Chapter 8!
The Accounting Cycle
Work Sheet and Adjusting Process
Unit 3 Test (cover chapter 6, 7 and 8, but we will cover
only some portion of chapter 8) will be Tue Nov 18

Adjusting Entry:
is a journal entry, which assigns an
amount of revenue or expense to the
appropriate accounting period.
It brings a balance sheet account to its
true value.
Reasons why we have to make adjusting
entry:
Revenue Recognition: You recognize the
revenue when it is earned not when you
get paid.
 Matching Principle: Accountants have to
match the expense with revenue (that it
helped to generate) in the same fiscal
period.

Reasons for making Adjusting Entries




Cost Principle: Assets must be shown in
balance sheet at their original cost. (not
current price)
Principles of Conservatism: Assets should be
neither overstated nor understated.
For example, if my business paid $15 000 for
land 30 years ago, and the land is now
worth $500 000. How should my balance
sheet show the value of the land?
Balance sheet should show $15 000 because
of cost principle.
Adjusting Entry

There are many different types of adjusting
entries accountants make at the end of the
fiscal period:
Prepaid Expense
Prepaid Insurance
Supplies adjustment
Unearned Revenue
Late-Arriving Purchase Invoice
Adjusting Entry for Supplies account





My office supplies account has a beginning
balance of 200.
On June 1, we purchased 350 worth of office
supplies. (paper, ink cartridge, pens and pencils)
On October 1, we purchased 250 worth of office
supplies. (similar to above)
As a result, my ending balance for supplies
account is 800.
Even though supplies were used everyday,
accountant did not make journal entries to record
these usages everyday. (Doing so would have
taken too much time and effort. )
Adjusting Entry for Supplies account




If noone makes any adjusting entry, the balance
sheet would show $800 for supplies account in
balance sheet. Is this fair to the reader?
No it is not fair. Since we used up a lot of office
supplies everyday, we are violating principles of
conservatism, if supplies account shows $800.
Therefore we have to make an adjusting entry.
The first step: someone counts how much worth
of supplies are left. This procedure is called,
“taking inventory”
Adjusting Entry for Supplies account




Suppose an accounting clerk counted the
supplies left in the office and discovered that
there was actually $200 worth of supplies left.
Accountant must make an adjusting entry, which
would reduce the ending balance of supplies
account from $800 to $200, so he or she would
credit $600 to supplies account.
We need a debit entry. Which account should
we debit for $600?
We would debit Supplies Expense account.
Adjusting Entry for Supplies account
The adjusting entry would be:
Dr.
Cr.
Dec 31 Supplies Expense
600
Supplies
600
Adjusting entry for supplies account

Summary:

After the adjustment, the supplies ledger
(asset) account reflects the true value.
MAKE SENSE?
Adjusting Entry for Late-Arriving Purchase Invoices



The financial statements are usually prepared two
to three weeks after the fiscal year end. For
example, if the fiscal year is from Jan 1 to
December 31, then the company would make
financial statement in the second week of
January.
Let’s say we receive Utility (Electricity) Bill on
January 17, but the bill is for the utility usage in
December. (Amount is 450$)
If we do not make any adjusting entry, then the
income statement contain lower total expense 
Net income is too overstated.
Adjusting Entry for Late-Arriving Purchase Invoices
As an accountant, you must apply matching
principle, so you will enter adjusting entry:
Dr.
Cr.
Dec 31Utilities Expense
450
Accounts Payable
450
Adjusting Entry, Utilities Bill Invoice #1234

Jan 17 Accounts Payable
450
Bank
Paying for Utilities Bill Check #5678
450
T-account for the entries
Classwork / Homework
1)
2)
Answer Review Questions – pg 276
#6, #7
P277 and P278 Ex#1, 2 (Only supplies
and late-arriving invoice questions)