FA15 - Adjusting Journal Entries - MORE EXAMPLES
Summary
TLDRThis video tutorial covers adjusting journal entries, creating an adjusted trial balance, and preparing financial statements for NetLock Security. The instructor walks through seven adjustments required for the June 30, 2024, unadjusted trial balance, including supplies, prepaid insurance, depreciation, interest expenses, unearned revenue, and accrued salaries. Each step is carefully explained with corresponding journal entries, focusing on the key concepts of accrual accounting. The video is part of a series that provides comprehensive guidance for students and professionals learning financial accounting.
Takeaways
- 💻 The problem involves preparing adjusting journal entries, an adjusted trial balance, and financial statements.
- 📊 The example provided shows the unadjusted trial balance of a company called Netlock Security, a firm offering hacking prevention services.
- 📝 Supplies adjustment: The physical count revealed $300 of supplies on hand, while accounting records showed $5,000, leading to a $4,700 adjustment.
- 💼 Prepaid insurance adjustment: A $28,000 insurance policy was purchased on March 1st, 2024. Four months of the policy have been used up, requiring an adjustment of $9,333.
- 💻 Depreciation adjustment: Computers purchased years ago for $214,000 are depreciated over 10 years, requiring a $21,400 annual depreciation expense.
- 💵 Interest accrual: A note payable issued on February 1st, 2024, with 10% annual interest, accrued $1,250 in interest over five months.
- 💼 Unearned revenue: A three-month security contract paid $15,000 upfront on May 1st. Two months of services have been delivered, resulting in $10,000 of earned revenue.
- 👩💼 Salary accrual: The company owes $1,500 in unpaid salaries for three employees who worked for two days, each earning $250 per day.
- 📅 Accrued revenue: The company provided services worth $4,000 in June for a new client but had not billed them yet, leading to an accounts receivable entry.
- 🎥 Future steps: The next video will cover filling in the adjusted trial balance and completing the financial statements.
Q & A
What kind of problem is being addressed in the video?
-The video addresses adjusting journal entries, the preparation of an adjusted trial balance, and financial statements.
What service does Netlock Security offer?
-Netlock Security offers hacking prevention services to large companies.
Why is the supplies account being adjusted in Part A?
-The supplies account is being adjusted because there is a discrepancy between the recorded amount of supplies ($5,000) and the actual amount on hand ($300). The adjustment records the used-up supplies.
How is the prepaid insurance being adjusted in Part B?
-Prepaid insurance is being adjusted to account for the four months of insurance used since March 1st. $9,333 of the $28,000 insurance policy has expired, so the journal entry records this usage as an expense.
What is the depreciation adjustment for the computers in Part C?
-The computers, purchased years ago for $214,000 with an estimated life of 10 years, require a depreciation adjustment of $21,400 for the current year.
How is interest expense calculated for the note payable in Part D?
-The interest expense is calculated at 10% annually on a $30,000 note payable, resulting in $3,000 per year. Since the note was issued on February 1st, 5 months of interest have accrued, totaling $1,250.
What adjustment is made for unearned revenue in Part E?
-The company had received $15,000 for a three-month contract. By June 30th, two months of the service had been provided, so $10,000 of the unearned revenue is recognized as earned revenue.
What is the accrued salaries expense adjustment in Part F?
-The company owes three employees for two days of work, with each employee earning $250 per day. The total accrued salaries expense is $1,500, which is recorded as a liability (salaries payable).
What adjustment is made for unbilled revenue in Part G?
-The company provided a month of service under a $4,000 per month contract but had not yet billed the client. The adjustment recognizes the revenue as earned and records it as accounts receivable.
What are the five types of adjustments mentioned in the video?
-The five types of introductory adjustments are for prepaid expenses, depreciation, accrued expenses, accrued revenues, and revenues.
Outlines
📥 Accessing the Workbook and Videos
The speaker explains how viewers can download a copy of the problem from the Counting Workbook website, which includes both public and members-only videos. Access to the members-only videos is available by clicking the join button on YouTube. The speaker introduces problem 3.3a, which involves adjusting journal entries, preparing an adjusted trial balance, and creating financial statements. The problem is comprehensive and will be covered in a series of videos, starting with the trial balance of a security firm called Net Lock Security as of June 30, 2024.
