Accounting 1: Program #12 – “Adjusting Journal Entries”

Accounting 1: Program #12 – “Adjusting Journal Entries”

Alright greetings, thank you for being here.
A couple things real quick before we go over the homework, to reiterate, I spend more time
on those first two chapters than most instructors. We had ten lectures didn’t we, and then you
took the test. One thing I wanted to point out is I don’t want you to get used to that
time frame. We are not going to have ten more lectures before your next test, okay. The
time period now before your next test will be not as great as the first go around. Does
that make sense? But you know your syllabus dates
what chapters are on what tests. So you can
kind of get a feel what the tests are over. I will let you know chapter four is pretty
short, okay. So the test number two over chapters three and four will come up a lot quicker
than the first one did okay. Will number two be over; I mean I know they build on each
other, but number two will be specifically on three and four. We will talk more about
that later and on this next test I will give you more of a review sheet. There are some
things I will ask, for example I like to ask what financial accounts are on. I like to
ask you how you affect the change in that account. Like how do you affect accounts payable
and those sorts of things? But it’s not going to be totally comprehensive. But you’re right
it builds on itself so, alright I want to go over the homework. But before we do that
I’m going to go over a few slides here, just as kind of a refresher of what we talked about
last class period. Last class period we began adjusting journal entries. So this is going
to be more of a difficult section for some people. This is the great thing about this
class, for you face to facers, for you folks at home if you need to re watch these lectures
you can re watch these lectures. If you think I’m great and entertaining the first time
you should see me the second time. Alright so let’s go to the slides right now. We talked
about how we do not use the cash basis of accounting because it’s not generally an accepted
accounting principal. We use the acrool basis of accounting. The acrool basis of accounting,
things aren’t hinged on when cash comes in or goes out. We recognize revenues when they
are earned. When are they earned; when the product or service has been provided. And
we want to recognize expenses when they are incurred. Okay, we went through some examples;
we talked through the revenue recognition principals, I just went through that. The
matching principal states that we should attempt to match the expenses to the same time period
in which they helped create revenue. We talked about an adjusted journal entry. And it is
a type of journal entry that is adjusted to bring an asset or liability account to its
proper amount and to recognize a revenue or expense. Okay, we talked about AJE’s are always
made on the last day of the period. Okay, some companies do statements every moth and
thus they do AJE’s at the end of every month. Some companies just do annual statements,
and thus they do AJE’s on the last day of the year. The cash account will never be a
part of the adjusting journals. And then we talked about the five types of journal entries.
One other thing that we talked about when switching over to the LMO is that every AJE,
every AJE will affect revenue or expense, and an asset or a liability.
One from this side and one from that side. Remember that? And we talked about how every
AJE is either going to credit a revenue account or its going to debit an expense account.
Okay, now id that kind of help you when you were doing your homework? Okay, I want to
go through that homework, I did not give you any book homework. Instead I wanted you to
work through these worksheets I gave you, which you folks at home can find on angel
under the lessons tab for the appropriate chapter. So let’s take a look at the prepaid
assets AJE worksheet. Let’s just look through the first one; the prepaid insurance account
has a 4700 debit balance before adjustments. An examination of an insurance policy shows
that $900 of unexpired insurance is remaining. Okay, now they tell us the beginning balance
and they tell us how much is remaining. We need to figure out how much was used up, how
much of the asset was used up and how much, needs to be recorded. Thirty eight hundred
bucks right? And thus the AJE is there circled in the yellow. Okay, does that make sense?
If you put the date you can just put it over here to the left. Now I want you to contrast
that with the next one I have. Company B and this is totally separate from company A. company
