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Creating Adjusting Entries

Creating Adjusting Entries

Author: Evan McLaughlin

In this lesson, the student will learn how to make adjusting entries.

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"Creating Adjusting Entries"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons,

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Hey, everyone, and welcome to our video today on creating adjusting entries. So what's today's video about? We're going to do a quick, adjusting entries review, the what, when, and where, and then we're going to look at examples of different types of adjusting entries. Today is going to be all about examples, examples, examples.

So let's do that quick review of adjusting entries. That's an entry that is made at the end of an accounting period to report any unrecognized income or expenses for that period. What are they used for? To correct values, or matching principles, or revenue and expense recognition principles, match those with the correct periods. And they're also used to correct errors or omissions that we made during the journalizing and posting process.

When are they entered, the beginning or the end of the period? Not the beginning, they're entered at the end of our period. Now, where are they entered? Our adjusting entries are entered in the general journal and then posted to the general ledger.

Now, we're going to look at the general journal entries today. And we're also going to look at the trial balance worksheet, and how these adjusting entries fit into that. So let's dive right into those examples. Unearned revenue, our first transaction, reporting at 12/31/12. Again, for all of these examples today, we're going to be reporting at the end of the year, so making our adjustments at the end of the year.

Initial transaction, we received $12,000 of cash on July 1st for monthly services through June of 2013. So on that date, we recorded the cash and the unearned revenue. It's unearned revenue because we haven't performed the services yet.

The adjustment is that services had been performed during the period. So at the end of the year, we have to reduce our unearned revenue and recognize the amount of revenue that we earned during the period. So that's the adjustment that you see.

Our next adjusting entry is prepaid expenses. Initially, we paid $12,000 for an insurance policy that includes coverage through June of 2013. And you'll see that we purchased that on July 1st. We recorded our prepaid insurance, and cash being paid for that.

Our adjustment, now our expenses have been incurred during the period. So what do we have to do? We have to record the insurance expense and reduce our prepaid insurance for the six months that we have covered.

Next, our accrued expenses. Initially, we incurred $5,000 of salaries in December of 2012 that were paid in January. So initially we didn't record anything. We just incurred the salaries that were paid in January.

So what do we have to do to adjust for that? We have to record the expenses that we incurred. So at the end of the year, we have to record our salary's expense, and then record our accounts payable, so that money that we know for those salaries.

Our next adjustment, our accrued revenues. We perform $20,000 of services in December that were paid for in January. Now, we haven't recorded anything. So the adjustment that we have to make is to record the revenues that we-- keyword there-- earned. So our matching principle, at 12/31/12 we have to record accounts receivable, so the money that we're going to receive from our customer, and recognize that revenue that we earned in December of $20,000.

So our next adjustment is for supplies. So what did we do initially? We purchased $10,000 of supplies. So on January 1st, we recorded an asset of supplies of $10,000.

And what's the adjustment? Well, $5,000 of those supplies were used during the period to help us generate our revenue. So what do we have to do?

It's a twofold adjustment. We have to record the expense of supplies that were used. And then we also have to reduce that asset, that supplies asset, to reflect the appropriate balance of the supplies account.

Now, depreciation, initially we purchased $50,000 of equipment at the beginning of the year. So you see here we have our equipment that we purchased for cash. And now what adjustment do we need to make?

Well, we need to record the portion of the equipment's useful life that has been utilized. So at the end of the year, we have to record depreciation expense. So we record depreciation expense. And then we also recorded accumulated depreciation. So that's where we track the total depreciation for that piece of equipment.

And our next adjustment, our last adjustment, is for error corrections. So again, we're reporting at 12/31/12. And initially we recorded $5,000 of cash received as revenue, cash received is revenue.

Turns out that cash payment was for accounts receivable. And we had already recognized that revenue. So what do we have to do to correct that?

Well, at the end of the year, we have to reverse that revenue recognition out, so debit our revenue. And then we would credit our accounts receivable because it was a payment for accounts receivable. So we have to reduce our revenue, as well as reduce our accounts receivable to correct for that error.

So preparing an adjusted trial balance, what we're going to look at now is our trial balance worksheet. So come on. And let's take a look at that.

So here we have our trial balance worksheet, starting with our trial balance. We have a list of all of our ledger accounts. And we also have a detail of all the debit or credit balances in those accounts.

So that's our trial balance. Now we've identified all of our adjustments. So now we're going to enter all of our adjustments into this trial balance worksheet.

Now, these are all the adjustments that we just went through in our example. So we see our adjustments for supplies, insurance, depreciation. So those we all enter into these columns, into our adjustments columns.

So after we've done that, we have our trial balance. We have all of the adjustments that we're going to need to make. Then we can prepare our adjusted trial balance, which is just taking those trial balances within those individual accounts and adjusting them for those adjustments that we're making there in the middle.

And then we can prepare our adjusted trial balance from that, which we then use to create our financial statements. So you'll see, we've made our adjustments. So now in our adjusted trial balance, we have balances in our supplies expense, in our insurance expense, in our depreciation expense. So we've now entered all of those adjustments. And we can begin to move forward.

Now that we've looked at that, let's move on to our summary. So in a nutshell, adjusting entries is what we talked about today. We looked at several examples. Again, today was all about examples, examples, examples. And then we also looked at preparing an adjusted trial balance with our trial balance worksheet.

I hope everybody enjoyed this video. And I hope to see you next time.