Adjustments Financial Accounting IOBM

Financial Accounting
Adjustments
Financial Accounting IOBM
11/7/2021 Financial Accounting Zartashia Kiran Imran 1

Accounting Cycle
Assets + Expense + Dividend= Liabilities + Equity+ Revenue
• Assets = Liabilities + equity
• Assumed period is one month
1. Recording (from 1 till 31st)
1. Recording journal
2. Ledger
3. Unadjusted Trial balance
2. Adjustments (31st)
1. Adjusting journal (Revenue & Expense)
2. Ledger
3. Adjusted Trial balance
1. Income statement: Statement of Financial Performance
2. Statement of Retained Earning
3. Closing (31st) (Revenue, Expense, Drawing)
1. Closing journal
2. Ledger
3. Post closing Trial balance
1. Balance sheet (Assets = liabilities + equity)

Advances
1. Paid
• Prepaid
• asset
2. Received
• Unearned revenue
• liability

Accruals
1. Receivables
• asset
2. Payables
• Liability

Adjustment is either related to Revenue or Expense
• If you analyze the adjustment data and figure out that it is about
revenue then revenue would be recorded on credit side. After that
think about debit side account.
• If you analyze the adjustment data and figure out that it is about
Expense then Expense would be recorded on debit side. After that
think about credit side.

If you analyze the adjustment data and figure out that
it is about revenue then revenue would be recorded on
credit side. After that think about debit side account.
• Revenue (Cr. Right hand side)

• Receivable
• Unearned

If you analyze the adjustment data and figure out that
it is about Expense then Expense would be recorded
on debit side. After that think about credit side.
• Expense (Dr. left hand side)
1. Payable
2. Prepaid, unexpired insurance
3. Current asset: Office supplies, stationery
Office supplies Expense
Office supplies
4. Non Current Asset: Contra asset
Depreciation Expense
Accumulated Depreciation (non current asset name)
Straight line method: cost / life of asset
Building cost = Rs.100,000 life = 5 years
Rs. 100,000 / 5 = Rs. 20,000 per year
Per month depreciation = 20,000/12=
11/7/2021 1667
Financial per month
Accounting Zartashia Kiran Imran 7
Adjustment accounts
• Revenue (Cr. Right hand side)
• Receivable
• Unearned
• Expense (Dr. left hand side)
• Payable
• Prepaid, unexpired
• Current asset
• Contra asset

Adjustment accounts
1.Revenue (Cr. Right hand side)
•Receivable
Fees receivable
Fees revenue
•Unearned
Unearned Fees
Fee revenue
1. Expense (Dr. left hand side)
1. Payable
Transportation expense
Transportation payable
2. Prepaid, unexpired
Rent Expense
Prepaid Rent
3. Current asset
Office supplies expense
Office supplies
4. Contra asset (tangible non current asset)
Depreciation Expense
Accumulated Depreciation (Furniture)

Steps to pass adjusting entry
Step 1: determine whether it’s a revenue or an expense
Step 2: start making entry by putting expense or revenue to its
respective side
Step 3: determine the nature of adjusting account required and
complete the entry.