📦 Adjusting Entry for Supplies
The speaker walks through the adjustment for supplies. Initially, $5,000 worth of supplies was recorded in the accounting books, but a physical count shows only $300 on hand. The speaker explains the need to adjust the books by $4,700 to reflect the usage of supplies. The entry involves crediting the supplies account by $4,700 and debiting the supplies expense account for the same amount.
📉 Adjusting Entry for Prepaid Insurance
The speaker discusses the adjustment for a $28,000 insurance policy purchased on March 1, 2024, for one year. By June 30, four months of insurance have been used up. The calculation for this usage amounts to $9,333.33, which is the expired portion of the insurance policy. The journal entry to record this involves debiting insurance expense and crediting prepaid insurance for the used-up amount.
🖥️ Depreciation of Computers
The adjustment for computer depreciation is explained next. Computers were purchased years ago for $214,000, with an estimated useful life of 10 years. The speaker calculates the annual depreciation to be $21,400, and since this is a year-end entry, the full depreciation for the year is recorded. The journal entry is to debit depreciation expense and credit accumulated depreciation by $21,400.
💸 Interest on Note Payable
The adjustment for a $30,000 note payable issued on February 1, 2024, is covered next. The note accrues interest at a 10% annual rate, equating to $3,000 per year. Since the note has only been outstanding for five months by June 30, the interest expense is calculated as $1,250. The speaker explains the journal entry, which involves debiting interest expense and crediting interest payable.
📅 Earned Revenue for Security Contract
The company entered into a three-month security contract on May 1, 2024, for $15,000. By June 30, two-thirds of the work has been completed. The speaker explains how to adjust for this earned revenue, where $10,000 (two-thirds of the total) is now recognized as earned. The journal entry debits unearned security revenue and credits security revenue by $10,000.
💼 Accrued Salaries Payable
The adjustment for unpaid salaries is explained. The company has three employees, each owed for two days of work, with each employee earning $250 per day. The total unpaid salaries amount to $1,500. The journal entry is to debit salaries expense and credit salaries payable by $1,500.
🧾 Accrued Revenue for Services
The adjustment for accrued revenue is discussed. The company provided services worth $4,000 in June 2024 but has not yet billed the client. The journal entry to record this accrued revenue involves debiting accounts receivable and crediting security revenue by $4,000.
✅ Conclusion and Next Steps
After completing all the adjusting journal entries, the speaker wraps up by mentioning that the next video will focus on filling out an adjusted trial balance using these entries. Viewers are encouraged to stay tuned for the next part of the video series.
Mindmap
Keywords
💡Adjusting journal entries
💡Supplies adjustment
💡Prepaid insurance
💡Depreciation
💡Accrued expenses
💡Unearned revenue
💡Salaries payable
💡Accounts receivable
💡Trial balance
💡Financial statements
Highlights
The video provides a comprehensive walkthrough of adjusting journal entries, an adjusted trial balance, and financial statements preparation.
The problem discussed is from a workbook available for download at 'accountingworkbook.com', offering both public and members-only videos.
The fiscal year-end is June 30th, 2024, and seven items require adjustments, with the first being an adjustment for supplies used.
The supplies on hand are $300, while the accounting records show $5,000. A $4,700 adjustment is required to match the records to reality.
The insurance policy was purchased on March 1st, 2024, for $28,000, covering a one-year period. An adjustment is made to account for the expired portion.
The expired insurance for four months is calculated as $9,333, which is adjusted in the journal entry.
The computers were purchased years ago for $214,000 with an estimated life of 10 years. Depreciation for the current year is calculated at $21,400.
An adjustment is made for interest accrued on a $30,000 note payable issued in February 2024, with a 10% annual interest rate, totaling $1,250.
An unearned revenue adjustment is made for a three-month contract, with two months of services fulfilled, earning $10,000 of the $15,000 total.
