{"id":72,"date":"2015-03-18T23:08:28","date_gmt":"2015-03-18T23:08:28","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=72"},"modified":"2017-08-22T16:26:56","modified_gmt":"2017-08-22T16:26:56","slug":"journalizing-and-posting-adjusting-entries","status":"web-only","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/journalizing-and-posting-adjusting-entries\/","title":{"raw":"Adjusting for Deferred Items","rendered":"Adjusting for Deferred Items"},"content":{"raw":"

Deferred Items<\/h2>\r\n

Deferred means to postpone or delay items.\u00a0 We will be moving items that have already been record in our books.\u00a0 We will move a liability to revenue or an asset to an expense.\u00a0 The deferred items we will discuss are unearned revenue and prepaid expenses.\u00a0 Unearned revenues are money received before work has been performed and is recorded as a liability.\u00a0 Prepaid expenses are expenses the company pays for in advance and are assets\u00a0including things like rent, insurance, supplies, inventory, and other assets.<\/p>\r\n\r\n

    \r\n \t
  1. Liability \/ revenue adjustments come from companies receiving advance payments for items such as training services, delivery services, tickets, and magazine or newspaper subscriptions. Receiving assets before they are earned creates a liability called unearned revenue.<\/strong> The firm debits such receipts to the asset account Cash and credits a liability account. The liability account credited may be Unearned Revenue, Revenue Received in Advance, Advances by Customers, or some similar title. The seller must either provide the services or return the customer\u2019s money. By performing the services, the company earns revenue and cancels the liability.<\/li>\r\n<\/ol>\r\n

    \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Remember:\u00a0 Unearned revenue is a liability account because we owe work to someone in the future.\u00a0<\/em><\/p>\r\nhttps:\/\/youtu.be\/zpY9M9S5z7A\r\n\r\n2.\u00a0 Asset\/ expense entries will initially be recorded as assets, then as the asset is used it will become an expense. If a business knows that they will use the asset before the end of the accounting period, they will initially record it as an expense. \u00a0Prepaid insurance, depreciation, prepaid rent and supplies on hand are all examples of\u00a0asset\/ expense entries.\r\n\r\nhttps:\/\/youtu.be\/hPq1Mv2gIec\r\n\r\nLet's look at some\u00a0examples.\r\n

    Example\u00a01 - Liability \/ revenue adjusting entry for future services rendered<\/h3>\r\nOn December 7, MicroTrain Company received\u00a0 $4,500 from a customer in payment for future training services. The firm recorded the following journal entry:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Dec. 7<\/td>\r\n<\/td>\r\n\u00a0Debit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    <\/td>\r\nCash<\/td>\r\n4,500<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Unearned Revenue<\/td>\r\n<\/td>\r\n4,500<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record the receipt of cash from a customer in payment for future training services.<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe balance in the Unearned Service Revenues liability account established when MicroTrain received the cash will be converted into revenue as the company performs the training services. Before MicroTrain prepares its financial statements, it must make an adjusting entry to transfer the amount of the services performed by the company from a liability account to a revenue account.\r\n\r\nIf we assume that MicroTrain earned one-third of the\u00a0$ 4,500 in the Unearned\u00a0Revenue account by December 31, then the company transfers\u00a0$ 1,500\u00a0 (4,500 x 1\/3) to the Service Revenue account in an adjusting entry as follows:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    <\/td>\r\n<\/td>\r\n\u00a0Debit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    Dec. 31<\/td>\r\nUnearned Revenue<\/td>\r\n1,500<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Service Revenue<\/td>\r\n<\/td>\r\n1,500<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record the receipt of cash from a customer in payment for future training services<\/em>.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n