B the prepaid insurance account has a 5890 balance before adjustment. An examined nation
of insurance policy shows that one thousand forty of insurance have expired. Do you see
the different wording there? I’m not telling you the ending balance; I’m telling you how
much is expired. So how much of the asset was used up and how much is exempt? One thousand
forty and that’s your JE. Now I’m not trying to trick you, I’m just saying that in the
real world people are going to come at you with questions, with different wordings right?
And I want you to understand the concepts to deal with that wording. So we always want
to know how much of the asset is used up. Company C, on September one 2011 we prepaid
twenty four thousand for two years of rent. We debited prepaid rent and credited cash.
Now of course that’s not an AJE, that’s just a journal entry. Now how much of the asset
was used up, now here we kind of got to figure out this a little bit. They paid twenty four
thousand for two years of rent right? And how many months is two years? Twenty four
months right? So basically what are they paying per month? Okay, so on September first they
gave us twenty four thousand dollars for two years of rent. Which is twenty four times
one thousand. At December thirty first of 2011, how many months have we provided them
occupancy? Four right? So four times one thousand that is how we came up with four thousand.
Or there are other ways we could have said it, you could have said it is twelve thousand
dollars a year and we provided occupancy for one third of a year which is four thousand.
I want you to understand how we got that four thousand. Okay, any questions on that first
worksheet? If not lets go to the second worksheet. Which was on office supplies AJE’s okay, alright.
The office supplies account had a three hundred debit balance on December thirty first 2010.
No office supplies were purchased during the year. December thirty one of the 2001 account
showed 110 of supplies available. How much of the asset is used up and thus needs to
be expensed. Did you get one ninety? Okay, and if you want you can do a little T account.
We had three hundred to begin with, we had purchasing so I put three hundred there and
then they gave us the ending amount of 110 right? So how much was used up? Said another
way you could say a restaurant had three hundred bottles of beer in its refrigerator. At the
end of the night they counted only a hundred and ten bottles remaining so how many bottles
of beer did they sell during that day? One hundred and ninety right? So we want to know
how much is used up as an expense, and this is the journal entry. Debit supplies expense,
credit office supplies. Make sense? Same situation for company E
and then we did an inventory account and found
six fifty remaining. We used up twenty two fifty. Last situation on this worksheet. We
started with a four thousand dollar balance, during 2011 they purchased office supplies
for ninety four hundred. And that was added to the office supplied account thus we used
up then thousand forty and thus that is our journal entry or adjusting journal entry more
specifically. Cool, questions on that? Alright lets go to the
depreciation adjusting journal entries worksheet.
We started talking about depreciation last time. Ok the first one is pretty easy isn’t
it? The company needs to record 13,500 of depreciation expense for the year. What amount
needs to be recorded as depreciation expense for the year; 13,500. Now the journal entry
is we debit depreciation expense and we credit this new account called accumulated depreciation.
I remember as a student I learned this word DEAD right, dead right, I still remember that
twenty years later. What type of account is accumulated appreciation? What type of balance
does it have; credit balance. What type of financial statement does it go on? Where do
assets go? Balance sheet contrasts that should go on the balance sheet too. Now this is where
you might want to use your flash card, if you use your flash cards. How many people
have not yet used their flash cards? Don’t raise your hands, alright I’ll be angry at
you. If you haven’t made them by now you’ll have to. But for those of you who have your
flash cards, this is a good chance to add one. Okay, because I like to ask that stuff
on the test. Alright um let’s go to the next one. The company has one fixed asset, they
purchased it on January one 2011. The asset had a cost of 44,000 and an estimated life
of five years. The salvage value is estimated to be zero at the end of the five years. So
we figure out how much depreciation by taking the cost minus the residual or salvage value
