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Principle of Accounting Topic Is: Adjusting Entries

The document discusses adjusting entries in accounting. Adjusting entries are journal entries made at the end of an accounting period to account for revenues and expenses that have been incurred but not yet recorded. There are two types of accounts requiring adjustment: accruals for earned/incurred revenues and expenses, and deferrals for cash received/paid related to future revenues/expenses. Common adjusting entries include those for inventory, bad debts, depreciation, accrued expenses, prepaid expenses, accrued income, unearned revenue, and returns/allowances. An adjusted trial balance is prepared after posting the adjusting entries.

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33 views

Principle of Accounting Topic Is: Adjusting Entries

The document discusses adjusting entries in accounting. Adjusting entries are journal entries made at the end of an accounting period to account for revenues and expenses that have been incurred but not yet recorded. There are two types of accounts requiring adjustment: accruals for earned/incurred revenues and expenses, and deferrals for cash received/paid related to future revenues/expenses. Common adjusting entries include those for inventory, bad debts, depreciation, accrued expenses, prepaid expenses, accrued income, unearned revenue, and returns/allowances. An adjusted trial balance is prepared after posting the adjusting entries.

Uploaded by

Ahsan aziz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Principle of Accounting

Topic is

Adjusting Entries
The Adjusting Process
• At the end of an accounting period, an
unadjusted trial balance is prepared to verify that
the total debit balances equal the total credit
balances.
• Many of these account balances are reported in
the financial statements without change.
The Adjusting Process
(slide 2 of 3)

• Some accounts on the unadjusted trial balance,


however, require adjustments for the following reasons:
o Some expenses are not recorded daily.
 For example, the daily use of supplies would require many entries
with small amounts.
o Some revenues and expenses are incurred as time passes
rather than as separate transactions.
 For example, rent received in advance (unearned rent) expires and
becomes revenue with the passage of time.
o Some revenues and expenses may be unrecorded at the end of
the accounting period.
 For example, a company may have provided services to customers
that it has not billed or recorded at the end of the accounting period.
The Adjusting Process
(slide 3 of 3)

• The analysis and updating of accounts at the


end of the period before the financial statements
are prepared is called the adjusting process.
• The journal entries that bring the accounts up to
date at the end of the accounting period are
called adjusting entries.
Types of Accounts Requiring
Adjustment
• The two general classifications of accounts
requiring adjustment are as follows:
o Accruals
o Deferrals
Types of Accounts Requiring
Adjustment: Accruals
• An accrual occurs when revenue has been
earned or an expense has been incurred but has
not been recorded.
o If the accrual is for revenue, the adjusting entry debits
an asset (Accounts Receivable) and credits a
revenue account.
o If the accrual is for an expense, the adjusting entry
debits an expense account and credits a related
liability account such as Accounts Payable or Wages
Payable.
Accruals
Types of Accounts Requiring
Adjustment: Deferrals
• A deferral occurs when cash related to a future revenue
or expense has been initially recorded as a liability or an
asset.
o If the cash received is related to future revenue, it is initially
recorded as a liability called unearned revenue.
 The adjusting entry in the period when the revenue is earned debits
an unearned revenue account and credits a revenue account.
o If the cash paid is related to a future expense, it is initially
recorded as an asset called prepaid expense.
 The adjusting entry in the period when the expense is incurred
debits an expense account and credits a prepaid expense (asset)
account.
Deferrals
Following are the type of Adjusting
Entries
1. Closing stock/Ending inventory
2. Bad debts and provision for doubtful debts
3. Depreciation
4. Accrued Expenses
5. Prepaid Expenses
6. Accrued income
7. Advance income/Un earned
8. Stock Destroyed
9. Sales or Return
Adjusted Trial Balance
• After the adjusting entries are posted, an
adjusted trial balance is prepared.
• The adjusted trial balance verifies the equality of
the total debit and credit balances before the
financial statements are prepared.

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