Adjusting entriesACCRUALS

NO CASH

REVENUE EARNED BUT NOT RECORDED at end ofperiod

Debit RECEIVABLE Credit REVENUE

Examples:

Sold $1,500 worth of merchandise to a customer on December31, 2005 (year end). The sale had not been recorded.

Accounts receivable 1,500Sales 1,500

We invested in a 12%, $100,000 bond issued by another company; interest was paid semi-annually on October 1 andApril 1.

Record the interest earned at year end December 31, 2005. 12%* 100,000 = 12,000 Annually or $1,000 per month3 months * $1,000 = $3,000 interest earned

Interest receivable 3,000Interest revenue 3,000

Adjusting entriesACCRUALS

NO CASH

EXPENSE INCURRED BUT NOT RECORDED at end ofperiod

Debit EXPENSECredit PAYABLE

Examples:

Owed employees $12,000 for salaries for work done in the lastweek of December 2005 (year end). The expense had not beenrecorded.

Salaries expense 12,000Salaries payable 12,000

We sold a 12%, $100,000 bond to investors; interest was paidsemi-annually on October 1 and April 1. Record the interest owed at year end December 31, 2005. 12%* 100,000 = 12,000 Annually or $1,000 per month3 months * $1,000 = $3,000 interest earned

Interest expense 3,000Interest payable 3,000

Adjusting entriesPREPAIDS OR DEFERRALS

REVENUES

CASH RECEIVED BEFORE REVENUE EARNED,REVENUE RECORDED WHEN EARNED.

Adjusting entry NO CASH

Debit Liability (Unearned Revenue)Credit Revenue Account

Example:

We received $24,000 from a customer on January 2, 2005 toprovide fire insurance coverage for two years, 2005 and2006. The bookkeeper had recorded the transaction onJanuary 2nd by dr cash and cr unearned revenue.

Record the adjusting entry on December 31, 2005 (year end)Earned during 2005 = ½ of 24,000 or $12,000

Unearned revenue 12,000Insurance revenue 12,000

Adjusting entriesPREPAIDS OR DEFERRALS

EXPENSES

CASH PAID OUT BEFORE ASSET USED (EXPENSEINCURRED) EXPENSE RECOGNIZED WHEN ASSET USED.

Adjusting entry NO CASH

Debit EXPENSECredit ASSET

Examples: Prepaid insurance; Supplies

1. We paid $24,000 on January 2, 2005 for a fire insurancepolicy that provided fire insurance coverage for threeyears, 2005, 2006 and 2007. The bookkeeper had recordedthe transaction on January 2nd by dr prepaid insurance andcr cash.

Record the adjusting entry on December 31, 2005 (year end)Used during 2005 = 1/3rd of 24,000 or $ 8,000

Insurance expense 8,000Prepaid insurances 8,000

Examples: Prepaid insurance; Supplies, Buildings

2. We had $2,000 worth of supplies on hand on January 1,2005; we purchased $15,000 worth of supplies during 2005and had $1,200 of supplies on hand at December 31, 2005

1/1/05 $ 2,000Purchased, 2005 15,000Available for use $17,000On hand 12/31/05 ( 1,200)Supplies USED $ 15,800

Adjusting entry:Supplies expense 15,800

Supplies 15,800

3. Building–Depreciation

Adjusting entry NO CASH

Debit EXPENSECredit CONTRA ASSET

Depreciation expense XXXXAccumulated depreciation XXXX

We bought a building for $250,000, expected life 25 years, noexpected salvage value.

Cost - Salvage Value = Annual Depreciation expense Expected life

250,000 - 0 = 10,000 per year 25 years

Adjusting Entry (EVERY YEAR)

Depreciation expense 10,000Accumulated depreciation 10,000