Lesson 017 - Adjusting Entries 1: Prepaid Expenses (Basic Approach)
Summary
TLDRThis video lesson covers the concept of adjusting entries in accounting, which are made at the end of the accounting period to update balances for assets, liabilities, revenues, and expenses. The instructor explains the importance of adjusting entries in preparing accurate financial statements, using practical examples like prepaid transportation cards. Different types of adjustments, such as prepaid expenses, accrued revenues, and depreciation, are discussed. The video emphasizes the application of key accounting principles such as completeness, matching, and revenue recognition. A step-by-step example of adjusting entries for office supplies is also provided.
Takeaways
- 📊 Adjusting entries are made at the end of an accounting period before closing procedures to update balances of assets, liabilities, revenues, and expenses for accurate financial reporting.
- 📆 Adjusting entries must be done at the end of each accounting period, whether it's monthly or annually, to ensure the balances are correct for financial statement preparation.
- 💡 Adjusting entries update accounts like prepaid expenses, deferred revenue, accrued revenue, accrued expenses, and depreciation, ensuring that all transactions are properly reflected in financial statements.
- 🚉 An analogy is used involving a prepaid transportation card to explain how adjusting entries work, showing how prepaid amounts decrease as they are used.
- 📜 Common types of adjusting entries include prepaid expenses, deferred revenue, accrued revenue, accrued expenses, asset depreciation, and bad debts (uncollectible accounts).
- 🏢 Prepaid expenses start as an asset (like prepaid insurance or office supplies) and are gradually expensed as they are consumed or expired over time.
- 💼 Deferred revenue occurs when a company receives payment for services not yet rendered; it starts as a liability and is later recognized as revenue once the service is provided.
- 📝 Accrued revenue and accrued expenses are recorded when a service has been provided but payment has not been received (for revenue) or when expenses are incurred but not yet paid.
- 🏗 Asset depreciation is systematically allocated over time, reducing the value of long-term assets like machinery and furniture as they age or are used.
- 📈 Adjusting entries adhere to key accounting principles like completeness, matching principle, and accrual basis of accounting, ensuring all financial transactions are accurately recorded and matched to the correct period.
Q & A
What are adjusting entries in accounting?
-Adjusting entries are journal entries made at the end of the accounting period before closing procedures to update balances of asset, liability, revenue, and expense accounts. These adjustments ensure that account balances are accurate and ready for the preparation of financial statements.
Why are adjusting entries necessary?
-Adjusting entries are necessary to accurately reflect the financial status of a business by ensuring that assets, liabilities, revenues, and expenses are reported correctly. This allows for the correct preparation of financial statements at the end of the accounting period.
Can you provide an example of an adjusting entry?
-An example of an adjusting entry involves prepaid transportation. If you purchase a prepaid transportation card for 100 pesos and use 30 pesos for transportation during the period, an adjusting entry is made to recognize the 30 pesos as a transportation expense and the remaining 70 pesos as a prepaid transportation asset.
What are the different types of adjusting entries?
-The different types of adjusting entries include prepaid expenses, deferred revenue, accrued revenue, accrued expenses, depreciation of assets, and adjustments for uncollectible accounts.
What are prepaid expenses, and how are they adjusted?
-Prepaid expenses are expenses paid in advance, such as prepaid insurance. Initially, they are recorded as an asset. Over time, as the service is consumed, part of the prepaid amount is recognized as an expense. For example, if you prepaid 100,000 for office supplies and used 60,000 by the end of the year, you would adjust by debiting 60,000 to office supplies expense and crediting 60,000 from the prepaid office supplies account.
What is the difference between accrued revenue and deferred revenue?
-Accrued revenue refers to revenue that has been earned but not yet received in cash, while deferred revenue is money received in advance for services or goods yet to be delivered. Accrued revenue is recorded as income even if cash is not yet received, while deferred revenue starts as a liability and is recognized as revenue when the service or product is delivered.
How is depreciation of assets handled in adjusting entries?
-Depreciation of assets is an adjustment made to allocate the cost of tangible fixed assets, like machinery or furniture, over their useful life. This is done systematically over time, and an adjusting entry is made to record the depreciation expense and reduce the asset's book value.
