Adjusting Journal Entries

All adjusting entries (other than error corrections) will always involve at least one account on the balance sheet and at least one account on the income statement.

I. Deferral Adjustments

A deferral involves a past exchange of cash that has initially been recorded on the balance sheet rather than on the income statement. The name deferral comes about because the recording on the income statement is deferred (postponed) to a later time.

A. Deferred Expenses

A deferred expense is initially recorded on the balance sheet as an asset than being immediately expensed. An adjusting entry becomes necessary as the asset is consumed and becomes an expense.


     1.  Illustration for a short-term asset

         > Past exchange of cash

           Asset                                  XXX
              Cash                                      XXX

         > Adjusting entry necessary as the asset is consumed

           Expense                                XXX         (Income statement)
              Asset                                     XXX   (Balance sheet)

          Example:
          The supplies account currently shows a $300 balance.  A count of the
          supplies determines that only $250 remains.

           Supplies Expense                        50
              Supplies                                   50

      2.  Illustration for a long-term asset

          The adjusting entry for long-term assets differs in that instead of
          reducing the asset directly, a contra account is used that is
          subtracted from the asset on the balance sheet.

          > Past exchange of cash

            Asset                                 XXX
               Cash                                     XXX

          > Adjusting entry necessary as the asset is consumed

            Depreciation Expense                  XXX         (Income statement)
               Accumulated Depreciation                 XXX   (Balance sheet)

          Example:
          Current year depreciation is $2,500.

            Depreciation Expense                 2,500
               Accumulated Depreciation                 2,500

          Note: Accumulated depreciation is a contra account that is
                subtracted from the asset on the balance sheet.  It
                has a normal credit balance.

B. Deferred Revenues

A revenue cannot be recorded until the income has been earned. Cash received in advance of income realization should be initially recorded in a liability account such as "Unearned Revenue". An adjusting entry later becomes necessary as the revenue is earned. The liability should be reduced and the revenue recorded.


     > Past exchange of cash

       Cash                                      XXX
          Unearned Revenue                              XXX

     > Adjusting entry necessary as revenue is earned

       Unearned Revenue                          XXX        (Balance sheet)
          Revenue                                       XXX (Income statement)

     Example:  Adams CPA previously received $500 for bookkeeping services
               in advance of providing the services.  Adams has now earned
               $300 of the money.

        Unearned Revenue                         300
           Revenue                                      300

II. Accrual Adjustments

An accrual involves a future exchange of cash that must be recorded on the income statement before cash is exchanged.

A. Accrued Expenses

       > Adjusting entry

         Expense                                  XXX      (Income statement)
            Liability                                  XXX (Balance sheet)

       > Future exchange of cash

         Liability                                XXX
            Cash                                       XXX

       Example:
       Interest accrued on a loan at the end of the month is $550.

         Interest Expense                         550
            Interest Payable                           550

B. Accrued Revenues

       > Adjusting entry

         Receivable                                XXX      (Balance sheet)
            Revenue                                     XXX (Income statement)

       > Future exchange of cash

         Cash                                      XXX
            Receivable                                  XXX

       Example:
       Performed $400 of services for a customer on account.

         Accounts Receivable                       400
            Revenue                                     400