Accounting of Adjusting Journal Entries
According to matching principle, the expense must be matched against recognized revenue.
But at the end of the fiscal year, some of the accounts are recorded without any changing.
So, these accounts must be updated for matching incurred expenses against the revenue of the period.
Reasons why accounts require the doing adjusting journal entries:
- Some expenses are not recorded on the daily basis and at the end of the month the account must be updated to real (on hand) amount. Adjusting entries journal examples, the office supplies could be recorded as the expense depending on the amount on hand.
- Some revenues are received in advance but the expense for their recognized will be incurred in the future. These revenues are named deferred revenues and usually recorded on the account as unearned revenue as the liabilities. At the end of each month, the unearned revenue account is decreased by the amount of earned revenue. As a sample of accounting adjusting of the deferred revenue is the receiving annual magazine subscription.
- Some expenses are prepaid for future expenses. These expenses are called deferred and recorded as the assets. At the end of each accounting period, these accounts must be reviewed and decreased if expenses are incurred. The adjusting examples of deferred expenses are prepaid insurance, prepaid rent for the next 12 months.
- Some revenues are earned, goods or services are sent or provided to customers but the sales invoices are not paid by customers. These revenues are named accrual revenues and defined as the assets account – receivables. The samples of these expenses are earned but not received sales revenue or interest revenue recorded as accounts receivable or interest receivables.
- Some expenses are incurred but unrecorded or unpaid at the end of accounting period. The adjusting samples of the incurred expenses are earned but unpaid in the current period wages. These expenses are recognized as the liabilities at the end of accounting period as wages payable, accounts payable, tax payable.
Adjusting Journal Entries on the Real Examples
Five accounting adjusting journal entries will be considered below:
Prepaid expenses – Insurance
The expired amount of the prepaid expenses will be calculated as the monthly prepaid insurance multiply by months expired.
Insurance expense per month = Prepaid insurance/Terms of insurance
Insurance expense per month = $1,800/12 months = $150
Insurance expense in 7 months = Insurance expense per month x 7 = $150 x 7= $1,050
Depreciation
According to the straight-line depreciation method, the annual depreciation expense will be calculated as the purchase price less residual value divided by useful life.
Annual depreciation = (Purchases price- Residual value)Useful Life
Annual depreciation =$15,000- 010 years =$1,500
As the vehicle was used only 4 months in 2017, the partial depreciation will be calculated using the following formulas:
Partial Depreciation = Annual Depreciation x (Used months /12)
Partial Depreciation =$1,500 x (412)=$500
Accrued expenses – Interest
At the end of the period, the incurred but unpaid interest expense must be recorded for matching purpose.
For the 8 months of 2017, the interest expense will be calculated as the partial interest rate for 8 months multiply by a number of borrowings:
Interest expense for 8 months = $10,000 * 10%* (8months/12months) = $666.67
At the moment of full repayment, the company is going to pay the full amount of borrowings plus incurred interest at the end of 2017 plus interest expense for 7 months of 2018. Interest expense for the 2018 year will be calculated as interest expense at the end of accounting period:
Interest expense for 7 months = $10,000 * 10%* (7months/12months) = $583.33
Full repayment = $10,000+$666.67+ $583.33=$11,250
Accrued revenues
At the end of 2017, the revenue earned for 3 months must be recorded for matching principle.
Service revenue = $1,000 x 3 months =$3,000
At the end of January of 2018, the recognized revenue is decreased by the amount of recognized revenue at December 31 of 2017, of $3,000, using reverse entry.
Unearned revenues
At the December 31, the ABC Company has earned the revenue which is calculated as the monthly service revenue multiply by expired months.
Service revenue = $15,000/5months*2months = $6,000
Take a look at the final results:
Keep your accounting record accurately.
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