What is the matching principle, and how does it relate to adjusting entries?
-The matching principle states that expenses should be recorded in the same period as the revenues they help generate. Adjusting entries adhere to this principle by ensuring that all related expenses and revenues are matched properly to measure a company's net income or net loss accurately.
What happens if adjusting entries are not made?
-If adjusting entries are not made, the financial statements will not accurately reflect the company's financial position. This can lead to misstated income, over- or under-stated assets and liabilities, and incorrect net income or loss calculations.
How are adjusting entries recorded in a journal?
-Adjusting entries are recorded in a journal by debiting and crediting the appropriate accounts. For example, in a case where prepaid expenses are used, the expense account is debited, and the related asset account is credited to reflect the consumption of the asset.
Outlines
📚 Introduction to Adjusting Entries in Accounting
The video begins with a recap of previous lessons on the accounting cycle, including source document analysis, journaling, and preparing an unadjusted trial balance. The focus is on the fifth step: adjusting entries. Adjusting entries are made at the end of an accounting period to update the balances of assets, liabilities, revenue, and expenses, ensuring they are accurate for the preparation of financial statements. The speaker gives an analogy using a transportation card to illustrate the concept, highlighting how prepaid assets (like the card) reduce over time as they are used.
💡 Understanding Prepaid Expenses and Other Adjustments
The speaker explains prepaid expenses as payments made in advance, starting as assets but becoming expenses as the service is consumed. Examples like prepaid insurance or prepaid transportation are used to show how the expense is recorded gradually. The paragraph also introduces other types of adjusting entries such as deferred revenue (where payment is received in advance but the service is not yet rendered), accrued revenue, accrued expenses, depreciation, and uncollectible accounts, laying the groundwork for detailed discussions on these topics later.
🏛 Higher Accounting Adjustments and Principles
This section touches on more complex adjustments, such as impairment loss on assets and amortization of intangible assets, which are covered in higher-level accounting. It emphasizes how adjusting entries adhere to key accounting principles like completeness, matching principle, and the accrual basis of accounting. These principles ensure that transactions are recorded properly, even if cash is not yet received or paid, aligning expenses and revenues for accurate financial reporting.
✏️ Adjusting Prepaid Expenses: An Example
The video presents an example of adjusting prepaid expenses using a problem about a company that purchased office supplies. The company initially recorded office supplies as an asset worth 100,000, but by the end of the year, only 40,000 remained. The adjustment is necessary to reflect the 60,000 used as an expense in the financial statements. The speaker walks through the journal entries, demonstrating how to calculate and record these adjustments, reinforcing the process of balancing asset and expense accounts at year-end.
📑 Journal Entries and Balancing Accounts
The speaker explains two different methods for recording prepaid expenses and their adjustments: the asset method and the expense method. In both cases, the final result is the same, but the approach differs. The asset method initially records prepaid items as assets, while the expense method treats them as expenses from the start. The speaker highlights that proper adjustment ensures accurate reporting in the income statement and balance sheet.
📘 Wrap-Up: Preparing for Next Lessons
The final part of the video recaps the discussion on prepaid expenses and adjustments, hinting at future lessons on other prepaid items like insurance. The speaker encourages viewers to download a handout for further practice and understanding, emphasizing the importance of both English comprehension and accounting skills in mastering these concepts. The video ends by thanking the audience and preparing them for more detailed topics in future videos.
Mindmap
Keywords
💡Adjusting Entry
💡Prepaid Expenses
💡Accrual Basis of Accounting
💡Deferred Revenue
💡Depreciation
💡Matching Principle
💡Uncollectible Accounts
💡Financial Statements
💡Accrued Expenses
💡Revenue Recognition Principle
Highlights
Introduction to adjusting entries and their role in the accounting cycle.
Review of the first four steps of the accounting cycle: analysis of source documents, journaling, posting, and preparing the unadjusted trial balance.
Definition of adjusting entries as entries made at the end of the accounting period before closing procedures.
Adjusting entries are necessary to update balances of asset, liability, revenue, and expense accounts for financial statement preparation.
