Step 4

ADJUSTMENTS
What is an Adjusting Entry?

Any entry to record unrecognized income or expenses for

the period is called an adjusting entry.
List of Adjusting accounts

 Prepaid Expense
 Unearned revenue
 Accrued Expense
 Accrued Revenue
 Depreciation
 Bad debts
 VS

Accrual-basis accounting Cash-basis accounting

Recognizes revenues when Recognizes and records

earned (rather than when cash revenues when cash is
is received) received.

Recognizes expenses when Recognizes and records

incurred (rather when cash expenses when cash is paid.
paid)

Mandated by GAAP Not considered as a GAAP

Financial Accounting and
Reporting
 Deferred expenses
 Deferred expenses are items that have been initially
recorded as assets but are expected to become expenses
over time or through the normal operations of the
enterprise. Deferred expenses are often called prepaid
expenses.
 Deferred revenues
 Deferred revenues are items that have been initially
recorded as liabilities but are expected to become
revenues over time or through the normal operations of
the enterprise. Deferred revenues are often called
unearned revenues.

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Financial Accounting and
Reporting
• Accrued expenses
 Accrued expenses are expenses that have been incurred but
have not been recorded in the accounts. Accrued expenses
are often called accrued liabilities.
 Accrued revenues
 Accrued revenues are revenues that have been earned but
have not been recorded in the accounts. Accrued revenues
are often called accrued assets.
 The primary difference between deferrals and accruals is that
deferrals have been recorded while accruals have not been
recorded.
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TYPES OF ADJUSTING ENTRIES:
 There are two categories of adjusting entries:
 Deferral
 Prepaid Expense
 Unearned revenue
 Office Supplies
 Depreciation

 Bad debts

 Accrual
 Accrued Expense
 Accrued Revenue
 Adjusting Entries for Prepayments
Prepayments are either prepaid expenses or unearned revenue

a. Prepaid Expenses (Expenses paid in cash and

recorded as assets before they are used or
consumed)

E.g. 1. Supplies (expires with consumption or use),

2. Insurance or Rent (expires with the passage
of time)
3. Purchase of buildings, machines, equipment etc.

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IMPORTANT RULES FOR ADJUSTING ENTRIES
 

 When recording adjusting entries, remember two very important

rules: 
 First, cash is never involved in adjusting entries. Cash is always
recorded when it is actually received or paid.
 Second, adjusting entries always involve either a revenue
account or an expense account.
An adjusting journal entry involves an income statement account
(revenue or expense) along with a balance sheet account
(asset or liability), and typically relates to the accounts for
accrued expenses, accrued revenue, prepaid expenses and
unearned revenue.
REVENUE

 RECOGNIZATION CONCEPT: - Revenue is to

be recognized when services / goods are
sold, no matter the cash has been received
or not.

THREE TYPES OF REVENUE

1. Services / goods have not been sold, but
cash has been received by us in advance.
UNEARNED REVENUE --- A Liability
Cr Account
Revenue

2. Services / goods have been sold by us and

cash has also been received at the same time.
A SIMPLE REVENUE requiring no
adjustments

3. Services / goods have been sold by us, but

cash has not been received by us.
ACCRUED REVENUE --- An Asset
Dr Account
EXPENSES

 MATCHING CONCEPT: Services / Goods have been

provided to us / received by us.
THREE TYPES OF EXPENSES
1.Services / Goods have not been received by us, but cash
has already been paid in advance.
PREPAID EXPENSE --- An Asset
(Dr. Account)
Expenses

2. Services / Goods received by us, and cash paid at the

same time.
A SIMPLE EXPENSE requiring no
adjustments
3. Services / Goods received by us, but cash
has not been paid by us.
ACCRUED EXPENSES --- A Liability
(Cr. Account)
Q #1 Following adjustments are for adjusting entries. 

 Unpaid salaries Rs. 7,500

 Outstanding Utility bills Rs. 650
 Depreciation of office furniture at 10% office equipment 15% (Office
furniture Rs. 35, 000 and office equipment Rs. 45,000)
 Allocate allowances for uncollectible 2% on accounts receivable.
(Accounts Receivable Rs. 17,000)
 Accrued mark-up on Notes Payable Rs. 150
 Insurance expenses for the period Rs. 4,200 (Prepaid Insurance Rs. 8,000)
 Prepaid rent Rs. 6,500 (Prepaid Rent Rs. 16,000)
 advertising expenses Rs. 10,800 (Prepaid Advertising Rs. 19,000)

Instruction
 -Adjusting entries at the end of the year on December 31, 2019
 ABC CO
Adjusting Journal
Date Particulars P/REF Dr. $ Cr. $