introduction to adjust entries

ADJUSTING ENTRIESBy Ben Reyes,

MBA

QUESTION

Say that you are a business owner. When making a business decision

would you base it on your company’s financial information from the beginning

of the month, or financial information at the end of the month?

Completed at the end of each period, adjusting entries are necessary to update financial information that involve the following:• revenues that have been earned • expenses that have been incurred

JUST LIKE IN LIFE,THINGS IN BUSINESS CHANGE.

2 Types

TO DEFER OR TO ACCRUE?THAT IS THE QUESTION!

Deferrals

Accruals

4 KindsDeferred Expense

Deferred Revenue

Accrued Expense

Accrued Revenue

• Deferrals– Adjust accounts that are already part of a

company’s accounting records• Deferred Revenues are income received but not yet earned• Deferred Expense are expenses paid but not yet incurred

• Accruals– Record revenues and expenses that are not yet in

a company’s accounting records• Accrued Revenues are income earned but not yet received• Accrued Expenses are expenses incurred but not yet paid

WHAT TYPE IS IT?

QUESTION

Without you knowing, one of your employees uses up office supplies

to help his daughter with her science project. What will happen to the amount of office supplies?

• Original entry:– Ex. $1,000 worth of supplies was purchased on March 1, 2017.

• Adjusting entry:– Ex. $300 worth of supplies was used:

SUPPLIESDEFERRED EXPENSE EXAMPLE

Say that you have a service business in which you provide relationship advice to

couples.

Before meeting with Kim and Kanye, they pay your fee in advance. Should you wait to deposit the money into your

business account until you actually meet with them?

QUESTION

• Original entry:– Ex. Advance payment of $5000 was received from Kim and

Kanye on March 4, 2017.

• Adjusting entry:– Ex. Provided relationship advice on March 31, 2017.

UNEARNED REVENUEDEFERRED REVENUE EXAMPLE

QUESTION

Say that you have employees that work Monday through Friday.

Your scheduled payday is each Friday. The month ends on a

Wednesday, would you pay your employees that day?

• Original entry:– None. There is no existing record for wages owed.

• Adjusting entry:– Ex. As of Wednesday May 31, 2017 $12,800 is owed

to employees.

SALARIES OWED TO EMPLOYEESACCRUED EXPENSE EXAMPLE

QUESTION

Say that one of your customers cannot pay on time, should you just

let them pay whenever they want to?

INTEREST NOT YET RECEIVED

ACCRUED REVENUE EXAMPLE• Original entry:

– None. There is no existing record for interest revenue.

• Adjusting entry:– Ex. Charged Charlie Brown, a customer, interest to pay later

for an invoice. Interest amount is $200 as of June 30, 2017.

• Adjusting entries bring the amounts for accounts current

• Updates financial information • Either an expense account or revenue

account is adjusted• Adjusting entries affect both the balance

sheet and the income statement• Adheres to the Matching Principle

BIG PICTURE

Material regarding adjusting entries:http://accountingexplained.com/financial/cycle/adjusting-entrieshttp://www.netmba.com/accounting/fin/process/adjusting/

A video on adjusting entries:https://www.youtube.com/watch?v=xtoTFSrv5Dc

Videos on deferrals:https://www.youtube.com/watch?v=C17Oc9JqG_Qhttps://www.youtube.com/watch?v=hPq1Mv2gIec Videos on accruals:https://www.youtube.com/watch?v=xXeoGlQOV1chttps://www.youtube.com/watch?v=ONkJXfvrAkc

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