Examples of adjusting entries in real-life scenarios, like prepaid transportation cards and how the balance reduces with usage.
Types of adjusting entries include prepaid expenses, deferred revenue, accrued revenue, accrued expenses, depreciation, and uncollectible accounts.
Detailed discussion of prepaid expenses, where a company pays in advance for services, such as prepaid insurance or transportation.
Deferred revenue is discussed as a situation where a company receives payment in advance but hasn’t yet delivered the service.
Accrued revenue and expenses are discussed as services rendered but not yet paid for, and expenses incurred but not yet paid.
Asset depreciation explained with examples of machinery and equipment losing value over time and its systematic allocation in accounting.
Uncollectible accounts (bad debts) are discussed as receivables that can no longer be collected, leading to an expense for the company.
Review of accounting principles that adjusting entries must adhere to: completeness, freedom from error, accrual basis, revenue recognition, and matching principles.
Example problem: A company purchases office supplies for 100,000 on August 1, and by the end of the year, only 40,000 remains.
Journal entries for the initial purchase of office supplies and subsequent adjusting entry to reflect the used portion.
Comparison of two methods of handling office supplies: asset method and expense method, both resulting in the same final amounts.
Transcripts
[Music]
hello everybody so today we will be
discussing adjusting entries okay so in
our previous lesson the monetize our
first four steps of the accounting cycle
the analysis of source documents and
then Jordan dicing posting and the
preparation of the initial and
unadjusted trial balance now we are
ready to start with the fifth step of
the accounting cycle in which the
documents needed for adjustments are
being prepared in analyzed now in that
step Vito Netanyahu unions in an hour
nothing
adjusting entry okay so let's define
first what an adjusting entry is or what
adjusting entries are okay adjusting
entries are entries made at the end of
the accounting period before closing
procedures to update balances of asset
liability revenue and expense accounts
to make their balances ready for the
preparation of financial statements so
in the definition it is said that these
are entries
okay so journal and priest insha now can
I go out nothing okay
Kalyan dal PO at the end of the
accounting period so a monthly you're
hunting period more month income yearly
or humpin period or year and I just
mentioned okay can I'm gonna go up
before closing
jury smell cousin Ione step in the
accounting cycle nothing at all nothing
close same procedures so I just meant I
mean I go up but I give up close
counting close okay no Palace and opal
you adjusting entries update balances of
asset liability revenue and expense
accounts in a big night in punta by you
more balance in an italic a not in
Sellinger palace on to make them ready
for the preparation of our financial
reports or financial statements so that
Camilla busting attend your financial
reports bugzilla Buster not in your
financial statements you adding mana
balances and our report done Tama and
Octavian
okay so let's first have some examples
of adjusting entries and let's try to
relate it in relax situations
that's it for example here in the
Philippines ago began with a tidy but on
the card you transportation card then
get a garvik that in just I think main
light rail transit lines and I'd be like
one like to win our MIT okay so pizza I
think in October nothing I don't know
how your monster job that means I'm
gonna go are not there whenever you are
in gift card
Lulu the nothing on 100 pesos so you
meet Cartman
mention 100 pesos and all in our
victim's entire good prepaid
transportation packet you 100 pesos
nabina yet more than the game blow
compete card more nagamma quad of a
certain sport Asian in the phenomena a
day Linda mocha Shinigami prepaid
transportation on top a sham friends are
going more but Putumayo canary monumento
station tie an annular
while that was kupatana veto crustacean
healer poet stationed somewhere no
Malaya
okay and then the longer going Messiah
win a mentos station that blowing a new
beam card Lana bus young young man
another guy 100 pesos paren kassig in
vivo passionate about me maybe pass of
another urine that was even an esse
trade that workin on it I will train
that was another parting nametrain don't
follow the green train suva reka
permanent dream jaroo jalloo discussion
noggin Sahaba Assad destination no more
master destination more a non-galvan
more lavas Moline give garmo casita de
bourree pas de Basque another style map
upon Sigma imbalance Nanami on prepaid
transportation card I 70 pesos in 30
pesos Novartis nah so an analogy on
Santa next are 100 pesos nah prepaid
transportation card but that emotion
destination more vomit Oscar nom nom 30
pesos
unpowered eligibility pesos
transportation expense
