ADJUSTMENT AT YEAR END

Concepts and Practice Question

We have to adjust business accounts at the end of year to present true and fair view of the
business. Here we discuss few important and regular adjustment required in common business
environment.

1) DEPRECIATION
All fixed assets that is used in business reduce their value because of their use in business. They
are not physically consumed in business but their economic usefulness diminishes over time.
Example of depreciable assets are equipment, building, plant, machinery etc.

So in accounting depreciation means the systematic allocation of the cost of a depreciable assets
to expense over the asset’s useful life.

Remember the land will not be depreciated because it has unlimited life.

ADJUSTING ENTRY
Depreciation expense-------------------------Dr

Accumulated depreciation----------------------Cr

2) BAD DEBTS/ UNCOLLECTABLE AMOUNT

Generally company expects that whole amount of A/c Receivable will not be collected from
customers because of one or other reason. The amount company expected not to be collected is
called “bad debts”. Company estimates bad debts at the end of the accounting period on A/c
Receivable. (It is also possible to compute bad debts on sales but we have to keep our practice
limit on a/c receivable only)

ADJUSTING ENTRY
Bad debts expense-----------------------Dr

Allowance for bad debts-------------------------- Cr

3) ACCRUED EXPENSE
The expenses due on firm but not yet paid is taken as “ accrued expense”

Other term this may be used instead of this are as follows

 Outstanding expense
 Unpaid expense
 Payable
 Due but not paid

Adjusting Entries & Questions for Practice: 1|Page

ADJUSTING ENTRY
Expense -----------------------------Dr

Payable ------------------------------ Cr

4) ASSETS AND EXPENSE

Trial Balance: Prepaid Rent Rs. 15000

Adjustment data: Rent expired Rs. 1000

NOTE: Word Prepaid, unexpired, unused, advance show that amount paid in advance and
treated as assets. When portion of assets used in business:

Expense----- increase------- debit

Assets--------decrease--------credit

ADJUSTING ENTRY
Rent expense Dr--- Rs. 1000

Prepaid Rent Cr---- Rs. 1000

5) ACCRUED REVENUE
When services given to client on credit and amount not received by the firm, this sort of
adjustment is called “accrued revenue”

Other term or words which may be used in question are:

 Earned but not yet received

 Accrued interest revenue
 Receivable income

Trial Balance: Service revenue Rs. 45,000

Adjustment: Accrued service revenue Rs. 5,000

ADJUSTING ENTRY
Service Receivable Dr----Rs. 5,000

Service Revenue Cr-----Rs. 5,000

Adjusting Entries & Questions for Practice: 2|Page

6) Unearned Revenue
Note: When amount received in advance and services not provided till the end of the period, this
amount is called “unearned” means amount received but no service given to client, so it would
be treated as liability

Other terms which may be used are as follows:

 Amount received in advance but included in revenue

 Amount received but not yet earned
 Client has given advance payment but it was reported in revenue
Trial balance: Commission revenue Rs. 4500
Adjustment: Commission revenue received in advance but included in revenue Rs. 400

Commission Revenue-----Decrease--------Dr

Commission unearned-----Increase--------Cr

ADJUSTING ENTRY
Commission Revenue Dr---Rs. 400

Commission Unearned Cr----- Rs. 400

7) DOUBLE ASSETS

This is only statement confusion created by suing similar words. For example you have Rs. 100
in your pocket right now and in evening you have Rs. 25 in your pocket, so what amount have
been used by you i.e Rs.75 by taking the difference of both statement amount. Same rule will be
applied here, let us see:

Trial balance: Prepaid Insurance Rs. 500

Adjustment: Insurance unexpired Rs. 100

ADJUSTING ENTRY
Insurance expense Dr----Rs. 400

Prepaid Insurance Cr-----Rs. 400

Adjusting Entries & Questions for Practice: 3|Page

 ADJUSTING ENTRIES
Q No.1

1) T.B: Prepaid insurance Rs. 5000

Adj: Insurance was paid for one year on July 1st( accounting year ends on Dec.31st each
year)

Date Particulars Debit Credit

2) T.B: Prepaid Rent Rs.6000

Adj: Rent was paid on first January for two years

Date Particulars Debit Credit

3) T.B: Office equipment Rs.50,000

Adj: Depreciation of office equipment is estimated 10%

Date Particulars Debit Credit

4) T.B: A/c Receivable Rs.25,000

Adj: Uncollectable account estimated 2.5% of A./c receivable

Date Particulars Debit Credit

Adjusting Entries & Questions for Practice: 4|Page

 5) T.B: Salaries expense Rs. 55,000

Adj: salaries outstanding Rs.12000

Date Particulars Debit Credit

6) T.B: Advertising expense Rs. 12500

Adj: Advertising expense for the last month of the year is Rs.14,000.