PROBLEM 5.5A: Silver Lining, Inc., provides investment advisory services. The company adjusts its accounts monthly, but performs closing entries annually on
December 31. The firm’s unadjusted trial balance dated December 31, 2011, is shown on the following page:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,835
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Accumulated depreciation: office equipment . . . . . . . . . . . . . . . . . . . …………………….. ……$ 35,250
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……………………………………1,400
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……………………………………360
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …………………………………..1,750
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …………………………………...9,000
Unearned consulting services revenue . . . . . . . . . . . . . . . . . . . . . . . . ………………………………....3,500
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……………………………………..30,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……………………………………..8,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Consulting services revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……………………………………. 60,000
Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605
Depreciation expense: office equipment . . . . . . . . . . . . . . . . . . . . .8,250
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,525
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,100
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,900
Totals . .11/7/2021
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Financial
. . . . . . .Accounting
. . $149,260 $149,260
Zartashia Kiran Imran 12
SILVER LINING, INC.
UNADJUSTED TRIAL BALANCE
as at 31st December, 2011
Account Number Particulars Debit Credit
1 Cash 42,835
2 Accounts Receiveble 2000.00
3 office supplies 205.00
4 Prepaid rent 1200.00
5 Unexpired Insurance 270.00
6 Office Equipment 54,000
7 Accumulated Depreciation: Office Equipment 35250.00
8 Accounts Payable 1400.00
9 Interest payable 360.00
10 Income taxes payable 1750.00
11 Notes payable 9000.00
12 Unearned consulting services revenue 3500.00
13 Capital stock 30000.00
14 Retained earnings 8000.00
15 Dividends 1000.00
16 Consulting services revenue 60000.00
17 Office supplies expense 605.00
18 Depreciation expense: office equipment 8250.00
19 Rent expense 3525.00
20 Insurance expense 1010.00
21 Salaries expense 27100.00
22 Interest expense 360.00
23 Income taxes expense 6900.00
Total 149,260 149260.00
1 Cash 42,835
5 Unexpired Insurance 180.00
7 Accumulated Depreciation: Office Equipment 36000.00 1. Cash
8 Accounts Payable 1400.00 2. Accoun
9 Interest payable 420.00 3. Accoun
10 Income taxes payable 2350.00 4. Notes r
11 Notes payable 9000.00 5. Notes p
6. Non cu
(Cost)
15 Dividends 1000.00 7. Non cu
16 Consulting services revenue 64000.00 liabilitie
17 Office supplies expense 700.00 8. Capital
18 Depreciation expense: office equipment 9000.00 9. Retaine
19 Rent expense 3825.00 10. dividen
21 Salaries expense 29000.00 6900dr
22 Interest expense 420.00 600 dr
23 Income taxes expense 7500.00 7500 dr
24 consulting services receivable 1,500
25 Salaries Payable 1900
Total

Other Data:
1. Accrued but unrecorded and uncollected consulting services revenue totals $1,500 at
December 31, 2011.
2. The company determined that $2,500 of previously unearned consulting services
revenue had been earned at December 31, 2011.
3. Office supplies on hand at December 31 total $110.
4. The company purchased all of its equipment when it first began business. At that time,
the estimated useful life of the equipment was six years (72 months).
5. The company prepaid its six-month rent agreement on October 1, 2011.
6. The company prepaid its 12-month insurance policy on March 1, 2011.
7. Accrued but unpaid salaries total $1,900 at December 31, 2011.
8. On June 1, 2011, the company borrowed $9,000 by signing a nine-month, 8 percent
note payable. The entire amount, plus interest, is due on March 1, 2012.
9. The company’s CPA estimates that income taxes expense for the entire year is $7,500.
The unpaid portion of this amount is due early in 2012.
Adjustments
Silver Lining, Inc.
Adjusting Journal
For the month ended on 31st December, 2011

Accrued but unrecorded and uncollected consulting
services revenue totals $1,500 at December 31, 2011.
Date Particulars P/R Debit $ Credit $
31st December, 2011 Consulting service Receivable 24 1,500
Consulting services revenue 16 1,500
(To adjust Consulting revenue)

Step 2: start making entry by putting expense or revenue to its respective side
Step 3: determine the nature of adjusting account required and complete the
entry.

The company determined that $2,500 of previously unearned
consulting services revenue had been earned at December 31, 2011.
31st December, 2011 Unearned consulting services revenue 12 2,500
Consulting services revenue 16 2,500
(to adjust consulting revenue)

entry.

Office supplies on hand at December 31 total
$110.
31st December, 2011 Office supplies Expense 17 95
Office supplies 3 95
(to Adjust office supplies expense)

entry.

