Adjusting Accounts

And Preparing Financial Statements

Learning objectives

1- The Accounting Period

2- Accrual Basis versus Cash Bases Accounting
3- The Basic of Adjusting Entries
4- Framework for Adjustments
5- Adjusting Entries for Prepaid (Deferred) Expenses
6- Adjusting Entries for Unearned (Deferred) Revenues
7- Adjusting Entries for Accrued Expenses
8- Adjusting Entries for Accrued Revenues
9- Adjusted Trial Balance

1- The Accounting Period

Accountants divide the economic life of a business into artificial time periods
(Time period Assumption), Generally may be:
1- Month …...or
2- Quarter…… or
3- Semiannually …. or
3- Annually

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 2- Accrual Basis versus
Cash Basis Accounting

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ACCRUAL BASIS VERSUS CASH

BASIS
Accrual Basis Cash Basis
Revenues are Revenues are
recognized when recognized when cash
earned and expenses is received and
are recognized when expenses are recorded
incurred. when cash is paid.

Note :
1- The Accrual basis is used to record all transaction incurred
2- Revenues are recognized when earned , rather than when cash is received
3- Expense are recognized when incurred, rather than paid

Example:
1- Services revenue $ 150000, collected cash $ 10000
2- Monthly salaries $ 5000. paid only $ 4000
Required:
Determine the amount of revenue and expense by using
1- Cash basis
2- Accrual basis
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 Solution
1- Cash Basis:

Revenue Expense
Recognize services revenue collected Recognize Salaries expense paid in
in cash equal $ 10000 cash equal $ 4000

2- Accrual Basis:

Revenue Expense
Recognize services revenue incurred Recognize Salaries expense incurred
$ 15000 regardless collected or no $ 5000 regardless paid or no

3- The Basic of Adjusting Entries

Adjusting entries make it possible to report the correct amounts on the
Balance sheet and on the Income statement
A company must make the adjusting entries every time it prepares financial
statements

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 4- Framework for Adjustments

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An adjusting entry is recorded to bring an asset or

liability account balance to its proper amount.
Framework for Adjustments
Adjustments
Adjustments

Paid
Paid (or
(or received)
received) cash
cash before
before Paid
Paid (or
(or received)
received) cash
cash after
after
expense
expense (or(or revenue)
revenue) recognized
recognized expense
expense (or
(or revenue)
revenue) recognized
recognized

Prepaid
Prepaid Unearned
Unearned Accrued
Accrued Accrued
Accrued
(Deferred)
(Deferred) (Deferred)
(Deferred) expense
expense revenues
revenues
expenses*
expenses* revenues
revenues
*including depreciation

The Types of Adjusting Entries:

Deferrals Accruals
1- Prepaid Expense: 1- Accrued Revenue:
Expenses paid in cash and recorded Revenues earned but not yet received
as assets before they are used or in cash or recorded
consumed
2- Unearned Revenue: 2- Accrued Expense:
Revenues received in cash and Expense incurred but not yet paid in
recorded as liabilities before they are cash or recorded
earned

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 5- Adjustment Cases
1-Prepaid Expenses
The Adjusting Entry:
Dr Cr
Expense ………... xx
Prepaid expense xx
Prepaid Insurance:
The company paid prepaid insurance at, Oct,1,2016 for two years, which
equals $2400
Required:
1- Prepare the entry to record the payments of prepaid insurance
2- Prepare the adjusting entry at Dec,31,2016

Solution
1- The entry to Record the payment:
Dr Cr
Prepaid insurance 2400
Cash 2400
2- The Adjusting Entry:
The monthly insurance = 2400 / 24 months = $ 100 per month
insurance expense = Oct.1………. Dec,31= 3 moths x 100 = $ 300
The Adjusting Entry:
Dr Cr
Insurance expense 300
Prepaid Insurance 300
Supplies:
Supplies Expense = Beg. Bal + Supplies purchased – End. Bal
The Adjusting Entry:
Dr Cr
Supplies expense xx
Supplies xx

