Accounting Adjusting Entries Summary

Adjusting entries ACCRUALS

NO CASH REVENUE EARNED BUT NOT RECORDED at end of period Debit Credit

RECEIVABLE REVENUE

Examples: Sold $1,500 worth of merchandise to a customer on December 31, 2005 (year end). The sale had not been recorded. Accounts receivable Sales

1,500 1,500

We invested in a 12%, $100,000 bond issued by another company; interest was paid semi-annually on October 1 and April 1. Record the interest earned at year end December 31, 2005. 12%* 100,000 = 12,000 Annually or $1,000 per month 3 months * $1,000 = $3,000 interest earned Interest receivable Interest revenue

3,000 3,000

Adjusting entries ACCRUALS

NO CASH

EXPENSE INCURRED BUT NOT RECORDED at end of period Debit Credit

EXPENSE PAYABLE

Examples: Owed employees $12,000 for salaries for work done in the last week of December 2005 (year end). The expense had not been recorded. Salaries expense Salaries payable

12,000 12,000

We sold a 12%, $100,000 bond to investors; interest was paid semi-annually on October 1 and April 1. Record the interest owed at year end December 31, 2005. 12%* 100,000 = 12,000 Annually or $1,000 per month 3 months * $1,000 = $3,000 interest earned Interest expense Interest payable

3,000 3,000

Adjusting entries PREPAIDS OR DEFERRALS REVENUES CASH RECEIVED BEFORE REVENUE EARNED, REVENUE RECORDED WHEN EARNED. Adjusting entry NO CASH Debit Credit

Liability (Unearned Revenue) Revenue Account

Example: We received $24,000 from a customer on January 2, 2005 to provide fire insurance coverage for two years, 2005 and 2006. The bookkeeper had recorded the transaction on January 2nd by dr cash and cr unearned revenue. Record the adjusting entry on December 31, 2005 (year end) Earned during 2005 = ½ of 24,000 or $12,000 Unearned revenue 12,000 Insurance revenue

12,000

Adjusting entries PREPAIDS OR DEFERRALS EXPENSES CASH PAID OUT BEFORE ASSET USED (EXPENSE INCURRED) EXPENSE RECOGNIZED WHEN ASSET USED. Adjusting entry NO CASH Debit Credit Examples:

EXPENSE ASSET

Prepaid insurance; Supplies

1. We paid $24,000 on January 2, 2005 for a fire insurance policy that provided fire insurance coverage for three years, 2005, 2006 and 2007. The bookkeeper had recorded the transaction on January 2nd by dr prepaid insurance and cr cash. Record the adjusting entry on December 31, 2005 (year end) Used during 2005 = 1/3rd of 24,000 or $ 8,000 Insurance expense 8,000 Prepaid insurances

8,000

Examples:

Prepaid insurance; Supplies, Buildings

2. We had $2,000 worth of supplies on hand on January 1, 2005; we purchased $15,000 worth of supplies during 2005 and had $1,200 of supplies on hand at December 31, 2005 1/1/05 Purchased, 2005 Available for use On hand 12/31/05 Supplies USED

$ 2,000 15,000 $17,000 ( 1,200) $ 15,800

Adjusting entry: Supplies expense Supplies

15,800 15,800

3. Building–Depreciation Adjusting entry NO CASH Debit Credit

EXPENSE CONTRA ASSET

Depreciation expense XXXX Accumulated depreciation XXXX We bought a building for $250,000, expected life 25 years, no expected salvage value. Cost - Salvage Value = Annual Depreciation expense Expected life 250,000 - 0 25 years

= 10,000 per year

Adjusting Entry (EVERY YEAR) Depreciation expense 10,000 Accumulated depreciation

10,000