Adjusting Entries - Examples

1550 Words Jan 1st, 2013 7 Pages
Adjusting Entries – Examples
Let’s work with some examples. We are working with a one year accounting period that ends on 12/31/X2.
Let’s use a three step process. Step 1 – Analyze the transaction. Step 2 – Record in the journal. Step 3 – Post to the ledger.
Example 1: On 12/31/X2 (before the adjusting process), Supplies, an asset, has a balance of $2,500. Employees take a physical account of the supplies on hand. That physical count reveals that $1,200 of supplies remains.
Step 1 ‐‐ The balance of Supplies before the adjusting entry is $2,500. Subtract the amount determined during the physical count ($1,200). The result ($1,300) represents the amount of supplies that have been used up – Supplies Expense.
Assets – Supplies is
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Example 4: On 7/25/X2, a law firm and its client sign a contract and the client pays $8,400 cash. The contract states the law firm will provide monthly legal services for 12 months, beginning on 8/1/X2. A regular journal entry is needed on 7/25/X2 – debit Cash and credit Unearned Revenue for $8,400.
On 12/31/X2, an adjusting journal entry is needed to record the amount of revenue that has been earned. The entry also results in the correct balance of the liability account as of 12/31/X2. Computation: $8,400 divided by 12 months equals $700 per month. $700 times 5 months (Aug – Dec) equals $3,500. $3,500 has now been earned. This complies with the revenue recognition principle – record revenue when it is earned. The liability is reduced because the services have been provided for 5 months.
Liabilities – Unearned Revenue is decreased. Stockholders’ Equity – Legal Fees Earned is increased.
The journal entry includes a debit to Unearned Revenue and a credit to Legal Fees Earned for $3,500
When the debit of $3,500 is posted to Unearned Revenue, the ending balance will be correct ($8,400 less $3,500).
Legal Fees Earned goes to the Income Statement.
Example 5: On 12/31/X2, the accountant questions the managers and discovers that revenue of $12,500 has been earned (the services have been provided) but the clients have not yet been billed.
This is an accrual of revenue. Revenue has been earned and must be recorded
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