Adjusting Entries

Adjusting entries are journal entries recorded at the end of an accounting period to adjust income and expense accounts so that they comply
with theaccrual concept of accounting. Their main purpose is to match incomes and expenses to appropriate accounting periods.
The transactions which are recorded using adjusting entries are not spontaneous but are spread over a period of time. Not all journal
entries recorded at the end of an accounting period are adjusting entries. For example, an entry to record a purchase on the last day of a
period is not an adjusting entry. An adjusting entry always involves either income or expense account.

Types

There are following types of adjusting entries:

Accruals:
These include revenues not yet received nor recorded and expenses not yet paid nor recorded. For example, interest expense on loan accrued
in the current period but not yet paid.
Prepayments:
These are revenues received in advance and recorded as liabilities, to be recorded as revenue and expenses paid in advance and recorded as
assets, to be recorded as expense. For example, adjustments to unearned revenue, prepaid insurance, office supplies, prepaid rent, etc.
Non-cash:
These adjusting entries record non-cash items such as depreciation expense, allowance for doubtful debts etc.

Example
This example is a continuation of the accounting cycle problem we have been working on. In the previous step we prepared an unadjusted trial
balance. Here we will pass adjusting entries.

Relevant information for the preparation of adjusting entries of Company A

Office supplies having original cost $4,320 were unused till the end of the period. Office supplies having original cost of
$22,800 are shown on unadjusted trial balance.
Prepaid rent of $36,000 was paid for the months January, February and March.
The equipment costing $80,000 has useful life of 5 years and its estimated salvage value is $14,000. Depreciation is provided
using the straight line depreciation method.
The interest rate on $20,000 note payable is 9%. Accrue the interest for one month.
$3,000 worth of service has been provided to the customer who paid advance amount of $4,000.
The adjusting entries of Company A are:

Date
Jan 31

Jan 31

Jan 31

Jan 31

Jan 31

Account
Debit
Supplies Expense
18,480
Office Supplies
Supplies Expense = $22,800 $4,320 = $18,480
Rent Expense
12,000
Prepaid Rent
Rent Expense = $36,000 3 = $12,000
Depreciation Expense
1,100
Accumulated Depreciation
Depreciation Expense = ($80,000 $14,000) (5 12) = $1,100
Interest Expense
150
Interest Payable
Interest Expense = $20,000 (9% 12) = $150
Unearned Revenue
3,000
Service Revenue

Credit
18,480

12,000

1,100

150

3,000

Example
Following is the unadjusted trial balance prepared from the ledger accounts of
Company A
Company A
Unadjusted Trial Balance
January 31, 2010
Cash
Accounts Receivable
Office Supplies
Prepaid Rent
Equipment
Accounts Payable
Notes Payable
Utilities Payable
Unearned Revenue
Common Stock
Service Revenue
Wages Expense
Miscellaneous Expense
Electricity Expense
Telephone Expense
Dividend
Total

Debit
$20,430
5,900
22,800
36,000
80,000

Credit

$5,200
20,000
3,964
4,000
100,000
82,600
38,200
3,470
2,470
1,494
5,000
$215,764

$215,764