UNIT #8 - ADJUSTING ENTRIES
TUTORIAL - INITIAL
TUTORIAL - COMPLETED
INSTRUCTIONS FOR UNIT #8
~ In Unit #7 you recorded and posted ten entries typical for a corporation. The entries covered transactions in which companies incorporate, buy assets, incur expenses and generate revenue from the sale of their product or service.
~ For each of these a journal entry was required to record the transaction and a posting was required to record the amounts in their accounts and calculate account balances.
~ Companies often have cycles and established systems in which certain transactions are journalized and posted. For example, a billing cycle or payment cycle. Entries are automatically recorded and posted for these transactions. However, there are other transactions that occur which must be journalized. These entries are called adjusting entries and they are recorded at the end of a time period, e.g. at the end of the month, quarter, or year end.
~ Adjusting entries correct or update account balances. They tend to fall into one of two categories, namely, deferrals or accruals. When you defer a transaction, you are delaying the recognition of expense or revenue. Examples: to provide insurance coverage for your business, you pay the premium in advance of the coverage. If insurance costs $ 2,400 for two year's coverage, you pay $ 2,400 on January 1, Year 1. At that point it is an asset (debit prepaid insurance and credit cash) as it provides a future benefit. As time elapses, it becomes an expense. Assume you record adjustments each month. Then debit insurance expense and credit prepaid insurance.
~ Another example: your company sells magazine subscriptions. Subscribers pay cash in advance of receiving their monthly magazine. As you (the company) receive the cash you defer the revenue recognition. At that point it is a liability. Let's assume you receive $ 4,800 in cash for forty eight months of magazines. Debit cash $ 4,800 and credit unearned fees income $ 4,800. As you issue the magazines, you are entitled to recognize the revenue. Therefore, debit unearned fees income and credit fees income.
~ An Accrual records a transaction which has been completed. As with deferrals they can be either expenses or revenues. For example, if work was done amounting to $ 500, you (the company) are obligated (expense and liability) for the wages regardless of when paid. Therefore, debit wage expense $ 500 and credit wages payable $ 500.
~ Depreciation is another typical example of accrued expenses. Using straight line depreciation, assume an asset cost $ 3,600 with a three year life and you record depreciation annually; the amount is $ 1,200. Therefore, debit depreciation expense $ 1,200 and credit accumulated depreciation $ 1,200.
INSTRUCTIONS FOR UNIT #8
~ On the revenue side, accruals record earned income.For example, your company installs computer networks. When the work is completed, you have "earned" the income; therefore, accrue the revenue. Let's assume you have completed work for $ 2,000 and will bill the client. Accordingly, debit accounts or fees receivable $ 2,000 and credit fees income $ 2,000.
~ Interest earned is another typical example. Interest is a function of time and must be accrued as time elapses. Suppose you have a note receivable amounting to $ 10,000 from a loan your company made. The note carries interest @ 8% per annum (year). The principle, $ 10,000, is not due for one year; the interest is recorded each month till due date. Therefore, .08 divided by 12 = .00667 of earned interest each month. Accordingly, debit interest receivable $ 67 and credit interest income $ 67 (.00667 x $ 10,000).
~ The tutorial titled Initial has eight transactions requiring adjusting journal entries. The first column on the left organizes the eight transactions into the four categories.
~ The first category is deferred expenses. There are two transactions, supplies used and expired insurance. The balance in supplies was $ 3,000 on 1/1 and $ 500 on 12/31. Enter these two amounts in the appropriate cell to the right. As you enter the numbers supplies used will be automatically calculated and recorded to the debit and credit columns. You are to enter the correct debit account and credit account. WHEN ENTERING THE CREDIT ACCOUNT, BE SURE TO INDENT THREE SPACES BEFORE WRITING THE ACCOUNT NAME. If the accounts and the indentation for credit accounts is right, the column on the far right titled "Accounts" will respond correct. If the account names are wrong and three spaces were not allowed for credits, the response will be not correct.
~ The second entry under deferred expenses is expired insurance. The prepaid insurance was $ 3,600 on 1/1; on 12/31 the balance was $ 1,200. Enter the two amounts in the cells to the right. The expired insurance is calculated and recorded to the debit and credit columns. Enter the correct debit and credit columns and look for the correct or not correct response.
~ The same procedure applies to the other three categories:
~ Deferred revenue. The unearned income at 1/1 is $ 4,800; @ 12/31 it is $ 3,600.
Enter these amounts and the correct accounts.
~ Accrued expenses. Wages owed at 12/31 are $ 2,400. Enter the amount and correct
accounts. The interest accrued at 12/31 to be paid later is $ 120. Enter the amount and
correct accounts. For depreciation, the equipment cost is $ 5,000, the salvage is $ 0, and
the life in years is 5 years. Enter these amounts and correct accounts.
~ Accrued revenue. Work completed and billed to the client at 12/31 is $ 600. Enter
INSTRUCTIONS FOR UNIT #8
~ Accrued revenue (continued). the amount and correct accounts. The last one is
interest earned. The amount earned at 12/31 to be received later is $ 500. Enter the
amount and correct accounts.
~ The tutorial Completed shows the correct amounts and accounts.