Three employees are owed salaries for two days of work at $250 per day each, leading to a $1,500 accrued expense adjustment.
An accrued revenue adjustment is made for $4,000, as the company provided a month of service but had not yet billed the client.
The video highlights common mistakes students make when adjusting for prepaid expenses, stressing the importance of recognizing used-up amounts.
The instructor emphasizes the importance of focusing on year-end adjustments rather than initial setup entries.
The process of calculating depreciation is simplified by focusing on full-year depreciation for assets with a pre-determined lifespan.
The next step after the journal entries is to prepare an adjusted trial balance, which will be covered in a future video.
Transcripts
the problem from this video can be
downloaded at a counting workbook com if
you go to the website click the PDF link
and you can download a copy of this and
all of my problems for yourself now if
you check the website and you click on
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than those I've listed publicly on
YouTube you can see that there's every
problem covered in the workbook has
either a public video or a members-only
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members only video just click the join
button beneath the video player on
YouTube alright let's jump into the
problem let's take a look at problem 3
3a this ladies and gentlemen is a
terrific problem it has us doing
adjusting journal entries we're gonna
prepare an adjusted trial balance and
we're gonna do financial statements so
it's so comprehensive you're gonna get a
lot of good information in this it'll be
a series of videos but what a great
problem here we go below is the June
30th 2024 unadjusted trial balance of
net lock security a firm that offers
hacking prevention services to large
companies so anyway there is their trial
balance ok fair enough I guess things
that kind of jump out at me I go okay
well there's supplies so probably will
do an adjusting their own tree for
supplies it's prepaid insurance I see
they have a long term asset so I'm gonna
have to do depreciation entries and all
sorts of other things you know I sort of
scan down the list I see unearned
security revenue well where there's
unearned revenue there are adjustments
to be done um it says the company's
fiscal year end is June 30th and the
following items require adjustment and
there's a big long list ABCD efg so
we're gonna have what is that seven
items requiring adjustment and Part A
says give us some adjusting journal
entries now if you haven't done so and I
will have uploaded this a video
walkthrough of problem 3 1a just
explaining what adjustments are and how
to do them and at the end of the video I
prepare this little cheat sheet that
says in our class in my course there's
five kind of introductory adjustments
there's adjustments for prepaid expenses
depreciation accrued expenses accrued
revenues
revenues and this problem has us doing
just adjusting journal entries so we're
not gonna do any of these like setup
entries we're gonna be focused in on
this column and let's see how it goes so
let's look at the first one a a says
account of supplies reveals that $300 of
supplies are on hand On June the 30th ok
so again all of our adjustments are
going to be dated June 30th so there's
Part A let's just do this June 30th and
we're doing the journal entry for this
one so we have three hundred dollars
worth of supplies on hand well that's
fine but remember what we're interested
in this supplies are a prepaid so we're
looking at the top column there we're
interested in how many dollars worth of
supplies we used up or how many dollars
we need to expense well here's where we
need to look we need to go up here and
have a look at the supplies so according
to my accounting records I have five
thousand dollars worth of supplies I go
out and I physically count the supplies
and I have three hundred dollars worth
of supplies there's a problem here right
my accounting records do not match
reality reality says three hundred
dollars of supplies that's something
you've got in your supply cabinet my
books say five thousand dollars I gotta
fix my books I go to adjust my books so
by how much well again my books say five
thousand reality my count says three
hundred five thousand - three hundred
means the difference here is forty seven
hundred dollars I have to reduce my
supplies asset by forty seven hundred
dollars so I credit supplies $4,700
because they've got to go down by
forty-seven hundred from five thousand
to three hundred the debit here is to
supplies expense to record the fact that
I used up some of my supplies and you
can see up here the journal entry
for prepaid debit some sort of expense
credit some sort of prepaid assets in
this case it's supplies expense and
supplies
we got another prepaid coming so I'll
just leave this highlighted the $28,000
