Adjusting Entries in Accounting
Posted by Professor Cram in Accounting Cycle
Adjusting Entries in Accounting – Introduction
Adjusting Entries are journal entries that are made at the end of the accounting period, to adjust expenses and revenues to the accounting period where they actually occurred. Generally speaking, they are adjustments based on reality, not on a source document. This is in sharp contrast to entries during the accounting period (such as utility bills or fees for services rendered) that depend on source documents.
Preparing adjusting entries is a key step in the ongoing accounting cycle, coming right after you’ve completed preparing a trial balance.
Types of Adjusting Entries
- Accrued revenues (also called accrued assets) are revenues already earned but not yet paid or recorded.
- Unearned revenues (or deferred revenues) are revenues received in cash and recorded as liabilities prior to being earned.
- Accrued expenses (also called accrued liabilities) are expenses already incurred but not yet paid or recorded.
- Prepaid expenses (or deferred expenses) are expenses paid in cash and recorded as assets prior to being used.
- Other adjusting entries include depreciation of fixed assets, allowances for bad debts, and inventory adjustments.
Examples of Adjusting Entries
By their nature, all adjusting entries will involve a pairing of either an asset or liability account with a revenue or expense account. Here are some typical examples of adjusting entries of each type mentioned above:
- Accrued revenues — Say your company provided $1,600 worth of consulting services to the Bogus Manufacturing Company over the past month, and today is the end of the accounting period. The consulting hours will be billed and collected next month, well past when you’ll be preparing a trial balance, financial statements, closing entries, etc. In this case, you need an adjusting entry to account for the unbilled services:
Adjusting Entry Debits Credits Accounts Receivable 1,600.00 Consulting Fees Earned 1,600.00 - Unearned revenues — Bogus Manufacturing Company purchased an annual service contract from you for $24,000, which they paid up front. If only three months of their contract are within this accounting period, then that means nine months of the contract’s revenues are unearned. In order to properly reflect reality, you need an adjusting entry:
Adjusting Entry Debits Credits Unearned Revenue 18,000.00 Revenue 18,000.00 - Accrued expenses — If you pay weekly salaries and the accounting period ends mid-week, you have accrued salary expenses that you haven’t yet paid. You’ll need an adjusting entry to reflect the as-yet unpaid salaries:
Adjusting Entry Debits Credits Salary Expense 7,200.40 Wages and Salaries Payable 7,240.40 - Prepaid expenses — Let’s say you paid $3,000 for your property insurance six months ago, and you still have six paid months remaining on the policy after this accounting period. To accurately reflect the value and expense of the remaining policy, you need an adjusting entry:
Adjusting Entry Debits Credits Property & Casualty Expense 1,500.00 Prepaid Insurance 1,500.00 - Other adjusting entries — Your company purchased $1 million of manufacturing equipment two years ago, and according to your depreciation schedule it has depreciated by $350,500 this accounting period. To ensure that your balance sheet doesn’t overstate the equipment’s value, you need an adjusting entry:
Adjusting Entry Debits Credits Depreciation Expense 350,500.00 Accumulated Depreciation – Equipment 350,500.00
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i believe there’s a mistake in your unearned revenue example because the entry upon receiving cash would be:
cash—–24,000
unearned revenue—–24000
and the adjusting entry should be:
unearned revenue—–6000
revenue—————————–6000
Gelissa,
I see your point. We hadn’t dealt with the cash receipts specifically, but presumed it was booked to cash and revenue – thus we showed the adjustment for the unearned part. The net result is the same, but your method books all revenue as unearned then earns it along the way (some now). I booked all the revenue, then pulled out the unearned part (for now). The point at this level of accounting is that revenue not yet earned has to be posted to unearned. Later, the concepts of consistency and following cost accounting standards, will impose more strict methodology such as you suggest. Thanks for your serious consideration.
I see your point. We hadn’t dealt with the cash receipts specifically, but presumed it was booked to cash and revenue – thus we showed the adjustment for the unearned part. The net result is the same, but your method books all revenue as unearned then earns it along the way (some now). I booked all the revenue, then pulled out the unearned part (for now). The point at this level of accounting is that revenue not yet earned has to be posted to unearned. Later, the concepts of consistency and following cost accounting standards, will impose more strict methodology such as you suggest. Thanks for your serious consideration.
In that case it should be a credit to UR, and a debit to Revenue. The example shows the opposite. Sorry to be a complainer, but it may as well be fixed I think.
IMO it’s more intuitive to just do the 24000 dr. cash, 24000 cr UR to start with.
i have also doubt for entery of unearned revenue. plz clear it for me.
revenue should be debited and unearned revenue should be credited.
need answer>>> PLs
As December 31 2009, Mr Nesto Pate holds a 60 day, 10% note of 240000 signed by Ma. Cristina Robles, Dated November 16 2009.
