In: Accounting
learn about Adjusting Entries. These are internal transactions that are required to make sure that all of the revenue and expenses are accurately recorded in the accounting period. They're also important so that our amounts recorded in the Balance Sheet are correct.
There are four categories of Adjusting Entries: Prepaid Expenses (including Depreciation), Unearned Revenue, Accrued Expenses and Accrued Revenue. Within each of these categories, there are a lot of examples that we could show.
For this graded discussion, please choose one category of Adjusting Entries. Within that category, choose one example of an adjusting entry that you might make in a company.
---Please describe why this adjusting entry needs to be made.
---Please describe the accounts that are affected by making the adjusting entry.
----Please describe the impact this adjusting entry has on the Income Statement and the Balance Sheet.
---Which adjusting entry do you think will be most prone to error? It does not have to be the example you chose.
Adjusting entries are entries to be made at the year end based on transactions occurred | ||||||||||||||||||
Four categories of Adjusting entries | ||||||||||||||||||
1 | Prepaid Expenses | |||||||||||||||||
When certain expenses are prepaid for a particular period, that time an asset is created which is known as prepaid expenses and is reflected under current assets | ||||||||||||||||||
2 | Unearned Revenue | |||||||||||||||||
When a customers provides advance for services or sales to be performed in future than a liability is created for the service known as unearned revenue and is shown under current liabilities | ||||||||||||||||||
3 | Accrued Expenses | |||||||||||||||||
When a particular expenses has been incurred by a company and the expenses are not paid, than a liability is created known as accrued expenses and is shown under current liability | ||||||||||||||||||
4 | Accrued Revenue | |||||||||||||||||
When a revenue has become due during the period but not yet received it is known as accrued revenue and is shown under current assets | ||||||||||||||||||
Let us understand prepaid expenses more in detail | ||||||||||||||||||
Prepaid expenses | ||||||||||||||||||
Lets assume the company has paid insurance premium for 24 months which amounts to $ 5000 during the year | ||||||||||||||||||
This adjusting entry is required because the company has incurred insurance expense for current year and therefore it should be reduced from the income statement, otherwise the income would be overstated. Also since the expense has been incurred in current year partly it should not be now shown as current assets as otherwise the assets would be overstated | ||||||||||||||||||
The journal entry for the above transaction would be | ||||||||||||||||||
At the time when insurance is paid | ||||||||||||||||||
Prepaid Insurance | $5,000 | |||||||||||||||||
To Cash | $5,000 | |||||||||||||||||
Prepaid Insurance - Will be shown as current assets | ||||||||||||||||||
At the year end adjusting entry for insurance expired | ||||||||||||||||||
Insurance Expense | $2,500 | |||||||||||||||||
To Prepaid Insurance | $2,500 | |||||||||||||||||
(5000/2) | ||||||||||||||||||
Insurance expense - will be shown in the profit and loss | ||||||||||||||||||
Prepaid insurance - will be reduced from $ 5000 to $ 2500 | ||||||||||||||||||
The accounts impacted would be insurance expense and prepaid insurance expenses | ||||||||||||||||||
With this entry the income would be reduce to the extend of the insurance expired that is $ 2500 | ||||||||||||||||||
With this entry the assets would be reduced to the extend of the insurance expired that is $ 2500 | ||||||||||||||||||
Unearned Revenue entry could be prone to error where the company may miss to recognise revenue in the income statement if the services for which advance has been received is provided partly or completely |