The company purchased all of its equipment when it first
began business. At that time, the estimated useful life of the
equipment was six years (72 months).
Date Particulars P/ Debit $ Credit $
R
31st December,2011 Depreciation Expense: office equipment 18 750
Accumulated Depreciation :Office Equipment 7 750
(to adjust depreciation expense)

entry.
Calculation:
Cost / life = 54,000 / 6 years = 9,000 per year /12 month = 750 per month

The company prepaid its six-month rent
agreement on October 1, 2011.
31st December, 2011 Rent Expense 4 300
Prepaid rent 19 300
(to adjust prepaid rent)

entry.
Calculation:
Prepaid date: 1st October. 2011, 1st adjustment 31st October, 2nd adjustment 30th November
Prepaid rent = 1,200 (4 months) = 1200 / 4 months = $ 300 per month rent
31st December, 2011 = $ 300

The company prepaid its 12-month insurance
policy on March 1, 2011.
31st December, 2011 Insurance Expense 20 90
2 Unexpired Insurance 5 90
(to adjust insurance expense)

entry.
Calculation: what was the total value of advance insurance = 90 *12 = 1080
Unexpired insurance = 270
1st March,
Adjustment = 31st march, 30th April, 31st may, 30th June, 31st July, 31st august, 30th September, 31st October, 30th
November
Accrued but unpaid salaries total $1,900 at
December 31, 2011.
31st December, 2011 Salaries Expense 21 1,900
Salaries Payable 25 1,900
(To adjust Salaries expense)

entry.

On June 1, 2011, the company borrowed $9,000 by signing a
nine-month, 8 percent note payable. The entire amount, plus
interest, is due on March 1, 2012.
31st December, 2011 Interest Expense 22 60
Interest Payable 9 60
(To adjust interest expense)

entry.
Calculation:
Principal amount = $ 9000
Interest rate = 8% per annum or per year
Interest calculation = 9000*8% = $ 720 per year
Interest per month = 720/12 = 60 per month
The company’s CPA estimates that income taxes
expense for the entire year is $7,500. The unpaid
portion of this amount is due early in 2012.
31st December, 2011 Income taxes expense 23 600
Income tax payable 10 600
To adjust Income tax expense)

entry.
Calculation:
7,500 – 6900 = 600

1 Cash 42,835
3 office supplies 110.00 110
5 Unexpired Insurance 180.00 180
7 Accumulated Depreciation: Office Equipment 36000.00 36000
9 Interest payable 420.00 420
10 Income taxes payable 2350.00 2350
15 Dividends 1000.00
18 Depreciation expense: office equipment 9000.00 9000
20 Insurance expense 1100.00 1100
21 Salaries expense 29000.00 29000
22 Interest expense 420.00 420
23 Income taxes expense 7500.00 7500
24 Fee Receivable 1500.00
25 Salries payable 1900
Total 154,070 154070.00

Financial Statements after Adjusted Trial
Balance
• Income Statement (Statement of Financial Performance)
• Statement of Retained earning

Income Statement: Statement of Financial
performance for service organization
Total Revenue
- Operating expenses
= Operating Profit
+ other income
= Earning Before Interest and Taxation (EBIT)
- Interest Expense
= Earning Before Tax
- Tax Expense
= Earning After Tax (Net Profit)
Income Statement
SILVER LINING, INC.
Income Statement (Statement of Financial Performance)
For the year ended on 31st December, 2011
$ $ $
Revenue
Consultancy Services Revenue 64,000
Minus: Operating Expenses

Office supplies expense 700.00
Depreciation expense: office equipment 9000.00
Rent expense 3825.00
Insurance expense 1100.00
Salaries expense 29000.00
Total Operating Expenses 43625.00

Operating Profit 20,375.00
Plus Other income 0

Earning Before interest and Taxation 20,375.00
Minus: Interest Expense 420

Earning Before Tax 19,955.00
Minus: Tax Expense 7500

Earning After Taxes, net profit 12,455.00

Statement of Retained Earning
Retained earning: Opening Balance
+ / - Net Profit or loss
- Dividend
- Reserves declared in same period
= Retained Earning: Closing Balance

Statement of Retained Earning
SILVER LINING, INC.
Statement of Retained Earnings
For the year ended on 31st December, 2011
Particulars Amount
Retained earning (Opening) 8000
Plus: Profit 12455
Minus: Dividend 1000
Retained Earning (Closing) 19455

