Adjusting Entries | Part 1
Accrual Accounting Application

Customer will pay next week for work done today
➛ Accrued Revenue

Paid insurance for a year in advance
➛ Prepaid Expense

Received payment before providing service
➛ Unearned Revenue

Electricity bill received but not yet paid
➛ Accrued Expense

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
➛ No
Already recorded correctly

Monthly depreciaton of asset
➛ Yes
Expense must be recognized

Sales made on credit, revenue not recorded
➛ Yes
Accrued revenue

Utility bill expected but not arrived yet
➛ Yes
Expense incurred

Prepare adjusting journal entries for all four items.

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



Which accounts increase revenue?
➛ Service Revenue | from accrued and unearned adjustments

Which items create liabilities?
➛ Salaries Payable
➛ Unearned Revenue | remaining balance

Which adjustments affect assets?
➛ Prepaid Rent | reduced
➛ Accounts Receivable | increased

Why do we make adjusting entries?
➛ To ensure revenue and expenses are recorded in the correct accounting period.

Prepaid expenses are initially recorded as what?
➛ Assets

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

What entry is used for expenses incurred but unpaid?
➛ Accrued Expense

Which principle requires expenses to match revenue?
➛ Matching Principle

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Adjusting Entries | Part 2 ➧ Here