Introduction to Adjust Entries
- 1. ADJUSTING ENTRIES By Ben Reyes, MBA
- 2. QUESTION Say that you are a business owner. When making a business decision would you base it on your company’s financial information from the beginning of the month, or financial information at the end of the month?
- 3. Completed at the end of each period, adjusting entries are necessary to update financial information that involve the following: • revenues that have been earned • expenses that have been incurred JUST LIKE IN LIFE, THINGS IN BUSINESS CHANGE.
- 4. 2 Types TO DEFER OR TO ACCRUE? THAT IS THE QUESTION! Deferrals Accruals 4 Kinds Deferred Expense Deferred Revenue Accrued Expense Accrued Revenue
- 5. • Deferrals – Adjust accounts that are already part of a company’s accounting records • Deferred Revenues are income received but not yet earned • Deferred Expense are expenses paid but not yet incurred • Accruals – Record revenues and expenses that are not yet in a company’s accounting records • Accrued Revenues are income earned but not yet received • Accrued Expenses are expenses incurred but not yet paid WHAT TYPE IS IT?
- 6. QUESTION Without you knowing, one of your employees uses up office supplies to help his daughter with her science project. What will happen to the amount of office supplies?
- 7. • Original entry: – Ex. $1,000 worth of supplies was purchased on March 1, 2017. • Adjusting entry: – Ex. $300 worth of supplies was used: DATE DESCRIPTION POST. REF. DEBIT CREDIT MAR 2017 31 Supplies Expense 3 0 0 Supplies 3 0 0 Adjusting entry for supplies ! ! DATE DESCRIPTION POST. REF. DEBIT CREDIT MAR 2017 1 Supplies 1 0 0 0 Cash 1 0 0 0 Purchased supplies ! ! SUPPLIES DEFERRED EXPENSE EXAMPLE
- 8. Say that you have a service business in which you provide relationship advice to couples. Before meeting with Kim and Kanye, they pay your fee in advance. Should you wait to deposit the money into your business account until you actually meet with them? QUESTION
- 9. • Original entry: – Ex. Advance payment of $5000 was received from Kim and Kanye on March 4, 2017. • Adjusting entry: – Ex. Provided relationship advice on March 31, 2017. DATE DESCRIPTION POST. REF. DEBIT CREDIT MAR 2017 4 Unearned Revenue 5 0 0 0 Couples Advice Fees 5 0 0 0 Provided advice to Kim and Kanye ! UNEARNED REVENUE DEFERRED REVENUE EXAMPLE
- 10. QUESTION Say that you have employees that work Monday through Friday. Your scheduled payday is each Friday. The month ends on a Wednesday, would you pay your employees that day?
- 11. • Original entry: – None. There is no existing record for wages owed. • Adjusting entry: – Ex. As of Wednesday May 31, 2017 $12,800 is owed to employees. DATE DESCRIPTION POST. REF. DEBIT CREDIT MAR 2017 4 Unearned Revenue 5 0 0 0 Couples Advice Fees 5 0 0 0 Provided advice to Kim and Kanye ! ! ! ! ! DATE DESCRIPTION POST. REF. DEBIT CREDIT ! ! DATE DESCRIPTION POST. REF. DEBIT CREDIT MAY 2017 31 Wage Expense 12 8 0 0 Wages Payable 12 8 0 0 Wages owed to employees ! ! SALARIES OWED TO EMPLOYEES ACCRUED EXPENSE EXAMPLE
- 12. QUESTION Say that one of your customers cannot pay on time, should you just let them pay whenever they want to?
- 13. INTEREST NOT YET RECEIVED ACCRUED REVENUE EXAMPLE • Original entry: – None. There is no existing record for interest revenue. • Adjusting entry: – Ex. Charged Charlie Brown, a customer, interest to pay later for an invoice. Interest amount is $200 as of June 30, 2017. DATE DESCRIPTION POST. REF. DEBIT CREDIT MAR 2017 4 Unearned Revenue 5 0 0 0 Couples Advice Fees 5 0 0 0 Provided advice to Kim and Kanye ! ! ! ! ! DATE DESCRIPTION POST. REF. DEBIT CREDIT ! ! DATE DESCRIPTION POST. REF. DEBIT CREDIT JUNE 2017 30 Interest Receivable 2 0 0 Interest Income 2 0 0 Interest earned on C. Brown account !
- 14. • Adjusting entries bring the amounts for accounts current • Updates financial information • Either an expense account or revenue account is adjusted • Adjusting entries affect both the balance sheet and the income statement • Adheres to the Matching Principle BIG PICTURE
- 15. Material regarding adjusting entries: http://accountingexplained.com/financial/cycle/adjusting-entries http://www.netmba.com/accounting/fin/process/adjusting/ A video on adjusting entries: https://www.youtube.com/watch?v=xtoTFSrv5Dc Videos on deferrals: https://www.youtube.com/watch?v=C17Oc9JqG_Q https://www.youtube.com/watch?v=hPq1Mv2gIec Videos on accruals: https://www.youtube.com/watch?v=xXeoGlQOV1c https://www.youtube.com/watch?v=ONkJXfvrAkc RECOMMENDED ADDITIONAL RESOURCES