ADJUSTING ENTRIES

ADJUSTING ENTRY FOR BAD DEBTS EXPENSE

The adjusting entry for bad debts expense is:
Bad debts expense Dr.
Allowance for bad debts Cr.
The amount of bad debts is depend on the data given in the question.

Example # 1:
Trial balance: Allowance for bad debts = No balance.
Adjustment data: Allowance for bad debts Rs.3,000.
Adjusting entry:
Bad debts expense 3,000 Dr.
Allowance for bad debts 3,000 Cr.

Example # 2:
Trial balance: Allowance for bad debts = 2,000 Cr.
Adjustment data: Allowance for bad debts Rs.3,000.
Adjusting entry:
Bad debts expense 1,000 Dr.
Allowance for bad debts 1,000 Cr.

Example # 3:
Trial balance: Allowance for bad debts = Rs.2,000 Dr.
Adjustment data: Allowance for bad debts Rs.2,000.
Adjusting entry:
No entry.

Example # 4:
Trial balance: Allowance for bad debts = 1,000 Dr.
Adjustment data: Allowance for bad debts Rs.2,000.
Adjusting entry:
Bad debts expense 3,000 Dr.
Allowance for bad debts 3,000 Cr.

Example # 5:
Trial balance: Allowance for bad debts = Rs.4,000 Cr.
Adjustment data: Allowance for bad debts Rs.3,000.
Adjusting entry:
Allowance for bad debts 1,000 Dr.
Retained earnings 1,000 Cr.

ADJUSTING ENTRY FOR DEPRECIATION EXPENSE

The adjusting entry for depreciation expense is:
Depreciation expense Dr.
Allowance for depreciation Cr.

Example # 1:
Trial Balance:
Furniture Rs.100,000.
Allowance for depreciation Rs.15,000.
Adjustment Data: Depreciation @ 10% on furniture cost.
Adjusting Entry:
Depreciation expense 10,000 Dr.
Allowance for depreciation 10,000 Cr.
(100,000 x 10% = 10,000. because it is mentioned to apply rate on cost).

Example # 2:
Trial Balance:
Furniture Rs.100,000.
Allowance for depreciation Rs.15,000.
Adjustment Data: Depreciation @ 10% on book value.
Adjusting Entry:
Depreciation expense 8,500 Dr.
Allowance for depreciation 8,500 Cr.
(100,000 - 15,000) x 10% = 8,500. because it is mentioned to apply rate on book value and book value means cost - allowance for depreciation).

Example # 3:
Trial Balance:
Furniture Rs.100,000.
Allowance for depreciation Rs.15,000.
Adjustment Data: Depreciation on furniture Rs.12,000
Adjusting Entry:
Depreciation expense 12,000 Dr.
Allowance for depreciation 12,000 Cr.
(Depreciation amount is already given in the question, so no need to calculate).

(Remember: It is just the explanation of adjusting entry, not the explanation of topic depreciation. The topic of depreciation will be explained in detail later.)

ADJUSTING ENTRY FOR ACCRUED EXPENSES

Adjusting entry for accrued expense is:
Expenses Dr.
Payable Cr.

Example # 1:
Trial balance: Salaries expense Rs.60,000.
Adjustment data: Accrued salaries/unpaid salaries/salaries payable Rs.20,000.
Adjusting entry:
Salaries expense 20,000 Dr.
Salaries payable 20,000 Cr.
(when adjustment data shows the word "accrued, unpaid, outstanding, due but not paid" it is the identification of accrued expense and entry will be passed with adjustment data amount).

Example # 2:
Trial balance: Salaries expense Rs.60,000.
Adjustment data: Salaries expense for the year Rs.70,000.
Adjusting entry:
Salaries expense 10,000 Dr.
Salaries payable 10,000 Cr.
(when adjustment data's expense amount is more than the amount of trial balance, it is the identification of accrued expense and entry will be passed with the difference amount 10,000 (70,000 - 60,000 = 10,000).

Example # 3:
Trial balance: Salaries expense Rs.60,000.
Adjustment data: Salaries expense for the year Rs.60,000.
Adjusting entry:
No entry.
(60,000 - 60,000 = NIL).

ADJUSTING ENTRY FOR ACCRUED INCOME

Adjusting entry for accrued income is:
Receivable Dr.
Income Cr.

Example # 1:
Trial balance: Commission income Rs.20,000.
Adjustment data: Accrued commission/commission receivable Rs.5,000.
Adjusting entry:
Commission receivable 5,000 Dr.
Commission income 5,000 Cr.
(when adjustment data shows the word "accrued, receivable" it is the identification of accrued income and entry will be passed with adjustment data amount).

Example # 2:
Trial balance: Commission income Rs.20,000.
Adjustment data: Commission income for the year Rs.23,000.
Adjusting entry:
Commission receivable 3,000 Dr.
Commission income 3,000 Cr.
(when adjustment data's income amount is more than the amount of trial balance, it is the identification of accrued income and entry will be passed with the difference amount 3,000 (23,000 - 20,000 = 3,000).

Example # 3:
Trial balance: Commission income Rs.20,000.
Adjustment data: Commission income for the year Rs.20,000.
Adjusting entry:
No entry.
(20,000 - 20,000 = NIL).

ADJUSTING ENTRY FOR PREPAYMENT INITIALLY RECORDED AS ASSET:

Adjusting entry will be:
Expense Dr.
Prepaid Cr.

When trial balance shows the word "prepaid" and adjustment data's amount is less than the trial balance amount, it is the identification of prepayment initially recorded as asset.

Example:

On October 1, 2010, rent paid in advance for 2 years Rs.48,000 initially recorded as prepaid. Accounting year ends on December 31.