insurance policy was purchased on March
1st 2024 ok so if I scroll up here I'm
expecting to see and I do see under
prepaid insurance $28,000
so is there saying hey this was
purchased and you know what what's not
being said is this was a 12-month
insurance policy a one-year insurance
policy now if it doesn't say that you
got to ask your profit could be a
two-year three-year but the assumption
would be unless it tells the otherwise
assume you buy insurance a year at a
time that's a good assumption okay so
it's a one-year insurance policy we
bought it on March 1st 2024 today is
June 30th 2024 so we got to say okay do
I have 28 thousand dollars worth of
insurance the answer is no right I've
used some up some of that insurance has
expired between March and June I've been
using the insurance so March April May
June that's four months so the math here
is 28,000 times
412 a mistake some students make here
it's not really a mistake but something
some students will do here is they'll
buy the insurance policy so go debit
prepaid insurance 20,000 credit cash or
AP 28,000 that's fine except for we've
already done it how do I know we've done
it because it's already there in the
books so some other accountant has done
this already we're getting to this
question that year and so somebody else
has done the journal entry to buy the
insurance we've got to record the
adjustment so we're not doing the setup
debit prepaid insurance credit cash or
AP no no no we're doing the adjustment
we're focused in on that right hand
column so we want to know how much
insurance that we use up just like here
we wanted to know how many dollars worth
of supplies we use them so how many
dollars worth of insurance that we use
up I can't do this math in my head I
think it's going to give me an awkward
number I was hoping for nice even
numbers twenty-eight thousand times 4/12
939 three three three nine thousand
three hundred and thirty three dollars
of insurance got used up so June
thirtieth and that this was journal
entry a here's journal entry be a debit
insurance expense credit prepaid
insurance for the insurance we used up
9333 I always say used up another way of
saying that is the amount of insurance
that has expired
right how much insurance has expired
here okay that's B let's clean this up
move on to see the computers were
purchased years ago for two hundred and
fourteen thousand dollars so a long time
ago we purchased these computers for two
hundred fourteen grand at the time of
the purchase the estimated life of the
computers was ten years with no
estimated residual value okay this is
actually easier than we've done in
previous problems in previous problems
I've said oh they purchased these on
June 30th and you gotta figure out oh
how many months have gone around let's
say April 3rd and you gotta figure out
how many months between April and June
and do two 12s or whatever the numbers
here we purchased some years ago for two
hundred fourteen thousand dollars and at
that time the estimated life is ten so
here's what we do we say okay well if we
purchase them years ago
we got to depreciate this for a full
year we've owned these for one full year
so I have these two hundred and fourteen
thousand dollars worth of computers I
don't even need to look at the ad on
those computers okay obviously you know
they've depreciated a little bit because
I've owned them for a little that
doesn't matter to my calculation I
divide here by ten years and I say the
rate is twenty one thousand four hundred
dollars a year so obviously if there
were as forty six thousand a
depreciation already I've owned them for
a couple of years which makes sense I've
got you know more than two years of
depreciation I just have to put one more
year of depreciation on these computers
so the journal entry on June 30th is the
journal entry that we always have for
appreciation so we're done with prepaids
now we're doing a depreciation entry and
again we're not doing the setup we're
doing the year-end entry debit
depreciation expense credit accumulated
depreciation on our computers twenty-one
thousand four hundred bucks
okay that's C let's move on to D D the
note payable was issued in February
first 2024 and accrues interest at a ten
percent annual rate the note is expected
to be repaid in late twenty twenty four
who cares when the notes expect to be
paid that doesn't matter expectations
don't matter in financial accounting it
is what happened so we lent somebody or
we borrowed rather thirty thousand
dollars there it is there's a note
payable for thirty thousand dollars we
borrow $30,000 and at a cruise interest
at a rate of 10% annually so let's do
some math here D $30,000 times 10% is
$3,000 per year
okay so $3,000 a year is our interest
cost now we hadn't board the money for a
full year we borrowed it on February 1st
2024
so it's June 30th today so account
February February March April May June
why do I count febray because it was
February 1st right it was February 28th
