Initially, costs that benefit more than one accounting period are recorded as assets.
GENERAL JOURNAL
Date
Account Titles and Explanation
Jan. 1 Unexpired/Prepaid Insurance
advance (creates an
asset).
Adjusting Entry Recognize portion of asset consumed as
expense, and
Reduce balance of
asset account.
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Entries to prepaid expenses
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Debit Credit
200 200
13
Entries to prepaid expenses
Balance Sheet
Cost of assets that benefit
future periods.
Income Statement
Cost of assets used this period to generate revenue.
50
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Depreciation Is Only an Estimate
JJ’s Lawn Care Service would make the following adjusting entry.
GENERAL JOURNAL
Date
Account Titles and Explanation
$200 Monthly Insurance Expense
Jan. 1
Dec. 31
On January 1, Webb, Co. purchased a one-
year insurance policy for $2,400.
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Entries to prepaid expenses
their economic usefulness over time.
Depreciation is the systematic allocation of the cost of a depreciable asset to expense.
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Need for adjustments
Revenue = Cash received Expense = Cash paid
Revenue <> Cash received Expense <> Cash paid
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Adjustments at the end of each period are necessary to update some of the asset, liability, expense, and revenue accounts and to show the effects of previously unrecorded internal economic events of the business.
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Accrual and cash basis accounting
Accrual accounting requires adjustments for prepaid, unearned, and accrued items; therefore, it reports revenues when earned and expenses when the expiration of benefit is incurred.
May 31 Depreciation Expense: Tools & Eq.
Accumulated Depreciation: Tools & Eq.
To record one month's depreciation.
Debit Credit 50 50
Contra-asset
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Depreciation Is Only an Estimate
On May 2, 2001, JJ’s Lawn Care Service purchased a lawn mower with a useful life
of 50 months for $2,500 cash.
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Need for adjustments
The life of a business is divided into accounting periods so that periodic financial reports can be prepared and used to evaluate the financial progress of the business.
The Concept of Depreciation
The portion of an asset’s utility that is used up must be expensed in the period used.
On date when initial payment is
made . . .
Prepaid Insurance 1/1 2,400 1/31 200 Bal. 2,200
பைடு நூலகம்
Insurance Expense 1/31 200
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The Concept of Depreciation
Depreciable assets are physical objects that retain their size and shape but lose
GENERAL JOURNAL
Date
Account Titles and Explanation
Monthly Adjusting Entry for Insurance
Jan. 31 Insurance Expense
Prepaid Insurance
Insurance expense for January.
Accrued Expenses
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Entries to prepaid expenses
End of Current Period Prior Periods Current Period Future Periods
Transaction Paid future expenses in
The cash basis of accounting is not generally accepted.
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Step 5: Adjusting the accounts
Adjusting entries are journalized in the general journal and then posted into the general ledger.
Fixed Asset (debit)
Cash (credit)
The asset’s usefulness is
partially consumed during the
period.
Accumulated Depreciation
(credit)
At end of period . . .
Depreciation Expense (debit)
accrue revenues and record the related assets
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Types of Adjusting Entries
Prepaid Costs/Expenses
Accrued Revenue
Unearned Revenue
Examples Include: Depreciation Supplies
Expiring Insurance Policies
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Entries to prepaid expenses
$2,400 Insurance Policy Coverage for 12 Months
Cash basis accounting does not make adjustments for prepaid expenses, accrued expenses, unearned revenues, and accrued revenues; revenues are recorded when cash is received and expenses are recorded when cash is paid.
accrue expenses and record the related liabilities
……
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