Chapter Two Adjusting Entries

Chapter Two
Adjusting Entries

After study this chapter, you should be able to :-

1- Explain the purpose of adjusting entries.
2- Describe and prepare the four basic types of adjusting entries.
3- Prepare adjusting entries to convert assets to expenses.
4- Prepare adjusting entries to convert liabilities to revenue.
5- Prepare adjusting entries to accrue unpaid expenses.
6- Prepare adjusting entries to accrue uncollected revenue.
7- Prepare an adjusted trial balance and describe its purpose.

Adjusting Entries
There is more to the measurement of business income than merely
recording simple rebalance and
expense transactions that affect only a single accounting period. Certain
transaction affect the revenue
or expenses of two or more accounting periods. The purpose of adjusters
entries is to assign to each
accounting period appropriate amounts of revenue and expense for
example, Overnight Auto Service
purchased shop supplies that will be used for several months. Thus, an
adjusting entry is required to
record the expense associated with the shop supplies that Overnight
uses each month.

Explain the purpose of adjusting entries.

For purposes of measuring income and preparing financial statements,
the life of a business is divided into a series of accounting periods. This
practice enables decision makers to company, the financial statements of
successive periods and to identify significant trends.
But measuring net income for a relatively short accounting period such
as a month even a year poses a problem because, as mentioned above .
some business activities affect the revenue and expenses of multiple
accounting periods. Therefore, adjusting entries needed at the end of each
accounting period to make certain that appropriate amounts of revenue
and expense are reported in the company's income statement.
For example, magazine publishers often sell two- or three-year
subscriptions to their publications. At the end of each accounting period,

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Chapter Two Adjusting Entries

these publishers make adjusting entries recognizing the portion of their

advance receipts that have been earned during the current period. Most
companies also purchase insurance policies that benefit more than one
period. Therefore, an adjusting entry is needed to make certain that an
appropriate portion of each polio total cost is reported in the income
statement as insurance expense for the period. In short adjusting entries
are needed whenever transactions affect the revenue or expenses of more
than one accounting period. These entries assign revenues to the period in
which they earned, and expenses to the periods in which related goods or
services are used.
In theory, a business could make adjusting entries on a daily basis. But as
a practical mater, these entries are made only at the end of each accounting
period. For most companies adjusting entries are made on a monthly basis.

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‫‪Chapter Two‬‬ ‫‪Adjusting Entries‬‬

‫قيود التسوية ‪:‬‬

‫يتم تحديد صافي دخل الشركات بحسب ما يتم تسجيمو بشكل مبسط لإليرادات والمصاريف التي تؤثر‬
‫فقط عمى فترة محاسبية واحدة ‪ .‬ولكن ىناك بعض العمميات الخاصة باإليرادات والمصاريف قد يمتد‬
‫تأثيرىا إلى أكثر فترة محاسبية ‪ ،‬فالغرض من قيود التسوية ىو لتحديد المصاريف واإليرادات الخاصة‬
‫بالفترة المحاسبية‪.‬‬
‫الحاجة إلى قيود التسوية ‪:‬‬
‫لغرض أعداد كشف الدخل والقوائم المالية‪ ،‬يجب أن يقسم عمر المشروع إلى فترات محاسبة منتظمة‪،‬‬
‫وىذا التطبيق سوف يوفر معمومات لمتخذي الق اررات من خالل المقارنة بين القوائم المالية لفترات‬
‫مختمفة فضال عن تحديد االتجاىات اليامة ‪.‬‬
‫ويمكن قياس صافي الدخل لفترات محاسبة قصيرة نسبياً ‪ ،‬كان يكون شير أو سنة فيذا يولد مشاكل‬
‫‪ ،‬فبعض الشركات تؤثر أنشطتيا المتعمقة بالمصاريف واإليرادات لفترات محاسبة متعددة ‪ ،‬لذلك ىناك‬
‫حاجة ألعداد قيود تسوية في نياية كل فترة محاسبية لتحديد المبمغ المناسب من اإليرادات‬
‫والمصاريف المرتبطة بالفترة المحاسبية بيدف إعداد كشف الدخل ‪.‬‬
‫أنواع قيود التسوية ‪:‬‬
‫أن قيود التسوية المطموبة في نياية كل فترة محاسبية يعتمد عمى طبيعة أنشطة المنظمات ‪ ،‬وعموماً‬
‫أغمب قيود التسوية تكون واحدة من المجاميع األربع اآلتية ‪:‬‬
‫‪First: Prepaid expenses‬‬
‫‪Expenses paid in cash and specific more accounting period‬‬
‫المصاريف المدفوعة نقداً والتي تخص أكثر من فترة محاسبة‬
‫‪There are two method to treatment the adjusting entries .‬‬
‫‪1. Assets method:‬‬
‫‪Expenses paid in cash and recorded as assets before they are used or‬‬
‫‪consumed, the adjusting entry:‬‬
‫‪Expenses………..‬‬
‫…………‪Prepaid expenses‬‬
‫‪Example 1 / on Dec 31 , 2012 the trial balance appeared in the records of‬‬
‫‪Ali co. 24000 I.D. prepaid rent the rent paid for two years,‬‬
‫‪starting from 1\1\2012 ,Required : record adjusting entry.‬‬
‫‪Sol /‬‬
‫‪24000‬‬ ‫‪=12000‬‬
‫‪Rent exp. 12000‬‬
‫‪Prepaid rent 12000‬‬

