FDNACCT 07 · Adjusting Entries

Recognize unrecorded earned income/incurred expenses and allocate benefits or obligations to the right period.

Accrual accounting records income when earned and expenses when incurred, even when cash moves in another period. Adjustments bring incomplete balances into line with that rule and separate used benefits from amounts belonging to future periods; an equal trial balance alone does not prove the period is correct.

At the end of the accounting period before statements are finalized.

Period-end is the point at which earned, incurred, used and still-unearned amounts can be measured for that reporting period. Record and post the adjustments before finalizing statements, so profit, assets and liabilities all use the same reporting date.

Debit Expense; credit Expense payable.

The business has consumed a service or incurred a cost, so debit the expense to recognize it in this period. Because payment is still owed, credit a payable rather than Cash; cash is credited only when the obligation is actually paid.

Debit Revenue receivable; credit Revenue.

The service has been performed, so credit Revenue even though collection has not happened. Debit a receivable because the business now has a claim to payment; Cash would wrongly imply it has already collected.

The used or expired portion.

The initial payment was recorded as an asset representing future benefits. As those benefits expire, debit Expense and credit the prepaid asset for the used portion; the unused portion remains an asset for later periods.

The earned portion.

The initial receipt was credited to a liability because the business still owed goods or services. Delivery satisfies that obligation, so debit Unearned revenue and credit Revenue for the earned portion; the undelivered portion remains a liability.

Available supplies − Unused supplies.

The available supplies balance contains both consumed and unconsumed items. Subtract the physical unused count to isolate consumption, which belongs in expense; treating the unused figure as expense would reverse their roles.

(Cost − Residual value) / Useful life in years.

Straight-line assumes equal consumption over time. Subtract residual value from cost because that amount is expected to remain at the end, then divide the depreciable amount by useful-life years to get one full year’s expense.

Cost − Residual value.

Depreciable amount is the portion of cost allocated over the asset’s use. Residual value is excluded because it is the expected amount left at the end, so depreciating the entire cost would allocate more than the asset is expected to consume.

Total depreciation recorded for the asset to date.

Each period’s depreciation expense is added to a cumulative contra-asset account. Accumulated depreciation therefore includes earlier periods as well as the current one, while depreciation expense describes only the current period’s allocation.

Cost − Accumulated depreciation.

The asset’s cost is reduced by total cost already allocated through accumulated depreciation. This gives its unallocated accounting amount; it is not necessarily the price obtainable on sale, and residual value is not deducted a second time.

Credit, because it is a contra-asset.

An asset normally has a debit balance. Accumulated depreciation offsets that asset without deleting its historical cost, so it carries a credit balance; it is a valuation deduction, not an amount owed to a creditor.

No. The course treats land as having an indefinite useful life.

Land has an indefinite useful life in these course cases, so there is no finite period over which to allocate its cost as depreciation. Buildings and equipment can wear out over a measurable life; their depreciation treatment is different.

Ending AR × Estimated uncollectible rate.

The percentage-of-receivables approach targets the total amount estimated uncollectible at the reporting date. Multiply ending AR by the loss rate to obtain the ending allowance; an existing allowance is used afterward to find the extra adjustment needed.

Required ending allowance − Existing credit allowance balance.

The existing credit allowance already contributes toward the required ending valuation deduction. Record only the gap between the required target and that existing credit; recording the entire target as expense would count the old allowance again.

Accounts receivable − Required ending allowance.

Receivables are shown at the amount expected to be collected rather than the gross amount billed. Deduct the complete ending allowance, not merely this period’s doubtful-accounts expense, because the ending allowance includes all relevant prior credits.

Groups receivables by age and applies a separate loss estimate to each group.

Older overdue receivables can carry different collection risks from current balances. Aging estimates each category with its own rate, then totals the categories; applying one group’s percentage to all receivables would ignore that risk pattern.

Credit, as a contra-asset against receivables.

Accounts receivable normally has a debit balance. The allowance reduces the receivables’ reported net value without removing specific customer balances, so it is a credit contra-asset; it does not represent a liability or a cash reserve.

Debit Merchandise inventory; credit Income summary.

Unsold goods remain an asset and must be excluded from the cost of goods sold. In the course’s periodic procedure, debit Merchandise inventory and credit Income summary for the physical ending inventory. The credit reduces the costs accumulated in Income summary; crediting Cash would incorrectly invent a new payment.

Profit is overstated; liabilities are understated.

An omitted accrued expense leaves both the incurred cost and the unpaid obligation unrecorded. Expense is too low, so revenue minus expense produces too much profit, while the missing payable makes liabilities too low; equity is also too high.

Profit and assets are understated.

An omitted accrual leaves earned revenue and the related right to collect unrecorded. Both profit and receivables are therefore too low; waiting for cash would put the revenue in the wrong period under accrual accounting.

Expense is understated; assets, profit, and equity are overstated.

Used insurance or supplies no longer provide a future benefit, but omitting the adjustment leaves them in the asset. Expense is too low and the asset too high; lower reported expense also overstates profit and the equity increased by that profit.

Liabilities are overstated; revenue, profit, and equity are understated.

After delivery, that portion of the advance no longer represents an obligation, and earned revenue should be recognized. Without adjustment, the liability remains too high while revenue, profit and resulting equity remain too low; cash is unchanged.

Expense is understated; net assets, profit, and equity are overstated.

Depreciation recognizes consumption of an asset’s depreciable cost through expense and a contra-asset credit. Omitting it leaves expense too low and net assets too high; the unrecognized expense also overstates profit and equity, without changing cash.

Inventory is understated, cost of sales overstated, and profit/equity understated.

Ending inventory is the cost of goods still unsold, so it must remain an asset and be deducted from goods available when finding cost of sales. Omitting it understates inventory and overstates cost of sales; excessive cost of sales understates profit and equity.