What are Adjusting Entries, and How

Do We Record Them?
Adjusting entries can be divided into two
basic categories:

Deferrals Accruals
1. Deferred expenses 1. Accrued expenses
2. Deferred revenues 2. Accrued revenues

after the cash is received or paid before the cash is received or paid

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 Deferred Expenses

• Deferred expenses are:

• Advance payments of future expenses
• Treated as assets until used
• Recognized as an expense by an adjusting
journal entry when the prepayment is used
• Types of deferred expenses:
• Prepaid rent
• Office supplies
• Depreciation

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 Prepaid Rent- initial journalization

Paying $3,000 for rent in advance gives us

the right to use the property for three
months.

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 Prepaid Rent-adjustment

To adjust the Prepaid Rent account on Dec.

31 , we need to reduce it by 1/3 since the
company has used the space for one month.

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 Office Supplies- adjustment

On November 3, Smart Touch Learning

purchased $500 of supplies on account. As
of December 31, only $100 of supplies
remain on hand.

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Depreciation-SKIP (WILL COVER
AFTER MIDTERM)

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 Deferred Revenue

• Deferred revenue:
– Occurs when a company receives cash before
it does the work or delivers a product
– Is a liability because the business owes the
customer the product, the service, or a refund
• Upon performance or delivery, deferred
revenue is converted to earned revenue.
– Unearned revenue

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Deferred Revenue- initial journalization

On December 21, a law firm engages Smart

Touch Learning to provide e-learning
services for the next 30 days, paying $600
in advance.

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 Deferred Revenue- adjustment

During the last 10 days of the month, Smart

Touch Learning performs 1/3 of the services.

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 Accrued Expenses

• Accrued expenses are expenses a

business has incurred but has not yet
paid.
• Examples of accrued expenses:
– Salaries
– Interest
– Utilities

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 Accrued Salaries Expense

Smart Touch
Learning pays its
employee a monthly
salary of $2,400,
half on the 15th and
half on the first day
of the next month.

© 2016 Pearson Education, Ltd. 3-11

Accrued Salaries Expense- adjustment

On December 31, Smart Touch Learning owes

its employee $1,200, which won’t be paid until
January 1. Accrue salaries for December.

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Accrued Interest Expense- adjustment

Smart Touch Learning borrows $60,000 on

December 1 to purchase a building. As of
December 31, Smart Touch Learning incurs
$100 of interest on the note.

© 2016 Pearson Education, Ltd. 3-13

 Accrued Revenue

• Accrued revenues arise when:

– A company performs a service but has not
yet collected cash.
– A company delivers a product but has not yet
collected cash.
• Record accrued revenues with a:
– Debit to Accounts Receivable.
– Credit to Service Revenue.

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 Accrued Revenue

On December 15, Smart Touch Learning

agrees to perform e-learning services for
$1,600 per month. By the end of December,
it has earned ½ of the monthly fee.

© 2016 Pearson Education, Ltd. 3-15

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