3.5: Classes and types of adjusting entries

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Adjusting entries fall into two broad classes: deferred (meaning to postpone or delay) items and accrued (meaning to grow or accumulate) items. Deferred items consist of adjusting entries involving data previously recorded in accounts. These entries involve the transfer of data already recorded in asset and liability accounts to expense and revenue accounts, respectively. Accrued itemsconsist of adjusting entries relating to activity on which no data have been previously recorded in the accounts. These entries involve the initial, or first, recording of assets and liabilities and the related revenues and expenses (see Exhibit 16).

Deferred items consist of two types of adjusting entries: asset/expense adjustments and liability/revenue adjustments. For example, prepaid insurance and prepaid rent are assets until they are used up; then they become expenses. Also, unearned revenue is a liability until the company renders the service; then the unearned revenue becomes earned revenue.

Accrued items consist of two types of adjusting entries: asset/revenue adjustments and liability/expense adjustments. For example, assume a company performs a service for a customer but has not yet billed the customer. The accountant records this transaction as an asset in the form of a receivable and as revenue because the company has earned a revenue. Also, assume a company owes its employees salaries not yet paid. The accountant records this transaction as a liability and an expense because the company has incurred an expense.

 MICROTRAIN COMPANY Trial Balance 2010 December 31 Acct. No. Account Title Debits Credits 100 Cash $8,250 103 Accounts Receivable 5,200 107 Supplies on Hand 1,400 108 Prepaid Insurance 2,400 112 Prepaid Rent 1,200 150 Trucks 40,000 200 Accounts Payable$ 730 216 Unearned Service Fees 4,500 300 Capital Stock 50,000 320 Dividends 3,000 400 Service Revenue 10,700 505 Advertising Expense 50 506 Gas and Oil Expense 680 507 Salaries Expense 3,600 511 Utilities Expense 150 $65,930$65,930

Exhibit 17: Trial balance

In this chapter, we illustrate each of the four types of adjusting entries: asset/expense, liability/revenue, asset/revenue, and liability/expense. Look at Exhibit 17, the trial balance of the MicroTrain Company at 2010 December 31. As you can see, MicroTrain must adjust several accounts before it can prepare accurate financial statements. The adjustments for these accounts involve data already recorded in the company’s accounts.

In making adjustments for MicroTrain Company, we must add several accounts to the company’s chart of accounts shown in Chapter 2. These new accounts are:

 Type of Account Asset Contra asset* Liability Revenue Expenses Account Title Interest Receivable Accumulated Deprecation—Trucks Salaries Payable Interest Revenue Insurance Expense Rent Expense Supplies Expense Depreciation Expense—Trucks Description The amount of interest earned but not yet received. The total depreciation expense taken on trucks since the acquisition date. The balance of this account is deducted from that of Trucks on the balance sheet. The amount of salaries earned by employees but not yet paid by the company. The amount of interest earned in the current period. The cost of insurance incurred in the current period. The cost of rent incurred in the current period. The cost of supplies used in the current period. The portion of the cost of the trucks assigned to expense during the current period.

Now you are ready to follow as MicroTrain Company makes its adjustments for deferred items. If you find the process confusing, review the beginning of this chapter so you clearly understand the purpose of adjusting entries.

An accounting perspective:

Uses of technology

It is difficult to name a publicly owned company that does not provide an extensive website. In fact, websites have become an important link between companies and their investors. Most websites will have a link titled investor relations or merely company information which provides a wealth of financial information ranging from audited financial statements to charts of the company's stock prices. As an example, check out the Gap, Incs website at:

http://www.gapinc.com

Browse the Gap site and see for yourself the comprehensiveness of the financial information available there.

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