Chapter 3! Chapter 3! The Adjusting EntryThe Adjusting Entry

Unit 1 Test (cover chapter 1 to 4) will occur on

Friday September 26!

There are many different types of adjusting entries accountants make at the end of the fiscal period:Prepaid Expense - AmortizationPrepaid InsuranceAccrued RevenueSupplies adjustment (Accrued

Expense)Unearned RevenueLate-Arriving Purchase Invoice

(Accrued Expenses)

Adjusting EntryAdjusting Entry

The Nature of Depreciation There are two categories for assets:

1. Short Term Assets: These assets last only short term: E.g. Cash and AR

2. 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”

Adjusting for DepreciationAdjusting for 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.

DepreciationDepreciation

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.

DepreciationDepreciation

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

Straight Line MethodStraight Line Method

Let’s 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)

Adjusting for DepreciationAdjusting for Depreciation

The car example we used: SLMD = 15000 - 0 = 1000 per year

15 years This means that my car’s 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$1000Accumulated Amortization – Auto $1000

To record annual depreciation

AmortizationAmortization

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 = 166December 31Amortization Expense$166

Accumulated Amortization – Auto$166

To record amortization of auto

AmortizationAmortization

The balance in the Accumulated Amortization account will increase by $83 every month or $1000 every year.

Statement Presentation on Dec 31 2013:Auto $15000Less: 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.

AmortizationAmortization

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.

Accrued Salaries Accrued Salaries (Accrued Expense category)(Accrued Expense category)

At December 31, they must make an adjusting entry: (4 employees * 5 days *$100 per day = 2000)

Dec 31Salaries Expense 2000

Salaries Payable 2000To record accrued salaries

Accrued Salaries (Accrued Expense category)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 7Salaries Payable $2000Salaries Expense $2000

Cash $4000To record January 7 payroll

Accrued Salaries (Accrued Expense category)Accrued Salaries (Accrued Expense category)

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.

Accrued RevenueAccrued Revenue

BMO’s 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 1Loan Receivable $50,000

Bank $50,000

Accrued RevenueAccrued Revenue

Adjusting Entry that BMO has to make on December 31, 2014?

(5% * 50000 * 4 months / 12 months = 833)Dec 31, 2014Interest Receivable $833

Interest Revenue $833Adjusting Entry for accrued interest Revenue :

Loan #5987

Accrued RevenueAccrued Revenue

JE on August 31 2015?Aug 31Cash $52500

Loan Receivable $50000Interest Receivable $833Interest Revenue $1667

Accrued RevenueAccrued Revenue

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.

The Adjusted Trial Balance and FSThe Adjusted Trial Balance and FS

P138 E3-5, E3-8 P142 P3-6A

Classwork / HomeworkClasswork / Homework