of zero. Divided by the estimated life of five years, that’s 8800 dollars a year right?
And I told you at the top here that they only do AJE’s annually so our journal entry is
this right here. Last the company has only one fixed asset, they purchased on January
the second of 2011. The asset had a cost of thirty two thousand and an estimated life
of seven years, the salvage value is estimated to be 4000 at the end of the seven years.
Does it matter that we purchased it on January the second; no. just round, round to how many
months okay. So the cost was thirty two thousand and the salvage value was four thousand, the
estimated life is seven years. Four thousand per year, are you with me? Okay, any questions?
Now let me ask you a question. On that last AJE, let’s go back to it. This is the journal
entry we made on December thirty first 2011. Are we saying that its market value has declined
by four thousand in that first year? No we are not! Once again to reiterate, depreciation
entries are not made to try to write things down to reflect their market value. Okay,
that is not why we do depreciation. We do depreciation to spread the expense over a
reasonable amount of time. Okay, are you with me? Now let’s talk about why we use a contract
account instead of crediting or decreasing equipment account or whatever. Alright I want
you to understand it’s a little different with fixed assets and long term assets. Okay,
let’s take a look at the second depreciation entry that we made on that, company H. okay,
now they had one fixed asset, they purchased it in January one of 201, it had a cost of
forty four thousand, and estimated life of five years, a zero salvage value was estimated.
So we make this adjusting journal entry right? Now we are going to make that at December
thirty first 2012, December thirty first 2013, December thirty first 2014, and 2015. Would
you agree? And the way that that is going to look on the balance sheet, lets remind
ourselves. Let’s do a partial balance sheet at twelve thirty one, eleven. Cool? You are
going to have um, let’s just say its equipment. Equipment and its cost is what? Forty four
thousand? And then we are going to say less that contra asset of accumulated depreciation,
which at this point is eighty eight hundred. And that gives you what we call the book value.
Forty four thousand minus eighty eight hundred is, I think it is thirty five two. Somebody
verify that please. Is it thirty five two hundred, okay now do you see where we are
going to make this entry again at twelve thirty one twelve and this is now going to be two
times eighty eight hundred. Which is seventeen six I think, right? Pretty soon do you see
at twelve thirty one fifteen, that will be forty four thousand. Do you see that? What
will that look like on the balance sheet? At twelve thirty one of fifteen. Well it is
going to be equipment of forty four thousand, thus accumulated depreciation of forty four
thousand. And that is going to be zero isn’t it? And that is the way it will look on the
balance sheet for the company. Equipment of forty four thousand plus accumulated depreciation
of forty four thousand equals the book value of zero. Now here is where we use a contra
asset. If we decreased the asset itself and did not use a contra account, then on the
BS or balance sheet it would just say this equipment, zero. Don’t you think that this,
knowing that this is going to show up, isn’t that a lot more informative for the reader?
Do you see what I am saying? Okay, this is the library building that you guys are sitting
in, right? This is one of the oldest buildings on campus, it is fully depreciated. Okay,
it is fully depreciated. That means it is probably on our books at like, I don’t know
how much it costs to make. Let’s say fifteen million, accumulated depreciation, depreciated
value, zero. Does that mean that this building is worth zero? Could you go offer the board
of trustees ten buck and they would jump at the offer? No! We are not trying to – we don’t
depreciate to market value, because everybody’s view of what market value is, is totally different.
Are you with me? It is totally different. Because fixed assets are a little different
than prepaid assets and office supplies. Okay, because we didn’t use contra assets there
did we? When you have an insurance policy that goes for six months, at the very end
what is that insurance policy worth? It is worth zero, it is worth nothing. Right, it’s
kind of like your best buy card. If you have a five hundred dollar gift card, when you
have used up that five hundred what is that card worth? Nothing and you throw it away,
