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    The Adjusting Process

    Accounting can be done on either a cash or accrual basis. A cash-basis means transactions are recorded when cash actually changes hands. An accrual basis means that transactions are recorded as they occur, even if no cash is received or paid out. Company's use an accrual basis for accounting because it gives us a better current snapshot of a firm's financial picture. For example, if a firm makes a sale on account, we record the accounts receivable as an asset on the balance sheet and the sale as revenue. If we waited until cash actually changed hands to record the transaction, we would be understating assets and sales in the meantime.

    However, because we use an accrual basis, some accounts need to be reconciled at the end of the period. These accounting adjustments fall into three basic categories: deferrals, depreciation and accruals. At the end of the period, we make these adjusting entries in the general journal, post these entries to the ledger and then prepare an adjusted trial balance. We often use a worksheet for the preparation of the adjusted trial balance. The adjusted trial balance is then used to prepare the income statement, the statement of retained earnings and the balance sheet.

    (1) Deferrals: Unearned Revenue and Prepaid Expenses

    A deferral is an adjustments for which the business paid or received cash in advance. For example, a company typical purchases office supplies over the period. These are kept on the balance sheet as an asset. At the end of the period, we determine how how much supplies we have left. The decrease in supplies is then recorded as an office supplies expense. Deferrals include, for example, unearned revenue, cost of goods sold (under a periodic inventory system) office supplies, prepaid rent, and prepaid insurance. These adjusting entries may look like this:


    (2) Depreciation 

    When we buy a capital asset, an asset that will last a long time, we do not expense it right away. We expense a portion of the asset every year we use it over its useful life. We call the portion of the asset that we expense depreciation, and we calculate the amount of depreciation for the period at the end of the period. We use a contra asset account called accumulated depreciation, and an expense account called depreciation expense to record depreciation.  The amount of the capital asset less its accumulated depreciation is called that asset's carrying amount; this is the book value of the asset, or the net amount that the asset is still worth based on its historical cost. 


    (3) Accruals: Accrued Revenue and Accrued Expenses

    Over time, businesses accrue revenues and expenses that have yet to be received or paid. For example, your phone company accrues revenue over the month, and sends you a bill at the end of the month. On your end, you accrue a phone expense over the month, which becomes an account payable. At the end of the period, the phone company must make an adjustments for this earned revenue, even if the bill hasn't been mailed. At the same time, even if you haven't received the invoice, you know that you've incurred some phone expense based on your contract (maybe its $100/month all inclusive). 



    We typically use a worksheet to help us prepare the trial balance from the adjusting entries. Below is an example of a worksheet. We started with the unadjusted trial balance we used before (see: Trial Balance) and added two columns for our adjusting entries. Adjusting entries (a) through (e) are the five types of entries from above. We also included entries for accrued salaries (f), building depreciation (g) and accrued taxes (h). We also added two more columns for our adjusted trial balance. We simply add the adjusting entries in the middle to columns to the balances in the first two columns to get the balances of the adjusted trial balance. 


    *Note: in our examples above, two different companies were used to show how accrued revenue for one company is an accrued expense for another. In our worksheet, we wanted to show both of these entries (since all companies accrue both revenues and expenses). To simplify things, we pretended our accrued phone expense was for ABC company as well, and included it on the worksheet. 

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    BrainMass Categories within The Adjusting Process

    Reversing Entries

    Solutions: 12

    At the beginning of each accounting period, some accountants use reversing entries to cancel out some adjusting entries from the previous period.

    BrainMass Solutions Available for Instant Download

    Identification of transactions and adjusting entries

    Divtek's Variety Store is completing the accounting process for the year just ended on December 31, 2017. The transactions during 2017 have been journalized and posted. The following data with respect to adjusting entries are available: a.Wages earned by employees during December 2017, unpaid and unrecorded at December 31, 2

    Prepare a Partial Worksheet

    The ledger of Walters Company includes the following unadjusted balances: Prepaid Insurance $3,000, Service Revenue $60,000, and Salaries and Wages Expense $25,000. Adjusting entries are required for (a) expired insurance $1,800; (b) services provided $1,100, but unbilled and uncollected; and (c) accrued salaries payable $900. E

    Journal Entries to Adjust the Accounts at the End of the Period

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    Year-End Journal Entry Adjustments

    Journal Entry Adjustments - Al Gerome's Services Example Please adjust the following entries: Data for the year-end adjustments for Al Gerome's Courier Services are as follows: 1). Insurance expired during the year ($950.00) 2). Depreciation

    Adjusting Entries Using the Aging Analysis Approach

    At the end of 2011, Geisel, Inc has a $1,000 debit balance in the Allowance for Doubtful Accounts, before adjusting entries were prepared. Credit sales for 2011 totaled $510,000. Sales returns for 2011 were $10,000. Credit Sales for 2010 were $610,000. Sales returns for 2010 were $10,000. The following aging analysis of Accoun

    Adjusting Entries and Income Statements

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    Adjusting Entries for Partner Admission

    Would you be interested in helping me with problem? Problem: The CAB Partnership, although operating profitably, has had a cash flow problem. Unable to meet its current commitments, the firm borrowed $34,000 from a bank giving a long-term note. During a recent meeting, the partners decided to obtain additional cash by admi

    Adjusting Journal Entries and Deferred Expense

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    Making adjusting entries to a company's financial accounts.

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    Maine Department Store: Create adjusting and closing entries.

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    Adjusting entries for corporate income tax expense

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    prepaid expenses, adjusting entries

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    Klein Photography Adjusting Entries

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    Adjusting and closing entries: Example

    Explain the purpose of adjusting entries. How is net income affected if adjusting entries are not made? Describe the four closing entries and explain their purpose.

    Maine Department Store: Create adjusting and closing entries.

    Create adjusting and closing entries. Maine Department Store is located near the Village Shopping Mall. At the end of the company's fiscal year on December 31, 2012, the following accounts appeared in two of its trial balances. Unadjusted Adjusted Unadjusted Adjusted Accounts Payable $79,300 $79,300 In

    Adjusting entry for earned but unpaid rent

    Since the company is not large enough to occupy the entire building it owns, it rented space to a tenant at $3000 per month, starting on November 1, 2011. The rent was paid on time on November 1, and the amount received was credited to the Rent Earned account. However, the tenant has not paid the December rent. The company has w

    Correcting Intangible Asset Account

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    Bank Reconciliation and Adjusting Entries..

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    Explain why adjusting entries are necessary

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    Adjusting Entries Cash and Non-Cash Transactions

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    Crimson Tide Music Academy: Prepare adjusting entries for year end

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    Preparation of a work sheet, financial statements, and adjusting

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    Posting Adjusting Journal Entries and Financial Statements

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    Conti Company Preparing Adjusting Entries

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