ACCT5930 Chap.4 Adjusting Entries and Financial Reports
Adjusting Entries and Financial Reports
Adjusting entries update the records at the end of a reporting period so assets, liabilities, income and expenses reflect the correct period and amount. Deferrals allocate earlier cash events: prepaid assets become expenses as benefits are used, while unearned revenue becomes income as performance occurs.
Accruals recognise later cash events that already belong to the period: unpaid expenses create liabilities and unbilled earned revenue creates receivables. Depreciation allocates the depreciable amount of a non-current asset while accumulated depreciation preserves the original cost and reports the total allocation to date.
Adjustments normally connect one income-statement account with one balance-sheet account and do not move cash at period end.
What this chapter covers
- 01
Prepaid assets are allocated to expense as their benefits expire
- 02
Unearned revenue liabilities reduce as promised performance is delivered
- 03
Accrued expenses recognise consumption and unpaid obligations
- 04
Accrued revenue recognises completed performance and a right to collect
- 05
Straight-line depreciation allocates depreciable amount across useful life
- 06
Accumulated depreciation is a contra asset rather than a liability
- 07
The adjusted trial balance supplies current balances for statement preparation
- 08
Every adjustment must preserve the accounting equation and debit-credit equality
Worked example · free
Prepare three period-end adjustments and reconcile profit
- +1Accrue wages: debit Wages Expense $5,600 and credit Wages Payable $5,600.
- +1Monthly insurance is $21,600 divided by 12 = $1,800; three months used equals $5,400 expense.
- +1Record insurance: debit Insurance Expense $5,400 and credit Prepaid Insurance $5,400.
- +1Annual depreciation is ($92,000 minus $12,000) divided by 8 = $10,000.
- +1Total expense increase is $5,600 + $5,400 + $10,000 = $21,000, reducing profit by that amount before tax.
Key terms
- Adjusting Entry
- A period-end internal entry that updates accounts for the correct recognition period and amount.
- Prepaid Asset
- A payment recorded as an asset until the related future benefit is consumed.
- Accrued Expense
- An expense already incurred that creates an unpaid liability at the reporting date.
- Accrued Revenue
- Income already earned that creates a receivable before billing or collection.
- Depreciation Expense
- The current period allocation of a depreciable asset's cost less residual value.
- Adjusted Trial Balance
- A trial balance prepared after posting period-end adjustments and before preparing final statements.
Adjusting Entries and Financial Reports FAQ
Why do adjusting entries usually avoid Cash?
The cash movement occurred earlier for a deferral or will occur later for an accrual. The period-end adjustment recognises use, performance, a receivable or an obligation without creating a second cash event.
How is prepaid insurance different from insurance expense?
Prepaid insurance is the unexpired future benefit reported as an asset. Insurance expense is the portion consumed during the current period. Each adjustment transfers the expired amount from the asset to expense.
Why credit accumulated depreciation instead of the asset?
The contra account preserves the asset's original cost while separately accumulating allocations to date. Presenting cost less accumulated depreciation gives carrying amount and makes the estimate history visible.
What is the best check for an adjusting entry?
Explain the period effect in words, verify that one statement-of-performance account and one balance-sheet account change, then test equal debits and credits and the accounting equation. The pattern supports analysis but does not replace it.
Exam move
Sort adjustment stems into four families before recording anything: prepaid asset used, unearned revenue earned, expense incurred but unpaid, and revenue earned but unbilled. Add depreciation as an allocation case. For each family, practise the statement effect and journal direction together. Build an unadjusted-to-adjusted ledger bridge and show the ending asset or liability, not merely the entry.
Finish by tracing the changed expense or revenue into profit and retained profits so the reports remain connected. Use a period-end grid with columns for the unadjusted balance, information discovered, required ending balance, adjustment and adjusted balance. This prevents the common mistake of recording the required ending allowance or prepaid amount as though it were the adjustment itself.
Pair every calculation with a timing sentence: a benefit was consumed, performance was delivered, an obligation arose, or a right to collect was earned. Then identify which balance-sheet account carries the timing difference. Mix stems that provide total contract cost, monthly amount, elapsed months and remaining months so you can derive rather than guess the relevant fraction.
After posting, prepare a compact adjusted trial balance and trace each changed revenue or expense through profit and retained profits. A complete solution must preserve debit-credit equality, the accounting equation and the reporting-period boundary simultaneously. Reverse one adjustment on the next-period opening date and explain why cash still remains untouched.
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