ADJUSTING ENTRIES

1) Adjusting entries in cases where cash was previously paid or received before

expense is incurred or revenue is earned:a)

Entries to Apportion Prepaid Expenses/Assets

Cash paid before expense is incurred and recorded as ASSET. The asset is used /consumed later and recorded as expense as an adjusting entry. Eg Prepaid Insurance, Advance Rent Paid, Machinery.

b)

Entries to Apportion Advance from Customers (LIABLITY)

Or (Unearned Revenue) Advance Cash received from customers before revenue is earned (i.e before delivery of goods or services to customers) and recorded as LIABLITY. Revenue is earned later and is recorded through an adjusting entry. Eg Advance Rent Received, Airline Tickets, Cricket Match Tickets

2)Cases where expense is incurred before payment and revenue is earned before receipt of cash, not yet recorded.

a) Entries to Record Unrecorded Revenue(Accrued Revenue)

Interest, Rent not billed & not recorded yet.

b) Entries to Record Unrecorded Expenses(Accrued Expenses)

Interest, Rent, Salaries, Taxes not paid & not recorded yet.

CONDITIONS FOR ADJUSTING ENTRIES

1) One part of the entry will affect revenue or expense AND other part of the entry will affect asset or liability. 2) It will never involve cash.
3)

At the time of adjusting entry no formal paper/document will be received by the Accounts Department to prompt them to pass the entry. They have to think of the adjusting entry themselves by reviewing the accounts etc. Normally passed at the end of the accounting period before preparing the financial statements.

4)