Adjusting Journal Entries

All adjusting entries (other than error corrections) will always involve at
least one account on the balance sheet and at least one account on the
income statement.
I. Deferral Adjustments
A deferral involves a past exchange of cash that has initially been
recorded on the balance sheet rather than on the income statement. The
name deferral comes about because the recording on the income
statement is deferred (postponed) to a later time.
A. Deferred Expenses
A deferred expense is initially recorded on the balance sheet as an asset
than being immediately expensed. An adjusting entry becomes
necessary as the asset is consumed and becomes an expense.
1. Illustration for a short-term asset
> Past exchange of cash
Asset XXX
Cash XXX
> Adjusting entry necessary as the asset is consumed
Expense XXX Income statement!
Asset XXX "alance sheet!
Example#
$he supplies account currently sho%s a &'(( )alance. A count of the
supplies determines that only &*+( remains.
,upplies Expense +(
,upplies +(
*. Illustration for a long-term asset
$he adjusting entry for long-term assets differs in that instead of
reducing the asset directly- a contra account is used that is
su)tracted from the asset on the )alance sheet.
> Past exchange of cash
Asset XXX
Cash XXX
> Adjusting entry necessary as the asset is consumed
.epreciation Expense XXX Income statement!
Accumulated .epreciation XXX "alance sheet!
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Example:
Current year depreciation is $2,500.
Depreciation Expense 2,500
Accumulated Depreciation 2,500
Note: Accumulated depreciation is a contra account that is
subtracted rom the asset on the balance sheet. !t
has a normal credit balance.
B. Deferred Revenues
A revenue cannot be recorded until the income has been earned. Cash
received in advance of income realization should be initially recorded in
a liability account such as "Unearned Revenue". An adjusting entry later
becomes necessary as the revenue is earned. The liability should be
reduced and the revenue recorded.
" #ast exchan$e o cash
Cash %%%
&nearned 'e(enue %%%
" Ad)ustin$ entry necessary as re(enue is earned
&nearned 'e(enue %%% *+alance sheet,
'e(enue %%% *!ncome statement,
Example: Adams C#A pre(iously recei(ed $500 or boo--eepin$ ser(ices
in ad(ance o pro(idin$ the ser(ices. Adams has no. earned
$/00 o the money.
&nearned 'e(enue /00
'e(enue /00
II. Accrual Adjustments
An accrual involves a future exchange of cash that must be recorded on
the income statement before cash is exchanged.
A. Accrued Expenses
" Ad)ustin$ entry
Expense %%% *!ncome statement,
0iability %%% *+alance sheet,
" 1uture exchan$e o cash
0iability %%%
Cash %%%
Example:
!nterest accrued on a loan at the end o the month is $550.
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Interest Expense 550
Interest Payable 550
B. Accrued Revenues
> Adjusting entry
Receivable XXX (Balance sheet
Revenue XXX (Inc!"e state"ent
> #uture exchange !$ cash
%ash XXX
Receivable XXX
Exa"ple&
Per$!r"ed '(00 !$ services $!r a cust!"er !n acc!unt)
Acc!unts Receivable (00
Revenue (00
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