Chapter 3! The Adjusting Entry

1
Chapter 3! The Adjusting Entry

• Unit 1 Test (cover chapter 1 to 4) will occur on
  Friday September 26!

2
Adjusting Entry

• There are many different types of adjusting
  entries accountants make at the end of the fiscal
  period
• Prepaid Expense - Amortization
• Prepaid Insurance
• Accrued Revenue
• Supplies adjustment (Accrued Expense)
• Unearned Revenue
• Late-Arriving Purchase Invoice (Accrued Expenses)

3
Adjusting for Depreciation

• The Nature of Depreciation
• There are two categories for assets
• Short Term Assets These assets last only short
  term E.g. Cash and AR
• Long Term Assets These assets last long term
  E.g. Land, Building, Equipment, Computer, Car,
  Truck etc
• Long Term assets are also called Fixed Assets
  or Capital Assets

4
Depreciation

• The long term assets (like car, truck, computer
  and equipment) help the business producing
  income over many assets.
• Therefore, the cost of purchasing these assets
  must be spread out over the length of time that
  they help produce revenue.
• By doing depreciation adjusting entry, we are
  honoring matching principle.

5
Depreciation

• Accountants must estimate the useful life of the
  long term assets.
• The two most common methods of calculating
  depreciation are the straight line method and
  declining balance method.

6
Straight Line Method

• SLMD for one year Cost Salvage Value
• Periods
• Cost original cost of the long term asset
• Salvage value how much you will receive when
  you sell it at the end of the useful life or
  selling price after you used it for many years.
• Periods How long you will use it before selling
  it or throwing away

7
Adjusting for Depreciation

• Lets say I own Pizza restaurant and I use my car
  to deliever pizza.
• How long does my car last? In other words, how
  many years will my car help my business to
  generate income?
• It lasts 15 years. After 15 years, my car will
  die. Its useful life is 15 years.
• We recorded 15000, the original cost in Balance
  Sheet. (I paid 15000 2 year old, used Honda
  Civic on January 1 2013)

8
Amortization

• The car example we used
• SLMD 15000 - 0 1000 per year 15 years
• This means that my cars value will decrease by
  1000 every year.
• (Assuming that we bought the car on January 1,
  2013) Adjusting Entry we should make on December
  31 is
• Amortization Expense 1000
• Accumulated Amortization Auto 1000
• To record annual depreciation

9
Amortization

• What if Mr. Park purchased this car on November
  1, 2013? How much should he depreciate on
  December 31, 2013?
• 1000 /12 months 2 months 166
• December 31
• Amortization Expense 166
• Accumulated Amortization Auto 166
• To record amortization of auto

10
Amortization

• The balance in the Accumulated Amortization
  account will increase by 83 every month or 1000
  every year.
• Statement Presentation on Dec 31 2013
• Auto 15000
• Less Accumulated amort auto (166)
• Net Book Value 14834
• The difference between the cost and its
  accumulated amortization is called the net book
  value of that asset.

11
Accrued Salaries (Accrued Expense category)

• Sometimes salaries and commissions are paid after
  the work has been performed.
• For example Pioneer Adverstising employees began
  work on December 13. They were last paid on
  December 24. Their next payment will occur on
  January 7.
• At December 31, the salaries for the last 5
  working days in December represent an accrued
  expense and a liability to Pioneer Advertising.

12
Accrued Salaries (Accrued Expense category)

• At December 31, they must make an adjusting
  entry (4 employees 5 days 100 per day
  2000)
• Dec 31
• Salaries Expense 2000
• Salaries Payable 2000
• To record accrued salaries

13
Accrued Salaries (Accrued Expense category)

• Pioneer Advertising pays salaries every two
  weeks.
• On January 7, 2014 as they pay their salaries,
  they will make the following journal entry
• Jan 7
• Salaries Payable 2000
• Salaries Expense 2000
• Cash 4000
• To record January 7 payroll

14
Accrued Revenue

• Some Revenues are earned but not yet received in
  cash or recorded at the statement date.
• Accrued revenues may accumulate (or accrue) with
  the passage of time, as happens with interest
  revenue and rent revenue.
• An adjusting entry is required for two purposes
  to record the accurate revenue and to record
  increase in AR or NR.

15
Accrued Revenue

• BMOs perspective Park Accounting borrowed
  50,000 at 5 interest on September 1, 2014 which
  is due August 31, 2015. What kind of JE is made
  on September 1, 2014?
• Sept 1
• Loan Receivable 50,000
• Bank 50,000

16
Accrued Revenue

• Adjusting Entry that BMO has to make on December
  31, 2014?
• (5 50000 4 months / 12 months 833)
• Dec 31, 2014
• Interest Receivable 833
• Interest Revenue 833
• Adjusting Entry for accrued interest Revenue
  Loan 5987

17
Accrued Revenue

• JE on August 31 2015?
• Aug 31
• Cash 52500
• Loan Receivable 50000
• Interest Receivable 833
• Interest Revenue 1667

18
The Adjusted Trial Balance and FS

• Adjusted Trial Balance After all adjusting
  entries are posted, another (or updated) trial
  balance is prepared from the general ledger
  accounts.
• Basic procedure of making ATB is same as Trial
  Balance.
• An adjusted trial balance proves that total debit
  balances and the total credit balances in the
  ledger are equal after all adjustments have been
  made.
• Show Page 125 We can make BS, IS, SOE from
  Adjusted Trial Balance.

19
Classwork / Homework

• P138 E3-5, E3-8
• P142 P3-6A