BUSN1001 Final: Adjusting Entries
Adjusting Entries
Deferrals – postponement of the recognition of expense already paid or revenue already
received.
Prepaid
Expenses
• Expenses paid in advance, eg: prepaid rental expenses.
• Prepaid expenses is an asset account.
• Need adjusting entry to accurately reflect:
o Expenses – the used up portion in the Income Statement, and
o Assets – the correct remaining amount in the Balance Sheet.
• The initial journal entry: Dr Prepaid insurance, Cr Cash.
• Entry at end of accounting period: Dr Insurance expense, Cr Prepaid
insurance.
Unearned
Revenue
• Cash collected in advance from customers, eg: received payment for 10
piano lessons in advance.
• Unearned revenue is a liability account.
• Need adjusting entry to accurately reflect:
o Revenue – the portion actually earned in the Income
statement, and
o Liability – the correct remaining liability in the Balance Sheet.
• Initial journal entry: Dr Cash, Cr Unearned revenue.
• Entry when revenue is recognised: Dr Unearned revenue, Cr Revenue.
Accruals – expenses or revenues have been incurred but have not been recorded.
Accrued
Expenses
• Expenses incurred but not yet paid, eg: salary for the first working week
but only paid at the end of the second working week.
• Accrued expenses is a liability account.
• Need adjusting entry to accurately reflect:
o Expenses – the expenses actually incurred in the Income
Statement, and
o Liability – the correct amount in the Balance Sheet.
• Entry eg: Dr Wages expense, Cr Accrued wages/Wages payable.
Accrued
Revenue
• Revenue earned but not yet received, eg: service rendered (or provided)
but not yet billed customer.
• Accrued revenue is an asset account.
• Need adjusting entry to accurately reflect:
o Revenue – the portion actually earned in the Income
Statement, and
o Asset – the amount actually owed by customers/clients in the
Balance Sheet.
• Entry eg: Dr Accrued interest revenue, Cr Interest revenue.
Adjusting Entries Summary:
Accruals
Deferrals
Revenues
Accrued
revenues
(an asset)
Unearned
revenues
(a liability)
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Document Summary
Deferrals postponement of the recognition of expense already paid or revenue already received. Expenses: expenses paid in advance, eg: prepaid rental expenses, prepaid expenses is an asset account, need adjusting entry to accurately reflect: Initial journal entry: dr cash, cr unearned revenue: entry when revenue is recognised: dr unearned revenue, cr revenue. Accruals expenses or revenues have been incurred but have not been recorded. Expenses: expenses incurred but not yet paid, eg: salary for the first working week but only paid at the end of the second working week. Revenue: accrued expenses is a liability account, need adjusting entry to accurately reflect, expenses the expenses actually incurred in the income. Statement, and: asset the amount actually owed by customers/clients in the. Balance sheet: entry eg: dr accrued interest revenue, cr interest revenue. Accounts receivable (ch 8. 3: potential problem, not all customers pay their accounts, do not want balance sheet accounts receivable to be overstated, overstated if exceed net realisable value.
