adjustments

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I. Deferral Adjustments A deferral involves a past exchange of cash that has initially been recorded on the balance sheet rather than on the income statement. The name deferral comes about because the recording on the income statement is deferred (postponed) to a later time. A. Deferred Expenses A deferred expense is initially recorded on the balance sheet as an asset than being immediately expensed. An adjusting entry becomes necessary as the asset is consumed and becomes an expense. 1. Illustration for a short-term asset > Past exchange of cash Asset XXX Cash XXX > Adjusting entry necessary as the asset is consumed Expense XXX (Income statement) Asset XXX (Balance sheet) Example: The supplies account currently shows a $300 balance. A count of the supplies determines that only $250 remains. Supplies Expense 50 Supplies 50 2. Illustration for a long-term asset The adjusting entry for long-term assets differs in that instead of reducing the asset directly; a contra account is used that is subtracted from the asset on the balance sheet. > Past exchange of cash Asset XXX Cash XXX > Adjusting entry necessary as the asset is consumed

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example of adjustment journal

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I. Deferral Adjustments A deferral involves a past exchange of cash that has initially been recorded on the balance sheet rather than on the income statement. The name deferral comes about because the recording on the income statement is deferred (postponed) to a later time. A. Deferred ExpensesA deferred expense is initially recorded on the balance sheet as an asset than being immediately expensed. An adjusting entry becomes necessary as the asset is consumed and becomes an expense. 1. Illustration for a short-term asset

> Past exchange of cash

Asset XXX

Cash XXX

> Adjusting entry necessary as the asset is consumed

Expense XXX (Income statement)

Asset XXX (Balance sheet)

Example:The supplies account currently shows a $300 balance. A count of the supplies determines that only $250 remains.

Supplies Expense 50

Supplies 50

2. Illustration for a long-term asset

The adjusting entry for long-term assets differs in that instead of reducing the asset directly; a contra account is used that is subtracted from the asset on the balance sheet.

> Past exchange of cash

Asset XXX

Cash XXX

> Adjusting entry necessary as the asset is consumed

Depreciation Expense XXX (Income statement)

Accumulated Depreciation XXX (Balance sheet)

Example: Current year depreciation is $2,500.

Depreciation Expense 2,500

Accumulated Depreciation 2,500

Note: Accumulated depreciation is a contra account that is subtracted from the asset on the balance sheet. It has a normal credit balance.

B. Deferred RevenuesRevenue cannot be recorded until the income has been earned. Cash received in advance of income realization should be initially recorded in a liability account such as "Unearned Revenue". An adjusting entry later becomes necessary as the revenue is earned. The liability should be reduced and the revenue recorded.

> Past exchange of cash

Cash XXX

Unearned Revenue XXX

> Adjusting entry necessary as revenue is earned

Unearned Revenue XXX (Balance sheet)

Revenue XXX (Income statement)

Example: Adams CPA previously received $500 for bookkeeping services in advance of providing the services. Adams has now earned $300 of the money.Unearned Revenue 300

Revenue 300

II. Accrual Adjustments An accrual involves a future exchange of cash that must be recorded on the income statement before cash is exchanged. A. Accrued Expenses > Adjusting entry

Expense XXX (Income statement)

Liability XXX (Balance sheet)

> Future exchange of cash

Liability XXX

Cash XXX

Example: Interest accrued on a loan at the end of the month is $550.

Interest Expense 550

Interest Payable 550

B. Accrued Revenues > Adjusting entry

Receivable XXX (Balance sheet)

Revenue XXX (Income statement)

> Future exchange of cashCash XXX

Receivable XXX

Example: Performed $400 of services for a customer on account.

Accounts Receivable 400

Revenue 400

Accrued revenues Say your company provided $1,600 worth of consulting services to the Bogus Manufacturing Company over the past month, and today is the end of the accounting period. The consulting hours will be billed and collected next month, well past when youll be preparing a trial balance, financial statements, closing entries, etc. In this case, you need an adjusting entry to account for the unbilled services:Adjusting EntryDebitsCredits

Accounts Receivable1,600.00

Consulting Fees Earned1,600.00

Unearned revenues Bogus Manufacturing Company purchased an annual service contract from you for $24,000, which they paid up front. If only three months of their contract are within this accounting period, then that means nine months of the contracts revenues are unearned. In order to properly reflect reality, you need an adjusting entry:Adjusting EntryDebitsCredits

Unearned Revenue18,000.00

Revenue18,000.00

Accrued expenses If you pay weekly salaries and the accounting period ends mid-week, you have accrued salary expenses that you havent yet paid. Youll need an adjusting entry to reflect the as-yet unpaid salaries:Adjusting EntryDebitsCredits

Salary Expense7,200.40

Wages and Salaries Payable7,240.40

Prepaid expenses Lets say you paid $3,000 for your property insurance six months ago, and you still have six paid months remaining on the policy after this accounting period. To accurately reflect the value and expense of the remaining policy, you need an adjusting entry:Adjusting EntryDebitsCredits

Property & Casualty Expense1,500.00

Prepaid Insurance1,500.00

Other adjusting entries Your company purchased $1 million of manufacturing equipment two years ago, and according to your depreciation schedule it has depreciated by $350,500 this accounting period. To ensure that your balance sheet doesnt overstate the equipments value, you need an adjusting entry:Adjusting EntryDebitsCredits

Depreciation Expense350,500.00

Accumulated Depreciation Equipment350,500.00