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Chapter Two Adjusting Entries

Example 2 / On Dec 31 , 2012 the trial balance appeared in the records of

Salah co. 40000 I.D. prepaid Insurance , The monthly
insurance 4000ID starting from 1/9/2012. Required : record
adjusting entry.
Sol /
4000 × 4months = 16000
Insurance exp…….. 25000
Prepaid insurance……… 25000
2. Expense method
Expanses paid in cash and recorded as expenses before they are used or
(consumed) , the adjusting entry :
Prepaid Expenses………..
expenses…………
Example 1: On Dec 31 , 2012 the trial balance appeared in the record of
Ali Co. 24000 ID rent . The rent paid for two years starting 1/1/2012.
Required : record adjusting entry..
Sol /
24000 ÷ 2 = 12000
Prepaid rent 12000
Rent expenses 12000
Examples 2: on 1, October2012 ABC , company pays 3600 cash to sandy
insurance Co. for one year recorded insurance. Required: record adjusting
entry.
Sol\ Insurance expense 3600 12= 300 × 3month = 900 for year 2012
300 × 9month = 2700 for year 2013
Prepaid Insurance …….1600
insurance expense …. 1600
Example 3: On Dec 31 , 2012 the trial balance appeared in the records of
salah Co. 40000 ID insurance . The monthly insurance 4000 ID. Starting from
1/9/2012. Required: record adjusting entry.
Sol / 4000 × 4 month = 16000 for year 2012
40000 – 16000 = 24000 for year 2013
Prepaid insurance 24000
Insurance 24000

Example 4: On 1, October , 2013 , Arab company pays 600 to sandy

insurance Co. record insurance exp for a one year.

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Chapter Two Adjusting Entries

Required: record adjusting entry.

Sol / 600 ÷ 21 = 40 …….40 × 9 months = 450 for 2014
Prepaid Insurance……….. 350
Insurance Expenses ……. 350
Example 5: On April 1 , 2013 , the company paid on insurance company
6000 ID. , for a two – years fire insurance policy . the entry 6000 ID. was
debit to insurance expenses .
Required: record adjusting entry.
6000
Sol.  250
24(2 12)
1/4 → 31/12 9 months for the yeas (2013)
250 9=2250 for the yeas (2013)
6000 – 2250 = 3750 for the yeas (2014)
Prepaid Insurance 3750
Insurance Expenses 3750

Second: Accrued Expenses/payable expenses:

