Chapter 4

Copyright © 2015 McGraw-Hill Education (Asia).

All rights reserved.
 Adjusting Every
entries are adjusting
needed whenever entry involves a
revenue or expenses change in either a
affect more than one revenue or expense
accounting and an asset
period. or liability.

4-2

 Converting
Converting 
 Converting
Converting
assets
assets to
to liabilities
liabilities to
to
expenses
expenses revenue
revenue


 Accruing
Accruing 
 Accruing
Accruing
unpaid
unpaid uncollected
uncollected
expenses
expenses revenue
revenue

4-3
 End of Current Period

Prior Periods Current Period Future Periods

Transaction
Transaction Adjusting
AdjustingEntry
Entry
Paid
Paidcash
cashin in 
Recognizes
Recognizesportion
portion
advance
advanceof of of
ofasset
assetconsumed
consumed
incurring
incurring as
asexpense,
expense,and
and
expense
expense 
Reduces
Reducesbalance
balanceofof
(creates
(createsan an asset
assetaccount.
account.
asset).
asset).
4-4
 $2,400 Insurance Policy
Coverage for 12 Months

$200 Monthly Insurance Expense

1 Jan. 31 Dec.

On
On 11 January,
January, Webb
Webb Co.
Co. purchased
purchased aa
one-year
one-year insurance
insurance policy
policy for
for $2,400.
$2,400.
4-5
 Initially,
Initially, costs
costs that
that benefit
benefit more
more than
than one
one
accounting
accounting period
period are
are recorded
recorded as
as assets.
assets.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Jan. 1 Unexpired Insurance 2,400
Cash 2,400
Purchase a one-year insurance policy.

4-6
 The
The costs
costs are
are expensed
expensed asas they
they are
are
used
used to
to generate
generate revenue.
revenue.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Monthly Adjusting Entry for Insurance
Jan. 31 Insurance Expense 200
Unexpired Insurance 200
Insurance expense for January.

4-7
 Statement
Statement of of Income
Income Statement
Statement
Financial
Financial Position
Position Cost
Cost of
of assets
assets
Cost
Cost of
of assets
assets used
used this
this period
period to
to
that
that benefit
benefit future
future generate
generate revenue.
revenue.
periods.
periods.

Unexpired Insurance Insurance Expense

1/1 2,400 1/31 200 1/31 200
Bal. 2,200

4-8
Depreciation
Depreciation is is the
the systematic
systematic allocation
allocation of
of
the
the cost
cost of
of aa depreciable
depreciable asset
asset to
to expense.
expense.
Fixed
Fixed The asset’s Depreciation
usefulness is Depreciation
Asset
Asset Expense
partially Expense
(debit)
(debit) (debit)
consumed (debit)
On date during the At end of
when initial period. period . . .
payment is
made . . . Accumulated
Accumulated
Cash
Cash Depreciation
Depreciation
(credit)
(credit) (credit)
(credit)
 On 2 May 2013, JJ’s Lawn Care Service
purchased a lawn mower with a useful life
of 50 months for $2,500 cash.
Using the straight-line method, calculate
the monthly depreciation expense.
Depreciation
Cost of the asset
expense (per =
Estimated useful life
period)
$50 = $2,500
50
JJ’s
JJ’s Lawn
Lawn Care
Care Service
Service would
would make
make the
the
following
following adjusting
adjusting entry.
entry.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 31 Depreciation Expense: Equipment 50
Accumulated Depreciation: Equipment 50
To record one month's depreciation.

Contra-asset
Contra-asset
4-11
 JJ’s $15,000 truck is depreciated over 60
months. Calculate monthly depreciation and
make the journal entry.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 31 Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
To record one month's depreciation.

$15,00060
$15,00060 months
months == $250
$250 per
per month
month
4-12
Accumulated
Accumulated depreciation
depreciation would
would
appear
appear on
on the
the balance
balance sheet
sheet as
as
follows:
follows:

Cost
Cost -- Accumulated
Accumulated Depreciation
Depreciation == Book
Book Value
Value
 End of Current Period

Prior Periods Current Period Future Periods

Transaction
Transaction Adjusting
AdjustingEntry
Entry
Collect
Collectcash
cashin in 
Recognizes
Recognizesportion
portion
advance
advanceof of earned
earnedas asrevenue,
revenue,
earning
earningrevenue
revenue and
and
(creates
(createsaa 
Reduces
Reducesbalance
balanceofof
liability).
liability). liability
liabilityaccount.
account.

4-14
 $6,000 Rental Contract
Coverage for 12 Months

$500 Monthly Rental Revenue

1 Jan. 31 Dec.
On
On January
January 1,
1, Webb
Webb Co.
Co. received
received $6,000
$6,000 in
in
advance
advance for
for aa one-year
one-year rental
rental contract.
contract.
4-15
Initially,
Initially, revenues
revenues that
that benefit
benefit more
more than
than one
one
accounting
accounting period
period are
are recorded
recorded as
as liabilities.
liabilities.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Jan. 1 Cash 6,000
Unearned Rent Revenue 6,000
Collected $6,000 in advance for rent.

4-16
 Over
Over time,
time, the
the revenue
revenue is is recognized
recognized
as
as itit is
is earned.
earned.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Monthly Adjusting Entry for Rent Revenue
Jan. 31 Unearned Rent Revenue 500
Rental Revenue 500
Rental revenue for January.

4-17
 Statement
Statement of of Income
Income Statement
Statement
Financial
Financial Position
Position Revenue
Revenue earned
earned
Liability
Liability for
for future
future this
this period.
period.
periods.
periods.