Date Particulars Debit Credit

7) T.B: Office supplies Rs.500

Adj: office supplies used by Rs.400

Date Particulars Debit Credit

8) T.B: Commission revenue Rs 75,000

Adj: accrued commission revenue at the end of the year Rs.12500

Date Particulars Debit Credit

Adjusting Entries & Questions for Practice: 5|Page

9) T.B: Commission unearned Rs.25000

Adj: commission earned by Rs.17500

Date Particulars Debit Credit

10) T.B: commission unearned Rs. 12500

Adj: commission unearned represents three months amount which company received in
advance on November 1st (accounting year ends on December 31st)

Date Particulars Debit Credit

Q No 2: Imran and co. presented following data on Sep 30, 2002

Title of account Debit Credit
Cash 51,000
A/c Receivable 25,600
Stationary 1500
Insurance expense 300
Equipment 68,000
Furniture 69300
Traveling expense 5000
A/c payable 14,300
Allowance for depreciation- equipment 5,000
Allowance for depreciation-furniture 18,600
Service revenue 85,300
Salaries expense 24000
Advertising expense 4500
Drawing 17000
Interest expense 1200
Capital 144,200
267400 267400

Adjusting Entries & Questions for Practice: 6|Page

Additional data:
a) Bad debts estimated 5% of A/c receivable
b) Depreciation on furniture 10%
c) Depreciation on equipment 10%
d) Salaries outstanding Rs.2700
e) Interest payable Rs. 400
f) Stationary used by company Rs.900
g) Traveling expense is outstanding Rs.1000

Required: Prepare adjusting entries

Date Particulars Debit Credit

Adjusting Entries & Questions for Practice: 7|Page

Q No.3The unadjusted trial balance of Christine Salomon, at July 31, 20X2, and the related
month-end adjustment data follow.

CHRISTINE SALOMON, CPA

Trial Balance
July 31, 20X2

Cash Rs. 5,600

Accounts receivable 11,600
Prepaid rent 4,000
Supplies 800
Furniture 28,800
Accumulated depreciation-Furniture Rs. 3,500
Accounts payable 3,450

Salomon, capital 39,050

Salomon, Drawing 4,000
Accounting service revenue 11,750

Adjusting Entries & Questions for Practice: 8|Page

 Salary expense 2,400

Utilities expense 550

Rs.57,750 Rs.57,750
Total

Adjustment data:

a. Accrued accounting service revenue at July 31, Rs.900.

b. Uncollectable expense estimated for the year 2% of A/c Receivable.
c. Prepaid rent expired during the month. The unadjusted prepaid balance of Rs.4,000 relates to the
period July through October.
d. Supplies on hand at July 31, Rs.400.
e. Depreciation on furniture for the month. The estimated useful life of the furniture is four years.
f. Accrued salary expense at July 31 for one day only. The five-day weekly payroll is Rs.1,000.
g. Utilities expense due Rs.50

Required: Prepare adjusting entries

Date Particulars Debit Credit

Adjusting Entries & Questions for Practice: 9|Page

Q No.4The trial balance of Cohen Construction Co. at June 30, 20X3, follows.

COHEN CONSTRUCTION CO.

Trial Balance
June 30, 20X3

Cash Rs. 21,200

Accounts receivable 37,820
Supplies 17,660
Prepaid insurance 2,300
Equipment 32,690
Accumulated depreciation—equipment Rs. 26,240
Building 42,890
Accumulated depreciation—building 10,500
Land 28,300
Accounts payable 22,690
Interest payable
Wage payable

Adjusting Entries & Questions for Practice: 10 | P a g e

 Unearned service revenue 10,560
Note payable, long-term 22,400
Lynn Cohen, capital 79,130
Lynn Cohen, withdrawals 4,200
Service revenue 20,190
Depreciation expense—equipment
Depreciation expense—building
Wage expense 3,200
Insurance expense
Interest expense
Utilities expense 1,110
Advertising expense 340
Supplies expense
Rs.191,710 Rs.191,710
Total

Additional data at June 30, 20X3:

a. Depreciation: equipment, Rs.630; building, Rs.370.

b. Accrued wages expense, Rs.240.
c. Supplies on hand, Rs.14,370
d. Prepaid insurance expired during June, Rs.500.
e. Accrued interest expense, Rs.180.
f. Unearned service revenue earned during June, Rs.4,970.
g. Accrued advertising expense, Rs.100 (credit Accounts Payable).
h. Accrued service revenue, Rs.1,100.

Required: Prepare adjusting entries

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Q No.5 The adjusted trial balance of Gallo Shipping & Handling at June 30, 20X9, after all
adjustments, follows.

