ACCT1101 Chap.8 End of Period Adjusting Entries
End of Period Adjusting Entries
Under accrual accounting there is regularly a gap between when income or an expense is recognised and when cash moves. Adjusting entries are the balance date pass that closes that gap, putting each income and each expense into the period it belongs to and lining a cost up against the revenue it helped produce.
Without them the statements balance but do not tell the truth.
The course names five kinds of adjustment, and each one moves a fixed pair of accounts. Income earned but not received, or accrued revenue, raises a receivable and raises income; when the cash arrives in the following period a second entry converts the receivable into cash and no income is recognised twice.
Expenses incurred but not yet paid, or accrued expenses, raise an expense and raise a liability such as wages payable, and payment later clears the liability against cash. Income received in advance, or unearned revenue, begins life as cash and a liability when the money arrives, and the adjustment reduces the liability and recognises income once the goods or service have been supplied.
Prepayments begin as cash out and an asset, and the adjustment reduces the asset and recognises the expense as the benefit is consumed. Depreciation puts a figure on how much of a long lived asset's remaining usefulness went during the period.
Depreciation introduces the idea of a contra asset.
Rather than reducing the equipment account directly, the entry raises depreciation expense and raises accumulated depreciation, an account that offsets the asset it relates to. The asset's original cost stays visible and the accumulated total sits beside it, so a reader can see both what was paid and how much has been used up. The same device reappears in the next topic for doubtful debts.
What this chapter covers
- 01
Why adjustments are needed at balance date at all
- 02
Accrued revenue and the follow up entry when cash arrives
- 03
Accrued expenses and clearing the liability on payment
- 04
Unearned revenue released as the obligation is discharged
- 05
Prepayments released as the benefit is consumed
- 06
Depreciation as an adjustment rather than a valuation
- 07
Contra assets and why cost stays on the face of the statement
- 08
The self check: no adjusting entry should touch cash
Five adjustments at one balance date, one of each kind
- +1Depreciation: three months at $410 is $1,230. Depreciation expense rises $1,230 and accumulated depreciation, a contra asset, rises $1,230. The equipment account itself is not touched.
- +1Boarding fees: cash came first, so this is unearned revenue being released. Two of the six months have elapsed by 30 June, so $5,400 times two sixths gives $1,800 of income, and the liability falls to $3,600.
- +1Accrued interest: the cost has been incurred and not paid, so interest expense rises $780 and interest payable rises $780. No cash has moved and none should.
- +1Supplies: what is gone is what was used. Opening $3,900 less closing $1,240 gives supplies expense of $2,660, with the supplies asset reduced to $1,240. The count, not the purchase record, sets the expense.
- +1Accrued revenue: the consultations were performed, so income of $2,150 is earned in June with a matching receivable. The July invoice date is irrelevant to recognition.
- +1Net the five. Income rises by $1,800 plus $2,150, or $3,950. Expenses rise by $1,230 plus $780 plus $2,660, or $4,670. Profit therefore falls by $720, and not one of the five entries involved cash.
Key terms
- Adjusting entry
- An entry made at the end of a period to recognise income or an expense in the correct period, pairing one profit statement account with one balance sheet account.
- Accrued revenue
- Income earned but not yet received, recognised with a matching receivable at balance date.
- Accrued expense
- A cost incurred but not yet paid, recognised with a matching payable at balance date.
- Contra asset
- An account that offsets and reduces a related asset, such as accumulated depreciation sitting against equipment.
- Accumulated depreciation
- The running total of all depreciation expense recognised against an asset since it was acquired.
- Depreciation expense
- The amount of a non current asset's service potential recognised as used up in the current period.
End of Period Adjusting Entries FAQ
Why use a contra account instead of just reducing the asset?
Because two facts are useful and one account can only carry one of them. Keeping the original cost intact and building the accumulated total beside it lets a reader see both what the asset cost and how much of its life has been consumed, which together indicate how soon it may need replacing. Netting them into a single figure throws that away.
Should an adjusting entry ever include cash?
No, and that makes a reliable self check. Adjustments redistribute amounts between periods; the cash they relate to moved earlier or will move later. If cash has appeared in your adjustment, the most likely explanation is that you have recorded the original transaction a second time rather than adjusted it.
How do I know how much of a prepayment or an unearned amount to release?
Read what was promised and count how much of it has been delivered by balance date. If the promise is in months, release by months; if it is in lessons, visits or deliveries, release by those. Questions frequently supply both a period and a count of events, and the unit the promise was written in is the one that governs.
Exam move
Turn the five adjustment types into five cards, each carrying the pair of accounts and the direction of each. Shuffle them and deal yourself scenarios until naming the pair takes no thought. The arithmetic in these questions is small; the marks sit in choosing the right pair and the right direction.
Then test yourself on the second entry, which is the part most revision skips.
For an accrual, what happens next period when the cash finally moves? Being able to write both halves proves you understand that the adjustment shifted timing rather than creating something new, and questions do ask for the follow up.
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