Adjusting Entries

Adjusting Entries

Adjusting Entries
bring certain account 12/31/2010

balances up to date at UPDATE

the end of the

accounting period.
 Adjustments
Adjusting entries are required when
changes in certain accounts have not been
recorded in the accounting records.
Adjustments are
necessary for items
that have either
been deferred or
accrued.
 Reason for Adjustments
It can be inefficient and costly to
account for certain types of
transactions on a daily basis.
 Adjusting Entries

Adjusting Entries are necessary when

accrual basis accounting is used.

Adjusting entries allow businesses to

adhere to the Matching Principle.
 Accrual Basis Accounting

Under accrual basis accounting, revenues

are recognized when earned (regardless of
whether cash has been received) and
expenses are recognized when incurred
(regardless of cash payment).
The Matching Principle
The Matching
Principle states that
expenses should be
“matched” together
with the income
they produced in
the same time
period.
 Characteristics of Adjustments
Adjusting entries will always have the
following characteristics:
•Adjusting entries are internal transactions—no
new source document exists for the adjustment.
•Adjusting entries are non-cash transactions—the
Cash account will never be used in an adjusting
entry.
•Adjusting entries will always involve at least one
income statement account and one balance sheet
account.
 How to Analyze an Adjusting Entry

When analyzing an adjusting entry, look

for the item that has not been recorded
but should have been. This information
is often not explicit and must be inferred
from the data given.
For expenses, look for the amount used. For
revenue, look for the amount earned.
 Adjusting Entries
• Outstanding • Outstanding expenses are
those expenses which have been
Expense incurred during the current
accounting period and are due to be
paid, however, the payment is not
made

• Entry • Expense Name (Expense)

To Outstanding Expense
 Example
• At year end, unrecorded interest expense
due to creditors was Rs. 4,000 (payable in
the next year). Prepare the adjusting entry at
year end (12/31):
 Examples

• Outstanding Salary Rs. 4500.

• Commission is still owing Rs. 7000.
• Rent for the building is still due Rs. 10000.
• Wages Rs. 4000 is Expired.
• Octri Duty is unpaid Rs. 1400.
• E-challan bill is pending Rs. 200.
 Adjusting Entries
• Prepaid Expenses • Prepaid expenses are
future expenses that have
been paid in advance

• Entry • Expense Name (Asset)

• To Prepaid Expense (Income)
 Example
• Prepaid Insurance account began the year with a balance
of Rs. 230. During the year, insurance in the amount of Rs.
570 was purchased. At the end of the year March 31st,
2009 the amount of insurance still unexpired was Rs. 350.
Prepare the year end adjusting entry:
 Examples
• Salary Paid in advance Rs. 50000
• Unexpired Rent Rs. 4500
• Prepaid Interest Received Rs. 4000
 Deprecaition Expenses
• Depreciation • Gradual decrease in
the amount of fixed
asset

• Entry Depreciation (Expense)

To Accumulated Depreciation (Liability)
 Examples
• Make Reserve on Land Rs. 700000 @ 5%.
• Charge 10% Depreciation on Building Rs.
800000.
• Make Furniture Depreciation at Rs. 400.
 Adjusting Entries
• Outstanding • 'Revenue Outstanding' is the
amount due from the customer as a
Revenue result of an organization's normal
business operation, that is, it is the
amount that has been billed by
organizations and is due, but which
has not been collected.

• Entry • Accrued Income (Asset)

– To Income (Income)
 Example
On October 4, Smith Company rendered services
valued at Rs. 11,000. The client will pay for the
services November 1 and closing are done at the end
of each month pass this transaction at the end of
period:
 Examples
• Receivable Interest Rs. 4000 recorded.
• Rent earned but not Received Rs. 5000.
• Commission Rs 4000 is Receivable.
• Services Rs. 1000 is accrued but not
received.
 Unearned Revenue
• Unearned Revenue • A liability account that reports
amounts received in advance of
providing goods or services.

• Entry • Unearned Revenue (Expense)

– To Revenue name (Liability)
 Example
• On July 3, a deposit in the amount of Rs. 5,000 was received for
services to be performed. By the end of the month, services in the
amount of Rs. 1,200 were performed. Prepare journal entries for the
original receipt of the deposit and the adjusting entry on 31st July:
 Examples
• Received Rent in advance Rs. 40000
• Commission Rs. 4000 is received in
advance before rendering services
• Interest on bank deposit receive in advance
Rs. 4000
 Adjusted Trail Balance

• An adjusted trial balance is a listing of all the account titles and

balances contained in the general ledger after the adjusting entries for
an accounting period have been posted to the accounts.