Study: Part A: Analyze, Record & Post Adjusting Entries. Prepare Adjusted Trial Balance
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Slides 1-5 (1m:46s)
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Slide 1
Analyze, record, and post adjusting entries. Prepare adjusted trial balance.
Slide 2
In prior videos we worked through the process of recording original transaction entries up through the creation of the pre-adjusted trial balance. We also discussed how to identify accounts needing adjustments. In this video we will analyze, record, and post adjusting journal entries, and prepare the adjusted trial balance.
Slide 3
Another way of looking at this is in prior videos we went through the process of recording original entries. Now we are going to go through the process of recording adjusting entries. In this video we’ll discuss the analyze, record, post, and prepare adjusting journal entries and prepare adjusted trial balance steps.
Slide 4
After we completed posting the original accounting entries we prepared the adjusted trial balance you see here. It’s dated March 31st X1; however, this company decided that it wanted to report its results as of and for the period ended December 31st, X1. So we’ll just assume that we went ahead and recorded a bunch more transactions for the remainder of the year and now have the pre-adjusted trial balance as of December 31, X1. We now need to adjust our December 31st, X1 pre-adjusted trial balance because some of the accounts are currently misstated.
Slide 5
By going through the identification process we were able to determine that some of the accounts are misstated. These items 1-20 indicate what we learned. We will now use this information to go through these one-by-one as examples of how to determine what the adjusting entries are, post them, and then prepare the adjusted trial balance.
Slide 6 (2m:31s)
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Slide 6
On this first example I will take a little longer than the others just so you can get the rhythm of how it’s going to work. In later videos we’ll go through quite quickly. Per the bank reconciliation we noted that $30 of the bank fees were not recorded yet. Thinking of the impact of those bank fees on the balance sheet equation, the bank fees would come out of our cash thus reducing assets, and because bank fees will have increased, the owner’s equity in the business will have decreased.
Step one: Draw T-accounts that represent the ledgers and enter the pre-adjusted account balances for each affected account. These balances came from the pre-adjusted trial balance and I’ve entered them here for you to save you a little time.
Step two: Determine what the adjusted account balances should be. In other words, after paying $30 in bank fees how much cash would you have left and what would your bank fees for the year be, assuming you started with having no bank fees. The answer is you would show you have $30 in bank fees, which we would show by debiting it [bank fees] $30, and our cash would’ve decreased by $30, to a balance of $149,970 worth of a debit.
Step three: Determine the debits or credits that are needed to adjust the wrong, pre-adjusted balances to the right, adjusted balances. Bank fees need to be increased $30 and cash needs to be reduced $30. I’ve indicated below for each of the T-accounts what side is the plus side and what side is the minus for each. Cash is increased with debits and decreased with credits and bank fees are increased with debits and decreased with credits. A debit to bank fees will increase [bank fees] to $30 and a credit to cash will decrease cash $30.
Step four: Record the adjusting entry in the general journal and post to ledger. We’ll debit bank fees $30 and credit to cash $30. Now, having said that, this visual representation is effectively saying that we recorded the journal entry first, and then posted it into the ledger. This is just a little work sheet to help us know what the adjusted entry is, but I’m also going to use this as if this were the posting of the general journal. It may seem a little bit backwards but this is the journal entry and then it is posted into the ledger as you can see here. Let’s go on to some other examples.
Slide 7 (0m:41s)
Links to an external site.Slide 7
$600 of interest revenue not yet recorded. That would increase our cash assets and increase our owner’s equity in those assets. The accounts affected are cash and interest revenue. The opening balance in cash is a debit of $149,970, which is the balance after making the adjustments related to the bank fees. Interest revenue has a zero balance at this stage. After recording interest revenue we should have $600 as a credit and our cash should have gone up $600 [to $150,570]. The journal entry therefore would be a debit to cash $600 and a credit to interest revenue $600.
Slide 8 (1m:31s)
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Slide 8
We’ve estimated that 3% of receivables are uncollectable. That means we will have to reduce receivables by 3%. When we reduce receivables, the owner’s equity will go down. We are dealing with these gross receivables of $15,000 we’re saying that they are overstated by 3%; therefore, we need to reduce them using a credit. Now we could put the credit here [in accounts receivable] but that’s not what accountants do. They put the credit in a separate account called an allowance for doubtful accounts. This [allowance for doubtful accounts] is what’s called a contra-asset account. We increase contra-assets by crediting them. On the balance sheet the gross accounts receivable of $15,000 will be reported but then they will deduct the balance in the allowance account, to bring it to the net amount which we believe is collectible. Therefore, if we take $15,000 times 3%, that gives us $450 that we don’t believe we can collect out of these receivables but it’s just an estimate. As of the end of the year then we should show that estimate as a credit of $450 in the allowance account, and record a related bad debt expense. The adjusting journal entry to go from the wrong numbers to the right numbers will have to be a debit to bad debt expense of $450 and a credit to allowance for doubtful accounts $450.
Now this example was quite easy because the opening allowance balance was zero. In future years there may be a carry-over debit or credit balance that we will have to deal with and will affect the adjusting entry that we will record.
Slide 9 (0m:58s)
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Slide 9
Only $70 of office supplies remain in the closet. On our pre-adjusted trial balance we show that we have $500, but now we’ve counted the office supplies and there’s only $70. Therefore we need to reduce the assets for the amount used up and that would come out of owner’s equity by recording office supplies expense. The accounts involved are office supplies and office supplies expense. Our opening balance in office supplies is $500 as a debit. As of the end of the year we’ve counted that there’s $70 of office supplies remaining. That means we’ve used up $430 [of office supplies] and that should be our office supplies expense for the period. What journal entry will take us from these wrong numbers to the right numbers? The answer is we would have to debit office supplies expense $430 and credit office supplies $430. The debit to office supplies expenses increases expenses and the credit to office supplies reduces assets.
Slides 10-12 (2m:00s)
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Slide 10
$12,000 of prepaid insurance represents a prepayment from 3/1/X1 to 2/28/X2. We’ve now used up some of that insurance because we are sitting at 12/31/X1. Therefore we will have to reduce the assets for the [prepaid] insurance we’ve used up and that will be an expense that will reduce equity. The accounts affected are prepaid insurance and insurance expense. This prepaid insurance account is overstated because we’ve used up some of it. The only remaining asset is $2,000, because if you take the $12,000 prepayment divided by 12 months and multiply it by the 2 months remaining that go into the year X2, there’s only $2,000 of the prepaid insurance that remains. We need to update this account to reflect that fact.
The ending balance of prepaid insurance should be $2,000, and insurance expense for the year should be 10 months of insurance so $12,000 divided by 12 that gives you $1,000 per month times 10 months used up = $10,000. That should be the insurance expense for the period. How do we go from the wrong pre-adjusted numbers to the right pre-adjusted numbers? We would have to debit insurance expense $10,000 thus increasing it and credit prepaid insurance thus decreasing it. Let’s stop there for Part 1 [of this topic]. We’ll have you take a quiz so you can make sure that you’ve learned adjusting entries in this part then we’ll move on to part 2 to wrap this up.
Slide 11
We’ve just finished recording adjusting entries 1-6 on this listing. I’m going to stop this video here and quiz you on the material you’ve learned so far so this video doesn’t get too long and then we’ll move onto the second part, Part B [noted in Slide 12 below] where you’ll go through 7-20. By completing parts A and B you’ll know how to analyze the information related to adjusting entries, record those adjusting entries, post them into the ledger, and prepare the adjusted trial balance. Good luck on the Part A quiz.
Slide 12