Give the adjusting journal entries.. ty
very good
thats great
1,800
thanks for the information ..
is that unearned revenue example correct?…
adjusting entry:
unearned revenue 6000
revenue 6000………
….?
i cant understand the prepaid expense example..
dose it really make any difference as to what colum you put it in
whats the point in making sure each transaction gose in to the credit and debit colum
i dont see how doing that would project a loss or a gain
beacuse everything will be balanced and how can a credit be a debit
accounting is starting to not make any sense at all anymore
it’s not easy to make an adjustment entries.
i know how to calculate the adjusting entry,
but i don’t know what are the account titles that i should put in the worksheet.
i’m confused please do help me.
please answer this..
Carrion Company acquires 2 years insurance policy on sep. 1 2005 the total amount of premium paid is 62 640.
assuming the payment was recorded by debiting prepaid insurance:
please give the adjusting entry on the end of the year..
and what is the balance of the prepaid insurance account that is to be presented in the asset section of the dec. 31 2005 balance sheet
thanks
pls help me to answer this problem#
1. the 2 year insurance was paid on january of the current year
2. interest of 18% per annum of P50,000.00 1 year bank loan granted on july 1 has accrue
3. advertising placement of P 1,800 for 3 months was effective on Oct 1 and was still unpaid
Nice efforts by u all….
Hi
i’m wondering what would happen if we assumed that we debited cash and credited service revenue..and then we received an advance payment which is considered a part of the revenue since we already recorded it as cash. what would the company do then? is their any adjustment needed or no
How do I do the Journal entry for fees earned but unbilled ?
@gelissa you are right. But this is also common in practice.i believe that it is not a mistake but it looks very complicated. What you suggested is ok
cash—–24,000
unearned revenue—–24000
and the adjusting entry should be:
unearned revenue—–6000
revenue—————————–6000
@annica
Sep 1. 2005 Journal entry
prepaid insurance 62640
cash 62640
Dec 31. 2005 Adjusting Entry
insurance expense 10440
prepaid insurance 10440
( 62640/24=2660 now 2660*4(months)= 10440
dec. 31 2005 balance sheet
prepaid insurance 62640
insurance expense (10440)
balance = 52200
ADJUSTING ENTRIES
Types of Adjusting Entries
1. CONVERTING ASSETS INTO EXPENSES
In this type of transaction we need to pass adjusting entries for converting asset into expense. Suppose if company purchases insurance for six months and for 6000 Rs paid in cash. They will need to pass the following entry at the moment.
Insurance A/C 6000
To cash A/C 6000
We know that purchased insurance is an asset of the company. The amount of insurance will be equally divided as following to all months.
January February March April May June
1000 1000 1000 1000 1000 1000
Adjusting at the January end will be as follow
Now at the end of the January Company will adjust the insurance which has been used for the month. The used insurance will be considered insurance expense for the month. The adjusting entry will be as follow.
Insurance expense A/C 1000
To insurance A/C 1000
2. CONVERTING LIABILITIES INTO REVENUE
In this kind of transaction we need to convert liability into revenue. Sometimes business takes money in advance from customers and renders it services later. At one side we get asset (cash) and another side we increase our liabilities because we have not yet performed our services. The typical term used for that revenue is unearned revenue (liability).
Suppose firm gets 5000 of cash in advance to sale goods in five months 1000 of each year. The entry for the transaction will be
Cash A/C 5,000
Unearned Revenue A/C 5,000
The duration will be equally divided in five months accordingly the contract as follow.
January February March April May
1,000 1,000 1,000 1,000 1,000
Adjusting at the January end will be as follow
At the end of the first month firm will pass adjusting entry for the sale of 1000.Rs they have made to the customer. In this time we will debit the unearned revenue account (liability) because liability decreased and earned revenue account (Revenue) will be credited because revenue generated or increased.
Unearned Revenue A/C 1,000
Earned Revenue A/C 1,000
3. ACCRUING UNPAID EXPENSE
Sometime business do not pay their expenses at due date for the current period in which they occurred. So at the end of the month in which the expenses made but not paid, business generates adjusting entry. They debit the expense account (expense occurred) and credit the expense payable account (liability increased).
Suppose electricity bill of 1,100 Rs due at 31 January but business did not pay. They will pass the following adjusting entry.
Adjusting at the January end will be as follow
Electricity Expense A/C 1,100
Electricity expense payable A/C 1,100
4. ACCRUING UNCOLLECTED REVENUE
It is opposite to the 3rd type of adjusting entries. Business also sale goods on credit to customers in one period and collect cash in another period. Unrecorded revenue for which no cash has been collected required adjusting entry at the end of the period.
Suppose if business makes sales of 600 to customer on credit in February at the end of the February they will pass following adjusting entry for unrecorded earned revenue for which no cash has been collected.
Adjusting at the February end will be as follow
Accounts Receivable A/C 600
Sales revenue A/C 600
pls try to revisit the entries that involve the unearned revenue being debited(which should have been credited instead).i think it should really be cash debited and unearned revenue credited.and when the service has been performed. then the entries should be unearned revenue debited and revenue credited since it is now earned.
