Adjustment

Adjustment

Assigns amounts of revenue and expenses to the proper accounting period before finalizing the books for the fiscal period (time period concept)

Supplies

• Needs adjustment because it is inexact between statement dates
• Supplies needs adjusted because they can be used, lost, or stolen

Example

The amount in the supplies account is $1480.90.  After doing an inventory, Hector figured that his supplies are only worth $500.  Prepare the adjusting journal entry

• Calculate the value of supplies that were used up during the year.  (1480.90-500=980.90)
• Put the debit and credit amounts on the adjustment columns of the worksheet.  If there is no account for an item, add it to the bottom of the worksheet.
• Journalize the entry. Date it for the end of the year or accounting period.

Supplies Expense                           980.90
          Supplies                                           980.90
Adjusting Entry

• Post the adjusting entry to the ledgers
  

Prepaid Expenses

• Expenses that are paid for in advance, but benefits extend into the future
• Most common type is prepaid insurance (asset)

Example

S. Lee purchased a one year insurance policy on Sept 1 valued at $1,800.  Prepare the journal entry.  Year end is Dec 31.

• Calculate the value of Prepaid Insurance used up from Sept 1 to the year end of Dec 31.
• 1800 x (4/12) = 600           (4 out of 12 months used up)
• Put the adjusting entry on the worksheet by debiting Insurance Expense for 600, and crediting Prepaid Insurance for 600.
• Journalize the entry.  Use the Year End date.

Insurance Expense                     600
     Prepaid Insurance                           600            
Adjusting Entry

• Post the adjusting entry to the ledgers.
  

Late Invoices

• Goods and services are often bought and received toward the end of a fiscal period
• Matching Principle states that expenses must be stated in the same period as the revenues they helped earn

Example

G. Teacher received the following bills on January 11th:  Prepare the adjusting entry.
          Telephone           $763
          Utilities               $852

• Enter the adjustment amounts on the worksheet in the adjustment columns.  Accounts affected will be Telephone Expense, Utilities Expense, and Accounts Payable
• Journalize the entry.  Use the year end date.

          Telephone Expense               763
          Utilities Expense                   852  
              Accounts Payable                       1615
          Adjusting entry for late invoices