    Example\u00a02 - Asset \/ expense adjusting entry for prepaid insurance<\/h3>\r\nMicroTrain Company purchased for cash an insurance policy on its trucks for the 12 month period beginning December\u00a0 1. The journal entry made on\u00a0December 1, to record the purchase of the policy is illustrated in the following table (remember, when we pay for expenses in advance we record them as an asset):\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    <\/td>\r\n<\/td>\r\n\u00a0 Debit<\/td>\r\n\u00a0Credit<\/td>\r\n<\/tr>\r\n
    \u00a0Dec. 1<\/td>\r\nPrepaid Insurance<\/td>\r\n2,400<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n2400<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nPurchased truck insurance to cover a one-year period<\/em>.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nOn December 31, an adjusting journal entry is made because it is the end of an accounting period and MicroTrain has not used all of the insurance they paid for. MicroTrain will record an adjusting entry for 1 month of insurance expense ($2,400 \/ 12 months)\u00a0since the policy began December 1 and the year end is December 31.\u00a0 The following table shows how to record this adjusting entry\u00a0in the journal:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    <\/td>\r\n<\/td>\r\n\u00a0 Debit<\/td>\r\n\u00a0Credit<\/td>\r\n<\/tr>\r\n
    \u00a0Dec. 31<\/td>\r\nInsurance Expense<\/td>\r\n200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Prepaid Insurance<\/td>\r\n<\/td>\r\n200<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record insurance expense for December.<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nBefore this adjusting entry was made, the entire\u00a0 $ 2,400 insurance payment made on\u00a0December 1, was a prepaid expense for 12 months of protection. So on\u00a0December 31, one month of protection had passed, and an adjusting entry transferred\u00a0 $ 200 of the\u00a0 $ 2,400 ( $ 2,400\/12 =\u00a0 $ 200) to Insurance Expense.\r\n\r\nAfter journal entries have been adjusted, they must be posted to the ledgers again, the three-column ledger accounts appear as follows:\r\n\r\nPrepaid Insurance\u00a0\u00a0\u00a0<\/strong><\/b>\r\n\r\n\r\n\r\n\r\n\r\n
    Date<\/td>\r\n<\/td>\r\nExplanation<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\nBalance<\/td>\r\n<\/tr>\r\n
    Dec.<\/td>\r\n1<\/td>\r\nPurchased on Account<\/td>\r\n\u00a0 2,400<\/td>\r\n<\/td>\r\n\u00a0 2,400<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n31<\/td>\r\nAdjustment<\/td>\r\n<\/td>\r\n200<\/td>\r\n\u00a0 2,200<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nInsurance Expense<\/strong><\/b>\r\n\r\n\r\n\r\n\r\n
    Date<\/td>\r\n<\/td>\r\nExplanation<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\nBalance<\/td>\r\n<\/tr>\r\n
    Dec.<\/td>\r\n31<\/td>\r\nAdjustment<\/td>\r\n\u00a0 200<\/td>\r\n<\/td>\r\n\u00a0 200<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNote that we are cycling through the second and third steps of the accounting equation again. On the income statement for the year ended\u00a0December 31, MicroTrain reports one month of insurance expense,\u00a0 $ 200, as one of the expenses it incurred in generating that year\u2019s revenues. It reports the remaining amount of the prepaid expense,\u00a0 $ 2,200, as an asset on the balance sheet. The\u00a0 $ 2,200 prepaid expense represents 11 months of insurance protection that remains as a future benefit.\r\n

    \u00a0Example\u00a03 - Asset \/ expense adjusting entry for supplies<\/h3>\r\nWhen a company purchases supplies in bulk, it is recorded as an asset until the supplies are used.\u00a0\u00a0An adjusting entry is used to record the amount of supplies used (supplies expense) during the period.\u00a0 To determine the amount of supplies used during the period, a physical count is made of the supplies remaining or on hand.\u00a0 We can use the following formula for supplies expense:\r\n\r\nBeginning supplies + supplies purchases during the period\u00a0 - physical count of supplies remaining<\/strong>\r\n\r\nNote:\u00a0 Beginning supplies + supplies purchased equals the Supplies balance in the Unadjusted Trial Balance.<\/em>\r\n\r\nMicroTrain has a beginning supplies balance of $ 500 and purchased $8,000 in supplies during the period.\u00a0 A physical count of supplies on December 31 shows we have $1,500 remaining on hand.\u00a0 The supplies expense for the period will be $7,000 ($500 beginning balance + $8,000 in supplies purchased - $1,500 remaining) and the adjusting entry will be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    <\/td>\r\n<\/td>\r\n\u00a0 Debit<\/td>\r\n\u00a0Credit<\/td>\r\n<\/tr>\r\n
    \u00a0Dec. 31<\/td>\r\nSupplies\u00a0Expense<\/td>\r\n7,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Supplies<\/td>\r\n<\/td>\r\n7,000<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record\u00a0supplies expense<\/em>.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nBefore this adjusting entry was made, the\u00a0supplies asset account had a balance of $8,500.\u00a0 After the adjusting entry, the account balance is $1,500\u00a0and matches the amount of supplies from the physical count.\r\n\r\n\u00a0<\/strong><\/b>\r\n

    Example\u00a04 - Asset \/ expense adjusting entry for depreciation<\/h3>\r\n

    A depreciable asset<\/strong> is a manufactured asset such as a building, machine, vehicle, or piece of equipment that provides service to a business. In time, these assets lose their utility because of (1) wear and tear from use or (2) obsolescence due to technological change. Since companies gradually use up these assets over time, they record depreciation expense on them.<\/p>\r\n

    Depreciation expense <\/strong>is the amount of asset cost assigned as an expense to a particular period. The three factors involved in computing depreciation expense are as follows:<\/p>\r\n\r\n