The Adjusting Process

Question 1

2 broad categories of adjusting entries

Answer 1

Prepaid or accrued

Question 2

prepaid adjustments

Answer 2

cash transaction occurs before the related expense/revenue is recorded

Question 3

Accrued

Answer 3

record the expense or revenue before the related cash settlement

Question 4

Types of Adjusting Entries

Answer 4

Prepaid expenses
Depreciation of Non-Current Assets
Accrued Expenses
Accrued Revenues
Unearned Revenues

Question 5

Prepaid expenses

Answer 5

advance payments of expenses

Question 6

How do you adjust prepaid expenses

Answer 6

Dr expense;Cr Asset
(Initially pay cash & record asset:
Dr Prepaid expenses
Cr Cash at bank
Later:
Dr expenses 
Cr Prepaid expense)

Question 7

How do you adjust unearned revenues

Answer 7

Dr Liability; Cr Revenue
(Initially receive cash & record unearned revenue:
Dr cash at bank
Cr Unearned Revenue
Later:
Dr Unearned Revenue
Cr Revenue)

Question 8

How do you adjust Accrued expenses

Answer 8

Dr Expenses, Cr Liability
(Initially record expense & the related payable:
Dr expenses
Cr Payable
Later:
Dr Payable 
Cr Cash)

Question 9

How do you adjust Accrued revenues

Answer 9

Dr Asset; Cr Revenue
(Initially record revenue & related receivable:
Dr Receivable
Cr Revenue
Later:
Dr Cash at Bank
Cr Receivable)

Question 10

Adjusting entries

Answer 10

assign revenues to the period when they are earned and expense periods when they are incurred

Question 11

Accrual accounting requires

Answer 11

adjusting entires at the end of the period

Question 12

Adjusting entries: What happens to prepayments?

Answer 12

Dr prepaid asset account (that you set up to increase)

Credit expense account (to reduce)

Question 13

Prepayments

Answer 13

occur when an expense account includes an amount that relates to a later accounting period

Question 14

Accruals

Answer 14

occur when some of the expense due remains unpaid at the end of the period

Question 15

Adjusting entries: What happens to accruals?

Answer 15

Dr expense account (to increase)
Cr liability (accrued expense- that you set up)

Question 16

Revenues due & prepaid

Answer 16

if revenue is prepaid need to adjust account so that amount of revenue that’s been earned is recorded.

Question 17

Depreciation is what?

Answer 17

an expense

Question 18

what is accumulated depreciation?

Answer 18

a contra-asset use to offset depreciation expense account- in this case a non current asset

Question 19

Adjusting entries: What happens for depreciation?

Answer 19

Dr depreciation expense

Cr accumulated depreciation

Question 20

Summary of worksheets

Answer 20

1. Prep worksheet
2. adjusting entry
3. Calculate GL balances
4. Id items to show on each financial statement
5. don’t forget to calculate profit!

Question 21

Once accounts have been adjusted and put onto worksheet, what accounts are posted to the balance sheet?

Answer 21

Assets, liabilities and Owner’s Equity from adjusted trial balance are added to the balance sheet columns

Question 22

Assets, liabilities and Owner’s Equity in worksheet after being adjusted?

Answer 22

posted balance sheet columns

Question 23

Once accounts have been adjusted and put onto worksheet, what accounts are posted to the income statement columns?

Answer 23

All the income accounts (revenues)

and expense accounts

Question 24

All the income accounts (revenues)
and expense accounts
are posted to which column after being adjusted?

Answer 24

the income statement column

Question 25

How to prepare a worksheet?

Answer 25

1. Start with account balance in the ledger at beginning of period
2. Analyse & journalise the transactions as they occur
3. Post journal entries to ledger accounts
4. Calculate the unadjusted balance in each account at the end of the period.
5. Enter the trial balance on the worksheet
6. Adjust trial balance
7. Identify the items to show on each financial statement (income statement & balance sheet)
8. CALCULATE PROFIT!

Question 26

When preparing financial statements, what is prepared each month?

Answer 26

Id new transactions, 
record in journal, 
post to general ledger,
 prepare trial balance.
(prepare internal management reports if necessary)

Question 27

When preparing financial statements, what is prepared at end of financial period/year?

Answer 27

End of period adjustments,
Prepare an adjusted trial balance
Prepare financial statements.

Question 28

Do adjusting entries have to be journalised and posted to ledgers?

Answer 28

YES. Must title under the original journal entires’ Adjusting entries’, assign the Drs & Crs and then post to the ledger, before adding to worksheet

Question 29

In terms of the income statement is the loss a debit or a credit?

Answer 29

As expenses are debit accounts (and revenue a credit account), a loss is a debit.

Question 30

In the income statement if you make a profit or a loss, on which side is it recorded?

Answer 30

If you make a profit - record remaining balance on the Dr side
If you make a loss- record remaining balance on the Cr side.

Question 31

What does a balance sheet have? (what do you transfer over from adjusted trial balance)?

Answer 31

Assets, liabilities & OE

Question 32

What does an income statement have? (what do you transfer over from adjusted trial balance)?

Answer 32

Revenues and expenses (it’s the profit & loss statement)

Question 33

Why do you copy over the closing balance from the income statement across to the balance sheet?

Answer 33

because OE= Capital + revenue - expenses- drawings - dividends.
Profit is a part of OE! , so we must move it over (it’s part of the balance sheet).

OE = capital + profit!!

Question 34

Capital + revenue - expenses- drawings - dividends

Answer 34

OE!

Question 35

If we have a loss as shown by the income statement (where we record the closing balance on the credit side), when we transfer over the loss amount to the balance sheet, do we transfer it to the Dr or Cr side?

Answer 35

As profit/loss is a part of OE (which is a credit based account), a loss will be put on the DR (as it is decreasing OE)

Question 36

If we a have a profit, do we debit or credit the profit amount when transferring across to the balance sheet?

Answer 36

We credit the profit!.

Question 37

Why do we have a contra asset account?

Answer 37

contra asset is an asset account in which the balance of the account will either be a zero or a credit (negative) balance. A contra asset account offsets the balance in the respective asset account that it is paired with on the balance sheet.

Question 38

which accounts get closed at the end of the financial year?

Answer 38

temporary accounts.

Question 39

Which accounts are permanent accounts that don’t get closed?

Answer 39

Balance sheet accounts- assets, liabilities, capital