Closing Process
• Closing Entries
• Post Closing Trial Balance
• Balance Sheet = Asset = liabilities + Equity

Assets = Liabilities + Equity
Assets+ Expenses+ dividend = liability+ equity + revenue

Closing Process
• Temporary accounts closed
• Assets = Liabilities + Shareholders’ Equity (permanent Accounts)
• Asset + Expenses + Dividend= Liabilities + Shareholders’ equity+ revenue
1. We will Credit Expenses for closing and debit income summary account.
2. We will Debit revenue for closing and credit Income summary account.
3. Income summary would be closed in Retained earning
1. In case of profit Income summary will debit and Retained earning will be credited.
2. In case of loss income summary will be credited and Retained earning will be
debited.
4. We will Credit Dividend for closing and debit Retained earnings account.
Closing Flow chart
1. Revenues 2. Expenses
4. Income Summary
Retained
3. Dividend earning

Closing Expenses.
31st December, 2011 Income Summary 51,545
Office supplies expense 700
Depreciation expense: office equipment 9000
Rent expense 3825
Insurance expense 1100
Salaries expense 29000
Interest Expense 420
Tax Expense 7500
(To close Expense Accounts)

Closing Revenue.
31st December, 2011 Consultancy Services revenue 64,000
Income Summary 64,000
(To Close Revenue Account)
Income Summary:
64,000 Credit
51, 545 Debit
12455 credit

Closing Income Summary.
31st December, 2011 Income Summary 12455
Retained earnings 12455
(To Close Income Summary Account)

Closing Dividend.
31st December, 2011 Retained earning 1000
Dividend 1000
(To Close Dividend account)

Post Closing Trial Balance

as at 31st December, 2011
1 Cash 42,835
4 Prepaid rent 900.00 RE= 8000 cr
5 Unexpired Insurance 180.00 12,455 cr
6 Office Equipment 54,000 1000 dr
7 Accumulated Depreciation: Office Equipment 36000.00
9 Interest payable 420.00
10 Income taxes payable 2350.00
15 Dividends 0.00
18 Depreciation expense: office equipment 0.00
21 Salaries expense 0.00
22 Interest expense 0.00
23 Income taxes expense 0.00
24 Fee Receivable 1500.00
25 Income summary 0.00
11/7/2021 26 Salries payable Financial Accounting 1900 Zartashia Kiran Imran 41
Balance Sheet (Statement of Financial
Position)
SILVER LINING, INC.
Balance Sheet Statement of Financial Position
as at 31st december, 2011
Assets Amount Liabilities + Shareholders' Equity Amount
Current Assets
Cash 42835.00
Accounts Receiveble 2000
Fee Receivable 1500
office supplies 110
Prepaid rent 900
Unexpired Insurance 180

Balance Sheet (Statement of Financial
Position)
SILVER LINING, INC.
Balance Sheet Statement of Financial Position
as at 31st december, 2011
Assets Amount Liabilities + Shareholders' Equity Amount
Current Assets Current Liabilities
Cash 42835.00 Accounts Payable 1400
Accounts Receiveble 2000 Interest payable 420
Fee Receivable 1500 Income taxes payable 2350
office supplies 110 Unearned consulting services revenue 1000
Prepaid rent 900 Notes payable 9000
Unexpired Insurance 180 Salries payable 1900
Non Current Assets Non Current Liabilities
Office Equipment 54000 Shareholders Equity
Accumulated Depreciation: Office equipment (36000) 18,000 Capital stock 30000
Retained earnings 19455
Total 65525.00 Total 65525

