Chapter 4

Adjusting Entries
Reference Book:
Weygandt Kimmel Keiso
9th edition
 Adjusting the Accounts
Causes for adjustments :
Fiscal and calendar year.
Accrual vs cash basis of accounting.
Recognizing revenues and expenses.
Time period assumptions.
 Causes for Adjustments
Time period assumption:

Dividing the economic life of a business into artificial time period. This
convenient assumption is referred to as the time period assumption.

Fiscal & Calendar Year :

A fiscal year usually begins with the first day of a month and ends
twelve months later on the last day of a month.

The accounting period used by most businesses coincides with the

calendar year ( January 1 to December 31) .
 Accrual vs Cash basis Accounting:
Under the accrual basis, transactions that change a companys
financials statements are recorded in the periods in which the
events occur.

Under cash basis accounting, revenue is recorded when cash is

received , and an expenses is recorded when cash is paid. Cash basis
accounting is not in accordance with generally accepted accounting
principles (GAAP).
 Recognizing Revenues & Expenses:
Revenue recognition principles dictates revenue should be
recognized in the accounting period in which it is earned.

The practice of expense recognition is referred to as the matching

principle because it dictates that efforts (expenses) be matched with
(accomplishment).
 Types of Adjusting Entries
Adjusting Entries

Prepayments Accruals

Prepaid expense Unearned revenue Accrued revenues Accrued

Expense
 Prepayments
Prepaid expenses
Expenses paid in cash and recorded as assets before they are used or
consumed.
Accounts Before adjustments Adjusting Entry
Asset overstated Expenses Dr
Expenses understated Asset Cr

For Example, X advertising agency purchased advertising supplies

costing $2500 on October 5 . October 31 balance shows that $1000
supplies are still on hand. The adjusting entry would be:
Advertising supplies expense Dr 1500
Advertising supplies Cr. 1500
 Prepayments
Unearned Revenue
Cash received and recorded as liability before revenue is earned.

Accounts Before adjustments Adjusting Entry

Liabilities overstated Liability Dr.
Revenue understated Revenue Cr.

For Example, Pioneer advertising agency received $1200 for future

services on October 2 . Pioneer provided services of $400 on October
31. The adjusting entry would be:
Unearned revenue Dr. 400
Service revenue Cr.400
 Accruals
Accrued Revenues
Revenue earned but not yet received in cash or recorded.

Accounts Before adjustments Adjusting Entry

Asset understated Asset Dr.
Revenue understated Revenue cr.

For Example, X advertising agency earned $200 for the service that have not been
recorded. The adjusting entry would be:

Accounts receivable Dr.200

Service Revenue Cr.200
 Accruals
Accrued Expenses
Expenses incurred but not yet paid in cash or recorded.

Accounts Before adjustments Adjusting Entry

Expenses understated Expenses Dr
Liabilities understated Liabilities Cr

On August 1, Mr. X borrowed $30000 from a local bank on a 15 year

note. The annual interest rate is 10%. The adjusting entry in August
31 would be:
Interest expense Dr. 250
Interest Payable Cr. 250
 The ledger of Hammond , Inc on March 31,2010,
includes the following selected accounts before
adjustments:
Debit Credit
Prepaid Insurance 3,600
Office Equipment 25,000
Office Supplies 2,800
Accumulated depreciation of office equipment 5000
Unearned service revenue 9,200
 An analysis of the accounts shows the following:
1. Insurance expires at the rate of $100 per month.
2. Supplies on hand total $800.
3. The office equipment depreciates $200 per month.
4. One half of the unearned service was earned in March.

Required: Prepare the adjusting entries for the month of

March.