General Journal Entry on October 1, 2010:

Prepaid rent                48,000 (Dr.)

    Cash                                                48,000 (Cr.)

One month's rent is Rs.2,000 (48,000/24). Company used 3 months (October to December). 3 months' rent is Rs.6,000 (2,000 x 3). Out of Rs.48,000, only Rs.6,000 is expired and remaining is still prepaid. Company's prepaid is decreased and expense is increased. Increase in expense is recorded as debit and decrease in prepaid (asset) is recorded as credit by Rs.6,000.

Adjusting Entry on December 31, 2010:

Rent expense              6,000 (Dr.)

    Prepaid rent                                6,000 (Cr.)

ADJUSTING ENTRY FOR PREPAYMENT INITIALLY RECORDED AS EXPENSE:

Adjusting entry will be:
Prepaid Dr.
Expense Cr.

When trial balance shows the word "expense" and adjustment data's amount is less than the trial balance amount, it is the identification of prepayment initially recorded as expense.

Example:

On October 1, 2010, rent paid in advance for 2 years Rs.48,000 initially recorded as expense. Accounting year ends on December 31.

General Journal Entry on October 1, 2010:

Rent expense            48,000 (Dr.)

    Cash                                        48,000 (Cr.)

One month's rent is Rs.2,000 (48,000/24). Company used 3 months (October to December). 3 months' rent is Rs.6,000 (2,000 x 3). Out of Rs.48,000, only Rs.6,000 is expired and remaining is still prepaid. Company's prepaid is increased and expense is decreased. Increase in prepaid (asset) is recorded as debit and decrease in expense is recorded as credit by Rs.42,000.

Adjusting Entry on December 31, 2010:

Prepaid rent            42,000 (Dr.)

    Rent expense                            42,000 (Cr.)

ADJUSTING ENTRY FOR UNEARNED INCOME INITIALLY RECORDED AS LIABILITY:

Adjusting entry will be:
Unearned Dr.
Income Cr.

When trial balance shows the word "Unearned" and adjustment data's amount is less than the trial balance amount, it is the identification of unearned income initially recorded as liability.

Example:

On March 1, 2010, rent received in advance for 12 months Rs.36,000 initially recorded as unearned. Accounting year ends on December 31.

General Journal Entry on March 1, 2010:

Cash                    36,000 (Dr.)

    Unearned rent                    36,000 (Cr.)

One month's rent is Rs.3,000 (36,000/12). Company provided services for 10 months (March to December). 10 months' rent is Rs.30,000 (3,000 x 10). Out of Rs.36,000, only Rs.6,000 is still unearned and remaining Rs.30,000 is earned by company. Company's income is increased and unearned (liability) is decreased. Increase in income is recorded as credit and decrease in unearned (liability) is recorded as debit by Rs.30,000.

Adjusting Entry on December 31, 2010:

Unearned rent        30,000 (Dr.)

    Rent income                        30,000 (Cr.)

ADJUSTING ENTRY FOR UNEARNED INCOME INITIALLY RECORDED AS INCOME:

Adjusting entry will be:
Income Dr.
Unearned Cr.

When trial balance shows the word "Income" and adjustment data's amount is less than the trial balance amount, it is the identification of unearned income initially recorded as income.

Example:

On March 1, 2010, rent received in advance for 12 months Rs.36,000 initially recorded as income. Accounting year ends on December 31.

General Journal Entry on March 1, 2010:

Cash                    36,000 (Dr.)

    Rent income                        36,000 (Cr.)

One month's rent is Rs.3,000 (36,000/12). Company provided services for 10 months (March to December). 10 months' rent is Rs.30,000 (3,000 x 10). Out of Rs.36,000, only Rs.6,000 is still unearned and remaining Rs.30,000 is earned by company. Company's income is decreased and unearned (liability) is increased. Increase in unearned (liability) is recorded as credit and decrease in income is recorded as debit by Rs.6,000.

Adjusting Entry on December 31, 2010:

Rent income        6,000 (Dr.)

    Unearned rent                    6,000 (Cr.)

IDENTIFICATIONS:

(a) Depreciation Expense:
The adjustment data show the information about fixed asset or depreciation. It is the identification of depreciation expense.

(b) Bad Debts Expense:
The adjustment data shows the information about receivables or bad debts. It is the identification of bad debts expense.

(c) Accrued Expense:
The adjustment data shows the word "accrued, unpaid, payable, outstanding, due but not paid". or the amount of expense in adjustment data is more than the amount of the expense in trial balance. It is the identification of accrued expense.

(d) Accrued Income:
The adjustment data shows the word "accrued, receivable, earned but not received". or the amount of income in adjustment data is more than the amount of the income in trial balance. It is the identification of accrued income.

(e) Prepayment Initially Recorded as Asset:
Trial balance shows the word "Prepaid" and the amount of expense in the adjustment data is less than the amount of expense in the trial balance. It is the identification of prepayment initially recorded as asset.

(f) Prepayment Initially Recorded as Expense:
Trial balance shows the word "Expense" and the amount of expense in the adjustment data is less than the amount of expense in the trial balance. It is the identification of prepayment initially recorded as expense.

(g) Unearned Income Initially Recorded as Liability:
Trial balance shows the word "Unearned" and the amount of income in the adjustment data is less than the amount of income in the trial balance. It is the identification of unearned income initially recorded as liability.

(h) Unearned Income Initially Recorded as Income:
Trial balance shows the word "Income or Revenue" and the amount of income in the adjustment data is less than the amount of income in the trial balance. It is the identification of unearned income initially recorded as income.