‫املصروفات املستحقة‬
Accrued expenses are expenses incurred but not yet paid or recorded at
the statement date .
‫ ىي عبارة عن مصروفات حدثت بالفعل مقابل خدمات حصمت عمييا‬: ‫المصاريف المستحقة‬
. ‫المنشأة ولكن لم تدفع ولم تسجل بالدفاتر بعد لغاية تاريخ أعداد البيانات المالية‬
Accrued expenses result from the same causes as accrued revenues and
include interest , rent , taxes and salaries .
‫تنتج المصروفات المستحقة عن نفس األسباب التي تنتج عنيا اإليرادات المستحقة فالمصروف‬
، ‫ اإليجار‬، ‫ مثال ذلك الفوائد‬، ‫المستحق في شركة ما يكون إيراد مستحق إلى الشركة األخرى‬
. ‫ الرواتب‬، ‫الضرائب‬
The adjusting entry results in an increase (a debit) to an expense account
and an increase (a credit) to a liability account .
‫يؤدي قيود التسوية لممصاريف المستحقة إلى زيادة في حساب المصروف في الجانب المدين‬
. ‫والى زيادة في حساب المطموبات الجانب الدائن‬
Example1: on Dec 31 , 2011 the trial balance for Iraq Co. appeared 30000
ID. Wages exp. And by reviewing records appeared the wages for one of
worker unpaid at end of 2011 750 ID.
Required : record adjusting entry .

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Chapter Two Adjusting Entries

Sol / Wages exp….. 640

Accrued wages…… 640
Example 2: Accrued interest ‫فوائد مستحقة‬
On Dec 1 , 2013 , Mr. Rafat takes a loan of 8000 from Mr. Ali , the loan
term is 3 months . The interest rate is 12% per year. Mr. Ali receives a note
for the amount.
Required : record adjusting entry for Rafat Co at 31,12.2013.
interest = 8000 × 12% × 1/12 = 80
Interest expense….. 70
Interest payable ……70
Example 3: On Dec 31 , 2011 the trial balance appeared in the records of
Ahmed co. 40000 ID insurance , the monthly insurance exp. is 5000 ID
Required : record adjusting entry.
5000 × 12 = 60000 for year 2011
60000 – 40000 = 20000 Accrued insurance
Insurance Exp ……10000
Accrued insurance ……10000
Example 4: On October 1 , 2013 , passim borrowed 50000 ID. From the
local bank and signed a note. The note requires interested to be paid
annually on September 30 at 12%, the loan is due in 10 years.
Record adjusting entry at 31/12/2013.
Sol.
1/10/2013 → 31/12/2013 3 months
12 3
Interest = 50000    1500
100 12
Interest Exp 1500
Interest Payable 1500

Third: Unearned Revenue ‫اإليرادات املستلمة مقدما‬

Revenue received in cash specifies more accounting period
‫اإليرادات المقبوضة نقداً والتي تخص أكثر من فترة مالية‬
There are two method to treatment the adjusting entries
1- Liabilities Method ‫طريقة املطلىب‬
Revenues received in cash and recorded as a liabilities before they are
earned.
‫اإليرادات المستممة نقداً والتي سجمت كمطموبات قبل تحققيا ويكون القيد المحاسبي‬

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Chapter Two Adjusting Entries

Unearned Revenues ………

Revenues ………
Example 1: On Dec 31 , 2013 the trial balance appeared in the record of
Ahmed Co. 9000ID, Unearned rent revenue The monthly rent revenue 3000
starting in 1/11/2013 Required: record adjusting entry .
Sol. 3000 2 =6000
Unearned rent revenue 6000
Rent revenue 6000

Example 2: On Dec 31, 2009 the trial balance appeared in the record Ali
Co. 13000ID. Unearned commission revenue. The monthly commission
earned is 1000 ID. Starting in 1/4/2009 Required: record adjusting entry.
Sol. 1000 × 9 = 9000 for year 2009
Unearned commission revenue….. 8000
Commission revenue…. 8000
2- Revenue Method ‫طريقة اإليراد‬
Revenue received in cash and recorded as revenue before they are
earned.
‫اإليرادات المستممة نقداً والتي سجمت كإيرادات قبل تحققيا ويكون القيد المحاسبي‬
Revenue
Unearned Revenue

Example 1: On Dec 31, 2009 the trial balance appeared in the record of
Ali Co. 13000ID. Commission revenue. The monthly Commission revenue is
1000 ID. Starting in 1/4/2009. Required: record adjusting entry .
Sol. 1000 × 9 = 9000 for year 2009
13000 – 9000 = 4000 for year 2010
Commission revenue 4000
Unearned commission 4000

