Recap of Last Class

• Balancing Accounts
• Trial Balance
 Learning objectives
• Adjusting Entries

• Depreciation

• Accruals - accumulate over time

• Deferrals - put off to a later time / postpone

• Adjusting entries are journal entries made at
the end of accounting period to allocate
revenue & expenses to the period in which
they are actually applicable.

• Adjusting entries are required because normal

journal entries are based on actual
transactions (cash / bank), and the date on
which these transactions occur may not be the
date required to fulfill the matching principle
of accrual accounting.
 Purpose of Adjusting Entries
• The main purpose of adjusting entries is to update
the accounts to conform with the accrual concept.
At the end of the accounting period, some income
and expenses may have not been recorded, taken
up or updated; hence, there is a need to update
the accounts.
• If adjusting entries are not prepared, some
income, expense, asset, and liability accounts may
not reflect their true values when reported in the
financial statements. For this reason, adjusting
entries are necessary.
 Types of Adjusting Entries
Generally, there are 4 types of adjusting entries.

• Accrued Income – income earned but not yet received

• Accrued Expense – expenses incurred but not yet paid

• Deferred Income – income received but not yet earned

• Prepaid Expense – expenses paid but not yet incurred

Also, adjusting entries are made for:

• Depreciation

• Doubtful Accounts or Bad Debts, and other allowances

 The Concept of Depreciation
Depreciation is the systematic allocation of the
cost of a depreciable asset to expense.

Fixed Asset The asset’s Depreciation

(debit) usefulness is Expense (debit)
partially
consumed
On date during the At end of
when initial period. period . . .
payment is
made . . . Accumulated
Cash (credit) Depreciation
(credit)
 Depreciation Is Only an Estimate
Overnight depreciates its $12,000 of tools and
equipment over 60 months. Calculate monthly
depreciation and make the journal entry.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
Feb 28 Depreciation Expense: Tools and Equipment 200
Accumulated Depreciation: Tools and Equipment 200
To record one month's depreciation.

$12,00060 months = $200 per month

 Depreciation Is Only an Estimate
We will assume that Overnight did not record any
depreciation expense in January because it operated for
only a small part of the month.

December 31, 2015 Balance Sheet Presentation

Building $ 36,000
Less: Accum. depr. 1,650 34,350
Tool and Equipment $ 18,000
Less: Accum. depr. 2,200 15,800

Cost - Accumulated Depreciation = Book Value

 Types of Adjusting Entries

 Converting  Converting
assets to liabilities to
expenses revenue

 Accruing  Accruing
unpaid uncollected
expenses revenue
 Converting Assets to Expenses
End of Current Period

Prior Periods Current Period Future Periods

Transaction Adjusting Entry

Paid cash in  Recognizes portion
advance of of asset consumed
incurring expense as expense, and
(creates an asset).  Reduces balance of
asset account.
 Converting Assets to Expenses
Initially, costs that benefit more than one accounting
period are recorded as assets.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Mar. 1 Unexpired Insurance 18,000
Cash 18,000
Purchase a one-year insurance policy.
 Converting Assets to Expenses

The costs are expensed as they are

used to generate revenue.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Monthly Adjusting Entry for Insurance
Mar. 31 Insurance Expense 1,500
Unexpired Insurance 1,500
Adjusting entry to record insurance expense for March.
 Converting Assets to Expenses

Balance Sheet Income Statement

Cost of assets that Cost of assets used
benefit future this period to
periods. generate revenue.

Unexpired Insurance Insurance Expense

3/1 18,000 3/31 1,500 3/31 1,500
Bal. 16,500
 Converting Liabilities to Revenue
End of Current Period

Prior Periods Current Period Future Periods

Transaction Adjusting Entry

Collect cash in  Recognizes portion
advance of earning earned as revenue,
revenue and
(creates a liability).  Reduces balance of
liability account.
 Accruing Unpaid Expenses
End of Current Period

Prior Periods Current Period Future Periods

Adjusting Entry Transaction

 Recognizes expense Pay cash in
incurred, and settlement of
 Records liability for liability.
future payment.
 Accruing Uncollected Revenue
End of Current Period

Prior Periods Current Period Future Periods

Adjusting Entry Transaction

 Recognizes revenue Collect cash in
earned but not yet settlement of
recorded, and receivable.
 Records receivable.
 Adjusting Entries and
Accounting Principles
Costs are matched with revenue
in two ways:

 Direct association of costs

with specific revenue
transactions.

 Systematic allocation of costs

over the “useful life” of the
expenditure.
 The Concept of Materiality
An item is “material” if knowledge of the item
might reasonably influence the decisions of users
of financial statements.

Many companies
immediately charge
the cost of Light bulbs
immaterial items to
expense.
Supplies
 Learning outcomes
You should have now learnt:
1.Adjusting Entries

2.Depreciation

3.Accruals

4.Deferrals
 Next Class
- Closing & Reversing Entries

- Opening & Closing Trial Balance