pero Mellencamp on 70 pesos anatomically
70 pesos prepaid transportation maybe
para hominem marrow acid shahe expense
so convenient that the winner things
adjusting entry if we will be making our
example in a real more accounting
situation
the 100 pesos that you paid for his
prepaid transportation and that is an
asset and then from the bingo
destination more the carbon cannon on 30
pesos 'no transportation expense
pero at the end of the period bell 70
osman ali jinnah Prive transportation so
on acid mo 70 pesos prepaid
transportation that was may expense
tabular report no 30 pesos
transportation expense Union Sina
subpoenaed Edna kale ammonia they as an
award of único que not only of the
imbalances the asset liability revenue
and expense nothing because a Coulomb
per kilowatt nothing analysis normally
record that in your transactions no time
than a judge or the next time okay so we
have different types of adjusting
entries we have prepaid expenses
deferred revenue accrued revenue accrued
expenses depreciation of assets and all
other subsequent Mussoorie uncollectible
accounts and all other subsequent
measurements of assets and liabilities
okay so let's talk about them one by one
prepaid expenses are expenses that was
that was paid for in advance by a
company best example prepaid of an
advance payment Aventa prepaid insurance
it Kumagai engine Gilligan with metallic
bubble Tina advance for some expenses
then making him pump pollinating some
emotional tapenade so from a safe
negating expense based on prepaid
expenses starts as an asset in their
chambray new asset new muna expired but
you know we're not even in a diviner
prepay transportation
many transportation expense the capitana
expiration so your asset and I expired
Maggie
okay so it happens that room next we
have is deferred revenue I'm different
revenue demand I tie you oun a police
even an advance payment granting semana
clients or customers method so Montana
Havilah dominance a vanilla your service
mainly but not in the renders anyway but
at the time nama rendering and a dinner
service a Panera nurdinov in shock Billa
revenue so the burger the new starts as
a liability and then it becomes rapid
okay we also have accrued revenue and
revenue mnemonic Americana be protecting
you the revenue Dominica on lambda no
your company has already given the
services no so now Hapuku render can
announcer piece by a cannon on customer
indeed back okay so uh accrued revenue
and on Eid for yes never none have been
very new haha collected island Damian
so I'm Fabian I well okay so I will
expect us know Marilyn expense in
empanada no away okay so expenses were
already incurred Lynn :
karolina expense no para no Breanna and
I been in the party
so he doesn't elemental panda through
the ravine you like the one an opinion
survey sparingly Fernando balance a
customer so no melon by Alito receiver
ball even Thomas after the expenses a
Marilyn I don't expense creme de banana
Baba Yaga so I know my legal am okay
next we also have asset depreciation so
as a depreciation of mine I simply wanna
assets not them most especially your mom
but I think machineries equipment
furniture through time then we'll room
iron as you see that session begin again
with nothing in accounting we have a
systematic way of allocating mechanical
Olympic aluminio in your pocket even
even a section break among Gilligan Vita
the new performance tomorrow as its name
link the decline and in the counting we
put a monetary amount on those and those
Nakayama nowhere pair of solitons k and
now opponent in the night
depreciation we also have uncollectible
accounts at the human receivable now
back on him didn't happen by received
sony he expense your pantalones
uncollectible accounts expense or but
deaths expense
bad debts okay and then that's the
subsequent measurement of asset and
liability accounts okay the most
subsequent measurement for hire a
comping talk same with uncollectible
accounts you more impairment loss no
acid your mana amortization of
intangible asset so mean
I got a thing where it's a bit about
beautiful okay so I'm collecting
bulletins from a subsequent measurement
of assets and liability you will be
talking about this in higher accounting
okay
so or at ADM one what we what we will be
talking about in the succeeding videos
is from here to here okay so we have
their friend examples that will be
available for you for prepaid expenses
need for revenue our walls and asset
depreciation okay we can call it
collectively number three and four as
after one okay now adjusting entries and
here to the following accounting
principle so remember you're not a
mechanic at all and in the previous
videos accounting concepts of principle
so some of them are are are applicable
on why we do adjusting entries okay so
first is completeness completeness
okay so adjusting entries and here's to
completeness because all of the
transactions are being recorded properly
okay Bahamut I mean be another important
than the one a nothing service via the
