Adjusting Journal Entries

Adjusting Journal Entries All adjusting entries (other than error corrections) will always involve at least one account on the balance sheet and at least one account on the income statement. I. Deferral Adjustments A deferral involves a past exchange of cash that has initially been recorded on the balance sheet rather than on the income statement. The name deferral comes about because the recording on the income statement is deferred (postponed) to a later time. A. Deferred Expenses A deferred expense is initially recorded on the balance sheet as an asset than being immediately expensed. An adjusting entry becomes necessary as the asset is consumed and becomes an expense. 1. Illustration for a short-term asset > Past exchange of cash Asset Cash XXX XXX

> Adjusting entry necessary as the asset is consumed Expense Asset XXX (Income statement) XXX (Balance sheet)

Example: The supplies account currently shows a $300 balance. A count of the supplies determines that only $250 remains. Supplies Expense Supplies 50 50

2. Illustration for a long-term asset The adjusting entry for long-term assets differs in that instead ofreducing the asset directly, a contra account is used that is subtracted from the asset on the balance sheet. > Past exchange of cash Asset Cash XXX XXX

> Adjusting entry necessary as the asset is consumed Depreciation Expense Accumulated Depreciation XXX (Income statement) XXX (Balance sheet)

Adjusting Journal Entries

Example: Current year depreciation is $2,500. Depreciation Expense Accumulated Depreciation 2,500 2,500

Note: Accumulated depreciation is a contra account that is subtracted from the asset on the balance sheet. It has a normal credit balance. B. Deferred Revenues A revenue cannot be recorded until the income has been earned. Cash received in advance of income realization should be initially recorded in a liability account such as "Unearned Revenue". An adjusting entry later becomes necessary as the revenue is earned. The liability should be reduced and the revenue recorded. > Past exchange of cash Cash Unearned Revenue XXX XXX

> Adjusting entry necessary as revenue is earned Unearned Revenue Revenue XXX (Balance sheet) XXX (Income statement)

Example: Adams CPA previously received $500 for bookkeeping services in advance of providing the services. Adams has now earned $300 of the money. Unearned Revenue Revenue 300 300

II. Accrual Adjustments An accrual involves a future exchange of cash that must be recorded on the income statement before cash is exchanged. A. Accrued Expenses > Adjusting entry Expense Liability > Future exchange of cash Liability Cash XXX XXX XXX (Income statement) XXX (Balance sheet)

Example: Interest accrued on a loan at the end of the month is $550 Interest Expense 550

Adjusting Journal Entries

Interest Payable B. Accrued Revenues > Adjusting entry Receivable Revenue > Future exchange of cash Cash Receivable XXX XXX XXX (Balance sheet) XXX (Income statement) 550

Example: Performed $400 of services for a customer on account. Accounts Receivable Revenue 400 400