First year - 6th sheet

Chapter Three
Expenses paid in cash and Prepaid expense xx
1. Prepaid expenses : recorded as assets before Asset Cash xx
they are used or consumed.
Cash received and recorded Cash xx
2. Unearned Revenues : as liabilities before revenue Liability Unearned revenue xx
is earned.
Revenues earned but not yet Accounts receivable xx
3. Accrued Revenues : Asset
received in cash or recorded. Revenue xx
Expenses incurred but not Expense xx
4. Accrued Expenses : Liability
yet paid in cash or recorded. Accounts payable xx

Definitions
Calendar year : Year that begins from January 1 and ends December 31.
Fiscal year : A year that begins the first day of a month and ends twelve months later
on the last day of a month.
Accrual basis : Under the accrual basis companies record transactions that change a
company's financial statements in the periods in which the events occur.
Cash basis : Companies only record revenues when received and expenses only when
paid (Cash basis accounting is not in accordance with GAAP)
Revenue recognition principal : Companies recognize revenue in the accounting period in which it is
earned.
Expense recognition principal : It dictates that efforts (expenses) be matched with results (revenues)
(matching principle)
Adjusting entries : Ensure that the revenue recognition and expense recognition principles
are followed.
Adjusting entries are required every time a company prepares financial
statements.
Depreciation : The allocation of the cost of an asset to expense over its useful life in a
rational and systematic manner.
Book value : The difference between the cost of a depreciable asset and its related
accumulated depreciation.
Contra asset account : An account offset against an asset account on the balance sheet.
Useful life : The length of service of a long lived asset.

Depreciation expense
Equipment costing $22,000 , will have a useful life 5 years, with salvage value $2,000
Asset - Salvage value
Annual depreciation expense =
Useful life

22 000 – 2 000
=
5 years

= $4,000

Depreciation expense – Equipment 4 000

Accumulated depreciation - Equipment 4 000

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 First year - 6th sheet

Adjusting Entries Summary

1 Prepaid expense = Asset
When Paid Adjusting entry
Prepaid Insurance Expense 1,200 Insurance Expense 100
Cash 1,200 Prepaid Insurance Expense 100

2 Unearned Revenue = Liabilities

When received Adjusting entry
Cash 1,200 Unearned Service revenue 100
Unearned Service Revenue 1,200 Service revenue 100

3 Supplies Adjusting entry

In Books (Trial Balance) = 5,000 Supplies expense 3,000
On hand = 2,000 Supplies 3,000
Used = 3,000

4 No recorded = Not billed Adjusting entry

Will be recorded as normal

5 Interest Adjusting entry

Interest expense
Note payable
Interest payable

Interest receivable
Note receivable
Interest revenue

Months
Interest = Note x interest x
12

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 First year - 6th sheet

Example 1:
The ledger of Piper Rental Agency on March 31 of the current year includes the
following selected accounts before adjusting entries have been prepared.
Debit Credit
Prepaid insurance 3,600
Supplies 2,800
Equipment 25,000
Accumulated depreciation – Equipment 8,400
Notes payable 20,000
Unearned rent 9,900
Rent revenue 60,000
Interest expense 0
Wages expenses 14,000

An analysis of the accounts shows the following:

1. The equipment depreciates $400 per month.
2. One-third of the unearned rent was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $700.
5. Insurance expires at the rate of $200 per month.

Instructions:
Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly.

Solution
Depreciation expense ($400 x 3) 1,200
1. Mar. 31
Accumulated depreciation - equipment 1,200
Unearned rent 3,300
2. Mar. 31
Rent revenue ($9,900 x 1/3) 3,300
Interest expense 500
3. Mar. 31
Interest payable 500
Supplies expense 2,100
4. Mar. 31
Supplies ($2,800 - $700) 2,100
Insurance expense 600
5. Mar. 31
Prepaid insurance 600

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 First year - 6th sheet

Example 2:
Selected accounts of Tabor Company are shown below
Supplies expense
7/31 800

Supplies Salaries payable

7/1 Bal. 1,100 7/31 800 7/31 1,200
7/10 400

Accounts receivable Unearned revenue

7/31 500 7/31 900 7/1 Bal. 1,500
7/20 1,000

Salaries expense Service revenue

7/15 1,200 7/14 2,000
7,31 1,200 7/31 900
7/31 500

Instructions:
After analyzing the accounts, journalize (a) the July transactions and (b) the adjusting entries
that were made on July 31.

Solution
Supplies 400
July 10
Cash 400
Cash 2,000
14
Service revenue 2,000
Salaries expense 1,200
15
Cash 1,200
Cash 1,000
20
Unearned revenue 1,000
Supplies expense 800
31
Supplies 800
Accounts receivable 500
31
Service revenue 500
Salaries expense 1,200
31
Salaries payable 1,200
Unearned revenue 900
31
Service revenue 900

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 First year - 6th sheet

Example 3:
The trial balances before and after adjustments for Garcia Company at the end of its fiscal year
are presented below.

