Adjusting Entries

Why??? 

To bring Balance Sheet and Income Statement accounts up to date for periodic financial statements.

Always:

Touch one Balance Sheet account and one Income Statement account.

Never:

Touch cash.

Two basic types of adjusting entries:

    1. Expense (such as insurance expense) with the normal adjusting entry debiting expense and crediting prepaid.  Also depreciation is a prepaid adjusting entry debiting expense but the contra asset is credited instead of the normal asset account in which the cost of the assets is recorded.
    2. Revenue (such as interest revenue) with the normal adjusting entry debiting unearned revenue (prepaid by the customer) and crediting revenue.
    1. Expense (such as interest expense) with the normal adjusting entry debiting expense and crediting a liability.
    2. Revenue (such as insurance revenue) with the normal adjusting entry debiting a receivable and crediting revenue.

Example 1

XYZ Business purchased a 3 year insurance policy for $3,000.  After the first year, the adjusting entry would be:
XYZ Business:     Insurance Company:
Debit Credit Debit Credit
Insurance Expense 1,000 Unearned Revenue 1,000
     Prepaid Insurance 1,000      Insurance Premium Revenue 1,000

Example 2

XYZ Business borrowed money from the bank and at the end of the year, $2,000 of interest is payable.
XYZ Business:     Bank:
Debit Credit Debit Credit
Interest Expense 2,000 Interest Receivable 2,000
     Interest Payable 2,000      Interest Revenue 2,,000