1.11 Adjusting Entry- Practice
Practice
Interactive Practice #1
Interactive Practice #2
YOUR TURN
1. Prepaid Expenses: an asset represented by CASH PAID IN ADVANCE for future services/benefits to be received or utilized over time. Examples: supplies, prepaid rent, prepaid insurance.
1a. Supplies: Purchased $1000 supplies on account, on Jan. 2. At month end, $350 of supplies remain.
What is the entry to record the purchase of the supplies?
What is the adjustment needed? Record the usage of the supplies.
1b. Prepaid Insurance: Purchased a 6-month auto insurance policy, paying $1800, on Feb 1.
What is the entry to record the purchase of the insurance coverage?
What is the adjustment needed? Record the expired/used insurance as of the end of the month.
2. Accrued Revenues: If the company has provided services, then revenue should be recorded, even if the cash has not yet been received. Example: Joe Shmoe CPA observes his client’s inventory count on Dec. 31. The value of these services is $700.
What is the adjustment needed? Record the value of services performed.
3. Accrued Expenses: If the company has used resources the related expense should be recorded, even if the cash payment for these items will not occur until the next period. Examples: salary expense and utilities expense.
3a. Salary Expense: The company pays employees a fixed salary. The weekly total for the salaries is $7500. The end of the period falls on a Monday.
What is the adjustment needed? Record (accrue) the salaries owed.
3b. Utility Expense: If the company uses electricity in December, but the December bill ($200) is not received until January- they must estimate an amount for December utility expense and record it.
What is the adjustment needed? Record the value of utility services used (amount owed).
4. Unearned Revenues: If the company RECEIVES CASH IN ADVANCE of the work or service to be performed, it results in a liability being recorded- Unearned Revenue. As the work is performed, the liability is settled and the company records revenue (Fees Earned). Example: Pete’s Photos receives $800 for engagement and wedding photography services. The cash was received in March. The engagement photos are worth $200; the wedding portrait is worth $600. The engagement photos will be taken in May, the wedding portrait will be completed in September.
What is the journal entry to record the cash received?
What TWO adjusting entries are needed?
In May, to record the partial earning /value of work provided to date.
In September, to record the earning of the remaining amount
SOLUTION
1a. Prepaid Expenses: an asset represented by CASH PAID IN ADVANCE for future services/benefits to be received or utilized over time. Examples: supplies, prepaid rent, prepaid insurance. Supplies: Purchased $1000 supplies on account on Jan. 2. At month end, $350 of supplies remain.
The entry to record the purchase of the supplies:
DR. Supplies $1000; CR. A/P $1000
Adjustment needed: Record the usage of the supplies.
DR. Supplies Expense $650; CR. Supplies $650
1b. Prepaid Insurance: Purchased a 6-month auto insurance policy, paying $1800, on Feb 1.
The entry to record the purchase of the insurance coverage:
DR. Prepaid Insurance $1800; CR. Cash $1800
Adjustment needed: Expiration of insurance coverage at the end of the month.
$1800 6 months = $300 per month usage (expense)
DR. Insurance Expense $300; CR. Prepaid Insurance $300
NOTE: Cash is not affected in the adjusting entries!
Each adjustment affects at least one B/S account and one I/S account.
2. Accrued Revenues: If the company has provided services, then revenue should be recorded, even if the cash has not yet been received. Example: Joe Shmoe CPA observes his client’s inventory count on Dec. 31. The value of these services is $700.
Adjustment needed: DR. Accounts Receivable $700; CR. Fees Earned $700
3a. Accrued Expenses: If the company has used resources the related expense should be recorded, even if the cash payment for these items will not occur until the next period. Examples: salary expense and utilities expense. Salary Expense: The company pays all its employees a fixed salary. The weekly total for all employees is $7500. The end of the period falls on a Monday.
Adjustment needed: $7500 ÷ 5 days per week = $1500 salary per day
DR. Salary Expense $1500; CR. Salary Payable $1500
3b.Utility Expense: If the company uses electricity in December, but the December bill is not received until January- they must estimate an amount for December utility expense and record it.
Adjustment needed: The company estimates the December utility bill amount will = $200.
DR. Utility Expense$200
CR. Accounts Payable $200. (or Utility Payable)
4. Unearned Revenues: If the company RECEIVES CASH IN ADVANCE of the work or service to be performed, it results in a liability being recorded- Unearned Revenue. As the work is performed, the liability is settled and the company records revenue (Fees Earned).
Example: Pete’s Photos receives $800 for engagement and wedding photography services. The cash was received in March. The engagement photos are worth $200; the wedding portrait is worth $600. The engagement photos will be taken in May, the wedding portrait will be completed in September.
The entry when the cash was received: DR. Cash $800; CR. Unearned Revenue $800
TWO Adjustments needed:
In May: DR. Unearned Revenue $200; CR. Photo Fees Earned $200 (or similar revenue acct)
In Sept: DR. Unearned Revenue $600; CR. Portrait Fees Earned $600