it is worthless. Same thing, if you do office supplies then they are all gone. They are
all gone, it is zero. However if I have a vehicle, going back to the LMO, if I have
a vehicle that I paid forty four thousand dollars on January one of 2011 and December
thirty first of 2015 rolls around, it is fully depreciated. Is that vehicle worth nothing?
No, now we are not trying to reflect market value on the balance sheet. But this lets
the reader know we have a piece of equipment that we paid forty four thousand for, it’s
fully depreciated. We still have that piece of equipment. Does that make sense guys? It
helps the reader know that we have a piece of equipment. Its fully depreciated, the book
value is zero but we do have that equipment. And we will keep using it, I drove a car to
work today that is 19 years old, older than some of you. And if I was a business, that
thing has been fully depreciated and has a book value of zero but does it still have
value to Dave Krug? Yes it is a sweet ride baby. And I drive that to work and if something
happened to it, I would have to buy a new car, I would be bummed right? So that is why
we use a contra asset account. Do you understand? And the lay people who don’t understand this
aren’t luck enough to take accounting classes. Balance sheets are not meant to reflect assets
at market value because that is just simply too subjective. Are you with me? Okay good.
Alright, okay we have gone through all of the homework have we not? Any questions on
that? Okay, there are five types of adjusting journal entries going back to the slides.
And we have gone through category one and category two right? Categories three four
and five we go a lot quicker, okay. So let’s talk about those last three categories, alright.
We went through this we went through that, went through that little review here, okay.
Now let’s go to this one. Adjusting for unearned revenue, and we have kind of already done
this analysis. This is discussed when we sometimes receive money in advance regarding the product
or services. And we have to record it as unearned revenue, and what type of account is unearned
revenue? It’s a liability, what happens when we provide those services? We earn that revenue,
we decrease that liability. Let’s look at an example, on October one, 2011 ox university
sold one thousand season tickets to its twenty home basketball games for one hundred dollars
each. Now they made the following entry when they recorded this, this is not the AJE, we
know that because it’s not the last day of the period and there is cash involved. But
when they got that, one hundred dollars time one thousand. They got cash at one hundred
thousand and the credited a liability, are you with me? Now it is the year end, and they
have played eight of those twenty regular home games. So what percentage of that money
have they earned? What is eight divided by twenty? Its forty percent isn’t it? Isn’t
eight divided by twenty forty percent? Yeah it is, so what is forty percent of one hundred
thousand, its forty thousand. They can thus reduce or debit that unearned revenue by forty
thousand and book it as revenue. Do you see how at this point in your learning how if
you don’t know your normal account balances, you have got a rough road don’t you? Because
let’s look at that journal entry again, what I’m basically asking is how do we decrease
unearned revenue? We debit it, how do we increase basketball revenue? We credit it. Right? Do
you see how that is forty thousand though? Because we have satisfied eight over twenty
or forty percent of that one hundred thousand dollars. Okay, questions? Let’s go to our
next category. This is accrued expenses. These last two categories the categories occurs
after we make the adjusting journal entries. This is costs that are incurred in the period
but we haven’t played them, let’s look at an example, its best to illustrate with an
example. Let’s say Barton Inc. Company pays its employees every Friday. Now a year in,
twelve thirty one eleven falls on a Wednesday. As of twelve thirty one eleven the employees
have earned salaries of two fifty for Monday through Wednesday of that week. Okay, now
we are not going to pay him until Friday January two of 2012, we are not paying them early,
but at twelve thirty one eleven do we owe them some money? Yes we do, and do you see
how for a company like sprint this could be a big, big amount of money. So even though
we do not have to pay them on twelve thirty one eleven and even though we are not going
to pay them on twelve thirty one eleven, we need to show and adjusting journal entry so
that we properly get that liability of forty seven two fifty on our books. And we need
