose? Proper Expense and Revenue
recognition in period incurred.
#1 – Expense Deferrals
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Have you ever paid for something in
advance? What was it?
◦ 1/1/10 - You paid for Rent for the entire year
in the amount of $24,000. Lease 1/1/10 –
12/31/10.
◦ 7/1/10 - You paid for Car Insurance for 1 year
$1,200. Policy 7/1/10 – 6/30/11.
#1 – Expense Deferrals
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6/1/10 - You buy a car worth $36,000 with a 5 year useful life and you drive
the car off the lot. What is the car’s value after 1 month? 7 months? 2 years?
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Depreciation – allocation of cost of the long-term asset over its useful life.
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Accumulated Depreciation – Account accumulates depreciation expense taken
over life of asset –
contra account (opposite debit/ credit rules).
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Depreciation = Cost
Useful Life
$36,000= $7,200 per year
5 years
◦ Depreciation Expense – debit
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Accumulated Depreciation - Credit
#1 – Expense Deferrals
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Occurs when a company uses previously purchased
assets in an attempt to generate revenue in future
periods.
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Expense recognition has been deferred.
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Increase expense, decrease asset
Rent Expense, debit
Prepaid rent, credit
Depreciation Expense, debit
Accumulated Depreciation (contra asset)
#2 – Expense Accruals
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Have you ever borrowed money from
anyone? Did they loan the money for free?
◦ 5/1/10 - You borrowed cash and signed a 3 year
note 8% $40,000 (loan due 4/30/13). How much
is owed the bank as of 12/31/10?
◦ At the end of they year 12/31/10, the company
owes more than just $40,000……..
 They also owe interest: $40,000 x 8% x 8/12 =
$2,133.33
#2 – Expense Accruals
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Recorded when expenses are incurred in
one accounting period and payment is
made in a later period.
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Increase expense, increase liability
Interest Expense, Debit
Interest Payable, Credit
#3 – Revenue Accruals
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Have you ever loaned someone money? Was it
for free?
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11/1/10 – Company loaned a supplier $10,000
cash for 90 days at 6 % interest. How much is
owed the company at 12/31/10?
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This note earns interest each day but the
company only needs to record the interest before
financial statement preparation.
 The customer also owes interest: $10,000 x 6% x 60/365 =
$98.63
#3 – Revenue Accruals
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Recorded when revenues are earned in
one accounting period and payment is
received in a later period.
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Increase revenue, increase asset
Interest Receivable, Debit
Interest Earned (revenue), Credit
#4 – Revenue Deferrals
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Has anyone paid you in advance for something?
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12/1/10 – A customer pays you $9,000 for services to be
performed during December and January. Two-thirds of the
services were completed by 12/31/10. How much revenue did you
earn as of 12/31/10?
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Original General Journal Entry –
Cash $9,000 Debit
Unearned Revenue $9,000
(Liability)
The company earned only 2/3 x 9,000 = 6,000. The company still
owes 1/3 of services to the customer to be completed. If they do
not complete the services, they must give 1/3 of the money back.
Therefore, this is a liability.
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#4 – Revenue Deferrals
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Occurs when a company has been paid in
advance by a client for services to be
performed in the future.
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Revenue Recognition has been deferred.
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Increase revenue, decrease liability
Unearned Revenue, Debit
Service Fees Earned (revenue), Credit
Exit ticket:
◦ “Go Around” – Tell me one thing you learned
from today.
◦ Ready…… Set……. Go!