I wouldn't count for everybody February
March April May June five months so five
months of interest means it's five
twelfths of a year 3000 times 5/12 it's
gonna be again an uneven awkward number
clear clear clear clear clear this thing
works inconsistently 3000 times 5/12 if
you ever think my writing is messy blame
the computer screen don't blame me I
have gorgeous writing
life just gorgeous I'm lying okay
the journal entry here June 30th it's a
journal entry for interest and it's an
interest cost this is an accrued expense
right it's a cost that is built up over
time but we haven't get this in read
that we haven't paid yet right we
haven't paid them back so we're gonna
debit some sort of expense credit some
sort of payable and to hopefully
nobody's surprise its debit interest
expense credit interest payable let's do
it
debit interest expense credit interest
payable any man is 1250 okay on to the
next e says on May 1st 2024 the company
entered into a three month contract to
provide security for a major corporation
the corporation paid fifteen thousand
dollars for their three month contract
on May 1st so we're getting paid in
advance you know if I may first I enter
into the contract I'm gonna give to work
for three months and they paid fifteen
thousand dollars on May 1st means they
paid before I did any work this is an
unearned revenue I'm expecting to see
unearned revenues of fifteen thousand
dollars and you know what I do there it
is fifteen thousand dollars of unearned
revenue so back when that happened the
accountant did a wonderful job they went
debit cash credit unearned Security
revenue and that amount was correctly
recorders honor in revenue on June 30th
net lock had fulfilled the first two
months of the contract so what this is
saying is look we said this was all
unearned revenue this is a liability we
owe them service you know we owe them
security work well guess what we've
delivered 2/3 of what we owed them right
it's a three month contract May and June
we fulfilled the first two months of
that contract so we've
two-thirds of the work we've earned
two-thirds of the revenue so here we go
II two-thirds of 15,000 has been earned
2/3 of 15,000 is 10,000 we've earned
$10,000 in Security revenue so the
journal entry for an unearned revenue
looking at our cheat sheet here it's the
bottom again sometime in the past we
want debit cash credit on our insecurity
revenue you know we debit unearned
Security revenue we credit security
revenue just going to make sure we have
an account called security revenue we do
so let's do it
debit unearned security revenue credit
security revenue and the amount of
course $10,000 moving on to F just two
more here F says the company had three
employees who were owed for two days of
salaries each as employed at your end
each employee earns $250 a day this is
like a word puzzle okay so this is an
accrued expense by the way salaries
unpaid salaries is an accrued expense so
what's happening here we have three
people they're both they're all owed
$250 a day so that's $750 a day and we
owe for two days so we owe $1,500 that
was a mouthful right company had three
employees who are owed for two days
salaries each employee makes 250 bucks a
day so I've kind of reconfigured that
and said okay three people they all make
250 bucks a day so that's 750 bucks a
day in salaries that I'm gonna owe I owe
two days 750 times to 1,500 okay so 1500
of unpaid salaries the journal entry is
pretty simple debit salaries expense
credit salaries
payable $1,500 there we go there's F on
to G G says clean this up a bit G says
on June 1st 2024 the company entered
into an agreement to provide service for
a new client at a rate of $4,000 a month
at the end of June the client had
received their first month of service
but had not yet been billed okay so
we've done work for which we haven't
been paid and we haven't even built it
yet this is a great example of an
accrued revenue its revenue building up
cuz I'm doing work but for which I
haven't been paid I'm gonna debit some
sort of receivable probably accounts
receivable there could be some sort of a
crude revenue receivable depending on
the company's chart of accounts but I
think we can fairly call this accounts
receivable and just credit our normal
revenues here we're doing work let's see
if there any other peoples no so I would
say accounts receivable and just plain
old security revenue are the two
accounts here that make the most sense
and it's a month we don't have any math
to do here it's four grand a month and
we've earned a month so G June thirtieth
debit accounts receivable four grand
credit security revenue curity Rev four
grand okay we have done all of the
journal entries the adjusting journal
entries our next step is going to be to
fill this in and to prepare an adjusted
trial balance we'll fill in these
columns and we'll do that in our next
video stay tuned
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