to book that expense in the proper period. If we don’t make that adjusting journal entry
then our liabilities are understated and our expenses are understated. Thus our net income
is overstated. This is a pretty big chunk of money isn’t it? This is one of the main
adjusting journal entries that when I go in with a client I go in and I make sure they
are making. Or else their financial statements are distorted. So at twelve forty seven two
fifty this company owes so even though they don’t have to pay it they have to make that
reflected that liability in the books and they have to make that an expense. They have
to match it to 2011, make sense? Sometimes you’ll see this with interest too. You’ll
say a company owes interest at this amount at year end. And so you would debit interest
expense and interest amount even though they don’t have to pay it you would have to put
the liability under expenses, cool? Last category, this is accrued revenue, this is the opposite.
This is when we earn revenue; we are not going to receive it early. But we need to at least
book it, let’s look at an example. Smith and jones CPA’s had thirty one thousand of work
completed at December thirty one 2011. Now we haven’t built them but we need to make
an adjusting journal entry necessary on December thirty one 2011 to reflect that we have an
asset of accounts receivable on the books. Okay and we have revenue that we want to match
to 2011. That’s when we earned it. So this is the journal entry, this is the adjusting
journal entry that we would make, does that make sense? Okay, that’s the five categories.
And what I want to do now is I want to spend time, switching over to the LMO and I’m going
to give you three new worksheets. Okay, one is for unearned revenue, one is for accrued
expense, and one is for accrued revenues. Okay, for you folks at home again these are
on your lessons tab. On your hand outs okay. So we have three worksheets, again we have
three key questions and three AJE’s that let you analyze each situation separately. But
we are going to spend some time working on those in class right now. Okay, so let’s roll
the music. Ill hand those out and let’s go ahead and work on those together, you folks
at home do the same okay. Okay folks we are going to come up here before class is over,
I don’t expect all of you to be done but what we are going to do is this, and I’m going
to say this for the face to facers and the folks at home. I’m going to show the answers
real quick, you are probably not done, so what I want you to do is have a separate sheet
of paper and jot these down real quick. Okay, no go ahead and show the LMO but I’m going
to keep talking. Okay, go ahead and show the LMO but I’m going to keep talking. Okay, now
don’t just copy these down on the worksheet itself. I want you guys to work through these
and do them. But I want you to have the answers so you can check them when you are done okay.
So just write these down on a separate sheet of paper and then I want you to complete these
three worksheets as part of your homework, not all of your homework but part of your
homework. Okay, so those are the answers to the first worksheet. Now we will walk through
thee in more depth. Next class period, alright. Let me show you the answers to the next one.
Right now just copy the answers down. And I pray I haven’t made a mistake because I
just did it real quick myself. Alright, we will talk through the how’s and whys and all
of that at the beginning of the next class period. But I want you to have the answers.
Okay, so write quickly. Okay, the last one, the answers to the last one the accrued revenues.
That’s the answers to the third worksheet. So I hope you wrote those on a separate sheet
of paper. And we will go through those next time, but let me write down your homework
assignment. Okay, let me write down your complete homework assignment. I hope you guys are doing
your homework, you guys will not and cannot learn this stuff just by watching me do it.
You guys have got to learn it, you guys have got to learn it by doing it. Okay, so let
me tell you your complete homework. Finish the three handouts that I gave you. Okay,
then I also want you to do quick study three point two and three point three. I want you
to do exercise 3.5 and then I want you to do exercise 3.4 but I only want you to do
C. okay, exercise three four, C only okay. So that is your entire homework, finish your
hand outs, do quick study three two and three, three. Do exercise three five and then do
exercise 3.4 C and do them in that order, that’s why I give you them in that order okay.
Alright folks you guys are doing good, let’s see you later. Bye bye.

