BBAW2103

Financial Accounting

Topic 4 Adjusting Entries

Before We Start….

• Let’s see the whole process of Accounting Cycle

Learning Objectives

• Describe the types of adjusting entries

• Prepare the Adjusted Trial Balance
Accrual Basis vs. Cash Basis

Accrual Basis Cash Basis

Revenues are recognized Revenues are recognized
when earned and expenses when cash is received and
are recognized when expenses recorded when
incurred. cash is paid.

Accrual vs Cash Basis

The Accounting Period

• Calendar year- reporting period of 12 months covering from 1

January to 31 December

• Fiscal year- reporting period consisting of any 12 consecutive

months, in which the starting month is not necessarily beginning
from 1 January. Eg. 1 April 2019 to 31 March 2019
Recognising Revenues and Expenses

We have delivered the

product to our customer,
so I think we should record
the revenue earned.

Summary Now that we have

of Expenses recognized the revenue,
Rent RM1,000 let’s see what expenses
Gasoline 500
Advertising 2,000
we incurred to
Salaries 3,000 generate that revenue.
Utilities 450
and . . . . ....
Adjusting Accounts

An adjusting entry is recorded to bring an asset or liability account

balance to its proper amount.

Framework for Adjustments

Adjustments

Paid (or received) cash before Paid (or received) cash after
expense (or revenue) recognized expense (or revenue) recognized

Prepaid Unearned Accrued Accrued

(Deferred) (Deferred) expense revenues
expenses* revenues
*including depreciation
Prepaid Insurance
On 1 December 2019, Scott Company paid RM12,000 to cover insurance
for December 2019 through May 2020. Scott recorded the
expenditure as Prepaid Insurance on 1 December. What adjustment is
required?

Dec. 31 Insurance Expense 2,000

Prepaid Insurance 2,000
To record first month's expired insurance

Prepaid Insurance 637 Insurance Expense 128

Dec. 1 12,000 Dec. 31 2,000 Dec. 31 2,000
Bal. 10,000
Supplies

During 2019, Scott Company purchase RM15,500 of supplies. Scott

recorded the expenditures as Supplies. At 31 December a count of the
supplies indicated RM2,655 on hand. What adjustment is required?

Dec. 31 Supplies Expense 12,845

Supplies 12,845
To record supplies used during 2019

Supplies 126 Supplies Expense 652

Bought 15,500 Dec. 31 12,845 Dec. 31 12,845
Bal. 2,655
Depreciation
Depreciation is the process of computing expense from allocating
the cost of plant and equipment over their expected useful
lives.

Straight-Line Asset Cost - Salvage Value

Depreciation =
Expense Useful Life
Depreciation

On 1 January 2019, Barton, Inc. purchased equipment for RM62,000

cash. The equipment has an estimated useful life of 5 years and
Barton expects to sell the equipment at the end of its life for RM2,000
cash.
Let’s record depreciation expense for the year ended 31 December
2019.

2019 RM62,000 - RM2,000

Depreciation = = RM12,000
Expense 5
Depreciation
On 1 January 2019, Barton, Inc. purchased equipment for RM62,000
cash. The equipment has an estimated useful life of 5 years and
Barton expects to sell the equipment at the end of its life for RM2,000
cash.
Let’s record depreciation expense for the year ended 31 December
2019.

Dec. 31 Depreciation Expense 12,000

Accumulated Depreciation - Equipment 12,000
To record equipment depreciation

Accumulated depreciation is
a contra asset account.
Depreciation

Dec. 31 Depreciation Expense 12,000

Accumulated Depreciation - Equipment 12,000
To record equipment depreciation

Equipment Depreciation Expense

1/1 62,000 31/12 12,000

Accumulated Depreciation
31/12 12,000
Depreciation

Barton, Inc.
Partial Balance Sheet
At 31 December 2019

Assets
Fixed Assets: RM
Equipment $ 62,000
Less: Acc Dep-Equipment (12,000) 50,000 Equipment is shown
net of accumulated
Current Assets: depreciation.
Cash $ -
Total Assets
Adjusting Unearned (Deferred) Revenues

On 1 October 2019, Ox University sold 1,000 season tickets to its 20

home basketball games for RM100 each. Ox University makes the
following entry:

Oct. 1 Cash 100,000

Unearned Revenue 100,000
Basketball revenue received in advance

Unearned Revenue
Oct. 1 100,000
Adjusting Unearned (Deferred) Revenues

On 31 December, Ox University has played 10 of its regular home

games, winning 2 and losing 8.

Dec. 31 Unearned Revenue 50,000

Basketball Revenue 50,000
To recognized 10-game basketball revenue

Unearned Revenue Basketball Revenue

Oct. 1 100,000 Dec. 31 50,000 Dec. 31 50,000
Bal. 50,000
Adjusting for Accrued Expenses

Barton, Inc. pays its employees every Friday. Year-end, 31/12/2019,

falls on a Wednesday. As of 31/12/2019, the employees have earned
salaries of RM47,250 for Monday through Wednesday of the week
ended 2/01/2020.

Last pay Next pay

date date
26/12/2019 2/01/2020

1/12/04 31/12/2019 Record adjusting

Year end journal entry.
Adjusting for Accrued Expenses

Barton, Inc. pays its employees every Friday. Year-end, 31/12/2019,

falls on a Wednesday. As of 31/12/2019 the employees have earned
salaries of RM47,250 for Monday through Wednesday of the week
ended 2/01/2020.

Dec. 31 Salaries Expense 47,250

Salaries Payable 47,250
To accrue 3-days' salary
Salaries Expense Salaries Payable
Other salaries Dec. 31 47,250
657,500
Dec. 31 47,250
Bal. 704,750
Adjusting for Accrued Revenues

Smith & Jones, CPAs, had RM31,200 of work completed but not yet
billed to clients. Let’s make the adjusting entry necessary on 31
December 2019, the end of the company’s fiscal year.

Dec. 31 Accounts Receivable 31,200

Service Revenue 31,200
To accrue revenue earned
Accounts Receivable Service Revenue
Other receivables Other revenues
1,325,268 6,589,500
Dec. 31 31,200 Dec. 31 31,200
Bal. 1,356,468 Bal . 6,620,700
Illustration
FastForward
Trial Balance
31 December 2019
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. -
Accounts payable 6,200
First, the initial
Salaries payable -
Unearned revenue 3,000 unadjusted amounts
Chuck Taylor, Capital 30,000 are added to the
Chuck Taylor, Withdrawals 600
Consulting revenue 5,800
worksheet.

Rental revenue 300

Depr. expense -
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300
Illustration
FastForward
Trial Balance
31 December 2019
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000
Next,
Accum. depr. - Equip. - c 375 FastForward’s
Accounts payable 6,200 adjustments
Salaries payable - e 210
are added.
Unearned revenue 3,000 d 250
Chuck Taylor, Capital 30,000
Chuck Taylor, Withdrawals 600
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals 45,300 45,300 3,785 3,785
 Illustration
Finally, the totals FastForward
are determined. Trial Balance
31 December 2019
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned revenue 3,000 d 250 2,750
Chuck Taylor, Capital 30,000 - 30,000
Chuck Taylor, Withdrawals 600 600
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals 45,300 45,300 3,785 3,785 47,685 47,685
Thank You