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Chapter 3

Adjusting the accounts

Appendix 3A:An alternative method of recording deferrals

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1. Prepare adjusting entries for prepaid expenses originally recorded in an expense account

2. Prepare adjusting entries for unearned revenues originally recorded in a revenue account

Learning objectives

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Prepare adjusting entries forprepaid expenses originally recorded

in an expense account

Learning objective 1

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▪Until now we have recorded prepaid expenses as a debit to an asset account such as Prepaid Expense and a credit to Cash▪However, prepaid expenses can initially be recorded in the related expense account▪The adjusting entry will differ depending on whether the initial payment was recorded as an asset or an expense▪Each method produces the same ending balances

Prepaid expenses initially recorded as expense

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Example:▪Paid $360 for an insurance premium▪At the end of the accounting period $10 had expired so is recorded in the Insurance Expense account▪$360 - $10 = $350 remains in the Prepaid Insurance account at the end of the accounting period

Prepaid expenses initially recorded as expense

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Prepaid expenses initially recorded as expense

Initial payment:

Adjusting Entry:

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Initial payment recorded as an ASSET

Dec. 1 Prepaid Insurance 360

Cash 360

Initial payment recorded as an EXPENSE

Dec. 1 Insurance Expense 360

Cash 360

Initial payment recorded as an ASSET

Dec. 31 Insurance Expense 10

Prepaid Insurance 10

Initial payment recorded as an EXPENSE

Dec. 31 Prepaid Insurance 350

Insurance Expense 350

Prepaid expenses initially recorded as expense

Initially recorded as an ASSET Initially recorded as an EXPENSE

General ledger accounts:

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Prepaid Insurance No. 142

Date Description Debit Credit Bal.

Dec. 1 Payment 360 360 Dr

31 Adjusting 10 350 Dr

Prepaid Insurance No. 142

Date Description Debit Credit Bal.

Dec. 1

31 Adjusting 350 350 Dr

Insurance Expense No. 542

Date Description Debit Credit Bal.

Dec. 1

31 Adjusting 10 10 Dr

Insurance Expense No. 542

Date Description Debit Credit Bal.

Dec. 1 Payment 360 360 Dr

31 Adjusting 350 10 Dr

Remember:▪The ending balance of each account is exactly the same under both methods

Prepaid expenses initially recorded as expense

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Prepare adjusting entries forunearned revenues originally

recorded in a revenue account

Learning objective 2

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▪Until now we have recorded the receipt of cash for unearned revenues as a debit to Cash and a credit to the liability account, Unearned Revenues▪However, unearned revenues can initially be recorded in a revenue account▪The adjusting entry will differ depending on whether the initial receipt was recorded as a liability or as revenue▪Each method produces the same ending balances

Unearned revenues initially recorded as revenue

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Example:▪Received $900 for services to be provided in the future▪At the end of the accounting period $600 revenue was earned so is recorded in the Revenues account▪$900 - $600 = $300 remains in the Unearned Revenues account at the end of the accounting period

Unearned revenues initially recorded as revenue

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Unearned revenues initially recorded as revenue

Initial payment:

Adjusting Entry:

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Initial payment recorded as a LIABILITY

Dec. 1 Cash 900

Unearned Revenue 900

Initial payment recorded as REVENUE

Dec. 1 Cash 900

Revenues 900

Initial payment recorded as a LIABILITY

Dec. 31 Unearned Revenue 600

Revenues 600

Initial payment recorded as REVENUE

Dec. 31 Revenues 300

Unearned Revenue 300

Unearned revenues initially recorded as revenue

Initially recorded as a LIABILITY Initially recorded as REVENUE

General ledger accounts:

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Unearned Revenue No. 230

Date Description Debit Credit Bal.

Dec. 1 Payment 900 900 Cr

31 Adjusting 600 300 Cr

Unearned Revenue No. 230

Date Description Debit Credit Bal.

Dec. 1

31 Adjusting 300 300 Cr

Revenues No. 400

Date Description Debit Credit Bal.

Dec. 1

31 Adjusting 600 600 Cr

Revenues No. 400

Date Description Debit Credit Bal.

Dec. 1 Payment 900 900 Cr

31 Adjusting 300 600 Cr

Remember:▪The ending balance of each account is exactly the same under both methods

Unearned revenues initially recorded as revenue

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Slide Number 1Chapter 3Learning objectivesLearning objective 1Prepaid expenses initially recorded as expensePrepaid expenses initially recorded as expensePrepaid expenses initially recorded as expensePrepaid expenses initially recorded as expensePrepaid expenses initially recorded as expenseLearning objective 2Unearned revenues initially recorded as revenueUnearned revenues initially recorded as revenueUnearned revenues initially recorded as revenueUnearned revenues initially recorded as revenueUnearned revenues initially recorded as revenue