The Basics of Adjusting Entries

67 views1 pages
27 Oct 2010
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
Types of adjusting entries
Prepaid expenses ± expenses
paid in cash and recorded as
assets before they are used or
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
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
Unlock document

This preview shows half of the first page of the document.
Unlock all 1 pages and 3 million more documents.

Already have an account? Log in

Get OneClass Notes+

Unlimited access to class notes and textbook notes.

YearlyBest Value
75% OFF
$8 USD/m
$30 USD/m
You will be charged $96 USD upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.