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Adjusting Entries for Accruals

Financial Accounting
Course Code
Liang Chen

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Adjusting Entries for Accruals
¾ The adjusting entry for accruals will increase both a balance sheet and an income
statement account
Accrued Revenues
¾ Revenues earned, but not yet received in cash or recorded at the statement date, are
accrued revenues.
¾ An adjusting entry is required for two purposes : to show the receivable that exists at
the balance sheet date, and to record the revenue that has been earned during the
¾ The adjusting entry results in a debit (increase) to an asset account and a credit
(increase) to a revenue account
Accrued Expenses
¾ Expenses incurred but not yet paid or recorded at the statement date are called
accrued expenses (i.e. interest, rent, taxes)
¾ The adjusting entry for accrued expenses results in a debit (increase) to an expense
account and a credit (increase) to a liability account
Adjusting Entries for Estimates
¾ According to the matching principle, a portion of the cost of a capital asset should be
¾ It is important to recognize that amortization is an estimate rather than factual
measurement of the cost that has expired
¾ To calculate the amortization expense, the cost of the asset is divided by its useful
Contra accounts
¾ It is an account to offset against a related account on the income statement of balance
¾ They are used in adjusting entries for amortization (i.e. Accumulated amortization ±)
¾ These are used instead of crediting/debiting accounts because it allows the reader to
see both the original cost of the item and the portion of the cost that has been
allocated to expense to date
¾ The difference between the cost of any amortizable asset and its accumulated
amortization is called the net book value
¾ This is different from its true market value; it shows only its unallocated cost
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