GARCIA COMPANY
Trial Balance
August 31, 2008
Before Adjustment After Adjustment
Cash 10,400 10,400
Accounts receivable 8,800 9,800
Office supplies 2,300 700
Prepaid insurance 4,000 2,500
Office equipment 14,000 14,000
Accumulated depreciation 3,600 4,500
Accounts payable 5,800 5,800
Salaries payable 0 1,100
Unearned rent 1,500 600
T. Garcia, Capital 15,600 15,600
Service revenue 34,000 35,000
Rent revenue 11,000 11,900
Salaries expense 17,000 18,100
Office supplies expense 0 1,600
Rent expense 15,000 15,000
Insurance expense 0 1,500
Depreciation expense 0 900
71,500 71,500 74,500 74,500

Instructions:
Prepare the adjusting entries that were made.

Solution
Accounts receivable 1,000
Aug. 31
Service revenue 1,000
Office supplies expense 1,600
Aug. 31
Office supplies 1,600
Insurance expense 1,500
Aug. 31
Prepaid insurance 1,500
Depreciation expense 900
Aug. 31
Accumulated depreciation – office equipment 900
Salaries expense 1,100
Aug. 31
Salaries payable 1,100
Unearned rent 900
Aug. 31
Rent revenue 900

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 First year - 6th sheet

Example 4:
Tony Masasi started his own consulting company, on June 1, 2008, the trial balance at June 30 is
shown below:
MASASI COMPANY
Trial balance
June 30, 2008
Debit Credit
Cash 7,150
Accounts receivable 6,000
Supplies 2,000
Prepaid insurance 3,000
Office equipment 15,000
Accounts payable 4,500
Unearned service revenue 4,000
T. Masasi, capital 21,750
Service revenue 7,900
Salaries expense 4,000
Rent expense 1,000
38,150 38,150

Other data:
1. Supplies on hand at June 30 are $600.
2. A utility bill for $150 has not been recorded and will not be paid until next month.
3. The insurance policy is for a year.
4. $2,500 of unearned service revenue has been earned at the end of the month.
5. Salaries of $2,000 are accrued at June 30.
6. The office equipment has a 5-year life with no salvage value. It is being depreciated at
$250 per month for 60 months.
7. Invoices representing $1,000 of services performed during the month have been
recorded as of June 30.

Instructions:
a) Prepare adjusting entries for the month of June.
b) Post the adjusting entries to the ledger accounts.
c) Prepare an adjusted trial balance at June 30, 2008.

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 First year - 6th sheet

Solution
1. Adjusting entries:
Date Account titles and explanation Debit Credit
2008 Supplies expenses 1 400
June 30 Supplies 1 400
Utility expense 150
June 30
Utility payable 150
Insurance expense 250
June 30
Prepaid insurance 250
Unearned revenue 2 500
June 30
Services revenue 2 500
Salaries expense 2 000
June 30
Salaries payable 2 000
Depreciation expense 250
June 30
Accumulated depreciation – Office equipments 250
Accounts receivable 1 000
June 30
Service Revenue 1 000

2. Ledger Accounts:
Supplies
Date Explanation Ref. Debit Credit Balance
June 30 2 000 2 000
June 30 1 400 600

Supplies expense
Date Explanation Ref. Debit Credit Balance
June 30 0
June 30 1 400 1 400

Utility expense
Date Explanation Ref. Debit Credit Balance
June 30 0
June 30 150 150

Utility payable
Date Explanation Ref. Debit Credit Balance
June 30 0
June 30 150 150

Insurance expense
Date Explanation Ref. Debit Credit Balance
June 30 0
250 250

Prepaid insurance
Date Explanation Ref. Debit Credit Balance
June 30 3 000 3 000
250 2750

Unearned services revenue

Date Explanation Ref. Debit Credit Balance
June 30 4 000 4 000
June 30 2 500 1 500

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Services revenue
Date Explanation Ref. Debit Credit Balance
June 30 7 900 7 900
June 30 2 500 10 400
1 000 11 400

Salaries expense
Date Explanation Ref. Debit Credit Balance
June 30 4 000 4 000
2 000 6 000

Salaries payable
Date Explanation Ref. Debit Credit Balance
June 30 0
2 000 2 000

Depreciation expense
Date Explanation Ref. Debit Credit Balance
June 30 0
250 250

Accumulated Depreciation
Date Explanation Ref. Debit Credit Balance
June 30 0
250 250

Accounts receivable
Date Explanation Ref. Debit Credit Balance
June 30 J1 6 000 6 000
June 30 1 000 7 000

Adjusted Trial balance on June 30

Account name Debit Credit
Cash 7 150
Accounts receivable 7 000
Supplies 600
Prepaid insurance 2 750
Office equipment 15 000
Accounts payable 4 500
Unearned services revenue 1 500
T. Masasi, Capital 21 750
Service revenue 11 400
Salaries expense 6 000
Rent expense 1 000
Supplies expense 1 400
Insurance expense 250
Depreciation expense 250
Accumulated depreciation 250
Salaries payable 2 000
Utility payable 150
Utility expense 150
total 41 550 41 550

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 First year - 6th sheet