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Example:
Pioneer Advertising agency purchased advertising supplies $2500, Oct,1, and
at Oct,31 $1000 of supplies are still on hand

Required:
Prepare the adjusting entry
Solution
The adjusting Entry:

Dr Cr
Supplies expense 1500
Supplies 1500

Example:
Pioneer Advertising agency purchased advertising supplies $3000, Oct,1, and
at Oct,31 $1000 of supplies are still on hand and the balance of supplies on
Oct,1, $ 2000
Required:
Prepare the adjusting entry
Solution

Supplies used = Beg. Bal + Purchased – End. Bal

= 2000 + 3000 – 1000 = 4000
The Adjusting Entry:
Dr Cr
Supplies expense 4000
Supplies 4000

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 2- Depreciation
A special category of prepaid expenses is Building, Equipment, and Vehicles
(Long-Lived assets Or Plant Assets) are recorded as assets, rather than an
expense, in the year acquired, and then used to produce and sell products or
services
The costs of these assets are deferred but are gradually reported as expenses
in the income statement over the asset’s useful life
Depreciation is the process of allocating the costs of these assets over their
expected useful life

Annual Depreciation Expense = (Cost – Salvage Value) / Useful Life

Adjusting Entry:
Dr Cr
Depreciation Expense xx
Accumulated Depreciation xx
Example:
The company purchased equipment at july,1,2016. its cost $ 110000, salvage
value $ 10000 and the useful life 5 years
Required:
Prepare the adjusting entry
Solution
Annual depreciation expense = (110,000 – 10000) / 10 = 10000 per year
Depreciation expense for the period = 10000 x 6/12 = 5000
Adjusting entry:

Dr Cr
Depreciation Expense 5000
Accumulated Depreciation – Equipment 5000

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 3-Unearned Revenues
Company makes an adjusting entry to record the revenue that has been
earned and to show the liability that remains
Adjusting Entry:
Dr Cr
Unearned Revenue xx
Revenue xx

Example:
On December,1, the client paid $ 3000 the 60-days fee in advance, covering
the period December to February, 1
Required:
1- Prepare the proper entry
2- Prepare the Adjusting Entry on, Dec, 31

Solution
1- The Proper Entry (collected Unearned Revenue):

Dr Cr
Cash 3000
Unearned Revenue 3000
2- The Adjusting Entry;
Revenue earned covers one month (December) = 3000/2= 1500
Dr Cr
Unearned Revenue 1500
services Revenue 1500

Example;
The balance of unearned revenue was $ 5000, and the company earned
revenue during the period equals $ 2000
Required:
Prepare the adjusting entry

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 Solution
Dr Cr
Unearned Revenue 2000
services Revenue 2000

4-Accrued Expenses
Company makes an adjusting entry to record the expense that has been
incurred and not yet paid or recorded
Adjusting Entry:
Dr Cr
Expense xx
Expense payable xx

Accrued Salaries Expense;

Example:
The monthly salaries for employees $ 2000, paid only 10 months during the
year
Required:
Prepare the adjusting entry
Solution
Salaries for 2 months not yet paid = 2x2000=4000
Adjusting Entry:
Dr Cr
Salaries Expense 4000
Salaries payable 4000

Accrued Interest Expense ;

Interest Expense = Face value x Interest Rate x period
Example:
Sam company signed a three- month note payable in the amount of $ 5000 on
Oct,1, the note requires to pay interest at an annual rate 12%
Required:
Prepare the adjusting entry on Oct,31

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 Solution
Interest expense = 5000 x 12% x 1/12 = 50
Adjusting Entry:
Dr Cr
Interest Expense 50
Interest payable 50

5- Accrued Revenues
Accrued Revenues refers to revenues earned during the accounting period
and not yet collected or recorded