Can you please help me with the following adjusting entries?
1. Repair expenses of the means of transport amounted to € 150, which were accrued during the second financial year and are still payable, had not yet been redorded in the accounting books.
2. Insurance Expenses amounted to € 18, referring to the period 1/7/20X5 to 31/12/20X5, are included in the account “Pre-paid insurance expenses”
3. Purchase of Packaging materials of € 20 on credit, which was realized during the second financial year, was recorded as a purchase of furniture against note payable.
Many thanks in advance
I’m sorry but that unearned revenue entry looks wrong. If your initial entry was
cash—–24,000
revenue—–24000 then you are recognizing revenue too early
cash—–24,000
unearned revenue—–24000
As Gelissa stated is correct. As you are creating an unearned liability.
and the adjusting entry should be:
unearned revenue—–6000
revenue—————————–6000
To properly bring down your liability and recognize the revenue earned.
Dear All,
Can any one tell us where to booked the fallowing entry
our company have purchase dogs for security as board decided,therefore kindly send what would be the posting entry in accounting
Mazhar
Here is my problem:
I have a wages payable balance of $500.00 as of April 30.
I have wages for May of $60,000.00, $6,000.00
I have wages earned but not yet paid at the end of May of $6,000.00.
My question is what do I do withthe $500.00 wages payable balance from April?
This assignmsnt is due tomorrow and I have been struggling with it for two weeks.
Great! Thank you!
I have a wages payable balance of $500.00 as of April 30.
I have wages for May of $60,000.00, $6,000.00
I have wages earned but not yet paid at the end of May of $6,000.00.
My question is what do I do with the $500.00 wages payable balance from April?
I think even better to post it as follows:
Dr cash. 24,000
Cr Revenue. 6,000
Cr Unearned Revenue. 18,000
Narration: Bogus Manuf. Yearly serv. Cont. 3m earned & 9m unearned
calim on insurence company what entries will.
understood it.thanks
Please help with my questions:
Total insurance premium for a year is $101436 (Aug 10 – Aug 11). Company paid 25% down payment and paid every month of $11484.90 for 8 months from Sep to Apr. Each month I record the journal entry as follow:
Dr prepaid exp $11484.90
Cr Insurance $11484.90
and
Dr Insurance $8453 (monthly accrual $101436/12=$8453)
Cr prepaid exp $8453
Now we cancel the policy as of Mar & start a new policy in Apr. How do I do all the adjusting entry?
Please advise.
Thanks
what is concept of Materiality? would anyone answer me plz??
i think the computation in unearned revenue is right..because, its said that the annual service contract is amounted to $24,000 but the contractor only serve for 9 months so the rest 3 months will not be paid..We know that in a year have 12months and in 12months we have 4 3months..so it means every 3 months the unearned revenue is only $6,000..Since the contractor services serves only for 9months therfore their unearned revenue in a year is $18,000..hope you’ve got what my point..heheheh
Materiality refers to … “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
can you please answer these??? thanks!!!
1. received an 18,000 cash advance for a contract to provide services in the future. the contract required a 1-year commitment, starting April 1.
2. invested 90,000 cash in a certificate of deposit that paid 4% annual interest. the certificate was acquired on May 1 and carried a 1-year term to maturity.
as the unearned revenue decreases it will be recorded to the debit side and the amount should be the amount already earned, so meaning the correct aje is:
unearned revenue 6,000
revenue 6,000
Awesome!!!!!!!! i want more.
coleen what is the ending month of your first question? i can help you.
coleen heres the answer of number two
Dr. interest expense————-3,600
Cr. interest payable—————–3,600
i have a facebook heres my account,.
jhunelleacopicop@yahoo.com
wrong amount in the revenue
what is the difference between final inventory and inventory end?
(my prof. said that the final inventory is greater than the beg. inventory)
pls correct this:
given: DR CR
inventory, Jan 1 133,000
adjustments:
inventory end, 126,000
so my adjusting journal entry is this
DR CR
Inventory 126,000
Profit and sales summary 126,000
to close beg and set up
end inventory
is this right?
Unearned revenue, my lecturer said that debit cash ( cos we received money from customer) and credit account payable ( cos we received cash but not yet given products or services for customers )
Im help me …our teacher in accounting assigned task for us..This task is project…..we are assigned to search problems …about adjusting entries.. hard And soft copy….we will pass this at Oct.14.. help me plss
Can you kindly please provide a worked out example of a trial balance of a financial institution,say bank that gives out loans
Can you kindley provide me a clear example of unearned revenue in adjusting entries
can you kindly show me the adjusting of six month salary advance? for exmple i paid the six month salary advance to my personal then every month how i put and adjustment can i make cash receive entry? or just an adjustment of journal entry.like this in bellow information
evry month 2000$ received from salary advance or other kind please show me the adjustment i have problem with thanks.
i cant understand that how we make these adjusting entry >
commisson unearned renvenu after financial year still unearned ,>
solved plzzz