records receivable olomana revenue
nothing well he may have monopoly
expense per than anyone ever wear and
you wanna record
okay so that part complete Iranian
transaction simulator for example
freedom from Edward Edward DeMarco or in
a burgundy connect injustice and even
update imbalances it okay so that part
now the Athenian balance is not asking
nah I think asset liability revenue in
expenses they are it also adheres to
freedom from error and then finally this
I'm gonna goes up and personally leaders
in this passage of time that is not
somehow pre-filter happy Nellie
prepaid rent for six months the money is
somewhat the phenolic worth morning is
on one expired now so we are be aware of
reporting in these amounts I mean it's
nothing and nothing if it's not timely
it's not relevant anymore
it also adheres to afterworld basis of
accounting Laguna Depot diversa a
proboscis a pulmonary whether or not
cash is received or paid or anyway the
company must an emollient transaction
Kayla on the record Cunha young related
revenue in expense same also with
revenue recognition principle that
whatever happens even though payment is
not yet received from the customer then
you record the revenue busting a
Goguryeo service revenue and lastly
matching principle but it is a matching
principle a matching principle I we
match revenue in expenses in order for
us to see if we have net income or net
loss however how can you properly
measure the income or the loss that was
that was enjoy or incurred by the
company if the revenue and expense is
wrong okay so it also adheres to the
matching principle in this video we will
be talking about an example for prepaid
expenses and there is also a handout for
this specific lesson okay
so enjoy at least moon attire yours and
landing a new travel services company to
say I will be giving you examples
regarding these adjusting entries okay
but when discussed elephanto12345
nightwalker but it is a landing on your
travel services company doctor what
happened China adjusting entries he had
a plane that they have not been being
for some abuse okay
so please download their relief and
handout for this specific video it is in
the description box below
and we're ready to discuss prepaid
expenses okay so now let's start
discussing adjustments on prepaid
expenses please again download the
handout that is available in the
description box so that between link
when you download and print it for
facilitation of discussion but the
problem is written here okay so let's
discuss prepaid expenses and let me read
to you first a problem
German company purchase office supplies
on August 1 2020 amounting to one
hundred thousand in which the company
immediately paid in cash at December 31
2020 which coincides to be in the end of
the accounting period in the venturi
record show that the amount of remaining
office supplies amount to forty thousand
okay so in accounting it's more
beneficial for you if you will be
learning a bit
English rather than mathematics because
the level of mathematics that we just
actually need accounting is just M -
multiplication division addition is
subtraction but the level of analysis
that you need in reading these English
paragraphs will be very important so you
need to assess your level of English
comprehension because it will really
help you answer problems in accounting
accounting is more of English actually
rather than mathematics that's what they
say okay so let's just try to interpret
okay so it goes like this
German company purchase office supplies
amounting to 100,000 km banana August 1
2020 and then at the end of the period
on December 31 so Cabasa high-end and
Vanina problem most probably the problem
pertains to a company with annual
reporting alien doesn't December 31 II
so I know our reporting period boomtown
okay now you've been living in an office
of lights 100,000 and then at the end of
the year the records show knock em down
knocking supplies is 40,000 and it's in
Asakusa in do and now import that's not
adjusting entries it's your own to
report in your financial statements
office supplies of 100,000 men in
reality at the end of the year the
office supplies is only 40,000
so a lemony adjust that i've been happy
ok so let's prepare the journal entries
to represent the initial entry and the
adjusting entry and how to analyze okay
that's fine okay so let's do the entry
for almost one okay so the entry for the
purchase of office supplies is just the
same as how you know with the kind of
eye in an office supplies so you debit
office supplies
among the two 100,000 and then the
problem tells you that it was
immediately paid in cash so we credit
here if the problem tells you that it
was on account and the urine should be
there with office supplies credit
accounts payable the problem with that
okay
now let's analyze the company purchased
officer place worth 100,000 payable
40,000 a long shot at the end of the
period so if your office supplies that
you purchase is 100,000 and then I'm