Example 2: On Dec 31 , 2012 the trial balance appeared in the record of

Ahmed Co. 9000ID. rent revenue . The monthly rent revenue 3000 starting
in 1/12/2012. Required: record adjusting entry .
Sol. 3000 for 2012
9000 – 3000 = 6000 for 2013
Rent revenue 6000
Unearned rent revenue 6000

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Chapter Two Adjusting Entries

Fourth: Accrued revenue / Receivable revenue ‫اإليرادات املستحقة‬

Revenue earned but not yet received in cash or record
‫إيرادات تحققت ولكنها لم تسلم نقداً ولم تسجل ويكون القيد المحاسبي‬
Accrued Revenue
Revenue
Example 1: On Dec 31 , 2010 the trial balance appeared in the record of
Ali Co. 300000ID Commission revenue ,annually 350000. Required: record
adjusting entry
Sol. 350000 – 300000 = 50000
Accrued Commission revenue 50000
Commission revenue 50000
Example 2: On Dec 1 , 2013 Mr. Ali Takes a loan of $ 8000 from Mr. Rafat,
The Loan term is 3 months , The interest rate is 12% per year . Mr Rafat
receives a note . Required: record adjusting entry for Rafat
Sol. 8000 × 12% × 1/12 = 80
Interest Receivable …… 70
Interest Revenue …… 70
Example 3: On March 1 , 2009 , the x company lent a supplier 20000 ID.
and note was signed the note required interest at 8% , To be paid on
February 28 , 2010
Record adjusting entry at 31/12/2009 .
8 10
Sol. 20000    1333
100 12
Interest Receivable. 1333
Interest Revenue 1333

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Chapter Two Adjusting Entries

Summary the adjusting entries

Expenses

Accrued Prepaid

Expenses ….
Accrued expenses …...
Assets method Expenses method
The amount Not
yet paid

Expenses …. Prepaid expenses….

Prepaid expenses…. Expenses….
The amount specific The amount specific
Current period future period

Revenue

Accrued Revenues Unearned Revenues

Accrued Revenues…..
Revenues …. Liabilities Method Revenues Method
The amount not yet
received
Unearned Revenue……. Revenue…….
Revenue… Unearned Revenue

The amount specific The amount

current period Specific future period
Current prior

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Chapter Two Adjusting Entries

THE CONCEPT OF DEPRECIATION

Depreciable assets are physical objects that retain their size and shape but
that eventually wear out or become obsolete. They are not physically
consumed, as are assets such as supplies, but nonetheless their economic
usefulness diminishes over time. Examples of depreciable assets include
buildings and all types of equipment, fixtures, furnishings-and even railroad
tracks. Land, however, is not viewed as a depreciable asset, as it has an
unlimited useful life.
Each period, a portion of a depreciable asset's usefulness expires.
Therefore, a corresponding portion of its cost is recognized as depreciation
expense.
What Is Depreciation ? In accounting, the term depreciation means the
systematic allocation of the cost of a depreciable asset to expense over the
asset's useful life.
Depreciation is not an attempt to record changes in the asset's market
value. In the shoe run, the market value of some depreciable assets may
even increase, but the process of depreciation continues anyway . The
rationale for depreciation lies in the matching principle. Oungoal is to offset
a reasonable portion the asset's cost against revenue in each period of the
asset's useful life .
Depreciation expense occurs continuously over the life of the asset, but
there are no daily " depreciation transactions. In effect , depreciation
expense is paid in advance when the ass is originally purchased. Therefore ,
adjusting entries are needed at the end of each accounting period to
transfer an appropriate amount of the asset's cost to depreciation expense.
‫االندثار‬
‫في المحاسبة يعني مصطمح االندثار ىو وسيمة منظمة لتوزيع كمفة الموجودات القابمة لالندثار‬
‫ االندثار ىو ليس محاولة لتسجيل التغيرات التي تؤشر‬، ‫إلى مصاريف تغطي سنوات عمر الموجود‬
‫ ولكن‬، ‫ أن القيمة السوقية لمموجودات القابمة لالندثار عادتاً ما تتزايد‬، ‫في القيمة السوقية لمموجودات‬
. ‫ ان المبدأ المقبول لالندثار ىو مبدأ المقابمة‬،‫االندثار يستمر لكل الموجودات‬
‫تحدث مصاريف االندثار بشكل مستمر خالل عمر الموجود ولكنيا ليس بشكل يومي (عمميات‬
.‫يومية) فقيود التسوية مطموبة في نياية كل سنة لتحويل مبمغ كمفة الموجودات الى مصروف االندثار‬
The most widely used means of estimating periodic depreciation
expenses in the straight line method depreciation , under the straight line
approach , an equal portion of the asset's cost is allocated to depreciation
expense in every period of the asset's estimated useful life the formula for
computing depreciation expenses by the straight-line is depreciation exp.

