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3.5: Classes and types of adjusting entries

  • Page ID
    19993
  • 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.