PROBLEM 4.1A Preparing Adjusting Entries
Florida Palms Country Club adjusts its accounts monthly. Club members pay their annual dues in advance by January 4. The entire
amount is initially credited to Unearned Membership Dues. At the end of each month, an appropriate portion of this amount is
credited to Membership Dues Earned. Guests of the club normally pay green fees before being allowed on the course. The amounts
collected are credited to Green Fee Revenue at the time of receipt. Certain guests, however, are billed for green fees at the end of
the month. The following information is available as a source for preparing adjusting entries at December 31:
1. Salaries earned by golf course employees that have not yet been recorded or paid amount to $9,600.
2. The Tampa University golf team used Florida Palms for a tournament played on December 30 of the current year. At December
31, the $1,800 owed by the team for green fees had not yet been recorded or billed.
3. Membership dues earned in December, for collections received in January, amount to $106,000.
4. Depreciation of the country club’s golf carts is based on an estimated life of 15 years. The carts had originally been purchased for
$180,000. The straight-line method is used. ( Note: The clubhouse building was constructed in 1925 and is fully depreciated.)
5. A 12-month bank loan in the amount of $45,000 had been obtained by the country club on November 1. Interest is computed at
an annual rate of 8 percent. The entire $45,000, plus all of the interest accrued over the 12-month life of the loan, is due in full
on October 31 of the upcoming year. The necessary adjusting entry was made on November 30 to record the first month of
accrued interest expense. However, no adjustment has been made to record interest expense accrued in December. 45000 * 8%
= 3600 interest expense for the year , 3600/12 = 300 per month
6. A one-year property insurance policy had been purchased on March 1. The entire premium of $7,800 was initially recorded as
Unexpired Insurance.
7. In December, Florida Palms Country Club entered into an agreement to host the annual tournament of the Florida Seniors Golf
Association. The country club expects to generate green fees of $4,500 from this event.
8. Unrecorded Income Taxes Expense accrued in December amounts to $19,000. This amount will not be paid until January 15.
Question No. 2 (10 Marks)
Up & Away Airlines has provided the following information regarding cash received for ticket sales in
September and October:
Cash received in September for October flights $500,000
Cash received in October for October flights 300,000
Cash received in October for November flights 400,000.

Required:
Apply the realization principle to determine how much revenue Up & Away Airlines should report in its October
income statement

A. Xavier Company had the following transactions during the current year: • Earned revenues of $100,000 and
incurred expenses of $56,000, all in cash. • Purchased a truck for $20,000. • Sold land for $10,000. •
Borrowed $15,000 from a local bank. What was the total change in cash during the year?
100,000-56000-20000+10000+15000 = 49,000
B. White Company’s assets total $780,000 and its owners’ equity consists of capital stock of $500,000 and
retained earnings of $150,000. Does White Company have any outstanding liabilities and, if so, what is the
total amount of its liabilities?
780,000 = ? + 500000+150000 = 130,000 liabilities
C. John Franklin, sole owner of Franklin Mattress Company, has an ownership interest in the company of
$50,000 at January 1, 2011. During that year, he invests an additional $10,000 in the company and the
company reports a net income of $25,000. Determine the balance of owners’ equity that will appear in the
balance sheet at the end of the year.
50,000+10000+25000 = 85000
D. Mr. A earned Rs. 50,000 sales revenue. He received Rs. 10,000 cash and remaining is receivable. To earn
this revenue he incurred Rs. 30,000 expenses Rs. 5,000 paid in cash and remaining is payable. Calculate
Total profit of Mr. A in case of Cash based Accounting and Accrual based accounting.
Cash based = 10000-5000= 5000
Accrual = 50,000-30000= 20000

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Financial Accounting

11/7/2021 Financial Accounting Zartashia Kiran Imran 1

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• Revenue (Cr. Right hand side)

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Step 1: determine whether it’s a revenue or an expense

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Step 1: determine whether it’s a revenue or an expense

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Step 1: determine whether it’s a revenue or an expense

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Step 1: determine whether it’s a revenue or an expense

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Step 1: determine whether it’s a revenue or an expense

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Step 1: determine whether it’s a revenue or an expense

Step 1: determine whether it’s a revenue or an expense

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Step 1: determine whether it’s a revenue or an expense

Step 1: determine whether it’s a revenue or an expense

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Minus: Operating Expenses

Total Operating Expenses 43625.00

Plus Other income 0

Minus: Interest Expense 420

Minus: Tax Expense 7500

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Total 65525.00 Total 65525

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