Adjusting Journal Entries (Accrual Type)

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As you'll remember, there's a couple different types of adjusting journal entries.

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When we think about them, we can think about kind of a prepayment adjusting journal entries.

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For example, we prepay for an insurance policy, and it's used up over time.

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But we can also think of in terms of accruals, right?

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And then accruals is gonna be the focus of this video, and ultimately accruals is itself gonna be split into two parts.

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And we're gonna have accrued revenue, and then we're gonna have accrued expenses, okay?

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Now, I'm gonna give some examples of each and show you how you'd go about making the adjusting journal entries with
respect to accruals.

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So let's start with accrued revenue, okay?

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So you might say, okay, well, why would we have to make an entry for some kind of accrual to revenue?

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Well, it's very similar to the prepayment issue, right?

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So time passes, and some things you're just not going to make some kinda entry every single day.

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So let's take an example as interest.

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Let's say that you have some money in the bank, and actually you go and you earn some interest.

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And so January 31st, 2016, you get a letter from your bank saying that you've earned $15 of interest, okay, $15 of interest.

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And they just went and took that, and they just added cash to your bank account, right?

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They just put it right in there.

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So you say, okay, well what's happened here?

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Well, now I have to make an adjusted journal entry to reflect this increase in cash, right?

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So you say, okay, when I find out about this, or at the end of the month, or quarter, whatever you get this, you say, okay,
I'm gonna adjust my cash account here of 15.

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And then you also have to adjust the revenue, right?

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And that's where this accrued revenue comes in.

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We have revenue that we weren't recognizing as it happened, right?

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It's not like a sale, right?

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A sale, you make the sale, you recognize the revenue right then, right?

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But this is different, right?

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This is interest, and it was happening every single hour of the month, of the quarter, whatever.

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And then we're just, at some point, just gonna have to make an adjustment, this adjusting journal entry to just say, okay,
we've got some interest here.

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So we go ahead and we just make this entry to reflect the fact that now we've had $15 of interest revenue.

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Now, so we can have these accrued, revenue type issues, but it can also be accrued expenses.

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So let's think about this.

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So also, you could have accrued interest expense, right, if it was interest expense rather than revenue.

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But let's use something a little bit different that happens quite often for firms.

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You might have a situation where, let's see in this example, so let's say that December 31st is your firm's fiscal year and
that's when they close the books.

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And December 31st fell on a Wednesday, right?

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So what could be the problem with that?

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Well, if you have workers working Thursday and Friday, and then they worked Monday, Tuesday, Wednesday.

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Then you got an issue where they've only worked three-fifths of the week, but maybe they don't get paid on Friday.

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So they're paid on Friday, but they've worked Monday, Tuesday, Wednesday as of December 31st.
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You see, they've already worked three-fifths of the week, but just cuz they didn't get paid on Friday doesn't mean you
haven't actually incurred an expense, right?

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So you've incurred an expense for that three-fifths of that week, whatever those wages are going to be.

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Even though you haven't paid it yet, you still incurred an expense.

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And you'd be understating your expenses in your financial records if on December 31st you didn't make some kind of
adjusted journal entry to go ahead and reflect this fact that these people have worked a part of a week.

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They worked a small portion of a week, okay?

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So now we need to make some kinda journal entry, so we're gonna say, okay, December 31st, 2016.

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We're gonna make an entry to reflect this wages expense or salaries expense, whatever you wanna call it, we'll call it
wages expense.

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Now, you haven't actually paid it yet cuz it's not gonna be paid till Friday.

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So what do we credit?

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Well, we're gonna credit an account called wages payable.

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So even though you haven't paid this, you're basically saying, okay, it's year end, right?

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And we've had these workers have done the work, let's say it's $700, that's the value of three-fifths of a week or something
like that.

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You go and you estimate it, and you say, okay, they've earned $700 of wages, haven't paid it yet cuz they would get paid
on Friday.

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But it's year end, we're closing our books, we need to make an adjusting journal entry to reflect the fact that these people
have earned $700 of wages.

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So that's an example of an accrued expense that you would need to make an adjusting journal entry for.

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