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Chapter Two Adjusting Entries

Cost of assets – Salvage value

Depreciation Exp (Per Period)=
Estimated useful life

The entry Depreciation Exp…………...

Accumulated depreciation ………….

‫ فبموجب ىذه الطريقة يتم توزيع‬، ‫بشكل واسع يتم استعمال طريقة القسط الثابت الحتساب اندثار‬
‫ والمعادلة الخاصة بمصروف‬، ‫الموجودات الخاضعة لالندثار بشكل متساوي عمى سنوات االستفادة‬
. ‫االندثار طبقاً لطريقة القسط الثابت‬
‫كمفة الموجود – األنقاض‬
= ‫مصروف االندثار‬
‫العمراالقتصادي لمموجود‬
Example : In 1/1/2012 Samar Co. purchase building at cost 600000 ID. and
estimated useful life 20 years , No salvage value .
Required:
1. Computed depreciation in 31/12/2012 and recorded the entry .
2. Effect that on balance sheet as at 31/12/2012 .

Sol
Cost – Salvage value
Dep. exp. =
Estimated useful life

600000 – 0
= = 30000
20
Depreciation exp. 30000
Accumulated Depreciation 30000
Balance sheet
As at 31/12/2012
Building 600000
- Acc. Dep. (30000)
Book value 570000

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Chapter Two Adjusting Entries

Supplies ‫التجهيزات‬
‫وتوجد طريقتان لمعالجة التجهيزات وحسب ما يتم تسجيلها في تاريخ الشراء‬
Example 1: Red company purchased 6000 ID supplies on may 2008., on
Dec 31, an inventory of supplies indicated only 2000 ID on hand . Required:
record adjusting entry.
Sol / Supplies used during period = Balance of supplies amount – supplies
on hand
6000 – 2000 = 4000
Supplies expenses ……. 3000
Supplies …….3000

Example 2: The trial balance shows supplies 1,350. If 600 of supplies are
on hand at the end of the period.
Required: record adjusting entry.
Sol / Supplies used during period = Balance of supplies amount – supplies
on hand
1350 – 600 = 750
Supplies Expense 750
Supplies 750

Example 3: The trial balance shows supplies expense 1,350. If 600 of

supplies are on hand at the end of the period.
Required: record adjusting entry.
Supplies 600
Supplies Expense 600

Example 1: On October 31 , 2008the trial balance for Basrah Co.

appeared the following balances .
Trial Balance October 31 , 2008
Accounts Debit Credit
Cash 15,200
Supplies 2500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,700

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Chapter Two Adjusting Entries

Unearned Revenue 1,200

capital 10,000
Drawing 500
Service Revenue 10,000
Salaries Expense 4,000
Rent Expense 900
Total 28,700 28,700
We assume that company uses an accounting period of one monthly.
and thus it makes monthly, adjusting entries.
1. supplies on hand at October 22 total $500.
2. Expired insurance for the month is $ 100.
3. Depreciation for the month is $50.
4. Unearned revenue earned in October totals $600.
5. Services Revenue provided but not recorded at October 31 are $300.
6. Interest accrued at October 31 is $70.
7. Accrued salaries at October 31 are $1,500.