GALLO SHIPPING & HANDLING

Adjusted Trial Balance
June 30, 20X9

Cash Rs. 12,350

Accounts receivable 26,470
Supplies 31,290
Prepaid insurance 3,200
Equipment 135,800
Accumulated depreciation—equipment Rs. 16,480
Building 34,900
Accumulated depreciation—building 16,850
Land 30,000
Accounts payable 38,400
Interest payable 1,490
Wages payable 770
Unearned service revenue 2,300

Adjusting Entries & Questions for Practice: 12 | P a g e

 Note payable, long–term 97,000
Linda Gallo, capital 58,390
Linda Gallo, withdrawals 45,300
Service revenue 139,860
Depreciation expense—equipment 7,300
Depreciation expense—building 3,970
Wage expense 21,470
Insurance expense 3,100
Interest expense 8,510
Utilities expense 4,300
Supplies expense 3,580
Rs.371,540 Rs.371,540
Total

Adjusting data at June 30, 20X9, which have all been incorporated into the adjusted trial balance
figures:

a. Prepaid insurance expired during the year, Rs.2,200.

b. Accrued interest expense, Rs.540.
c. Accrued service revenue, Rs.940.
d. Unearned service revenue earned during the year, Rs.7,790.
e. Accrued wage expense, Rs.770.
f. Depreciation for the year: equipment, Rs.7,300; building, Rs.3,970.
g. Supplies used during the year, Rs.3,580.

Required:Prepare Adjusting Entries

Adjusting Entries & Questions for Practice: 13 | P a g e

Q.6: The trial balance of Law Office of Pat Hamilton prepared at April 30, 2010. The business
adjusts and closes its accounts at the end of each month.

Law Office of Pat Hamilton

Trial Balance
April 30, 2010
Title of Accounts Dr Cr
Cash Rs.10,060
Unexpired Insurance 3,000
Notes Payable 4,800
Office Supplies 1,460
Office Equipment 26,400
Notes Payable 16,000
Unearned legal fees 15,020
Pat Hamilton Capital 20,000
Pat Hamilton Drawing 3,000
Legal Fees earned 1,580
Salaries expense 2,680
Misc. expense 1,200
Rs.52,600 Rs.52,600

Adjusting Entries & Questions for Practice: 14 | P a g e

Additional Data for April 30, 2010:

a. Accrued Interest on Notes Payable amounts to Rs. 200.

b. Salaries earned by the office staff but not yet recorded or paid amounted to Rs. 970.
c. Clients made advance payments against the legal fees. During April, Rs. 4,700 of these advances
was earned by the business.
d. Some clients were not billed (legal fees) until all services relating to their matter have been
rendered. As of April 30, services of Rs. 2,780 have been rendered to these clients but had not
been yet recorded.
e. An insurance policy was purchased on April 01. The premium of Rs. 3,000 for the six months
was paid.
f. On April 01, three months’ rent of Rs. 1,600 was paid in advance.
g. Office supplies on hand at April 30 amounted to Rs. 800.
h. Office equipment purchased on April 1 is being depreciated over an estimated life of 10 years.

Required:

1. Prepare adjusting entries.

Adjusting Entries & Questions for Practice: 15 | P a g e

Q.7: Island Hopper is an airline providing passenger and freight services. The accounts are
adjusted and closed each month. At June 30 the trial balance shown below was prepared from the
ledger.

Island Hopper
Trial Balance
June 30, 2010
Title of Accounts Dr Cr
Cash Rs.23,600
Accounts Receivable 7,200
Prepaid rent 9,600
Unexpired Insurance 21,000
Aircraft 1,200,000
Accumulated Depreciation:Aircraft Rs.380,000
Notes Payable 600,000
Unearned Passenger revenue 60,000
Mary Earheart Capital 230,850
Mary Earheart Drawing 7,000
Freight Revenue 130,950
Fuel Expense 53,800
Salaries expense 66,700
Maintenance Expense 12,900

Adjusting Entries & Questions for Practice: 16 | P a g e

 Rs.1,401,800 1,401,800
Additional Data for June 30, 2010:

a. The aircraft is being depreciated over a period of 10 years.

b. Out of total unearned revenue, Rs. 38,650 was earned during the month.
c. Salaries earned by the employees but not yet paid amount to Rs. 3,300 at June 30.
d. Accrued interest on Notes payable amounts to Rs. 5,000 at June 30.
e. Accrued freight revenue amounts to Rs. 4,600 in June.
f. Three months rent Rs. 14,400 had been paid in advance on May 1.
g. On April 1, a 12 months insurance policy had been purchased for Rs. 25,200.

Required:

1. Give the adjusting entries.

Adjusting Entries & Questions for Practice: 17 | P a g e

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