Unearned Rental Revenue Rental Revenue

1/31 500 1/1 6,000 1/31 500
Bal. 5,500

4-18
 End of Current Period

Prior Periods Current Period Future Periods

Transaction
Transaction
Pay
Paycash
cashin in
settlement
settlementof of
liability.
liability.

4-19
 $3,000 Wages
Expense

Monday, Wednesday, Friday,

29 May 31 May 2 June

On
On 31
31 May,
May, Webb
Webb Co.
Co. owes
owes wages
wages ofof
$3,000.
$3,000. Payday
Payday is
is Friday,
Friday, 22 June.
June.

4-20
 Initially,
Initially, an
an expense
expense and
and aa liability
liability are
are
recorded.
recorded.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 31 Wages Expense 3,000
Wages Payable 3,000
To accrue wages owed to employees.

4-21
 Statement
Statement of of Income
Income Statement
Statement
Financial
Financial Position
Position Cost
Cost incurred
incurred this
this
Liability
Liability toto be
be paid
paid period
period to
to generate
generate
in
in aa future
future period.
period. revenue.
revenue.

Wages Payable Wages Expense

5/31 3,000 5/31 3,000

4-22
 $5,000 Weekly Wages

$3,000 Wages $2,000 Wages

Expense Expense

Monday, Wednesday, Friday,

29 May 31 May 2 June
Let’s
Let’s look
look at
at the
the entry
entry for
for 22 June.
June.
4-23
 The
The liability
liability is
is extinguished
extinguished when
when the
the
debt
debt is
is paid.
paid.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
June 2 Wages Expense (for June) 2,000
Wages Payable (accrued in May) 3,000
Cash 5,000
Weekly payroll for May 29-June 2.

4-24
 End of Current Period

Prior Periods Current Period Future Periods

Adjusting
AdjustingEntry
Entry Transaction
Transaction

Recognizes
Recognizesrevenue
revenue Collect
Collectcash
cashinin
earned
earnedbut
butnot
notyet
yet settlement
settlementof
of
recorded,
recorded,and
and receivable.
receivable.

Records
Recordsreceivable.
receivable.

4-25
 $170 Interest
Revenue

Saturday, Monday, Tuesday,

15 Jan. 31 Jan. 15 Feb.
On
On 31
31 Jan.,
Jan., the
the bank
bank owes
owes Webb
Webb Co.
Co.
interest
interest of
of $170.
$170. Interest
Interest is
is paid
paid on
on the
the
15
15th day
th
day of
of each
each month.
month.
4-26
Initially,
Initially, the
the revenue
revenue isis recognized
recognized and
and
aa receivable
receivable is
is created.
created.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Jan. 31 Interest Receivable 170
Interest Revenue 170
To recognize interest revenue.

4-27
 Statement
Statement of of
Financial Income
Income Statement
Statement
Financial Position
Position
Receivable Revenue
Revenue earned
earned
Receivable to to be
be
collected this
this period.
period.
collected in
in aa future
future
period.
period.

Interest Receivable Interest Revenue

1/31 170 1/31 170

4-28
 $320 Monthly Interest

$170 Interest $150 Interest

Revenue Revenue

Saturday, Monday, Tuesday,

15 Jan. 31 Jan. 15 Feb.
Let’s
Let’s look
look at
at the
the entry
entry for
for 15
15 February.
February.
4-29
 The
The receivable
receivable is
is collected
collected in
in aa future
future
period.
period.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Feb. 15 Cash 320
Interest Revenue (for February) 150
Interest Receivable (accrued Jan. 31) 170
To record interest received.

4-30
 As
As aa corporation
corporation earns
earns taxable
taxable income,
income, itit
incurs
incurs income
income taxes
taxes expense,
expense, and
and also
also aa
liability
liability to
to governmental
governmental tax
tax authorities.
authorities.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Dec. 31 Income Taxes Expense 780
Income Taxes Payable 780
Estimated income taxes applicable to
taxable income earned in December.
4-31
 Costs
Costs are
are matched
matched with
with revenue
revenue in
in
two
two ways:
ways:


 Direct
Direct association
association ofof costs
costs with
with
specific
specific revenue
revenue transactions.
transactions.


 Systematic
Systematic allocation
allocation ofof costs
costs over
over
the
the “useful
“useful life”
life” of
of the
the expenditure.
expenditure.
 An
An item
item is
is “material”
“material” ifif knowledge
knowledge ofof the
the
item
item might
might reasonably
reasonably influence
influence the
the
decisions
decisions of of users
users of
of financial
financial statements.
statements.

Many companies
immediately charge
the cost of Light bulbs
immaterial items to
expense.
Supplies
 Income Statement Statement of Fin. Position

Adjustment Revenue Expenses Profit Assets Liabilities Equity

Type I
Converting Assets to Expenses No effect Increase Decrease Decrease No effect Decrease
Type II
Converting Liabilities to Revenue Increase No effect Increase No effect Decrease Increase
Type III
Accruing Unpaid Expenses No effect Increase Decrease No effect Increase Decrease
Type IV
Accruing Uncollected Revenue Increase No effect Increase Increase No effect Increase
 JJ's Lawn Care Service
Adjusted Trial Balance All balances
31 May 2013
Cash $ 3,925 are taken from
Accounts receivable
Tools & equipment
75
2,650
the ledger
Accum. depreciation: tools & eq. $ 50 accounts on 31
Truck 15,000
Accum. depreciation: truck 250 May after
Notes payable 13,000 preparing the
Accounts payable 150
Share capital 8,000 two
Dividends
Sales revenue
200
750
depreciation
Gasoline expense 50 adjusting
Depreciation exp.: tools & eq. 50
Depreciation exp.: truck 250 entries.
Total $ 22,200 $ 22,200

4-35
4-36