Adjusting Journal Entries: Understanding and Applying

School: Western Governors University - Course: ACCOUNTING IA1 - Subject: Accounting

Adjusting Journal Entries Click onrecording link. Hello and welcome to this recording on adjusting journal entries. I am Dr. P, a course instructor for intermediate accounting one, D103. This recording assumes you have read all the course material and done all the learning checks, module quizzes, and unit tests in the course, and have a firm understanding of the course material. It will serve as an excellent review before taking the assessment. Adjusting entries are journal entries recorded at the end of an accounting period to adjust income and expense accounts so that they comply with matching incomes and expenses to appropriate accounting periods. Adjusting journal entries result from deferrals, accruals, and noncash items. Every adjusting journal entry will have an income statement account and a balance sheet account, and cash will never be part of the adjusting journal entry. Adjustments for deferrals are for prepaid expenses and unearned revenues. Prepaid Expense A prepaid expense is an asset on the balance sheet that results from a company making advance payments for services or goods that will be used in the future. In other words, the company converts the asset to an expense in the income statement over time by debiting an expense account and crediting the prepaid asset account. Study and memorize the journal entry in the illustration. Prepaid expenses expire either with the passage of time such as advertising, rent, and insurance or through use and consumption such as supplies. Unearned Revenue Unearned revenue is the opposite of prepaid expense. The company converts a liability on the balance sheet that results from receiving cash before a service is provided or a good is delivered. View it as a prepayment for a service or a good that a company is expected to provide to the customer later.

2As the revenue becomes earned over time, it will be reported in the income statement by debiting the unearned revenue liability account and crediting a revenue account. Study and memorize the journal entry in the illustration.