Adjusting entries explanation, purpose, types, examples

Insurance policies can require advanced payment of fees for several months at a time, six months, for example. The company does not use all six months of insurance immediately but over the course of the six months. At the end of each month, the company needs to record the amount of insurance expired during that month. Depreciation Expense increases (debit) and Accumulated Depreciation, Equipment, increases (credit). If the company wanted to compute the book value, it would take the original cost of the equipment and subtract accumulated depreciation.

Prepaid Expenses

1. A company may choose its yearly reporting period to be based on a calendar or fiscal year.
2. As soon as the asset has provided benefit to the company, the value of the asset used is transferred from the balance sheet to the income statement as an expense.
3. Often, a business will collect monies in advance of providing goods or services.

It is the end of the first month and the vertical analysis of balance sheet company needs to record an adjusting entry to recognize the insurance used during the month. The following entries show the initial payment for the policy and the subsequent adjusting entry for one month of insurance usage. He does the accounting himself and uses an accrual basis for accounting. At the end of his first month, he reviews his records and realizes there are a few inaccuracies on this unadjusted trial balance. The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company.

As one can see on each year’s balance sheet, the asset continues to be reported at its $150,000 cost. However, it is also reduced each year by the ever-growing accumulated depreciation. The asset cost minus accumulated depreciation is known as the book value (or “net book value”) of the asset. For example, at December 31, 20X2, the net book value of the truck is $50,000, consisting of $150,000 cost less $100,000 of accumulated depreciation.

Unearned revenue scaled agile business strategy integration is reported as a liability, reflecting the company’s obligation to deliver product in the future. Remember, revenue cannot be recognized in the income statement until the earnings process is complete. Supplies Expense is an expense account, increasing (debit) for $150, and Supplies is an asset account, decreasing (credit) for $150. This means $150 is transferred from the balance sheet (asset) to the income statement (expense).

Who Is Responsible for Performing the Accounting Cycle?

Did we continue to follow the rules of adjusting entries in these two examples? Alternatively, the budget cycle relates to future operating performance and planning for future transactions. The accounting cycle assists in producing information for external users, while the budget cycle is mainly used for internal management purposes. Did we continue to follow the rules of adjusting entries inthese two examples?

Customer ServiceCustomer Service

Accruals are types of adjusting entries that accumulate during a period, where amounts were previously unrecorded. The two specific types of adjustments are accrued revenues and accrued expenses. Recall that unearned revenue represents a customer’s advanced payment for a product or service that has yet to be provided by the company. Since the company has not yet provided the product or service, it cannot recognize the customer’s payment as revenue. At the end of a period, the company will review the account to see if any of the unearned revenue has been earned. If so, this amount will be recorded as revenue in the current period.

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The salary theemployee earned during the month might not be paid until thefollowing month. For example, the employee is paid for the priormonth’s work on the first of the next month. The financialstatements must remain up to date, so an adjusting entry is neededduring the month to show salaries previously unrecorded and unpaidat the end of the month. During theyear, it collected retainer fees totaling $48,000 from clients.Retainer fees are money lawyers collect in advance of starting workon a case. When the company collects this money from its clients,it will debit cash and credit unearned fees. Even though not all ofthe $48,000 was probably collected on the same day, we record it asif it was for simplicity’s sake.

Income Tax Expense increases (debit) and Income Tax Payableincreases (credit) for $9,000. The following are the updated ledgerbalances after posting the adjusting entry. Interest Expense increases (debit) and Interest Payableincreases (credit) for $300. Insurance policies can require advanced payment of fees forseveral months at a time, six months, for example. The company doesnot use all six months of insurance immediately but over the courseof the six months. At the end of each month, the company needs torecord the amount of insurance expired during that month.