Chapter 3 Accounting- Adjusting Entries

Prepaid (Deferred) Expenses

Assests paid for in advance of recieving their benefits

Prepaid insurance has $5,000 debit balance to start year. A review of insurance policies shows that $1,000 of unexpired insurance remains at year-end.

Dec.31st- insurance expense- Debit-4,000 Prepaid insurance- Credit- 4,000 Income statement: Revenue Debit Expense Balance Sheet: Credit Asset Liability

Four types of Adjustments for transactions that extend over more than one period

Prepaid Expenses, Unearned Revenues, Accrued expenses, Accrued Revenues

Examples of Prepaid Expenses:

Prepaid Insurance, Prepaid Rent, Supplies

Prepaid Rent... On October 1 of the current year, the company prepaid $12,000 for one year of rent for facilities being occupied from that day foward. The company debited Prepaid rent and credited Cash for 12,000. December 31 year-end statements must be prepared.

Step 1- Determine what the current account balance equals- 12,000 Step 2: Determine what the current account balance should equal- 9,000 (.75?) Step 3: Record an adjusting entry to get from step 1 to step 2 Rent Expense, debit-3,000 Prepaid Rent, credit-3,000 Income Statement- (Revenue Debit Expense) Balance Sheet- (Credit Asset Liability)

Adjustments made using a 3-step process:

Step 1- Determine what the current amount balance equals Step 2- Determine what the current account balance should equal Step 3- Record an adjusting entry to get from step 1 to step 2

Accumulated Depreciation. The Company has only one fixed asset (equipment) that it purchased at the start of this year. That asset had cost $38,000, had an estimated life of 10 years, and is expected to be valued at $8,000 at the end of the 10-year life.

Step 1: Determine what the current account balance equals. -$0 Step 2: Determine what the current account balance should equal. -3,000 (38,000-8,000/10 years) Step 3 Record an adjusting entry to get from step 1 to step 2. Dec.31- Depreciation Expense, Debit- 3,000 Accumulated Depreciation, Credit -3000 Income Statement- Revenue Debit Expense Balance Sheet- Credit Asset Liability

Supplies: the supplies account has a 1,000 debit balnce to start the year. Supplies of 2,000 were purchased during the current year and debited to the Supplies account. A December 31 physical count shows $500 of supplies remaining.

Step 1: Determine what the current amount balance equals: 3,000 Step 2: Determine what the current account balance should equal: 500 Step 3: record an adjusting entry to get from step 1 to step 2 Supplies Expense- Date:Dec.31st: Debit- 2,500 Supplies: Credit- 2500 Income Statement: Revenue Debit Expense Balance Sheet: Credit Asset Liability