FA15 - Adjusting Journal Entries - MORE EXAMPLES

Summary

This 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

00:00

📥 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.

05:00

📦 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.

10:02

📉 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.

15:04

🖥️ 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.

Keywords

💡Adjusting journal entries

Adjusting journal entries are accounting entries made at the end of an accounting period to allocate income and expenses to the correct period. In the video, adjusting journal entries are emphasized as crucial for updating the trial balance and financial statements. Examples include adjusting supplies, insurance, and unearned revenue.

💡Supplies adjustment

Supplies adjustment involves recording the expense of supplies that have been used during a period. In the video, the supplies count shows $300 worth on hand, but the accounting records indicate $5,000, so a $4,700 adjustment is necessary to match the records to reality. This is an example of adjusting prepaid expenses.

💡Prepaid insurance

Prepaid insurance refers to insurance that has been paid in advance but not yet used. In the video, a $28,000 insurance policy was purchased on March 1st, 2024, and the adjustment for the amount used by June 30th is $9,333, which must be recorded as an insurance expense.

💡Depreciation

Depreciation is the allocation of the cost of a long-term asset over its useful life. The video explains the depreciation of computers purchased years ago for $214,000, with a useful life of 10 years. The annual depreciation expense is $21,400, and the adjustment is made to account for the accumulated depreciation.

💡Accrued expenses

Accrued expenses are costs that have been incurred but not yet paid by the end of the accounting period. The video discusses accrued interest on a note payable, where $1,250 of interest has accumulated but has not yet been paid. This requires an adjusting entry to record the expense and the payable.

💡Unearned revenue

Unearned revenue is money received before a service is provided. In the video, a company received $15,000 for a security contract but had only completed two-thirds of the work by June 30th. An adjusting entry is made to recognize $10,000 as earned revenue, moving it from unearned revenue to security revenue.

💡Salaries payable

Salaries payable refers to wages that are owed to employees but have not yet been paid. In the video, three employees are owed $1,500 in total for two days of work, leading to an adjusting entry that debits salary expense and credits salaries payable to reflect the accrued salaries.

💡Accounts receivable

Accounts receivable represents money owed to a company for services already rendered but not yet paid for. In the video, the company has completed a month of service for a new client at a rate of $4,000 per month, but has not yet billed the client, so an adjusting entry is made to record the revenue as accounts receivable.

💡Trial balance

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account columns. The video begins with the unadjusted trial balance for Net Lock Security and explains how adjusting entries will lead to the preparation of an adjusted trial balance to reflect the company's accurate financial position.

💡Financial statements

Financial statements are formal records of the financial activities and position of a business, including the income statement, balance sheet, and cash flow statement. In the video, after making adjusting entries and preparing the adjusted trial balance, the next step is to prepare the financial statements, providing a comprehensive view of the company's performance.

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

videos you'll see there are more videos

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

video if you'd like access to the

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