The Adjusting Process Flashcards
2 broad categories of adjusting entries
Prepaid or accrued
prepaid adjustments
cash transaction occurs before the related expense/revenue is recorded
Accrued
record the expense or revenue before the related cash settlement
Types of Adjusting Entries
Prepaid expenses Depreciation of Non-Current Assets Accrued Expenses Accrued Revenues Unearned Revenues
Prepaid expenses
advance payments of expenses
How do you adjust prepaid expenses
Dr expense;Cr Asset (Initially pay cash & record asset: Dr Prepaid expenses Cr Cash at bank Later: Dr expenses Cr Prepaid expense)
How do you adjust unearned revenues
Dr Liability; Cr Revenue (Initially receive cash & record unearned revenue: Dr cash at bank Cr Unearned Revenue Later: Dr Unearned Revenue Cr Revenue)
How do you adjust Accrued expenses
Dr Expenses, Cr Liability (Initially record expense & the related payable: Dr expenses Cr Payable Later: Dr Payable Cr Cash)
How do you adjust Accrued revenues
Dr Asset; Cr Revenue (Initially record revenue & related receivable: Dr Receivable Cr Revenue Later: Dr Cash at Bank Cr Receivable)
Adjusting entries
assign revenues to the period when they are earned and expense periods when they are incurred
Accrual accounting requires
adjusting entires at the end of the period
Adjusting entries: What happens to prepayments?
Dr prepaid asset account (that you set up to increase)
Credit expense account (to reduce)
Prepayments
occur when an expense account includes an amount that relates to a later accounting period
Accruals
occur when some of the expense due remains unpaid at the end of the period
Adjusting entries: What happens to accruals?
Dr expense account (to increase) Cr liability (accrued expense- that you set up)
Revenues due & prepaid
if revenue is prepaid need to adjust account so that amount of revenue that’s been earned is recorded.
Depreciation is what?
an expense
what is accumulated depreciation?
a contra-asset use to offset depreciation expense account- in this case a non current asset
Adjusting entries: What happens for depreciation?
Dr depreciation expense
Cr accumulated depreciation
Summary of worksheets
- Prep worksheet
- adjusting entry
- Calculate GL balances
- Id items to show on each financial statement
- don’t forget to calculate profit!
Once accounts have been adjusted and put onto worksheet, what accounts are posted to the balance sheet?
Assets, liabilities and Owner’s Equity from adjusted trial balance are added to the balance sheet columns
Assets, liabilities and Owner’s Equity in worksheet after being adjusted?
posted balance sheet columns
Once accounts have been adjusted and put onto worksheet, what accounts are posted to the income statement columns?
All the income accounts (revenues)
and expense accounts
All the income accounts (revenues)
and expense accounts
are posted to which column after being adjusted?
the income statement column
How to prepare a worksheet?
- Start with account balance in the ledger at beginning of period
- Analyse & journalise the transactions as they occur
- Post journal entries to ledger accounts
- Calculate the unadjusted balance in each account at the end of the period.
- Enter the trial balance on the worksheet
- Adjust trial balance
- Identify the items to show on each financial statement (income statement & balance sheet)
- CALCULATE PROFIT!
When preparing financial statements, what is prepared each month?
Id new transactions, record in journal, post to general ledger, prepare trial balance. (prepare internal management reports if necessary)
When preparing financial statements, what is prepared at end of financial period/year?
End of period adjustments,
Prepare an adjusted trial balance
Prepare financial statements.
Do adjusting entries have to be journalised and posted to ledgers?
YES. Must title under the original journal entires’ Adjusting entries’, assign the Drs & Crs and then post to the ledger, before adding to worksheet
In terms of the income statement is the loss a debit or a credit?
As expenses are debit accounts (and revenue a credit account), a loss is a debit.
In the income statement if you make a profit or a loss, on which side is it recorded?
If you make a profit - record remaining balance on the Dr side
If you make a loss- record remaining balance on the Cr side.
What does a balance sheet have? (what do you transfer over from adjusted trial balance)?
Assets, liabilities & OE
What does an income statement have? (what do you transfer over from adjusted trial balance)?
Revenues and expenses (it’s the profit & loss statement)
Why do you copy over the closing balance from the income statement across to the balance sheet?
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!!
Capital + revenue - expenses- drawings - dividends
OE!
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?
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)
If we a have a profit, do we debit or credit the profit amount when transferring across to the balance sheet?
We credit the profit!.
Why do we have a contra asset account?
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.
which accounts get closed at the end of the financial year?
temporary accounts.
Which accounts are permanent accounts that don’t get closed?
Balance sheet accounts- assets, liabilities, capital
