Chapter 3: Recording adjusting entries Accounting Business and Society
In this article, we shall first discuss the purpose of adjusting entries and then explain the method of their preparation with the help of some examples. These adjustments are then made in journals and carried over to the account ledgers and accounting worksheet in the next accounting cycle step. In this case, Unearned Fee Revenue increases (credit) and Cash increases (debit) for $48,000. There are a few other guidelines that support the need for adjusting entries.
- This means $150 is transferred from the balance sheet (asset) to the income statement (expense).
- Since the account has a $900 balance from the December 8 entry, one “backs in” to the $700 adjustment on December 31.
- Some common examples of prepaidexpenses are supplies, depreciation, insurance, and rent.
- The company has accumulated interest during the periodbut has not recorded or paid the amount.
The Adjustment Process
Accumulated Depreciation is contrary to an asset account, suchas Equipment. This means that the normal balance for AccumulatedDepreciation is on the credit side. Accumulated Depreciationwill reduce the asset account for depreciation incurred up to thatpoint. The difference between the asset’s value (cost) andaccumulated depreciation is called the book valueof the asset.
What Is the Accounting Cycle?
Income Tax Expense increases (debit) and Income Tax Payable increases (credit) for $9,000. Interest Expense increases (debit) and Interest Payable increases (credit) for $300. For example, a company performs landscaping services in the amount of $1,500. At the period end, the company would record the following adjusting entry. Adjusting entries requires updates to specific account types at the end of the period. Not all accounts require updates, only those not naturally triggered by an original are federal taxes progressive source document.
When depreciation is recorded in an adjusting entry,Accumulated Depreciation is credited and Depreciation Expense isdebited. Keep in mind that the trial balance introduced in the previous chapter was prepared before considering adjusting entries. Subsequent to the adjustment process, another trial balance can be prepared. This adjusted trial balance demonstrates the equality of debits and credits after recording adjusting entries.
What Are Benefits of the Accounting Cycle?
Accounts Receivable increases (debit) for $1,500 because thecustomer has not yet paid for services completed. Service Revenueincreases (credit) for $1,500 because service revenue was earnedbut had been previously unrecorded. Let’s say a company paid for supplies with cash in the amount of$400.
Besides deferrals, other types of adjusting entries includeaccruals. You will learn more about depreciation and its computation inLong-Term Assets. However, one important fact that we needto address now is that the book value of an asset is notnecessarily the price at which the asset would sell. The same is true about just about any asset youcan name, except, perhaps, cash itself. When a company purchases supplies, it may not use all suppliesimmediately, but chances are the company has used some of thesupplies by the end of the period. One fundamental concept to consider related to the accounting cycle—and to accrual accounting in particular—is the idea of the accounting period.
These expenses are often recorded at the end of period because they are usually calculated on a period basis. For example, depreciation is usually calculated on an annual basis. This also relates to the matching principle where the assets are used during the year and written off after they are used.
During the year, it collected retainer fees totaling $48,000 from clients. Retainer fees are money lawyers collect in advance of starting work on a case. When the company collects this money from its financial forecasting models clients, it will debit cash and credit unearned fees.
Recall that unearned revenue represents a customer’s advancedpayment for a product or service that has yet to be provided by thecompany. Since the company has not yet provided the product orservice, it cannot recognize the customer’s payment as revenue. Atthe end of a period, the company will review the account to see ifany of the unearned revenue has been earned. If so, this amountwill be recorded as revenue in the current period.
The balances in the Supplies and Supplies Expenseaccounts show as follows. On January 9, thecompany received $4,000 from a customer for printing services to beperformed. The company recorded this as a liability because itreceived payment without providing the service. Assume that as ofJanuary 31 some of the printing services have been provided. Since a portion of the service wasprovided, a change to unearned revenue should occur.
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