Chapter 3. Adjusting the accounts. Appendix 3A: An alternative method of recording deferrals

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2 Chapter 3 Adjusting the accounts Appendix 3A: An alternative method of recording deferrals 2

3 Learning objectives 1. Prepare adjusting entries for prepaid expenses originally recorded in an expense account 2. Prepare adjusting entries for unearned revenues originally recorded in a revenue account 3

4 Learning objective 1 Prepare adjusting entries for prepaid expenses originally recorded in an expense account 4

5 Prepaid expenses initially recorded as expense Until now we have recorded prepaid expenses as a debit to an asset account such as Prepaid Expense and a credit to Cash However, prepaid expenses can initially be recorded in the related expense account The adjusting entry will differ depending on whether the initial payment was recorded as an asset or an expense Each method produces the same ending balances 5

6 Prepaid expenses initially recorded as expense Example: Paid $360 for an insurance premium At the end of the accounting period $10 had expired so is recorded in the Insurance Expense account $360 - $10 = $350 remains in the Prepaid Insurance account at the end of the accounting period 6

7 Prepaid expenses initially recorded as expense Initial payment: Initial payment recorded as an ASSET Dec. 1 Prepaid Insurance 360 Cash 360 Initial payment recorded as an EXPENSE Dec. 1 Insurance Expense 360 Cash 360 Adjusting Entry: Initial payment recorded as an ASSET Dec. 31 Insurance Expense 10 Prepaid Insurance 10 Initial payment recorded as an EXPENSE Dec. 31 Prepaid Insurance 350 Insurance Expense 350 7

8 Prepaid expenses initially recorded as expense General ledger accounts: Initially recorded as an ASSET Prepaid Insurance No. 142 Dec. 1 Payment Dr 31 Adjusting Dr Initially recorded as an EXPENSE Prepaid Insurance No. 142 Dec Adjusting Dr Insurance Expense No. 542 Dec Adjusting Dr Insurance Expense No. 542 Dec. 1 Payment Dr 31 Adjusting Dr 8

9 Prepaid expenses initially recorded as expense Remember: The ending balance of each account is exactly the same under both methods 9

10 Learning objective 2 Prepare adjusting entries for unearned revenues originally recorded in a revenue account 10

11 Unearned revenues initially recorded as revenue Until now we have recorded the receipt of cash for unearned revenues as a debit to Cash and a credit to the liability account, Unearned Revenues However, unearned revenues can initially be recorded in a revenue account The adjusting entry will differ depending on whether the initial receipt was recorded as a liability or as revenue Each method produces the same ending balances 11

12 Unearned revenues initially recorded as revenue Example: Received $900 for services to be provided in the future At the end of the accounting period $600 revenue was earned so is recorded in the Revenues account $900 - $600 = $300 remains in the Unearned Revenues account at the end of the accounting period 12

13 Unearned revenues initially recorded as revenue Initial payment: Initial payment recorded as a LIABILITY Dec. 1 Cash 900 Unearned Revenue 900 Initial payment recorded as REVENUE Dec. 1 Cash 900 Revenues 900 Adjusting Entry: Initial payment recorded as a LIABILITY Dec. 31 Unearned Revenue 600 Revenues 600 Initial payment recorded as REVENUE Dec. 31 Revenues 300 Unearned Revenue

14 Unearned revenues initially recorded as revenue General ledger accounts: Initially recorded as a LIABILITY Unearned Revenue No. 230 Dec. 1 Payment Cr 31 Adjusting Cr Initially recorded as REVENUE Unearned Revenue No. 230 Dec Adjusting Cr Revenues No. 400 Dec Adjusting Cr Revenues No. 400 Dec. 1 Payment Cr 31 Adjusting Cr 14

15 Unearned revenues initially recorded as revenue Remember: The ending balance of each account is exactly the same under both methods 15