Textbook Notes (231,155)
CA (157,516)
UTSC (19,949)
MGA (391)
MGAB01H3 (127)
Liang Chen (50)
Chapter

The Basics of Adjusting Entries

1 Page
138 Views
Fall 2010

Department
Financial Accounting
Course Code
MGAB01H3
Professor
Liang Chen

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The Basics of Adjusting Entries
¾ Under the accrual basis of accounting, adjusting entries are needed to ensure that the
revenue recognition and matching principle are followed
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income/loss
Types of adjusting entries
Prepayments
Accruals
Estimates
Prepaid expenses ± expenses
paid in cash and recorded as
assets before they are used or
consumed
Accrued expenses ± expenses
incurred buy not yet paid in
cash or recorded
Amortization ± allocation of
the cost of capital assets to
expense over their useful lives
Unearned revenues ± revenues
received in cash and recorded
as liabilities before they are
earned
Accrued revenues ± revenues
earned but not yet received in
cash or recorded
Adjusting entries for prepayments
¾ Adjusting entries are used to record the portion of the prepayment that is for the
expense incurred or the revenue earned in the current accounting period
¾ If an adjustment is needed for prepayments, the asset and liability are overstated and
the related expense and revenue are understated until the adjustments are made
Prepaid Expenses
¾ Prepaid expenses expire either with the passage of time (e.g. rent and insurance) or
through use and consumption (e.g. supplies)
¾ Thus, the prepaid expense adjusting entry results in a debit (increase) to an expense
account and a credit (decrease) to an asset account
Unearned Revenues
¾ The adjusting entry for unearned revenues results in a debit (decrease) to a liability
account and a credit (increase) to a revenue account
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Description
The Basics of Adjusting Entries Under the accrual basis of accounting, adjusting entries are needed to ensure that the revenue recognition and matching principle are followed ,N08L95488L-O094705479,557457L,90,88098OL,-LOL9L084Z307806:L9,3309 incomeloss Types of adjusting entries Prepayments Accruals Estimates Prepaid expenses expenses Accrued expenses expenses Amortization allocation of paid in cash and recorded as incurred buy not yet paid in the cost of capital assets to assets before they are used or cash or recorded expense over their useful lives consumed Unearned revenues revenues Accrued revenues revenues received in cash and recorded earned but not yet received in as liabilities before they are cash or recorded earned Adjusting entries for prepayments
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