Adjusting the Accounts II: Additional Examples

1.  Supplies, must be adjusted to show what has been used up. The value of supplies
used are debited to the Supplies Expense account.   The offsetting credit reduces the
Supplies account to the amount of supplies actually left on hand.

Example: Monolithic Company purchased $1,200 of supplies on January 1. At the end

of January, they counted the supplies and found that $900 of supplies were left. This
would imply that $300 of the supplies were used up. On the last day of the month, an
adjustment would be made to record the amount of supplies used up:

General Journal
Date Accounts Ref Debit Credit
 
  
     

2.  Prepaid Insurance adjustments breaks down prepaid insurance, expensiving what is

used and adjusting that account to the value of prepaid insurance left. Assume a
$3600 insurance policy was purchased on January 1, and that it is a one-year policy.   
This would mean that one month's worth of the policy ($300 worth) expires each
month.  At the end of January, we would record this adjustment.  

General Journal
Date Accounts Ref Debit Credit
  
   
        

3.  Depreciation adjusts the value of equipment or buildings, originally valued at their

purchase price, to show how these investments are are used up during the period. If a
company purchased a $54,000 truck on January 1, that is estimated to last for 36
months.  The company will record depreciation on a monthly basis, at the rate of
$1,500 per month.  The depreciation adjustment for January will look like this.   

General Journal
Date Accounts Ref Debit Credit
  
   
        

©2017 Mr. Breitsprecher & BreitLinks. All Rights Reserved Making Adjusting Entries II, page 1
 Depreciation Expense is an expense account and needs to be part of each period’s
income statement. A contra-account must be used, as we never make an adjustment
to the historical cost in the original asset account. Accumulated Depreciation--Truck is
the contra-asset for (contra means "against") that asset account. At the end of January,
after the depreciation adjustment, the Equipment account will appear on the balance
sheet like this:   

The $52,500 amount is called the "book value" of the asset, and will decline by $1,500
each month as the Accumulated Depreciation continues to increase. After 36 months,
the Equipment will still have a $54,000 balance, but the Accumulated Depreciation will
also be $54,000, and the book value will be 0. After that, further depreciation may not
be taken on this asset. 

The Equipment account and the Accumulated Depreciation Equipment account

are two separate accounts. And, while it is true that we subtract accumulated
depreciation from the Equipment account on the balance sheet, a trial balance would
show the status of the two accounts separately. In the example shown above, the
Equipment account has a balance of $36,000 and the Accumulated Depreciation--
Equipment account has a balance of $1,000. We only compute the book value on the
balance sheet.

4.  Unearned Revenue must be adjusted to show what has been earned in a period.   
Unearned Revenue is an account used when customers make an advance payment to
us for future services.  If a client pays us $10,000 for consulting services we will
provide next month, we cannot count the $10,000 as revenue.    In accrual accounting,
revenue can only be recorded when we earn it.  This receipt of $10,000 in cash be
recorded?  Here's how: 

General Journal
Date Accounts Ref Debit Credit

            

©2017 Mr. Breitsprecher & BreitLinks. All Rights Reserved Making Adjusting Entries II, page 2
 Let’s assume that ½ of this unearned revenue was earned at the end of the period. In
other words, during the remainder of January, we have provided $5000 of the services
we are obligated to provide. The following adjustment would convert $5000 of the
obligation to revenue.

General Journal
Date Accounts Ref Debit Credit
  
 
        

Note: Unearned Revenue is considered a liability and is never part of an income

statement even though the account’s title has the term “revenue” in it

5.  Salaries earned by employees but not paid to them are common. Employees

expect to be paid periodically and regularly. Their pay periods typically differ from the
accounting period. At the end of an accounting period, we must determine if
employees have worked any hours that they have not been paid for. 

This happens, for example, if employees are paid every Friday and January 31
happens to be a Wednesday.  There would be three days of salaries (Monday,
Tuesday, and Wednesday) for which the employees won't get paid until Friday. 
January salaries must be included in that period’s expenses. They are part of that
period’s income statement.  If we pay all employees $1000 per day and we owe them
for Monday, Tuesday and Wednesday, with Wednesday being January 31.

The adjustment will appear as follows:  

General Journal
Date Accounts Ref Debit Credit

        

General Journal
Date Accounts Ref Debit Credit
  
   
 
        

©2017 Mr. Breitsprecher & BreitLinks. All Rights Reserved Making Adjusting Entries II, page 3
6.  Interest earned on a Note Receivable.  If we received a $2,000 Note Receivable on
January 1 that earns interest at the rate of 3% per year.  As of January 31, there will be
interest owed to us (Interest Receivable).    When we earn interest, it is considered a
revenue.  The amount of interest can be computed using the formula:  Interest =
Principal * Rate * Time.   (The * means multiply.)  The time must be in years.  If the
note was outstanding for one month, we would consider the time to be one-twelfth of a
year.   The interest amount would therefore be $2,000 * .03 * 1/12 = $5.00.  The
adjustment would be: 

General Journal
Date Accounts Ref Debit Credit
  
   
        

The Note Receivable illustrated would also apply if we loaned a client $2,000,
documenting it with a note. We earn the interest revenue we earn over time.

Summary: Adjustments are:

1. Recorded in the journal

2. Posted to the ledger like any other transactions
3. These entries will occur on the last day of the accounting period.
4. After the adjustments are posted, the accuracy of adjusting entries is verified to
show the ledger is still in balance by preparing an Adjusted Trial Balance.

The Adjusting entries involved a three-step process:

1. Determine what the current balance of each account is.

2. Plan what should balance of each account should be when revenues and expenses
are matched (accrual accounting).
3. Determine how much is the adjustment to affected accounts must be (NOTE: All
adjustments affect a balance sheet account is adjusted and an income statement
account)

©2017 Mr. Breitsprecher & BreitLinks. All Rights Reserved Making Adjusting Entries II, page 4