done I'm done the office supplies is
what was remained at the end of the
accounting period is just 14,000 so we
try to the top 100,000 minus 40,000 will
give you an amount of 60,000 entry
you'll use opposite legs while remaining
you 40,000 and the 60,000 new Muse
napping no office supplies and this
represents office supplies expense okay
so on December 31 let's prepare the
adjusting entry to adjust the amount of
office supplies again money that you
report nothing's a financial statement
some office supplies more one hundred
thousand five with in reality another
anonymous forty thousand so we had
office supplies expense of sixteen
thousand so we there
debbie office supplies expense for the
expense portion or the use portion of
the office supplies which is 16,000 and
then credit of this life but it cooking
the red lip and office supplies Angelina
this office supplies account young
Nogami planet in 16,000 na office
applies because it is already an expense
okay so let's try to put them in T
accounts on how to properly represent it
so this is your Utley account for office
supplies and then this is for your
office supplies expense okay
debit office supplies 100,000 so this
goes here then credit cash of 100,000 so
people a Papa Geeta and then you're
adjusting entry then with office
supplies expense 60,000 and then credit
office supplies 60,000 so we credited
here 60,000 and then let's update rule
and balance the T accounts so 100,000 -
sixteen thousand fourteen thousand
homonym the cost of the supplies
remained at the end of the accounting
period is forty thousand epyon and then
our office of vice expense in the gap in
the office of price is sixty thousand
however some companies would have this
mindset believe in an opinion
100,000 officer place Guinness turn up
an expense they and so other companies
would make this entry
the raksasa office supplies expense okay
100,000 and then create one so we say
good luck on his face okay
other companies would do it that way he
does susan has been so lacking office
supplies their expense man however you
know at the end of the period
mallamma not they now forty thousand 500
remaining so we under a small a 100,000
your office supplies will be needed and
then forty thousand family remaining so
expense will end up analogous 60,000
capital expense another report movin
hundred thousand sobre an expense on him
ever been happy baba was a nothing I say
overstated it oh so bright oh so another
Monica a win at the adjusting entry but
the team on December 31 congenital McGee
unum entry not company bubbly Karina
okay so there
office of blacks como con una Guerra
40,000 and then credit
office supplies expense for 40,000 but
attacking the credit on office supplies
expense Panama Bob Watson from 100,000
below us and another nap warranty by the
office of place expense 1916 Ella
Paddington attendance LP accounts okay
so this is your office supplies and then
this is your this supplies expense then
we office supplies expense 100,000 then
credit cash and then there with office
supplies 14 hours and then credit office
supplies expense 40,000 okay let's try
to rule in balance office supply snapped
in 40,000 ear mainly office supplies
expense 100,000 - 40,000 which gives you
16,000 now think the knowing in your
magic office supplies under this method
is 40,000 under this method of this
applies is 40,000 and then office
supplies expense is 16,000 office
supplies expense is 16,000 whatever
method you may use it is just the same
okay so now look at what happens here in
this paper I wanna some direct or NASA
NASA and then adjusting entry mo kamo
Canio expired
portion
within a month of metal death or blood
cell and the revered work pass expense
an adjusting entry with a man I knew
unexpired portion in deep and academia
okay an entirely personal method at all
at all I mean Accord initially as I said
so some people ethanol and inner nature
apps expense so one that would be the
cement on the phone expense metals in
the asset method we initially record it
as an asset the adjusting entry would be
been expired portion of the prepayment
in the expense method we initially
recommended us an expense then we are
just be unexpired portion but whatever
method you may use it should just be the
same office supplies are you remaining
idle and even ago gamut forty thousand
office supplies expense in Agra McNabb
16,000 it's just the same now for Canon
okay or how much should be reported in
the income statement at the end of the
year as office supplies expense no
Yamagami 60,000 and then how much should
be presented in the balance sheet as
office supplies and he says epigenomic
you mean leave anagram for II okay so
you know mapping hazard method and
expense method on adjustment for free
payments in the next video we'll be
talking about three payments on
insurance prepaid
I hope you understand so it's green
chutney that okay so I hope you
understand Vanessa today thank you and
everything
[Music]
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