Review: Adjusting Entries

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Here are a few adjustments that you should know how to do.  I suggest that you focus on
the revenue or expense applicable to each adjustment.

1.  The Supplies adjustment records the cost of supplies used up during the month.  The
supplies used up are debited to the Supplies Expense account.   The offsetting credit
reduces the Supplies account to the proper balance (the amount of supplies actually
left on the shelf).  Example: Johnson Company purchased $1,050 of supplies on
January 1. At the end of January, they counted the supplies and found that $700 of
supplies were left. This would imply that $350 of the supplies were used up. On the last
day of the month, an adjustment would be made to record the amount of supplies used
up:

General Journal
Date Accounts Ref Debit Credit
 
      
       

2.  The Insurance adjustment is quite similar.  Suppose that a $2400 insurance policy

was purchased on January 1, and that it is a one-year policy.    This would mean that
one month's worth of the policy ($200 worth) expires each month.  At the end of
January, we would record this adjustment.  

General Journal
Date Accounts Ref Debit Credit
  
   
        

3.  Depreciation is the cost of equipment or buildings that have been used up during the
month. Suppose the company purchased a $36,000 truck on January 1, that is
estimated to last for 36 months.  The company will record depreciation on a monthly
basis, at the rate of $1,000 per month.  The depreciation adjustment for January will
look like this.   

General Journal
Date Accounts Ref Debit Credit

©2017 Mr. Breitsprecher & BreitLinks (www.breitlinks.com). All Rights Reserved Review: Adjusting Entries, page 1
Depreciation Expense is an expense account, just like Supplies Expense or Insurance
Expense.  These expenses will be reported on the Income Statement.  Accumulated
Depreciation--Equipment is considered a contra-asset (contra means "against"). At the
end of January, after the depreciation adjustment, the Equipment account will appear on
the balance sheet like this:   

Cash   $2,000
Accounts Receivable   8,000
Equipment $36,000  
Less Accumulated Depreciation 1,000 35,000
Total Assets   $45,000

Notice that the Accumulated Depreciation is subtracted from the asset cost of $36,000.   
The $35,000 amount is called the "book value" of the asset, and will decline by $1,000
each month as the Accumulated Depreciation continues to increase. After 36 months, the
Equipment will still have a $36,000 balance, but the Accumulated Depreciation will also be
$36,000, and the book value will be at zero. After that, further depreciation may not be
taken on this asset. 

Note that the Equipment account and the Accumulated Depreciation Equipment account
are two separate accounts. And, while it is true that we subtract accumulated depreciation
from the Equipment account on the balance sheet, a trial balance would show the status
of the two accounts separately. In the example shown above, the Equipment account has
a balance of $36,000 and the Accumulated Depreciation--Equipment account has a
balance of $1,000. So, we only compute the book value on the balance sheet.

4.  We must adjust for Unearned Revenue that has been earned.    Unearned Revenue is
an account used when customers make an advance payment to us for future services. 
For example, if a client comes to us in January, and pays us $5,000 for consulting
services we will provide next month, we cannot count the $5,000 as revenue.   
Revenue can only be recorded when we earn it.  How would the receipt of $5,000 in
cash be recorded? 

General Journal
Date Accounts Ref Debit Credit

©2017 Mr. Breitsprecher & BreitLinks (www.breitlinks.com). All Rights Reserved Review: Adjusting Entries, page 2
This receipt of cash is a normal recurring transaction for many types of business. At the
end of the month, let us assume that one-half of the Unearned Revenue has now been
earned. In other words, during the remainder of January, we have provided $2500 of the
services we are obligated to provide. The following adjustment would convert $2500 of the
obligation to revenue.

General Journal
Date Accounts Ref Debit Credit

Note: Unearned Revenue is considered a liability, so it goes on the balance sheet. Do not

be tempted to put Unearned Revenue on the Income Statement, even though the word
"revenue" is in its title.

5.  Salaries earned by employees but not paid to them.  At the end of a month, we must
determine if employees have worked any hours that they have not been paid for.  This
could happen, for example, if employees are paid every Friday and January 31
happens to be a Wednesday.  There would be three days of salaries (Monday,
Tuesday, and Wednesday) for which the employees won't get paid until Friday.  We
must include the January salaries as expenses for January, so that they appear on
January's income statement.  Suppose we pay our employees $500 per day and we
owe them for Monday, Tuesday and Wednesday, with Wednesday being January 31.

General Journal
Date Accounts Ref Debit Credit

Let's go one step further and ask this question: what entry would be made on Friday,
February 2? Our payroll will be 5 times $500 or $2500. We also have to clear the liability
established on Wednesday January 31.

General Journal
Date Accounts Ref Debit Credit

©2017 Mr. Breitsprecher & BreitLinks (www.breitlinks.com). All Rights Reserved Review: Adjusting Entries, page 3
Note that this technique specifically assigns the salaries expense to the proper month.

6.  Interest earned on a Note Receivable.  Suppose we received a $1,000 Note

Receivable on January 1 that earns interest at the rate of 6% per year.  As of January
31, there will be interest owed to us (Interest Receivable).    When we earn interest, it is
considered a revenue.  The amount of interest can be computed using the formula: 
Interest = Principal * Rate * Time.   (The * means multiply.)  The time must be in years. 
If the note was outstanding for one month, we would consider the time to be one-
twelfth of a year.   The interest amount would therefore be $1,000 * .06 * 1/12 = $5.00. 

General Journal
Date Accounts Ref Debit Credit

The Note Receivable illustrated might arise if we loaned a client $1,000 and they gave us
the note to signify their indebtedness. Our reward for loaning out cash is the interest
revenue we earn over time.

We may also discuss notes from the opposite point of view. For example, we might borrow
$1,000 from the bank and incur interest expense. An adjustment would be made at the
end of the accounting period involving a debit to Interest Expense, and a credit to Interest
Payable.

Remember that every adjustment is 1) recorded in the journal and 2) posted to the ledger,
just like the regular transactions. These entries will occur on the last day of the accounting
period. After the adjustments are posted, the accountant verifies that the ledger is still in
balance by preparing an Adjusted Trial Balance.

©2017 Mr. Breitsprecher & BreitLinks (www.breitlinks.com). All Rights Reserved Review: Adjusting Entries, page 4