AFM101 Chapter Notes - Chapter 4: Book Value, Debits And Credits, Deferral
7 Jun 2018
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Adjusting Entries that Increase Expenses:
• Deferred Expenses: previously recorded assets (ex. Prepaid rent, supplies, equipment) that
were created when cash was paid in advance and must be reduced to the actual amount of
expense incurred
o Ex. Supplies, prepayments (e.g. rent, insurance), buildings and equipment
o During the period:
▪ Prepaid Insurance (+A)
Cash (-A)
o End of period:
▪ Insurance expense (+E, -SE)
Prepaid Insurance (-A)
• Accrued Expenses: expense that have been incurred but not yet recorded because cash will be
paid after the g or s are used
o Interest payable, wages payable, property taxes payable
o End of period:
▪ Wages Expense (+E, -SE)
Wages Payable (+L)
o Next period:
▪ Wages Payable (-L)
Cash (-A)
Adjustment Process
• Three steps to analyzing adjustments at the end of period:
o 1) Ask: Was revenue earned or an expense incurred that has not yet been recorded?
o 2) Ask: Was the related cash received or paid in the past or will it be received or paid in
the future?
o 3) Compute the amount of revenue earned or expense incurred, and record the
adjusting entry
Unadjusted Trial Balance
• Trial balance = a list of all accounts with their balances that provides a check on the equality of
the debits and credits
o *See pg. 169 to see an example*
Deferred Revenues
• Deferred Service Revenue – Ex. Sun-Rype provided additional services in January for $10 to new
clients that had previously paid initial fees to Sun-Rype
o Was revenue earned that is not yet recorded? YES
o Was the related cash received in the past or will it be received in the future? Sun-Rype
received cash in the past and recorded it in the deferred service revenue liability
account. This account must be reduced by $10 at January 31, because Sun-Rype
performed the services during the current period
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Document Summary
Adjusting entries that increase expenses: deferred expenses: previously recorded assets (ex. Prepaid rent, supplies, equipment) that were created when cash was paid in advance and must be reduced to the actual amount of expense incurred: ex. Supplies, prepayments (e. g. rent, insurance), buildings and equipment: during the period, prepaid insurance (+a) Prepaid insurance (-a: accrued expenses: expense that have been incurred but not yet recorded because cash will be paid after the g or s are used. Interest payable, wages payable, property taxes payable: end of period, wages expense (+e, -se) Wages payable (+l: next period, wages payable (-l) Unadjusted trial balance: trial balance = a list of all accounts with their balances that provides a check on the equality of the debits and credits, *see pg. Deferred revenues: deferred service revenue ex. Sun-rype received cash in the past and recorded it in the deferred service revenue liability account.