39 thoughts on “Accounting 1: Program #12 – “Adjusting Journal Entries”

  1. Could anyone help with these queries:1)If final depreciated value doesnt reflect market value, how is book value determined in the 1st place? 2 Once an asset is fully depreciated to net value 0, is its asset/contra asset entry shown in the BS each subsequent year while the asset still in use? (3) As the revenue recognition principle states that a service must be provided before revenue is recognised, does this mean that the recording of unearned revenue in the books is an exception to this rule?

  2. as well as asset valuations being too subjective, isn't it also better to use this method of deprecation when trying to evaluate the profitability of a company per period?

  3. I want to take a minute to THANK YOU for simplifying accounting to a person that has no clue what the heck is my professor talking about. I am currently attending BCCC and my professor SUCKS, she rambles on and on and on with out taking into consideration to slow down and explain what is she talking about. I believe my professor has been a professor for many years and now when she lectures she starts from the middle of the, ( as you call it) foundation and   instead of building up our brains brick by brick. We all have NO clue what is she talking about and now we are covering chapter 6, reporting and analyzing inventory. I had done nothing over this Spring Break but try to catch up with your lectures and write as many notes as I possible can. I am determined to succeed in the accounting industry. There are still many things I don't get but I am trying to catch up to our chapter six in your teaching before I go back next week and over the summer break, I can go through your lectures once again. I just need to pass this accounting class by D.  

    Thank You , Thank You , Thank You. 

  4. if capital and drawings on trial balance is 40000 and 10000 respectively. The owner withdraws 1000 from the bank for his personal use then how will you adjust the trial balance??? If I get the answer it would be helpful Thank You!

  5. 8:25 at December 31st 2011 how much it was used up ? where is that part of the question written in the worksheet? I do not see that question in the paper ?

  6. Easier way to remember this is by paring them up like this
    SE > S
    EX > PP   (Prepaid Expenses) paid in advance
    EX > AP  (Accrued Expenses) used it have not paid
    AR > R   (Accrued Revenue) did it have not paid
    UR > R   (Unearned Revenue) pay me have not done it
    DE > AD
    learn the left column first and later the second on the right is is easier
    S: Suupplies , Ar: accounts receivable, Ex: Expenses , Ur: unearned revenue, Ap: Accounts payable , R: revenue, De depreciation , accumulated depreciation

  7. Great teacher, have learned so much from these lectures. Just one question though, when he talks about the homework (supplies) at 9:57 or so, he explains how if a company has 300 bottles of beer in the fridge and sells 190 they would have 110 left and then you would make the adjustment like he has done. The fact is, (if im not mistaken, (I usually am)) that would not be an adjustment account (beer inventory) it would be more to do with COGS and revenue. or am I missing the point of comparison? In my understanding, there would be no adjustment for inventory like there is for supplies because inventory is auto reduced by sales (using COGS) please advise me if I am mistaken…

  8. also needed to ask where can I get all the hand-outs for the exercises done and if can or anybody else have them can they email them to me

  9. Looking for handouts?
    Like Mr. Krug's FB page:

  10. Beginning Balance + Purchases – Ending Balance = Cost of Good Sold

    About leasing: maybe I remember a little different, but needs to pass at least one of the T- BPO-75-90 rules.

  11. Hi everyone…. Thank you so much Mr Krug for simplifying accounts for me. These are helping me alot. Can you (or anyone here) please direct me to the text book so that i can practice.

  12. Regarding Accrued Revenues example – If the customer is not billed yet, then how can we put the amount in Accounts Receivable account? The very first rule of making anything accounts receivable is to bill the customer.. Isn't it?
    Don't we need to put the amount in some temporary accounts first and then reverse them once we generate the bill for the customer…?

  13. At 21:10–22:00. If that piece of vehicle is still being used, why the salvage value is 0 instead of $4,000 or $5,000(for example)? Thank you!

  14. Dude you are SOMETHING….im an electrical engineering student…even working as an engineer…….never knew a word abt commerce subjects…..have a family business to run so i started studying it…..n you took me away from lect 1 to now n i believe to the end of accounting 2 so swiftly…..i can not tell…….so you are Something…Hats of to you Prof David Krug……N Thanks alot Sir.

  15. Professor David Krug, you are an amazing accounting instructor so far i have seen. I am Mongolian student in Alaska. Thank you again.

  16. In the basketball season tickets example, why wouldn't you recognize the revenue after each game instead of at the end of the period (year)?

  17. Mr. Krug, Thank you very much. Before I started watching your videos, I felt very stupid with Accounting. With your help and a tutor's help, I will be able to do this Accounting class at the Graduate level without ever having taken Accounting before. Thank you very much. God Bless you.

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