Maravilla, Justine Lloyd O.

September 20, 2022

ACT224 Integrated Accounting Fundamentals

Adjusting Entries

1. What are Adjusting Entries? Why is it necessary?

• Adjusting entries are a group of journal entries completed at the conclusion of an
accounting period to ensure that all accounts have up-to-date and correct balances.
• The goal of modifying entries is to provide a clear picture of the company's finances. The
management may go through the financial accounts with confidence, knowing that
everything that happened during the month is recorded, even if the financial element of
the transaction should have happened later. A financial statement prepared without
modifying entries might misrepresent the company's financial health.

2. Differentiate accruals and deferrals

• Accruals occur after an item or service has been supplied, whereas deferrals occur
before a commodity or service has been delivered. An accrual moves a current
transaction into the current accounting period, whereas a deferral moves a transaction
into the next period.

3. Discuss the different methods of accounting for accruals.

a. Accrual of Expenses
- Accrued costs are those incurred but for which no invoice or other proof exists.
They are categorized as current obligations, which means they must be paid within the
next 12 months and appear on a company's balance sheet.
- "We need to accrue the interest expenditure on the bank loan," an accountant
may argue, because no interest expense had been recorded in the books, although the
firm did suffer interest expense throughout the accounting period. Furthermore, the
corporation is liable or obligated for unpaid interest till the conclusion of the accounting
period. The accountant is implying that an accrual-type adjustment journal entry is
required.
b. Accrual of Revenues
- Accrued revenue is revenue gained by supplying an item or service but for
which no money was collected. Accrued revenues are reported on the balance sheet as
receivables to indicate the amount of money that consumers owe the company for the
items or services they purchased.

- "We need to accrue for the interest the firm has earned on its certificate of
deposit," an accountant could remark. In that case, the company presumably did not
receive any interest, nor did it record any sums in its accounts, but the company did
generate interest revenue throughout the accounting period. Furthermore, the
corporation owns the interest generated and must report it as an asset on its balance
sheet.
4. Discuss the different methods of accounting for deferrals
a. Deferral of Expenses
- Deferred expenditures, often known as prepaid expenses or accumulated
expenses, are expenses paid but not yet incurred by the firm. Prepaid costs commonly
include monthly rent or insurance payments made in advance.
-"We need to delay part of the cost of goods," the accountant could explain.
This deferral is required since some of the materials purchased were not utilized or
consumed within the accounting period. An adjustment entry will be required to
postpone the cost of goods not utilized to the balance sheet and report only the cost of
supplies actually used on the income statement. The costs of supplies that have not yet
been used are recorded in the balance sheet account Supplies, whereas the costs of
supplies utilized during the accounting period are recorded in the income statement
account Supplies Expense.

b. Deferral of Revenues
- Deferred revenue, often known as unearned revenue, refers to payments
received in advance for goods or services that will be supplied or performed in the
future. The corporation that receives the prepayment reflects the amount on its balance
sheet as deferred revenue, a liability.
- If a corporation gets $600 on December 1 in exchange for delivering a monthly
service from December 1 to May 31, the accountant should "defer" $500 of the money
to a liability account Unearned Revenues and record $100 as December service
revenues. The $500 in Unearned Revenues will be postponed from January through
May, when it will be shifted from Unearned Revenues to Service Revenues at a rate of
$100 per month using a deferral-type adjusting entry.

5. Aside from accruals and deferrals, provide some other examples of transactions that needs
adjustments. Discuss.
• Deprecation
- Depreciation is the process of dispersing an asset's cost, such as a building or a
piece of equipment, over the asset's useful or economic life. The asset value depreciates
for a variety of causes, and an adjustment entry is made to account for the depreciation
expenditures.
References:

Tally Solutions. (2022, April 19). Adjusting Entries: Definition, Types and Examples. Tally. Retrieved
September 20, 2022, from https://tallysolutions.com/accounting/adjusting-
entries/#:%7E:text=Adjusting%20entries%20refers%20to%20a,the%20accrual%20basis%20of%20accoun
ting.

undefined [Accountant’s Journal]. (2020, August 25). ADJUSTING JOURNAL ENTRIES [Video]. YouTube.
Retrieved September 20, 2022, from https://www.youtube.com/watch?v=8fY3WLwjqq0

Averkamp, H. (n.d.). Adjusting Entries - Accruals & Deferrals | AccountingCoach. AccountingCoach.com.

Retrieved September 20, 2022, from https://www.accountingcoach.com/adjusting-entries/explanation/4