Adjusting Entries | Part 1
Accrual Accounting Application

Module 1:
Foundations of Accounting

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Understand why adjusting entries are necessary.

➛ Identify accounts that require adjustment at the end of the period.

➛ Prepare adjusting entries for prepaid expenses & accrued expenses.

➛ Differentiate between prepayments vs accruals.

➛ Apply adjusting entries to real accounting scenarios.

➛ Adjusting Entries
➛ Prepaid Expense
➛ Accrued Expense
➛ Accrued Revenue
➛ Unearned Revenue
➛ Depreciation

➛ Revenue recorded when earned
➛ Expense recorded when incurred

Even if cash has not changed hands

Used under accrual basis, required by GAAP/IFRS.

Expense + Reduce Asset

Examples
rent, insurance, supplies

Adjustment Example
Paid 6 months rent $1,200. One month used.

Record Expense + Payable

Example
unpaid salaries, utilities

Example
Unpaid salaries at month end $500

Record Revenue + Receivable

Example
work done but not billed

Convert to Earned Revenue

Received money, service not yet done

State whether each is
• Prepaid Expense
• Accrued Expense
• Accrued Revenue
• Unearned Revenue

➛ Customer will pay next week for work done today
➛ Paid insurance for a year in advance
➛ Received payment before providing service
➛ Electricity bill received but not yet paid

Write adjusting entries

➛ Office supplies used during month = $150
➛ Unpaid rent at month end = $600
➛ Earned revenue of $800 but not yet received
➛ Received $1,200 in advance; half service now completed

State if adjusting entry is needed or not needed.

➛ Bought equipment and paid cash same day
➛ Monthly depreciaton of asset
➛ Sales made on credit, revenue not recorded
➛ Utility bill expected but not arrived yet

Explain why briefly.

A business has the following at month end

➛ Prepaid Rent: $900 (3 months total) ➧ 1 month passed
➛ Salaries incurred but unpaid: $700
➛ Service worth $1,200 completed but not yet billed
➛ Customer paid $500 in advance; 40% work now completed

Questions

➛ Prepare adjusting journal entries for all four items.
➛ Which accounts increase revenue?
➛ Which items create liabilities?
➛ Which adjustments affect assets?

➛ Why do we make adjusting entries?

➛ Prepaid expenses are initially recorded as what?

➛ True or False | Adjusting entries are made at the beginning of period.

➛ What entry is used for expenses incurred but unpaid?

➛ Which principle requires expenses to match revenue?

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Answers ➧ Here

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Adjusting Entries | Part 2 ➧ Here