Instructions:
Prepare the adjusting entries at October 31.
($2,500 – $500)

1. Supplies Expense........2,000
Supplies …………………….1,000
2. Insurance Expense …………… 200
Prepaid Insurance …………………200
3. Depreciation Expense…………..40
Accumulated Depreciation ……….. 40
4. Unearned Revenue …………….. 500
Service Revenue …………………. 500
5. Accrued Service …………… 200
Service Revenue …………………. 200
6. Interest Expense ………………… 60
Interest Payable …………………… 60
7. Salaries Expense ………………… 2,400
Accrued Salaries …………………… 2,400

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Chapter Two Adjusting Entries

Example 2: Presented below is the December 31 trial balance of Iraq Co.

Iraq Co.
TRIAL BALANCE
DECEMBER 31
Debit Credit
Cash 18,500
Accounts Receivable 32,000
Allowance for Doubtful Accounts 700
Inventory, December 31 80,000
Prepaid Insurance 5,100
Furniture and Equipment 84,000
Accumulated Depreciation—Furniture and
35,000
Equipment
Notes Payable 28,000
Common Stock 80,600
Retained Earnings 10,000
Sales 600,000
Cost of Goods Sold 408,000
Salaries Expense 50,000
Advertising Expense 6,700
Administrative Expense 65,000
Office Supplies Expense 5,000
Total $754,300 5754,300

And by reviewing records show the following information.

(1) Furniture and equipment is depreciated based on a 7-years life (no
salvage value).
(2) Insurance expired during the year ID 2,550.
(3) Interest accrued on notes payable ID 3,360.
(4) Sales salaries earned but not paid ID 2,400.
(5) Advertising paid in advance ID700.
(6) Office supplies on hand ID 1, 500, charged to Office Expense when
purchased.

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Chapter Two Adjusting Entries

Required: Prepare adjusting journal entries .

1- 84,000 ÷ 6
Depreciation Expense ………………… 21000
Accumulated Depreciation ………. 21000
2-
Insurance Expense ………………………….. 1440
Prepaid Insurance ……………………………….. 1440
3- Interest Expense ……………………………… 2250
Interest Payable ………………………………….. 2250
4- Sales Salaries Expense …………………… 1300
Salaries Payable………………………………1300
5- Prepaid Advertising Expense …………… 600
Advertising Expense ………………….. 600
6- Office Supplies ……………………… 2400
Office Supplies Expense …..…………………… 2400

Example 3: Choose the correct answer

1. Each of the following is a major type (or category) of adjusting entries
except,.
A. prepaid expenses.
B. accrued revenues.
C. accrued expenses.
D. earned revenues.
2. The time period assumption stares that:
A. Revenue should be recognized in the accounting period in which it is
earned.
B. Expenses should be matched with revenues.
C. The economic life of a business can 'be divided into artificial time
periods.
D. The fiscal year should correspond with the calendar year.
3. One of the following basis statements about the accrual basis of
accounting is false . That statement is,
A. Events that change a company's financial statements are recorded in the
period in which the events occur.
B. Revenue is recognized in the period in which it is earned.
C. This basis is in accord with generally accepted accounting principles.
D. Revenue is recorded only when cash is received, and expense is
recorded only when cash is paid.

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Chapter Two Adjusting Entries

4. A adjusting entries are made. to ensure that :

A. expenses are recognized in the period in which they are incurred.
B. revenues are recorded in the-period in which they are earned.
C. balance sheet and income statement accounts have correct balances at
the end of an accounting period.
D. all of the above.
5. The trial balance shows supplies $1,350 and Supplies Expense $0. If $600
of supplies are on hand at the end of the period, the adjusting entry. Is :
A. Supplies 600
Supplies Expense 60
B. Supplies 750
Supplies Expense 750
C. Supplies Expense 750
Supplies 750
R Supplies Expense 600
Supplies 600
6. Adjustments for unearned revenues according to liabilities method:
A. Decrease liabilities and increase revenues.
B. Have an assets and revenues account relationship.
C Increase assets and increase revenues.
D. Decrease revenues and decrease assets.
7. Adjustments for accrued revenues:
A. Have a liabilities and revenues account relationship.
B. Have an assets and revenues account relationship.
C. Decrease assets and revenues.
D. Decrease liabilities and increase revenues.

]25[