Types of Adjusting entries
Thursday, March 11, 2010
11:50 PM
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1. Prepaid Expenses (Prepaid Insurance, Supplies, etc.)
Original Adjusting
Prepaid Asset Expense
Cash Prepaid Asset
OR OR
R Expense Prepaid Asset
Cash Expense
2. Prepaid Revenues (Unearned or Deferred Revenue)
Original Adjusting
Cash Unearn. Rev - Liab.
Unearn. Rev. - Liab. Revenue (earned)
OR OR
R Cash Revenue (earned)
Revenue (earned) Unearn. Rev. - Liab.
3. Accrued Expenses (Wages, Utilities, Interest, etc.)
Original Adjusting
R N/A Expense
Payable
4. Accrued Revenues (Interest, etc.)
Original Adjusting
R N/A Receivable
Revenue
5. Estimated Items (Bad Debt Expense, Depreciation Expense, etc.)
Bad Debt Expense
Allowance for Doubtful Accounts (contra A/R)
Depreciation Expense
Accumulated Depreciation (contra building or equipment)
REVERSING ENTRIES
Only reverse the following types of adjusting entries:
º Prepaid Expense in which original entry debited expense.
º Prepaid Revenue in which original entry credited revenue.
º Both Accrued Expenses and Accrued Revenues.
Do NOT reverse the following types of adjusting entries:
º Prepaid Expense in which original entry debited prepaid asset.
º Prepaid Revenue in which original entry credited unearn. rev.-liab.
º All Estimated Items.
CLOSING ENTRIES
Purpose is to remove the balances from all temporary or nominal accounts (revenues, expenses, withdrawals) and place them into owner's equity (capital). Although textbooks often show the use of an Income Summary account, in practice temporary accounts usually are closed directly into capital. Using an Income Summary account is entirely optional and is basically an invention of academics.
Usual Steps:
º Close all temporary accounts with credit balances (e.g. revenues) by debiting them and place the total into capital as a credit.
º Close all temporary accounts with debit balances (e.g. expenses, withdrawals) and place total into capital as a debit.
OR
º Close all temporary accounts in one gigantic entry with the net amount placed into capital.
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