Adjusting Entry:
Dr Cr
Accounts Receivable xx
Revenue xx
Accrued services Revenue;
Example:
During the accounting period rendered services to clients, but not collected
yet equals $ 8000
Required:
Prepare the adjusting entry
Solution
Adjusting Entry:
Dr Cr
Accounts Receivable 8000
Services Revenue 8000
Accrued Interest Revenue;
Interest Revenue = Face value x Interest Rate x period
Example:
S.H. company rendered services through a two- month note receivable in the
amount of $ 5000 on Oct,1, the note requires to pay interest at an annual rate
12%
Required:
Prepare the adjusting entry on Oct,31

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 Solution
Interest revenue = 5000 x 12% x 1/12 = 50
Adjusting Entry:
Dr Cr
Account Receivable 50
Interest Revenue 5

Adjusted Trial Balance

An Adjusted Trial Balance

Is a list of accounts and balances prepared after adjusting entries have been
recorded and posted to the ledger
The Form of Adjusted Trial Balance

Account Title Unadjusted Trial Adjustments Adjusted Trial

Balance Balance
Dr Cr Dr Cr Dr Cr

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 General Example
The Trial balance for S.M. Company before adjustments as follows:
Trial Balance on Jan, 31
Account Title Debit Credit
Cash 100000
Accounts Receivable 50000
Notes receivable 150000
Supplies 15000
Prepaid insurance 10000
Equipment 250000
Accounts payable 20000
Notes Payable 25000
S, Capital 480000
S, withdrawals 10000
Services Revenue 100000
Rent expense 15000
Salaries expense 25000

625000 625000

Additional data:
1- Insurance expense 2000
2- Depreciation for equipment 5000
3- Supplies used 10000
4- Accrued Revenues 20000
5- Salaries 5000 not yet paid
Required:
1- Prepare the Adjusting Entries
2- Prepare the Adjusted Trial Balance
3- Prepare the Income statement
4- Prepare the Owner’s equity statement
2- Prepare the Balance Sheet

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 Solution

1- Adjusting Entries
Date Account Name Debit Credit
Jan,31 Insurance Expense 2000
Prepaid Insurance 2000
Adjust prepaid insurance
Jan,31 Depreciation Expense – Equipment 5000
Accumulated Depreciation- Equipment 5000
Adjust Depreciation

Jan,31 Supplies Expense 10000

Supplies 10000
Adjust Supplies
Jan,31 Account Receivable 20000
Services Revenue 20000
Adjust Accrued Revenue
Jan,31 Salaries expense 5000
Salaries payable 5000
Adjust Salaries Expense

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 2- Adjusted Trial Balance
Account Title Unadjusted Trial Adjustments Adjusted Trial
Balance Balance
Dr Cr Dr Cr Dr Cr
Cash 100000 100000
Account Receivable 50000 20000 70000
Notes Receivable 150000 150000
Supplies 15000 10000 5000
Prepaid Insurance 10000 2000 8000
Equipment 250000 250000
Accounts payable 20000 20000
Notes Payable 25000 25000
S, capital 480000 480000
S, withdrawals 10000 10000
Services Revenue 100000 20000 120000
Rent expense 15000 15000 15000
Salaries Expense 25000 5000 30000
Total 625000 625000
Insurance Expense 2000 2000
Depreciation Expense 5000 5000
Accumulated 5000 5000
depreciation
Supplies Expense 10000 10000
Salaries payable 5000 5000
Total 42000 42000 655000 655000

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 3- Income Statement
Revenues
Services Revenue 120000
Minus
Expenses
Rent Expense 15000
Salaries Expense 30000
Insurance Expense 2000
Depreciation Expense 5000
Supplies Expense 10000
Total Expenses 62000 62000
Net Income 58000

4- Owner’s Equity Statement

Beg. Capital 480000
Plus
Net income 58000
Minus
Withdrawals 10000
End. Capital 528000

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 5- Balance Sheet
Assets Liabilities
Cash 100000 Accounts Payable 20000
Account Receivable 70000 Notes payable 25000
Notes Receivable 150000 Salaries Payable 5000
Supplies 5000 50000
Prepaid Insurance 8000
Equipment 250000 Capital
Accumulated Depreciation (5000) [Link] 528000

Total assets 578000 Total liabilities & Capital 578000

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